10-K 1 form10k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 2003 Or [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________ Commission File Number 001-14015 U.S. HOME & GARDEN INC. ------------------------------------------------------------------------------- (Exact Name of Registrant as specified in its charter) Delaware 77-0262908 --------------------------------- ------------- (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 655 Montgomery Street, San Francisco, California 94111 ------------------------- ----- (Address of Principal Executive (Zip Code) Offices) (415) 616-8111 ------------------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Exchange Act: Name of Each Exchange Title of each class on Which Registered ------------------- --------------------- None Not Applicable Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $.001 par value; Preferred Share Purchase Rights -------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).Yes___No__X_ The aggregate market value of the Common Stock held by non-affiliates of the registrant (based upon the closing sale price) on December 31, 2002 was approximately $8,616,480. As of September 15, 2003, 17,951,267 shares of the registrant's Common Stock, par value $.001 per share, were outstanding. Documents Incorporated By Reference: None 1 PART I. ITEM 1. BUSINESS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Report contains statements that are forward-looking, such as statements relating to plans for our future activities. Such forward-looking information involves important known and unknown risks and uncertainties that could significantly affect actual results, performance or achievements in the future and, accordingly, such actual results, performance or achievements may materially differ from those expressed or implied in any forward-looking statements made by or on behalf of us. These risks and uncertainties include, but are not limited to, those relating to our historical operations, including growth strategy, customer concentration, outstanding indebtedness, dependence on weather conditions, seasonality, expansion and other activities of competitors, ability to successfully integrate acquired companies and product lines, changes in federal or state environmental laws and the administration of such laws, protection of trademarks and other proprietary rights, the ability to maintain adequate financing arrangements necessary to fund operations and the general condition of the economy and its effect on the securities markets and other risks detailed in our other filings with the Securities and Exchange Commission. If the proposed asset sale described below under "Recent Developments" is consummated, the risks and uncertainties described above will not be applicable to our ongoing business operations insofar as any such factors apply only to our historical lawn and garden businesses, which we will be divesting. Moreover, if the asset sale is consummated we will also be subject to the risks of a company with limited operations that will be seeking to supplement its remaining business operations. The words "believe," "expect," "anticipate," "intend" and "plan" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date the statement was made. GENERAL We are a leading manufacturer and marketer of a broad range of consumer lawn and garden products. Our products include weed preventive landscape fabrics, fertilizer and plant food spikes, decorative landscape edging, grass and flower seed products, shade cloth and root feeders, which are 2 sold under recognized brand names such as WeedBlock(R), Jobe's(R), Emerald Edge(R), Shade Fabric(TM), Ross(R), Tensar(R), Amturf(R) and Landmaster(R). We believe that we have significant market share and favorable brand-name recognition in several of our primary product categories. We market our products through most large national home improvement and mass merchant retailers ("Retail Accounts"), including Home Depot, Lowe's, Kmart, Wal-Mart, Ace Hardware and TruServe in North America. We were organized under the laws of the State of California in August 1990 under the name Natural Earth Technologies, Inc. In January 1992 we reincorporated under the laws of the State of Delaware and in July 1995 we changed our name to U.S. Home & Garden Inc. Our lawn and garden operations are conducted through our subsidiary Easy Gardener, Inc. ("Easy Gardener") and Easy Gardener's subsidiaries and through our subsidiary, Ampro Industries, Inc. ("Ampro"), and our agricultural products operations are conducted through our subsidiary Golden West Agri-Products, Inc. ("Golden West"). Unless the context suggests otherwise, references in this Report to "we", "us", "the Company", or "our" refer to U.S. Home & Garden Inc. and its subsidiaries. Our executive offices are located at 655 Montgomery Street, Suite 830, San Francisco, California 94111, and our telephone number is (415) 616-8111. RECENT DEVELOPMENTS We and our primary operating subsidiaries, Easy Gardener and Ampro, have entered into an asset purchase agreement with an entity formed by current and former members of management of those subsidiaries, Easy Gardener Products, Ltd. ("Easy Gardener Products"). Under the terms of the asset purchase agreement, Easy Gardener and Ampro are to sell their operations, including substantially all of their assets to Easy Gardener Products. These operations comprise approximately 99% of our consolidated sales and 98% of our consolidated assets. The assets to be acquired by Easy Gardener Products consist of: 3 o substantially all of the assets of Easy Gardener and Ampro, including: o all of their business operations and assets, o the capital stock and operations of Easy Gardener's wholly-owned subsidiaries, Easy Gardener UK Ltd. and Weatherly Consumer Products Group, Inc. and o indirectly, the capital stock and operations of Weatherly Consumer Products, Inc., a wholly-owned subsidiary of Weatherly Consumer Products Group, Inc; and o from us, all of the common securities of our subsidiary, U.S. Home & Garden Trust I (the "Trust"), as well as the 251,981 trust preferred securities previously issued by the Trust and currently owned by us. 4 The proposed management buyout, which is expected to close in October 2003, is also structured to include Easy Gardener Products' assumption of substantially all of the selling subsidiaries liabilities and the transfer by us of our obligations relating to the Trust. These liabilities comprise approximately 99% of our consolidated liabilities. o Easy Gardener Products will pay us a total purchase price of $11,950,000, less certain expenses related to the transaction for the assets it is acquiring. Of this amount, $10,350,000 will be paid to us in cash at the closing and $1,600,000 will be paid to us in the form of a subordinated promissory note. The note will mature in 2009 subject to certain prepayments from excess cash flow. Interest on the principal amount outstanding from time to time will accrue at the rate of 9% per annum and will be capitalized by increasing the principal amount of the note. The note will be subordinated to the indebtedness of Easy Gardener Products under its senior credit facility and under its note to be issued to Central Garden & Pet Company. It will be senior to the debentures underlying the trust preferred securities issued by the Trust. In addition, Easy Gardener Products is to: o pay or assume our senior credit facility, including all borrowings outstanding under the facility as of the closing. There was a total of $24,000,000 outstanding under this facility as of September 15, 2003. In connection with this payment or assumption we are to be discharged from any future obligations under the facility; o assume our obligations under the Trust-related documents, including its issuance of a guarantee and new debentures in the aggregate principal amount of $57,035,000, each identical to the current guarantee and debentures. In connection with this assumption, we will be discharged from any further obligations under the Trust-related documents; and o assume our obligations under an outstanding option granted by us in November 2001 to our prior subordinated lenders, which is exercisable for 94,875 of the trust preferred securities currently owned by us. 5 o Assume substantially all of our selling subsidiaries' operational (non-debt) liabilities; If the proposed asset sale is consummated, then under the terms of a settlement agreement with our prior subordinated lenders, upon the closing of the proposed asset sale the warrants to purchase our common stock held by these former lenders will be amended to increase the number of shares that may be issued upon exercise of the warrants and to reduce the per share exercise price. In addition to the consideration to be received upon consummation of the proposed asset sale we will be retaining the capital stock and assets of Golden West, which accounted for less than 1% of our consolidated net sales for each of the last three fiscal years. After the asset sale we intend to explore certain business opportunities to supplement or replace the operations of Golden West that we will be retaining after the sale. The asset sale will result in the elimination of our historical lawn and garden operations. Immediately after the sale, our only operations will consist of those of Golden West. Therefore, the asset sale will result in the elimination of a significant amount of our historical operating expenses and the elimination of all of our debt, with a corresponding elimination of the interest expense associated with the debt. The discussion of our historical business set forth below does not reflect the effects on our operations which will result from the consummation of the proposed asset sale. LAWN AND GARDEN INDUSTRY Historically, the lawn and garden industry was comprised of relatively small regional manufacturers and distributors whose products were sold to consumers primarily through local nurseries and garden centers. As the industry has grown, national home improvement and mass merchant retailers have replaced many of these local garden centers as the primary retail source for lawn and garden products. In an effort to improve operating margins and reduce the number of vendors needed to source high volume lawn and garden products, the preference among home improvement and mass merchant retailers has shifted towards single source suppliers that offer broad product lines of consumer brand-name merchandise and the product support necessary to stimulate consumer demand and ensure timely and cost effective order fulfillment. Smaller regional suppliers 6 generally lack the capital and other resources necessary to offer the variety and number of product lines, the product support and the inventory stocking and tracking capabilities required by home improvement and mass merchant retailers. PRIOR ACQUISITIONS Since August 1992, we have consummated the following eleven (11) acquisitions of companies or product lines for a total of approximately $111 million in consideration: o Golden West Chemical Distributors, Inc. A manufacturer of humic acid-based products designed to improve crop yield, which we acquired in August 1992 for approximately $1.1 million in cash and $1.1 million in promissory notes. o Easy Gardener, Inc. A manufacturer of multiple fabric landscaping products including WeedBlock(R), which we acquired in September 1994 for approximately $21.3 million consisting of $8.8 million in cash, a $10.5 million promissory note and two convertible notes each in the principal amount of $1.0 million. Approximately $2.2 million of additional purchase price was contingent on Easy Gardener meeting certain income requirements. These contingencies were met and we paid the entire $2.2 million. o Emerald Products LLC. A manufacturer of decorative landscape edging which we acquired in August 1995 for $835,000 in cash and a $100,000 promissory note. o Weatherly Consumer Products Group, Inc. ("Weatherly"). A manufacturer of fertilizer spikes and other lawn and garden products, which we acquired in August 1996 for 1,000,000 shares of our common stock valued at $3.0 million and approximately $22.9 million in cash. o Plasti-Chain product line of Plastic Molded Concepts, Inc. A line of plastic chain links and decorative edgings, which we acquired from Plastic Molded Concepts, Inc. in May 1997 for approximately $4.3 million in cash. o Weed Wizard, Inc. A manufacturer and distributor of weed trimmer replacement heads, all of whose assets were acquired in February 1998 for approximately $16.0 million (plus an additional $1.7 million for excess working capital and acquisition expenses), of which approximately $5.0 million was based on the value of certain net assets acquired. In June 2002, we decided to 7 discontinue the Weed Wizard operations effective September 30, 2002. o Landmaster Products, Inc. A manufacturer and distributor of polyspun landscape fabrics for use by consumers and professional landscapers, substantially all of whose assets were acquired in March 1998 for approximately $3.0 million (plus an additional $600,000 for certain assets and acquisition expenses), of which approximately $750,000 was based on the value of certain assets acquired. o Tensar(R) consumer products line of The Tensar Corporation. A line of lawn and garden specialty fencing, which we acquired from The Tensar Corporation in May 1998 for approximately $5.4 million in cash plus an additional $1.0 million for inventory. o Ampro Industries, Inc., a manufacturer and distributor of lawn and garden products including specialty grass and flower seeds which we acquired in October 1998 for approximately $24.6 million. An additional $1.0 million was paid for a non-compete agreement. o Egarden Inc. Our business-to-business Internet subsidiary was acquired in June 1999 for approximately $400,000, plus expenses of approximately $100,000. At the time of acquisition, Egarden's activities were limited to sales of Internet gardening related products to the end consumer. In fiscal 2001, we suspended all of the operations relating to Egarden Inc. and sold the remaining assets during the year ended June 30, 2002. o Findplants.com., an electronic horticulture catalogue and locater business-to-business service for commercial growers and wholesalers all of whose assets were acquired by Egarden Inc. in May 2000 for approximately $537,000 in cash. We suspended all of the operations relating to Findplants.com and sold the assets of Findplants.com back to the former owner in September 2001. CONSUMER LAWN AND GARDEN PRODUCTS The primary consumer lawn and garden products marketed by us to our Retail Accounts are: Landscape Fabric. We market different types of landscape fabric in varying thicknesses and strengths under the trade names WeedBlock(R), MicroPore(R), Pro WeedBlock(TM), and Landmaster(R). Landscape fabrics allow water, nutrients and oxygen to filter through to the soil but prevent weed growth by blocking sunlight. Our primary landscape fabrics are made from non-woven fabrics which are generally manufactured with extruded polymers, 8 pressed or vacuum formed into thin sheets having the feel and texture of light plastics. For the fiscal years ended June 30, 2003, 2002 and 2001, sales of landscape fabric represented approximately 48%, 51% and 48%, respectively, of our consolidated net sales. Fertilizer, Plant Food and Insecticide Spikes. Fertilizer spikes deliver plant food nutrients directly to the root of the plant, an alternative method of maintaining plant health to surface-delivered liquid or solid fertilizers. Some of our fertilizer spikes have the added feature of containing an insecticide for the control of unwanted insects. We market a variety of indoor and outdoor specialty fertilizer and plant food spikes primarily under the Jobe's(R) tradename, one of the most recognized brands in the consumer lawn and garden industry. For the years ended June 30, 2003, 2002 and 2001, sales of fertilizer, plant food and insecticide spikes constituted approximately 12%, 14% and 17%, respectively, of our consolidated net sales. Landscape Edging. We market a variety of resin-based decorative landscape edgings under trade names including Emerald Edge and Terra Cotta Tiles(TM). Our decorative edgings are used by consumers to define the perimeter of planting areas with a variety of designs which include stone, log, terra cotta tiles and picket fences. For the years ended June 30, 2003, 2002 and 2001, sales of landscape edging constituted approximately 10%, 10% and 9%, respectively, of our consolidated net sales. Shade Cloth. We market shade cloth fabrics in a variety of sizes and colors. Shade cloth is utilized generally in conjunction with some type of outdoor structure such as a patio veranda, and provides shade, privacy or protection from wind for people, plants and pets. We market shade cloth fabrics as an exclusive United States retail distributor of a shade cloth manufacturer. Fertilizers and Root Feeders. We market fertilizers under the Ross trade name. The Ross fertilizer, when applied through a Ross Root Feeder, a long steel irrigation tube with a hose connector that is inserted deep into the ground, provides the homeowner with a means of deep feeding and irrigating trees and shrubs. The Ross Root Feeder may also be used without fertilizer as a deep watering device. Lawn and Garden Fencing. We market resin-based fencing for lawns and gardens. A variety of fencing products are marketed by us and are used by the consumer for numerous applications including preventing animals from entering a garden or orchard. 9 Mulch, Fertilizer, Grass and Flower Seed. We distribute specialty combinations of mulch, fertilizer, grass and flower seeds. Consumers spread this "ready-to-grow" combination and only need to water regularly for a green lawn or colorful flower garden. Other Products. In addition to landscape fabrics, fertilizer, plant food and insecticide spikes, landscape edging, shade cloth, fertilizer and root feeders, lawn and garden fencing, and specialty mulch, fertilizer, grass and flower seed combinations, we also sell complementary lawn and garden products for the home gardener. The products include a line of animal repellents that are formulated to deter dogs, cats, deer and rabbits from destroying garden and landscape environs, a variety of protective plant and tree covers, bird and animal mesh blocks, protective garden and tree netting to prevent animal damage, synthetic mulch and fabric pegs. Agricultural Products. Through Golden West, we manufacture and distribute certain humic acid-based agricultural products for use on farms and orchards. Golden West generally sells its products to agricultural distributors, which in turn market Golden West's products to farms and orchards. The principal agricultural products manufactured or distributed by us are: Energizer(R), a formulation of humic acids which, when applied in conjunction with liquid fertilizers, permits crops to absorb a greater amount of the nutrients in the fertilizer; Penox(R), a surfactant, or penetrating wetting agent, that contains humic acid which, when applied in conjunction with herbicides, defoliants and other agricultural products, increases their effectiveness; and Powergizer(R), a foliar nutrient, or plant food, containing humic acid which promotes growth and vigor in many types of crops. Sales of our agricultural products accounted for less than 1% of our consolidated net sales in the fiscal years ended June 30, 2003, 2002 and 2001. CONVERSION, MANUFACTURING AND SUPPLY Lawn and Garden Products. Except for the materials for our WeedBlock landscape fabric, which are obtained primarily from a single source, the basic materials for our consumer lawn and garden products are purchased from a variety of suppliers. All of such materials are converted, packaged and shipped by us from either our Waco, Texas facility, our Paris, Kentucky facility or our facility located in Colorado. 10 We purchase most of the landscape fabric used to manufacture WeedBlock from Tredegar Industries, Inc. ("Tredegar"). We purchase large rolls of various types of landscape fabric from Tredegar for shipment to our Waco, Texas facility where we size, cut and package the fabric for consumer sale. Although we have purchased most of our supply from Tredegar for over 10 years and believe that our relationship with Tredegar is good, Tredegar is free to terminate its relationship with us at any time and accordingly could market its fabrics to other companies, including our competitors. Nevertheless, we own the registered trademark "WeedBlock(R)" and to the extent that we establish alternative supply arrangements, our rights to market products under the WeedBlock brand name would continue without restriction. We manufacture and package our Jobe's fertilizer spikes at our Paris, Kentucky facility. The raw materials that comprise our indoor fertilizer spikes are mixed with a binding agent and then passed through an extrusion process which feeds a continuous strand of fertilizer through a heat-drying system. The strand is then cut into ready-to-use fertilizer spikes which are then machine counted and packaged into shelf-ready blisterpacks. Our outdoor fertilizer spikes are manufactured in a similar manner except rather than passing through an extrusion process, the outdoor spikes are processed through molds which shape the spikes into their final form. The outdoor spikes are packaged in either a foil pouch, bag or box. The specifications for our landscape edging, shade cloth and root feeder products and packaging are designed by us and independent design consultants. The products are then manufactured and packaged by third party manufacturers according to our specifications. The material used in our resin-based fencing is manufactured for us pursuant to open purchase orders. The material is then sized and cut for consumer sale at our Waco, Texas facility. The Ampro and Amturf "ready-to-grow" combination mulch, fertilizer and seed products are produced in Michigan pursuant to a contract manufacturing agreement. Newsprint is shredded and processed into mulch and then combined with seed and fertilizer. The mixture is now packaged in bags, boxes, canisters, and clear jugs. Agricultural Products. We do not own or lease any manufacturing facilities for our agricultural products. Substantially all of our humic acid-based agricultural products, Energizer, Penox and Powergizer, are processed 11 by Western Farm Services, Inc. ("Western Farm") pursuant to purchase orders placed by us from time to time in the ordinary course of business. Furthermore, through Western Farm, we have an open purchase order arrangement with an entity which supplies us with leonardite ore, a source of humic acid used in our agricultural products. CUSTOMERS Our customers include home improvement centers, mass merchandisers, hardware stores, nurseries, and garden centers and other retail channels throughout the United States. Our two largest customers for fiscal 2003, Home Depot and Ace Hardware, accounted for approximately 54% and 6%, respectively, of our consolidated net sales during that period. Our two largest customers for fiscal 2002, Home Depot and Lowe's, accounted for approximately 49% and 10%, respectively, of our consolidated net sales during such year. Home Depot and Lowe's, accounted for approximately 43% and 14%, respectively, of our consolidated net sales during fiscal 2001. Our ten largest customers as a group accounted for approximately 77%, 78% and 80% of our consolidated net sales during fiscal 2003, 2002 and 2001, respectively. Sales to such customers are not governed by any contractual arrangement and are made pursuant to standard purchase orders. While we believe that relations with our largest customers are good, the loss of any of these customers could have an adverse effect upon our results of operations. Our International sales are subject to certain risks in doing business in foreign countries including, but not limited to, currency exchange rate fluctuations and tariffs. Our sales are concentrated in the United States, with international sales (primarily in Europe and Canada) accounting for approximately 10%, 6%, and 3% of our net sales for each of fiscal 2003, 2002 and 2001, respectively. We are currently attempting to develop relationships with distributors outside of the United States. SALES AND MARKETING Our selling efforts are managed by two Vice Presidents of Sales. One specializes in home center customers and the other directs our four regional sales managers responsible for mass merchants, hardware and all other channels. Because of the service-oriented nature of our business, the sales managers devote a substantial amount of their time to servicing and maintaining relationships with our largest customers in addition to managing the overall sales operations. We also utilize the services of over 30 non-exclusive independent sales organizations. This integrated sales approach is designed to 12 help achieve sales of all products to all customers. Our marketing activities are coordinated by our National Marketing Manager. In addition to designing and developing our distinctive packaging and overall advertising and promotional activities, the National Marketing Manager works closely with the sales organization to help develop programs which are tailored to the strategies of our key Retail Accounts. We expect that our lawn and garden products will continue to be marketed by retailers primarily through the use of special displays and in-store consumer promotions in Retail Accounts, hardware stores, nurseries and garden centers. In addition we believe that a substantial portion of lawn and garden sales are impulse driven and not overly price sensitive. Therefore we seek to increase consumer awareness, understanding and brand identification of our products through our distinctive packaging and point-of-sale displays. Retail Accounts and our other customers receive our products in packaging that is easily displayed. The retail product packaging is informative to the end-user and incorporates attention getting, eye-pleasing color schemes. We also tailor our displays to the evolving needs of retailers. Because many home improvement and mass merchant retailers maintain outdoor sales areas for their lawn and garden products, we utilize waterproof displays for many of our products. In addition, we meet the specific needs of many of our larger customers by tailoring the size of our displays to the dimensions requested by such customers. Our independent sales representatives periodically visit individual retail outlets to assist Retail Accounts in achieving innovative and optimal use of our distinctive store displays. We spent approximately $2.6 million in fiscal 2003 on a combination of media development, print, radio and television advertising, cooperative advertising (advertising done in conjunction with retailers), attendance at trade shows and public relations to promote awareness, understanding and brand identification of our lawn and garden products. We utilized a substantial portion of our marketing budget for fiscal 2003 on cooperative advertising in conjunction with key retail customers. INFORMATION SYSTEMS We maintain a sophisticated retail data information system which enables us to provide timely and efficient order fulfillment to our Retail Accounts and other customers. Internally, our information systems track orders and deliveries and provide exception reports if product is not delivered on 13 time. The systems "push" the necessary information to the proper personnel, allowing us to react quickly to information. Our purchase order process can be paperless, with most Retail Accounts placing their orders through an electronic data interchange with us. In addition, we have implemented the QAD Applications e-business supply-chain enabled enterprise planning software at our executive offices and at several of our subsidiaries. SEASONALITY Our sales are seasonal due to the nature of the lawn and garden business and generally parallels the annual growing season. Our sales and shipping are typically most active from late March through May when home lawn and garden customers are purchasing supplies for spring planting and retail stores are increasing their inventory of lawn and garden products. The buying pattern of retailers is changing and stores are replenishing their inventory when sales are made rather than buying large quantities of inventory in advance of the selling season. Sales of our agricultural products are also seasonal. Most shipments occur during the agricultural cultivation period from March through October. INVENTORY AND DISTRIBUTION In order to meet product demand, we historically kept relatively large amounts of product inventory on hand during the months of highest demand. As a result of changes in customer inventory purchasing patterns described in the preceding paragraph and improved communications with customers, we improved our ability to meet customer demands without maintaining excess inventory levels during the last two fiscal years. Inventory obsolescence has historically not been a major issue but could increase in the future. Retail Accounts generally require delivery within five business days. Orders are normally processed within 48 hours and shipped by common carrier. Our shipping and freight costs have increased during the last two fiscal years due to smaller orders, higher costs from the freight carriers and increased volume to a significant customer that stipulates we use a required carrier. COMPETITION The consumer lawn and garden care industry is highly competitive and somewhat fragmented. With respect to our sale of consumer lawn and garden products, we compete with a combination of national and regional companies 14 including catalog and Internet e-commerce businesses specializing in the marketing of lawn and garden care products. The Scotts Company, in particular, has captured a significant and controlling share in a variety of categories as a result of their acquisition of the Ortho brand and the licensing of the Roundup brand for the consumer market. Scotts also markets products under the Scotts and Miracle-Gro brands which compete both directly and indirectly with many of our products. Many of our competitors have achieved significant national, regional and local brand name and product recognition and engage in frequent and extensive advertising and promotional programs. Many of these companies have substantially greater financial, technical, marketing and other resources than us. Large, dominant manufacturers, which manufacture and sell lawn and garden products, such as the Scotts Company, and other lawn and garden care companies have, in the past, manufactured and marketed landscape fabrics. Currently, few of such competitors compete with us in this product category. Nevertheless, well-capitalized companies and smaller regional firms may develop and market landscape fabrics and compete with us for customers who purchase such products. Among our competitors in the lawn and garden market for the Jobe's spike line of fertilizer and insecticide products and the Ampro combination mulch, seed and fertilizer line of products is the Scotts Company, which markets competing products under the Miracle-Gro brand. Competition for our agricultural products consists of other manufacturers of products that are humic acid based but that utilize formulas that are different from Golden West's. These competitors include Monterey Chemical Corporation and Custom Formulators, Inc. We compete with a variety of regional lawn and garden manufacturers in the markets for landscape edging, shade cloth and root feeders. GOVERNMENT REGULATION We are subject to many laws and governmental regulations and changes in these laws and regulations, or their interpretation by agencies and the courts, occur frequently. Fertilizer and Pesticide Regulation. Products marketed, or which may be marketed, by us as fertilizers or pesticides are subject to an extensive and frequently evolving statutory and regulatory framework, at both the Federal and state levels. The distribution and sale of pesticides is subject to regulation by the U.S. Environmental Protection Agency ("EPA") pursuant to the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), as well as regulation by many states in a manner similar to FIFRA. Under FIFRA and similar state laws, all pesticides must be registered with the EPA and the state and must be 15 approved for their intended use. FIFRA and state regulations also impose other stringent requirements on the marketing of such products. Moreover, many states also impose similar requirements upon products marketed for use as fertilizing materials, which are not typically regulated under FIFRA. Failure to comply with the requirements of FIFRA and state laws that regulate marketing and distribution of pesticides and fertilizers could result in the imposition of sanctions, including, but not limited to suspension or restriction of product distribution, civil penalties or criminal sanctions. We market certain animal repellent and pesticide products that are subject to FIFRA and to similar state regulations. We also market certain fertilizer products that are subject to regulation in some states. We believe that we are in substantial compliance with material FIFRA and applicable state regulations regarding our material business operations. However, there can be no assurance that we will be able to comply with future regulations in every jurisdiction in which our material business operations are conducted without substantial cost or interruption of operations. Moreover, there can be no assurance that future products marketed by us will not also be subject to FIFRA or to state regulations. If future costs of compliance with regulations governing pesticides or fertilizers exceed our budget for such items, our business could be adversely affected. If any of our products are distributed or marketed in violation of any of these regulations, we could be subject to a recall of, or a sales limitation placed on, one or more of our products, or civil or criminal sanctions, any of which could have a material adverse effect upon our business. Environmental Regulation. Our manufacturing operations are subject to various evolving federal, state and local laws and regulations relating to the protection of the environment, which laws govern, among other things, emissions to air, discharges to ground, surface water, and groundwater, and the generation, handling, storage, transportation, treatment and disposal of a variety of hazardous and non-hazardous substances and wastes. Federal and state environmental laws and regulations often require manufacturers to obtain permits for these emissions and discharges. Failure to comply with environmental laws or to obtain, or comply with, the necessary state and federal permits can subject the manufacturer to substantial civil and criminal penalties. Easy Gardener 16 operates two manufacturing facilities and its wholly-owned subsidiary, Weatherly Group, operates one manufacturing facility. Although we believe that our material manufacturing facilities are in substantial compliance with applicable material environmental laws, it is possible that there are material environmental liabilities of which we are unaware. If the costs of compliance with the various existing or future environmental laws and regulations including any penalties which may be assessed for failure to obtain necessary permits, exceed our budget for such items, our business could be adversely affected. Potential Environmental Cleanup Liability. The Federal Comprehensive Environmental Response, Compensation and Liability Act, as amended ("CERCLA"), and many similar state statutes, impose joint and several liability for environmental damages and cleanup costs on past or current owners and operators of facilities at which hazardous substances have been discharged, as well as on persons who generate, transport, or arrange for disposal of hazardous wastes at a particular site. In addition, the operator of a facility may be subject to claims by third parties for personal injury, property damage or other costs resulting from contamination present at or emanating from property on which its facility is located. Easy Gardener operates two manufacturing facilities and Weatherly Group operates one manufacturing facility. Although our Ampro/Weed Wizard facility was sold by us in April 2001, liability could exist for remediation of such facility in the future relating to the operations conducted at that facility while it was owned and operated by us. Moreover, we or our predecessors have owned or operated other manufacturing facilities in the past and may have liability for remediation of such facilities in the future, to the extent any is required. In this regard, Weatherly Group previously owned a facility that was the subject of certain soil remediation activities. Although this facility was sold by Weatherly Group prior to our acquisition of Weatherly, there can be no assurance that we will not be liable for any previously existing environmental contamination at the facility. Moreover, although the purchaser of the facility indemnified Weatherly Group for any environmental liability and the sellers of Weatherly Group, in turn, indemnified us from such liability, there can be no assurance that, if required, the indemnifying parties will be able to fulfill their respective obligations to indemnify us. Furthermore, certain business operations of our subsidiaries also involve shipping hazardous waste off-site for disposal. As a result, we could be subject to liability under these statutes. We could also incur liability under CERCLA or similar state statutes for any damage caused as a result of the mishandling or release of hazardous 17 substances owned by us but processed and manufactured by others on our behalf. As a result, there can be no assurance that the manufacture of the products sold by us will not subject us to liability pursuant to CERCLA or a similar state statute. Furthermore, there can be no assurance that Easy Gardener, Weatherly Group, or Ampro/Weed Wizard will not be subject to liability relating to manufacturing facilities owned or operated by them currently or in the past. Other Regulations. We are also subject to various other federal, state and local regulatory requirements such as worker health and safety, transportation, and advertising requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. TRADEMARKS, PROPRIETARY INFORMATION AND PATENTS We believe that product recognition is an important competitive factor in the lawn and garden care products industry. Accordingly, in connection with our marketing activities of our lawn and garden care products, we promote, and intend to promote, certain trade names and trademarks which are believed to have value to us. In connection with our acquisition, through Easy Gardener, of the assets of Easy Gardener's predecessor in September 1994, we acquired certain trademarks and copyrights used by Easy Gardener, Inc. in connection with its business including, but not limited to, the trademarks, WeedBlock(R), Easy Gardener(R), MicroPore(R) and BirdBlock(R). In connection with its acquisition of Weatherly Group, we acquired certain patents, as well as certain copyrights and trademarks used in connection with Weatherly Group's business including, but not limited to, Jobe's(R), Ross(R), Green Again(R), Gro-Stakes(R), Tree Guard(R) and XP-20(R). We also acquired certain patents and trademarks when we acquired the assets of Emerald Products, LLC and also acquired certain trademarks in connection with our purchase of the Plasti-Chain line of products from Plastic Molded Concepts, Inc. We also acquired the trademark Landmaster(R) in connection with our acquisition of substantially all of the assets of Landmaster Products, Inc. In addition, we acquired the trademarks Polyspun 350(R), Nature Shield(R) and Diamondback(R) in connection with our acquisition of the Tensar(R) consumer product line. In connection with the acquisition of the Tensar(R) consumer product line, The Tensar Corporation granted to us an exclusive royalty-free perpetual license to use the trademark Tensar(R) in connection with a wide range of polymeric grid, mesh, net and related products supplied to us by The Tensar 18 Corporation. In connection with our acquisition of Ampro, we acquired certain trademarks used in connection with Ampro's business including, but not limited to, Amturf(R). There can be no assurance that we will apply for any additional trademark or patent protections relating to our products or that our current trademarks and patents will be enforceable or adequately protect us from infringement of our proprietary rights. Although we believe that the products sold by us do not and will not infringe upon the patents or violate the proprietary rights of others, it is possible that such infringement or violation has or may occur. In the event that products sold by us are deemed to infringe upon the patents or proprietary rights of others, we could be required to pay damages and modify our products or obtain a license for the manufacture or sale of such products. There can be no assurance that, in such an event, we would be able to do so in a timely manner, upon acceptable terms and conditions or at all, and the failure to do any of the foregoing could have a material adverse effect upon us. PRODUCT LIABILITY We, as a manufacturer of lawn and garden care and pesticide products, may be exposed to significant product liability claims by consumers. Although we have obtained product liability insurance coverage in the aggregate amount of $2.0 million with all policies limited to $1.0 million per occurrence, and have obtained an umbrella policy in the amount of $10.0 million, which excludes Weed Wizard, there can be no assurance that such insurance will provide coverage for any claim against us or will be sufficient to cover all possible liabilities. In the event a successful suit is brought against us, unavailability or insufficiency of insurance coverage could have a material adverse effect on us. Moreover, any adverse publicity arising from claims made against us, even if such claims were not successful, could adversely affect the reputation and sales of our products. EMPLOYEES As of September 15, 2003 we had 178 full-time employees. Of such employees, 3 are executive officers of U.S. Home & Garden Inc., 51 were engaged in administration and finance, 29 were engaged in sales and marketing, 30 were engaged in warehouse, shipping and receiving, and 65 were engaged in production. None of our employees are covered by collective bargaining agreements. We 19 believe that we have a good relationship with our employees. If our proposed sale of assets to Easy Gardener Products is consummated, most of these employees will become employees of Easy Gardener Products and we will retain only certain executive and administrative employees and the employees of our Golden West subsidiary. SEGMENT INFORMATION Our primary continuing operations are in one segment - the manufacture and sale of consumer lawn and garden products. Product and major customer information are disclosed separately above. ITEM 2. PROPERTIES. Our executive offices are currently located in San Francisco, California, in approximately 2,000 square feet of office space for which we pay $12,121 per month in rent, which includes the costs of utilities and janitorial services. Our office space is rented pursuant to a lease expiring in February 2004. Easy Gardener leases approximately 250,000 square feet of office and warehouse space in Waco, Texas for which we pay $19,386 per month in rent, pursuant to a lease agreement that expires in February 2005. Easy Gardener's facilities contain landscape fabric converters, packaging equipment and warehouse and shipping facilities. Weatherly leases approximately 72,000 square feet of manufacturing and warehouse space in Paris, Kentucky for $9,931 per month in rent pursuant to a lease that expires in June 2006. Weatherly also leases an additional 59,000 feet of warehouse space in Paris, Kentucky for $9,845 per month in rent, pursuant to a lease agreement that expires in June 2006. Golden West's offices are located in Merced, California in approximately 900 square feet of space it leases for $1,500 per month base rent on a month to month basis. With respect to the storage, packaging and distribution of certain of our commercial grade landscape fabric products, Easy Gardener has entered into a lease pursuant to which we are provided with 60,000 square feet of warehouse space in Colorado. The lease, which expires on May 31, 2005, provides for a rental rate of $16,010 per month, which increases 5% per year on June 1 of each year. 20 We believe that our current manufacturing and warehouse space is adequate for our planned future operations. If our proposed sale of assets to Easy Gardener Products is consummated we will retain only our executive offices and Golden West's offices. ITEM 3. LEGAL PROCEEDINGS Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable 21 PART II. ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our common stock has traded in the over-the-counter market and was quoted on the NASDAQ Stock Market from March 26, 1992 until April 18, 2003. Our common stock has been traded on the over-the-counter bulletin board since April 18, 2003. The symbol for our common stock is "USHG.OB". The following table sets forth, for the periods indicated, the high and low sales prices for the common stock, for the following periods as reported by Nasdaq. Year Ended June 30, 2003 High Low First Quarter $.67 $ .20 Second Quarter .68 .16 Third Quarter .59 .44 Fourth Quarter .60 .31 Year Ended June 30, 2002 First Quarter $.98 $ .47 Second Quarter .78 .38 Third Quarter .62 .36 Fourth Quarter .72 .34 As of September 15, 2003, the number of holders of record of our common stock was 200. In addition, there are in excess of 500 beneficial owners of our common stock whose shares are held in "street name". We have not paid any cash dividends on our common stock to date and do not expect to declare or pay any cash or stock dividends in the foreseeable future. The lending agreements between us and our primary lending institutions prohibit us from paying dividends without the lenders' consent. The following table sets forth certain information as of June 30, 2003 regarding outstanding options, warrants and other rights to purchase Common Stock that were outstanding on June 30, 2003. 22
-------------------------------- ---------------------- ------------------------- ------------------------------ (a) (b) (c) -------------------------------- ---------------------- ------------------------- ------------------------------ Plan Category Number of securities Weighted-average Number of securities to be issued upon exercise price of remaining for future exercise of outstanding options, issuance under equity outstanding options, warrants and rights compensation plans warrants and rights (excluding securities reflected in column (a)) -------------------------------- ---------------------- ------------------------- ------------------------------ Equity compensation plans 3,099,000 $2.33 536,000 approved by security holders -------------------------------- ---------------------- ------------------------- ------------------------------ Equity compensation plans not 3,069,000 (1) $1.71 - approved by security holders -------------------------------- ---------------------- ------------------------- ------------------------------ Total 6,168,000 $2.02 536,000 -------------------------------- ---------------------- ------------------------- ------------------------------
(1) Represents the aggregate number of shares of common stock issuable upon exercise of individual arrangements with option and warrant holders. These options and warrants expire at various dates between 2005 and 2009 and contain anti-dilution provisions providing for adjustments of the exercise price under certain circumstances. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA). The following selected consolidated financial data at and for the years ended June 30, 1999, 2000, 2001, 2002 and 2003 has been derived from our audited consolidated financial statements. Such information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes thereto appearing elsewhere in this Report. Differences between amounts included below and amounts previously reported are due to the reclassification of discontinued operations. 23 Statement of Operations Data
Year Ended June 30, ------------- -------------- ------------- ---------------- ------------- 1999 2000 2001 2002 2003 ------------- -------------- ------------- ---------------- ------------- Net sales.................................. $85,024 $86,919 $78,863 $78,947 $76,244 Cost of sales.............................. 42,322 47,802 44,065 43,358 43,453 ------------- -------------- ------------- ---------------- ------------- Gross profit............................... 42,702 39,117 34,798 35,589 32,791 Selling, shipping, general and administrative expenses................................... 31,683 29,554 30,638 27,686 28,025 Restructuring charges (1).................. - - 2,860 - - ------------- -------------- ------------- ---------------- ------------- Income from operations..................... 11,019 9,563 1,300 7,903 4,766 Refinancing and transaction costs.......... - - - (254) (4,291) Other (3).................................. - 1,224 - - - Interest expense, net...................... (6,883) (6,692) (7,331) (7,291) (7,994) Income tax (expense) benefit............... (1,643) (1,213) 1,406 (228) (133) ------------- -------------- ------------- ---------------- ------------- Income (loss) from continuing operations before 2,493 2,882 (4,625) 130 (7,652) cumulative effect of a change in accounting principle.................................. Loss from discontinued operations, net of tax and minority interest (2)....... (444) (3,227) (16,253) (1,760) (1,436) Gain (loss) on disposal of discontinued operations, net of tax and minority interest (2) - - (4,551) 20 (49) ------------- -------------- ------------- ---------------- ------------- Income (loss) before cumulative effect of a change in accounting principle............. 2,049 (345) (25,429) (1,610) (9,137) Cumulative effect of a change in accounting principle (4).............................. - - - (9,882) - ------------- -------------- ------------- ---------------- ------------- Net income (loss).......................... $2,049 $(345) $(25,429) $(11,492) $(9,137) ============= ============== ============= ================ ============= Income (loss) from continuing operations per common share before cumulative effect of a change in accounting principle: Basic...................................... $.13 $.09 $(.26) $.01 $(.43) Dilutive................................... $.11 $.08 $(.26) $.01 $(.43) Net income (loss) per share: Basic ..................................... $.10 $(.02) $(1.40) $(.66) $(.51) Dilutive................................... $.09 $(.02) $(1.40) $(.64) $(.51) Weighted average number of common and common equivalent shares outstanding: Basic...................................... 19,621,000 19,031,000 18,181,000 17,555,000 17,951,000 Dilutive................................... 23,595,000 20,760,000 18,181,000 18,024,000 18,068,000 Balance Sheet Data: June 30, ----------------------------------------------------------------- 1999 2000 2001 2002 2003 ---- ---- ---- ---- ---- Working capital (deficit)...... $32,874 $25,151 $4,867 $2,728 $(5,532) Intangible assets, net......... 82,109 67,839 65,892 56,259 56,268 Total assets................... 138,263 138,545 109,463 99,365 96,559 Short-term debt................ -- 3,125 21,670 22,748 27,227 Long-term debt................. 78,750 58,338 56,951 56,951 57,092 Total liabilities.............. 91,779 89,331 90,256 92,383 98,595 Stockholders' equity (deficit). 46,484 45,103 17,968 6,982 (2,036)
24 (1) Amount represents restructuring charges relating to the closing and sale of the Ampro facility. See further discussion at Note 15 to the Consolidated Financial Statements included in Part II, Item 8. (2) Amounts represent operations and estimated loss on disposal of the Weed Wizard and Egarden subsidiaries. See further discussion at Note 2 to the Consolidated Financial Statements included in Part II, Item 8. (3) Amount represents gain incurred on the repurchase of mandatorily redeemable trust preferred securities of U.S. Home & Garden Trust I. Amount was reclassified from extraordinary gain upon adoption of Statement of Financial Accounting Standards No. 145. See summary of Accounting Policies in the Consolidated Financial Statements included in Part II, Item 8. (4) Amount represents the cumulative effect of a change in accounting principle related to goodwill. See further discussion at Note 7 to the Consolidated Financial Statements included in Part II, Item 8. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL We manufacture and market a broad range of brand-name consumer lawn and garden products through our wholly-owned subsidiaries, Ampro, Easy Gardener and Golden West, and through Easy Gardener's wholly-owned subsidiaries, Weatherly and Easy Gardener UK. Since 1992, we have consummated eleven acquisitions of complementary lawn and garden companies and product lines for an aggregate consideration of approximately $111 million in cash, notes and equity securities. As a result of such acquisitions, we recognized a significant amount of goodwill which, in the aggregate, was approximately $49.9 million as of June 30, 2003. Effective July 1, 2001 we adopted Statement of Financial Accounting Standards (SFAS) No. 142. Accordingly, no amortization of goodwill was reflected in the financial statements for the fiscal years ended June 30, 2003 and 2002 compared to $2.5 million for the year ended June 30, 2001. We completed the transitional goodwill impairment test during fiscal 2002 and recorded an impairment loss of $9.9 million which relates primarily to the Ampro operations. This loss is reflected as a cumulative effect of a change in accounting principle. See also "Summary of Accounting Policies - Intangible Assets" and 25 Note 7 to the Consolidated Financial Statements included in Part II, Item 8. Our results of operations for the fiscal year ended June 30, 2003 were adversely affected by the prolonged periods of inclement weather in many portions of the United States during the late spring and early summer which negatively impacted the lawn and garden industry. Our results were also adversely affected by the refinancing costs and related write-offs and transaction expenses related to the proposed sale of Easy Gardener assets. Our results were also adversely affected by the discontinued Weed Wizard operations that generated a loss of $1.4 million for the year. Results were also impacted in the third and fourth quarters by changes in the buying pattern of certain of our key customers who carried less inventory than in prior years and replenished their lower inventory levels as sales were made by them. Our results of operations for the fiscal year ended June 30, 2002 were adversely affected by the transitional goodwill impairment test that resulted in the recording of an impairment loss of $9.9 million. Our results were also adversely affected by the discontinued Weed Wizard operations that generated a loss of $1.8 million for the year. Results were also impacted in the third and fourth quarters by changes in the buying pattern of certain of our key customers who carried less inventory than in prior years and replenished their lower inventory levels as sales were made by them. Our results of operations for the fiscal year ended June 30, 2001 were adversely affected by losses attributable to the discontinued operations of Weed Wizard and Egarden Inc., of $16.3 million including the impairment of goodwill of Weed Wizard of $10.8 million, and the estimated net loss on disposal of Egarden assets of $4.6 million. Our results were also adversely affected by the restructuring loss from the closure of the Ampro Industries, Inc. facility in Michigan, an overall soft economy and prolonged periods of inclement weather in many portions of the United States during the late spring and early summer which negatively impacted the lawn and garden industry. There continues to be a consolidation in the lawn and garden industry which creates, over time, a downward pressure on operating margins. If our proposed sale of assets to Easy Gardener Products is consummated there will be a material reduction in our net sales and operating expenses and in our assets and liabilities as a result of our divestiture of substantially 26 all of the assets and operations of our material operating subsidiaries. Except as specifically set forth below, the discussion below does not give effect to the consummation of the proposed sale of assets. Historical Results of Operations The following table sets forth for the periods indicated certain selected income data as a percentage of net sales:
Percentages of Net Sales ---------------------------------------------------------- Year Ended June 30, ---------------------------------------------------------- 2001 2002 2003 ---- ---- ---- Net sales............................................ 100% 100% 100% Cost of sales........................................ 55.9 54.9 57.0 ---- ---- ---- Gross profit......................................... 44.1 45.1 43.0 Selling and shipping expenses........................ 20.8 23.2 24.5 General and administrative expenses.................. 18.1 11.9 12.2 Restructuring charges................................ 3.6 - - --- - - Income from operations............................... 1.6 10.0 6.3 Refinancing and transaction costs - (.3) (5.6) Interest expense, net................................ (9.3) (9.3) (10.5) Income tax (expense) benefit......................... 1.8 (.3) (.2) Loss from discontinued operations, net............... (20.6) (2.2) (1.9) Loss on disposal of discontinued operations, net..... (5.7) - (.1) Cumulative effect of a change in accounting principle - (12.5) - - ------ - Net loss ............................................ (32.2)% (14.6)% (12.0)% ------- ------- -------
27 FISCAL YEAR ENDED JUNE 30, 2003 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2002 Net sales. Net sales decreased $2.7 million, or 3.4%, to $76.2 million for the fiscal year ended June 30, 2003 from $78.9 million during the fiscal year ended June 30, 2002. The decline was due to prolonged periods of inclement weather in many areas of the United States as well as increased discounts, returns and allowances. Gross profit. Gross profit decreased by $2.8 million, or 7.9%, to $32.8 million for the fiscal year ended June 30, 2003 from $35.6 million during the comparable period in 2002. Gross profit as a percentage of net sales decreased to 43.0% during the fiscal year ended June 30, 2003 from 45.1% during the comparable period in 2002. The decrease in gross profit is due to the decrease in sales volume and the increased discounts, returns and allowances. Selling and shipping expenses. Selling and shipping expenses increased $.4 million, or 2.2% to $18.7 million during the fiscal year ended June 30, 2003 from $18.3 million during the comparable period in 2002. Selling and shipping expenses as a percentage of net sales increased to 24.5% during the fiscal year ended June 30, 2003 from 23.2% during the comparable period in 2002. This increase in expense and percentage was primarily a result of increased out bound freight costs resulting from a reduction in the average size of shipments, increase in freight costs, and increase in volume to a significant customer that stipulates we use a required carrier. General and administrative expenses. General and administrative expenses decreased $0.1 million or 0.7% to $9.3 million during the fiscal year ended June 30, 2003 from $9.4 million during the comparable period in 2002. As a percentage of net sales, general and administrative expenses increased to 12.2% during the fiscal year ended June 30, 2003 from 11.9% during the comparable period in 2002. Income from operations. Income from operations decreased by $3.1 million, or 39.7% to $4.8 million during the fiscal year ended June 30, 2003 compared to $7.9 million for the comparable period in 2002. The decrease in income from operations for the 2003 period is primarily attributable to the reduction in sales and increase in discounts, returns and allowances. As a percentage of net sales, income from operations decreased to 6.3% for the fiscal year ended June 30, 2003 from 10.0% during the comparable period in 2002. 27 Refinancing and transaction costs. Refinancing and transaction costs increased $4.0 to $4.3 million during the year ended June 30, 2003 from $0.3 million during the comparable period in 2002. Included in such costs for the year ended 2003 is $2.0 million of previously deferred finance costs and discounts related to the replaced finance agreements and $2.3 million of refinancing and transaction expenses. We wrote-off $0.3 million of deferred finance costs during the comparable period in 2002 as a result of refinancing. Net interest expense. Net interest expense increased $0.7 million, or 9.6% to $8.0 million during the fiscal year ended June 30, 2003 compared to $7.3 million during the comparable period in 2002. The increase in expense is primarily due to increased borrowings under the term loan and the revolver and increased borrowing rates at the end of the year due to covenant violations. Income tax expense. Income tax expense was $0.1 million during the fiscal year ended June 30, 2003 compared to $0.2 million during the comparable period in 2002. Discontinued operations. In June 2002, we announced we were discontinuing the Weed Wizard line of products effective September 30, 2002 due to continued operating losses, the loss of sales due to the product recall in fiscal 2000, and the current and future prospects for the operation. The net loss from discontinued operations was $1.4 million during the year ended June 30, 2003 compared to $1.8 million in fiscal 2002. In fiscal 2002, we recorded an estimated net loss on disposal of Weed Wizard of $1.1 million related to the write-down of inventory and long-lived assets. As of June 30, 2003, all Weed Wizard assets have been written off. The remaining assets at June 30, 2002 consisted of accounts receivable of $0.4 million, inventory of $0.3 million, other current assets of $0.3 million, and net property and equipment of $0.1 million. Remaining liabilities included accounts payable and accrued expenses of $0.3 million. As of June 30, 2003, we recorded cash of $0.1 million and accrued liabilities of less than $0.1 million for our discontinued Egarden operation. Such liabilities exclude leases guaranteed having an unpaid balance of $0.1 million at June 30, 2003. Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, our consolidated financial statements and notes have been restated for all periods presented to reflect the discontinued components. The assets and liabilities of the discontinued components have been classified as "Held for Sale" and the net operations and net cash flows have been reported as "Discontinued Operations". See Note 2 to the Consolidated Financial Statements included in Part II, Item 8. 28 Cumulative effect of a change in accounting principle. We recorded a cumulative effect of a change in accounting principle for the fiscal year ended June 30, 2002 as a result of the completion of the transitional goodwill impairment test in conjunction with the adoption of SFAS No. 142. The recording of an impairment loss of $9.9 million, which is primarily related to the Ampro operations, is reflected as a cumulative effect of a change in accounting principle. See Note 7 to the Consolidated Financial Statements included in Part II, Item 8. Net loss. Net loss decreased by $2.4 million to $9.1 million during the fiscal year ended June 30, 2003 from a net loss of $11.5 million during the comparable period in 2002 due to the matters described above. The diluted net loss per common share decreased $.13 to a net loss of $.51 per share when compared to the diluted net loss per common share of $.64 during the comparable period in 2002. FISCAL YEAR ENDED JUNE 30, 2002 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2001 Net sales. Net sales remained consistent at $78.9 million during the fiscal years ended June 30, 2002 and 2001. There were no significant changes in sales prices or volume. Gross profit. Gross profit increased by $0.8 million, or 2.3%, to $35.6 million for the fiscal year ended June 30, 2002 from $34.8 million during the comparable period in 2001. Gross profit as a percentage of net sales increased to 45.1% during the fiscal year ended June 30, 2002 from 44.1% during the comparable period in 2001. This increase in gross profit is due to a decrease in cost of sales as a result of the restructuring and closing of the Bradley, Michigan facility in late 2001 of approximately $0.3 million, a reduction in certain raw material costs of approximately $0.3 million, and increased operating efficiencies of approximately $0.2 million. Selling and shipping expenses. Selling and shipping expenses increased $1.9 million, or 11.7% to $18.3 million during the fiscal year ended June 30, 2002 from $16.4 million during the comparable period in 2001. Selling and shipping expenses as a percentage of net sales increased to 23.2% during the fiscal year ended June 30, 2002 from 20.8% during the comparable period in 2001. This increase in expense and percentage was primarily a result of increased out bound freight costs resulting from using required carriers stipulated by a significant customer and a reduction in the average size of shipments. 29 General and administrative expenses. General and administrative expenses decreased $4.9 million or 34.1% to $9.4 million during the fiscal year ended June 30, 2002 from $14.3 million during the comparable period in 2001. As a percentage of net sales, general and administrative expenses decreased to 11.9% during the fiscal year ended June 30, 2002 from 18.1% during the comparable period in 2001. This decrease is primarily a result of the adoption of SFAS No. 142 effective July 1, 2002 that requires, among other things, companies to no longer amortize goodwill, but instead test goodwill for impairment at least annually. Goodwill amortization included in general and administrative expenses for the year ended June 30, 2001, totaled approximately $2.5 million. This decrease is also due to the restructuring of Ampro and closing of its Bradley, Michigan facility and the related reduction of costs. The savings related to the closing of the Bradley, Michigan facility totaled approximately $1.6 million. The cost reductions were offset in part by a $0.5 million write off of K-Mart receivables when they declared bankruptcy. We continue to sell to K-mart under secured financing. K-Mart's receivable balance at June 30, 2002 was $0.7 million, all of which has subsequently been collected. Restructuring charges. There were no restructuring costs incurred in fiscal 2002. In 2001, we recorded restructuring charges of $2.9 million relating to the closing and sale of the Ampro Industries, Inc. facility in Michigan. We continue to sell many of the products that were being manufactured at Ampro's Michigan facility through a contract manufacturing agreement. We recognized approximately $1.7 million of expenses and losses relating to the closing and sale of property and equipment of the Ampro facility and $1.2 million for the termination benefits to be paid to all 60 employees involved with our facility. All severance payments as a result of the restructuring were made by June 30, 2002. No adjustments were made to the liability recorded for severance payments during the year ended June 30, 2002. Income from operations. Income from operations increased by $6.6 million, to $7.9 million during the fiscal year ended June 30, 2002 compared to $1.3 million for the comparable period in 2001. The increase in income from operations for the 2002 period is primarily attributable to the matters described above, the most significant matter being the reduction in general and administrative expenses. As a percentage of net sales, income from operations 30 increased to 10.0% for the fiscal year ended June 30, 2002 from 1.6% during the comparable period in 2001. Net interest expense. Net interest expense remained consistent at $7.3 million during the fiscal years ended June 30, 2002 and 2001. Borrowings under our revolving credit facilities decreased and interest rates on the revolving credit facility also decreased, but were offset by the increased cost of subordinated debt. Income tax benefit (expense). Income tax expense was $0.2 million during the fiscal year ended June 30, 2002 compared to an income tax benefit of $1.4 million during the comparable period in 2001. This results from having pre-tax income before discontinued operations of $.4 million in fiscal 2002 and a pre-tax loss of $6.0 million in the comparable period in 2001. See Note 16 to the Consolidated Financial Statements included in Part II, Item 8. Discontinued operations. In June 2002, we announced we were discontinuing the Weed Wizard line of products effective September 30, 2002 due to continued operating losses, the loss of sales due to the product recall in fiscal 2000, and the current and future prospects for the operation. In fiscal 2002, we recorded an estimated net loss on disposal of Weed Wizard of $1.1 million related to the write-down of inventory and long-lived assets. We plan to dispose of the assets and liabilities of Weed Wizard, including amounts written off, through a sale of the assets and liquidation of the liabilities during fiscal 2003. The remaining assets at June 30, 2002 consist of accounts receivable of $0.4 million, inventory of $0.3 million, other current assets of $0.3 million, and net property and equipment of $0.1 million. Remaining liabilities include accounts payable and accrued expenses of $0.3 million. In addition to the estimated loss on disposal in fiscal 2002, we had a net loss from the operations of Weed Wizard of $1.8 million. In June 2001 we wrote off the net goodwill balance related to the Weed Wizard product line. As a result of the decision to discontinue the operations in June 2002, we have reflected this loss on impairment of goodwill of $10.8 million and the loss from operations of $.8 million for the fiscal year ended June 30, 2001, net of income taxes of $2.5 million, as discontinued operations. Also, in June 2001, we announced that we were discontinuing our 31 e-commerce initiative, which we were conducting through our subsidiary, Egarden Inc., effective June 30, 2001. All of the assets of Egarden, including amounts previously written off, were sold during the fiscal year ended June 30, 2002. We recorded a net gain on the disposal of Egarden of $1.1 million, primarily as a result of the elimination of minority interest of $1.2 million as the subsidiary was liquidated. We recorded a net loss on disposal of Egarden of $4.6 million, net of minority interest of $1.1 million in 2001. This included the write-off of all long-lived assets of $5.2 million and $0.5 million of restructuring expense related to the termination of all 39 Egarden employees. All severance payments have been made by June 30, 2002. No adjustments were made to the liability recorded for severance payments during the year ended June 30, 2002. The remaining assets at June 30, 2002 consist of cash of $62,000 and the remaining liabilities consist of accrued expenses of $16,000. In addition to the net loss on disposal in 2001, we had a net loss from the operations of Egarden of $7.1 million, net of minority interest of $1.8 million. Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, our consolidated financial statements and notes have been restated for all periods presented to reflect the discontinued components. The assets and liabilities of the discontinued components have been classified as "Held for Sale" and the net operations and net cash flows have been reported as "Discontinued Operations". See Note 2 to the Consolidated Financial Statements included in Part II, Item 8. Cumulative effect of a change in accounting principle. We recorded a cumulative effect of a change in accounting principle for the fiscal year ended June 30, 2002 as a result of the completion of the transitional goodwill impairment test in conjunction with the adoption of SFAS No. 142. The recording of an impairment loss of $9.9 million, which is primarily related to the Ampro operations, is reflected as a cumulative effect of a change in accounting principle. See Note 7 to the Consolidated Financial Statements included in Part II, Item 8. Net loss. Net loss decreased by $13.9 million to a net loss of $11.5 million during the fiscal year ended June 30, 2002 from a net loss of $25.4 million during the comparable period in 2001. The diluted net loss per common share decreased $.75 to a net loss of $.65 per share when compared to the diluted net loss per common share of $1.40 during the comparable period in 2001. The decrease in net loss per common share 32 is primarily attributable to the unusual events in fiscal 2001 which were the impairment of goodwill of one of its subsidiaries, Weed Wizard, Inc., the restructuring charge related to the closure of the Ampro Industries, Inc. facility in Michigan, and the discontinuance of its business-to-business e-commerce subsidiary, Egarden Inc. There were also slightly fewer weighted average common and common equivalent shares outstanding during the year ended June 30, 2002 compared to the comparable period in the prior year. QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY Our sales are seasonal due to the nature of the lawn and garden business and generally parallels the annual growing season. Our sales have traditionally been most active from late March through May when home lawn and garden customers are purchasing supplies for spring planting and retail stores are increasing their inventory of lawn and garden products. The buying pattern of retailers, including our retail customers, is changing and stores are replenishing their inventory when sales are made by them rather than buying large quantities of inventory in advance of the selling season. Sales typically decline by mid-summer. Sales of our agricultural products, which were not material for fiscal 2003, are also seasonal. Most shipments occur during the period from March through October. RELATED PARTY TRANSACTIONS See discussion regarding related party transactions in Part II, Item 13 and Note 8 to the Consolidated Financial Statements included in Part II, Item 8. 33 Set forth below is certain unaudited quarterly financial information:
Quarter ended (in thousands, except percentages and per share data) ----------------------------------------------------------------------------------------------- September 30, December 31, March 31, June 30, September 30, December 31, March 31, June 30, 2001 2001 2002 2002 2002 2002 2003 2003 ------------- ------------ ---------- --------- ------------- ------------ --------- ---------- Net sales.............. $13,483 $11,762 $23,913 $29,789 $13,151 $12,351 $24,036 $26,706 Cost of sales.......... 7,943 7,010 12,826 15,579 8,186 7,167 12,758 15,342 ----------------------------------------------------------------------------------------------- Gross profit........... 5,540 4,752 11,087 14,210 4,965 5,184 11,278 11,364 Selling, shipping, general and administrative expenses............... 6,326 5,594 7,455 8,311 6,815 5,657 7,895 7,658 Restructuring charges.. - - - - - - - - ----------------------------------------------------------------------------------------------- Income (loss) from (786) (842) 3,632 5,899 (1,850) (473) 3,383 3,706 operations............. Interest income........ 43 27 12 1 - - - - Refinancing and transaction costs...... - (254) - - (194) (3,869) (116) (112) Interest expense....... (1,810) (1,766) (1,822) (1,976) (1,834) (1,826) (1,998) (2,336) ----------------------------------------------------------------------------------------------- Income (loss) from (2,553) (2,835) 1,822 3,924 (3,878) (6,168) 1,269 1,258 continuing operations before income taxes and cumulative effect of a change in accounting principle... Income tax benefit (expense).............. - - - (228) - (108) (3) (22) Income (loss) from discontinued operations, net of taxes and minority interest..... (268) (490) 227 (1,229) (978) (215) (41) (202) Gain (loss) on disposal of discontinued operations, net of taxes and minority interest............... - - - 20 - - - (49) ----------------------------------------------------------------------------------------------- Income (loss) before (2,821) (3,325) 2,049 2,487 (4,856) (6,491) 1,225 985 cumulative effect of a change in accounting principle......... Cumulative effect of a change in accounting principle......... (9,882) - - - - - - - ----------------------------------------------------------------------------------------------- Net income (loss)...... $(12,703) $(3,325) $2,049 $2,487 $(4,856) $(6,491) $1,225 $985 ----------------------------------------------------------------------------------------------- Diluted net income $(0.72) $(0.19) $0.11 $0.14 $ (0.27) $(0.36) $0.07 $0.06 (loss) per share(1).... Weighted average common and common equivalent shares outstanding(1)......... 17,543 17,543 17,915 17,929 17,752 17,879 18,124 17,863 ----------------------------------------------------------------------------------------------- Net sales.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales.......... 58.9% 59.6% 53.6% 52.3% 62.2% 58.0% 53.1% 57.4% ----------------------------------------------------------------------------------------------- Gross profit........... 41.1% 40.4% 46.4% 47.7% 37.8% 42.0% 46.9% 42.6% Selling, shipping, general and administrative..... 46.9% 47.6% 31.2% 27.9% 51.8% 45.8% 32.8% 28.7% Restructuring charges............ - - - - - - - - ----------------------------------------------------------------------------------------------- Income (loss) from (5.8%) (7.2%) 15.2% 19.8% (14.0%) (3.8%) 14.1% 13.9% operations............. Interest income........ 0.3% 0.2% - - - - - - Refinancing and transaction costs...... - (2.1%) - - (1.5%) (31.3%) (0.5%) (0.4%) Interest expense....... (13.4%) (15.0%) (7.6%) (6.6%) (14.0%) (14.8%) (8.3%) (8.8%) ----------------------------------------------------------------------------------------------- Income (loss) from (18.9%) (24.1%) 7.6% 13.2% (29.5%) (49.9%) 5.3% 4.7% continuing operations before income taxes and cumulative effect of a change in accounting principle......... Income tax benefit (expense)............. - - - (0.7%) - (0.9%) - (0.1%) Income (loss) from discontinued operations, net of tax and minority interest.. (2.0%) (4.2%) 1.0% (4.1%) (7.4%) (1.7%) (0.2%) (0.7%) Gain (loss) on disposal of discontinued operations, net of tax and minority interest.. - - - - - - - (0.2%) ----------------------------------------------------------------------------------------------- Income (loss) before cumulative effect of a change in accounting principle......... (20.9%) (28.3%) 8.6% 8.4% (36.9%) (52.5%) 5.1% 3.7% Cumulative effect of a change in accounting principle........... (73.3%) - - - - - - - ----------------------------------------------------------------------------------------------- Net income (loss)...... (94.2%) (28.3%) 8.6% 8.4% (36.9%) (52.5%) 5.1% 3.7% -----------------------------------------------------------------------------------------------
34 (1) Pursuant to SFAS No. 128, dilutive income per share was calculated using the treasury stock method except for quarters reporting a net loss from continuing operations. Such quarters only reflect issued and outstanding shares of our common stock in the weighted average shares outstanding. Differences between amounts included above and amounts previously reported on Form 10-Q are due to the reclassification of discontinued operations as described in Note 2 to the Consolidated Financial Statements included in Part II, Item 8, and the cumulative effect of a change in accounting principle of $9.9 million, related to the loss on impairment of goodwill recorded as of July 1, 2001. See Note 7 to the Consolidated Financial Statements included in Part II, Item 8. The fourth quarter of 2002 includes the write off of minority interest of $1.1 million, net of an estimated loss on disposal of discontinued operations of $1.1 million. See Note 2 to the Consolidated Financial Statements included in Part II, Item 8. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our operations primarily through cash generated by operations, net proceeds from our private and public sales of securities and borrowings from lending institutions. At June 30, 2003, we had consolidated cash and short-term investments totaling $0.8 million and a working deficit of $5.5 million due to classifying the revolver and the term loan in short-term debt. Under our credit facility with Wells Fargo Foothill described below, substantially all cash balances are automatically used to reduce outstanding borrowings. At June 30, 2002, we had consolidated cash and short-term investments totaling $0.2 million and working capital of $3.0 million. Under our credit facility with PNC Bank described below, substantially all cash balances were automatically used to reduce outstanding borrowings. At June 30, 2001, we had consolidated cash and short-term investments totaling $2.7 million, and working capital of $4.9 million. Net cash provided by operating activities for fiscal 2003 of $1.2 million consisted primarily of an increase in accounts payable and accruals of $2.4 million and an increase in accounts receivable and other current assets of $2.0 million, offset in part by a decrease in inventory of $1.1 million and the net loss from continuing operations adjusted for non-cash expenses of $2.1 million. The increase in accounts payable and accruals is primarily due to 35 extended credit terms with certain vendors. The decrease in inventory is primarily due to increased demand late in the year due to the poor weather earlier in the season. Net cash used in investing activities for fiscal 2003 of $1.4 million is primarily due to capital purchases of equipment and intangible assets. Net cash provided by financing activities for fiscal 2003 of $1.4 million is primarily related to the $3.4 of net proceeds received as a result of our new credit facilities described below offset by repayment of existing debt and deferred finance costs of $2.0 million. We entered into a senior credit facility dated as of October 30, 2002 for us and our material subsidiaries. Wells Fargo Foothill, which is the administrative agent for the facility, is also the revolving credit lender, and Ableco Finance LLC is providing a term loan. The total amount of the new credit facility is $35 million, of which $23 million is a revolving credit facility and $12 million is a term loan. The new credit facility matures October 30, 2005. Interest on the revolving credit facility is at variable annual interest rates based on the prime rate or LIBOR plus applicable marginal rates. Interest on the term loan is at variable annual interest rates based on the prime rate with a minimum rate of 9.75% plus 2% of accrued interest payable upon maturity (payment in kind interest). The balance of the term loan at June 30, 2003 including payment in kind interest, was $12,142,000. The interest rate on the term loan increases 2% each year the balance is outstanding. Borrowings on the revolving credit facility were $15,085,000 at June 30, 2003 and are limited based on eligible borrowing bases, effectively $17,659,000 at June 30, 2003. Our obligations and the obligations of our material subsidiaries under the new credit facility are secured by a security interest in favor of the lenders in substantially all of our assets. We and our material subsidiaries are subject to certain financial and other covenants under the new credit facility. At the end of January 2003, our financial performance created a "Triggering Event" which increased the interest rate on the term loan in February through June by 2.5% points, to 14.25%. At June 30, 2003, we were in violation of certain covenants under the credit facility. Due to the covenant violations, the interest rates on both the term loan and the revolver increased by 3% points, to 17.25%, and the lender could require us to pay all principal and accrued interest at any time. 36 As a result of the loan covenant violations, the opinion of our certified public accountants on our consolidated financial statements included in Part II, Item 8 was modified due to the uncertainty of our ability to obtain financing at a commercially reasonable rate, which raised doubt about our ability to continue as a going concern. However, management believes the proposed transaction described in the Business -- Recent Developments section of this report beginning on page 3 will close by October 31, 2003, and all outstanding bank debt will be repaid at the closing. If this transaction does not close, management believes, although there can be no assurance, we will be able to obtain alternative financing arrangements at commercially reasonable terms. We had a financing agreement to provide $25,000,000 in senior secured financing. The agreement provided for a $23,000,000 revolving credit facility and a $2,000,000 term loan due in monthly installments of $33,000 plus interest. The term loan balance outstanding at June 30, 2002 was $1,767,000. Interest on borrowings was calculated at variable annual rates based on either the bank's prime rate plus an applicable marginal rate or the federal funds rate plus an applicable marginal rate. At June 30, 2002 we had $15,036,000 of borrowings outstanding under the revolving credit facility. These borrowings were paid in full on November 1, 2002 with proceeds from the new financing agreements discussed above. We also had a financing agreement to provide $6,250,000 of subordinated debt. At June 30, 2002, we had borrowings outstanding of $5,945,000, net of discounts of $905,000, pursuant to the subordinated secured notes. Interest was charged on the face of the notes at 16% and 14% per annum, payable monthly. The issue price of the 16% notes was 90% of the face amount of the notes resulting in a discount of $600,000. In connection with this financing, we issued to the purchasers of the notes warrants to purchase up to 3.75% of our fully diluted common stock and an option to purchase from us certain Trust Preferred Securities of our subsidiary, U.S. Home and Garden Trust I, that are owned by us, which resulted in an additional discount of $402,000. These borrowings were paid in full on November 1, 2002 with proceeds from the new financing agreements discussed above. Upon repayment of the $6,250,000 subordinated debt, we continue to have certain ongoing obligations under the subordinated debt financing agreement to the holders of the warrants to purchase our common stock and option to purchase Trust Preferred Securities described above by virtue of these 37 agreements. Under the option agreement, payments of interest on the Trust Preferred option securities is used to reduce the option price and is recorded as additional Trust Preferred liability. When the option price is reduced to zero, we will issue the underlying Trust Preferred Securities to the holders of the options. If the proposed asset sale to Easy Gardener Products is consummated the obligation under the option agreement to purchase Trust Prefered Securities will be assumed by Easy Gardener Products. COMMITMENTS We lease office and warehouse space, certain office equipment and automobiles under operating leases expiring through 2006. The future minimum lease payments under these non-cancelable operating leases are as follows: Year ended June 30, Amount ------------------------------------------------------------------- 2004 819,000 2005 595,000 2006 214,000 ------------------------------------------------------------------- $ 1,628,000 ------------------------------------------------------------------- CRITICAL ACCOUNTING POLICIES The preparation of financial statements requires the adoption and implementation of accounting policies and the use of assumptions and estimates in their presentation. The accounting policies and uncertainties, judgments and estimates make it likely that materially different amounts would be reported under different conditions and different assumptions. We have included below a discussion of the more critical accounting policies that are affected by the significant judgments and estimates used in the preparation of the financial statements, how such policies are applied, and how results differing from the estimates and assumptions would affect the amounts presented in the financial statements. Other accounting policies also have a significant effect on the financial statements, and some of these policies also require the use of estimates and assumptions as discussed in the Summary of Accounting Policies in our Consolidated Financial Statements at June 30, 2003. 38 Allowance for Doubtful Accounts Receivable. We maintain an allowance for doubtful accounts receivable, which represents the potential estimated losses resulting from the inability of customers to make required payments for amounts owed. The allowance is estimated based on historical experience of write-offs, the level of past due amounts and information known about specific customers with respect to their ability to make payments at the balance sheet date. If the financial condition of our customers were to change, resulting in an impairment or improvement in their ability to make payments, additional allowances may be required or allowances may be reduced. Inventories. We record inventory reserves for estimated obsolescence of inventory equal to the difference between the cost of inventory owned and the estimated market value. Market value is based upon the age of specific inventory on hand and assumptions about future demand and market conditions. If actual market conditions for the sale of the inventory are less favorable than those anticipated by management, additional reserves may be required. Goodwill. We have consummated eleven acquisitions accounted for using the purchase method. The excess of cost over net assets acquired which relates to our acquisitions has been recorded as goodwill. Goodwill is tested for impairment by comparing the carrying value of the assets of our individual reporting units to their fair value. The fair value of the assets could vary significantly over time and different assumptions and estimates will result in different valuations. Deferred Income Taxes. We record deferred income taxes based on enacted income tax rates in effect on the dates temporary differences between the financial reporting and tax bases of assets and liabilities reverse. To the extent that available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance is established. We have recorded a valuation allowance due to the uncertainty of our ability to generate sufficient future taxable income to realize the gross deferred tax assets. If we are able to generate future taxable income, the valuation allowance may be adjusted. NEW ACCOUNTING PRONOUNCEMENTS In April 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No 13, and Technical 39 Corrections. SFAS No. 4 required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. SFAS No. 145 requires any gain or loss from the extinguishment of debt to meet the requirements of APB No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions to be classified as an extraordinary item, otherwise the item would be classified in the results of continuing operations. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods that does not meet the criteria of APB No. 30 for classification as an extraordinary item shall be reclassified. The provisions of the statement related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. SFAS No. 145 did not have an effect on our financial statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. SFAS No. 146 did not have an effect on our financial statements. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We adopted SFAS No. 148 during the year ended June 30, 2003. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The provisions of this statement are effective for contracts 40 entered into or modified after June 30, 2003. We do not expect SFAS No. 149 to have an effect on our financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for us for periods ending after June 30, 2003. SFAS No. 150 did not have an effect on our financial statements. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of the Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in the Interpretation were effective for us for the period ended March 31, 2003, and did not have an effect on our financial statements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. This Interpretation addresses consolidation by business enterprises of variable interest entities. The Interpretation will apply to us for the periods ended after June 30, 2003. We do not expect the Interpretation to have an effect on the financial statements. INFLATION Inflation has historically not had a material effect on our operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As a result of our variable rate revolving credit line and term loan, we are exposed to the risk of rising interest rates. The following table provides information on our fixed maturity debt as of June 30, 2003 that is sensitive to changes in interest rates. 41 The Revolving Credit Facility had an interest rate varying from 5.25% to 8.25% for the year ended June 30, 2003 $15.1 million The Term Loan had an interest rate varying from 11.75% to 17.25% for the year ended June 20, 2003 $12.1 million ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. This information appears in a separate section of this report following Part IV. ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. ITEM 9A. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in timely alerting them to material information required to be included in our periodic SEC filings at the reasonable assurance level. (b) Changes in internal control over financial reporting. There has been no change in our internal control over financial reporting that occurred during our fiscal quarter ended June 30, 2003 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting. 42 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Our current directors and executive officers are as follows: Name Age Position ---- --- -------- Robert Kassel 63 Chairman of the Board, Chief Executive Officer, President, Secretary and Treasurer Richard Kurz * 61 Chief Financial Officer David Harper 52 Executive Vice President Richard Raleigh (1) 49 Director Fred Heiden(1)(2) 62 Director Brad Holsworth(2) 43 Director Jon Schulberg(1)(2) 45 Director ------- (1) Member, Compensation Committee (2) Member, Audit Committee * It is anticipated that if the proposed sale of assets to Easy Gardener Products is consummated that Mr. Kurz will shortly thereafter become an employee of Easy Gardener Products and will no longer be employed by us. Robert Kassel co-founded U.S. Home & Garden Inc. and has been its Chairman of the Board, Chief Executive Officer, President, and Treasurer since October 1990, and Secretary since July 2002. From 1985 to August 1991, he was a consultant to Comtel Communications, Inc., a company specializing in the installation and operation of telephone systems in hotels. From 1985 to 1990, Mr. Kassel was also a real estate developer in Long Island, New York and Santa Barbara, California. From 1965 to 1985, he was a practicing attorney in New York City, specializing in corporate and securities law. Richard Kurz has been Chief Financial Officer of U.S. Home & Garden Inc. since October 2001 and served as its Vice President-Finance from June 2001 43 until October 2001. He has also served as Chief Financial Officer of Easy Gardener since October 2001. From 1997 until December 2000 he was Executive Vice President and Chief Financial Officer for Aircraft Interior Resources, Inc, a company that provides products and services to commercial airlines. From 1994 until 1997 he was Senior Vice President and Chief Financial Officer of American Eagle Group, Inc., a service company that provided insurance services to the aviation and other specialized industries. From 1991 to 1994 he was Chief Financial and Administrative Officer for BDP International, Inc. a logistics service provider. From 1979 to 1991 he held a variety of senior financial positions with CIGNA Corporation, a healthcare provider. Mr. Kurz is a Certified Public Accountant. David Harper has been a Vice President of U.S. Home & Garden Inc. since May 1999, has been an Executive Vice President of U.S. Home & Garden Inc. since July 2003 and has been employed by U.S. Home & Garden Inc. since May 1998. From 1995 to May 1998 he was an independent consultant within the lawn and garden industry where his clients included selected manufacturers, distributors, retailers and industry associations. From 1975 to 1994, he was employed by Monsanto Company in a variety of positions of increasing responsibility. From 1988 to 1994, Mr. Harper headed Monsanto's efforts to introduce its Roundup product line and the creation of its Solaris division with Monsanto's acquisition of Ortho Consumer Products in 1993. Richard Raleigh has been a director of U.S. Home & Garden Inc. since March 1993. He served as Chief Operating Officer of U.S. Home & Garden Inc. from June 1992 to June 30, 2001 and served as a consultant to U.S. Home & Garden, Inc. from July 2001 through June 2003. He served as Executive Vice President-Operations of U.S. Home & Garden Inc. from December 1991 to June 1992. Prior to joining U.S. Home & Garden Inc., Mr. Raleigh was a free-lance marketing consultant to the lawn and garden industry from January 1991 to December 1991. From April 1988 to January 1991, he was Director of Marketing, Lawn and Garden of Monsanto Agricultural Co. From December 1986 to April 1988, he was Vice President of Sales and Marketing of The Andersons, a company engaged in the sale of consumer and professional lawn and garden products. From November 1978 to December 1986, he held a variety of positions at The Andersons, including Operations Manager and New Products Development Manager. Fred Heiden, a director of U.S. Home & Garden Inc. since March 1993, has been President and principal owner of Marlin Mortgage Group, a mortgage banker business, since February 2002. He was a private investor from November 1989 to February 2002. From April 1984 to November 1989, Mr. Heiden was President and Principal owner of Bonair Construction, a Florida based home improvement construction company. 44 Brad Holsworth has been a director of U.S. Home & Garden Inc. since July 2000. Since February 2003, he has been employed by Senetek, PLC, a biopharmaceutical company, as its chief financial officer. From April 2000 to February 2003, he was employed by Prescient Capital LLC, a money manager and venture capital firm, as its chief financial officer. From April 1999 to April 2000, he was employed by Banc of America Securities, as a Principal, Accounting and Finance. He was employed by the accounting firm, BDO Seidman, LLP from July 1982 to April 1999 and was a partner of BDO Seidman, LLP from July 1995 to April 1999. Jon Schulberg, a director of U.S. Home & Garden Inc. since March 1993, has been employed as President of Schulberg MediaWorks, a company engaged in the independent production of television programs and television advertising since January 1992. From January 1989 to January 1992, he was a producer for Guthy-Renker Corporation, a television production company. From September 1987 to January 1989 he was Director of Development for Eric Jones Productions. All of our directors hold office until the next annual meeting of the stockholders and the election and qualification of their successors. Our officers are elected by the Board and serve at the discretion of the Board. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires that officers and directors, and persons who beneficially own more than 10 percent of a registered class of equity securities of U.S. Home & Garden Inc., file certain reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Officers, directors, and greater than 10 percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms received by us, or representations obtained from certain reporting persons, we believe that during the year ended June 30, 2003 all filing requirements applicable to the officers, directors, and greater than 10 percent beneficial stockholders of U.S. Home & Garden Inc. were complied with. 45 ITEM 11. EXECUTIVE COMPENSATION. The following table discloses the compensation awarded by U.S. Home & Garden Inc., for the three fiscal years ended June 30, 2003, 2002 and 2001, to Mr. Robert Kassel, its Chairman, Chief Executive Officer, President, Secretary and Treasurer, Mr. Richard Grandy, its former Chief Operating Officer, and Mr. Richard Kurz, its Chief Financial Officer (together, the "Named Officers"). During the fiscal year ended June 30, 2003, no other person who served as an executive officer of U.S. Home & Garden Inc. during the fiscal year ended June 30, 2003 received a total salary and bonus that exceeded $100,000 during such fiscal year.
SUMMARY COMPENSATION TABLE Annual Compensation Long-Term Compensation Securities Name and Principal Position Underlying All Other --------------------------- Year Salary ($) Bonus ($) Options (#) Compensation($)(1) ---- ---------- --------- --------------- ------------------ Robert Kassel, 2003 450,000 239,500 - - Chairman, Chief Executive Officer, 2002 450,000 325,000 - 5,149 President, Secretary and Treasurer 2001 354,000 315,000 1,468,000 (2) 7,000 Richard Grandy, former Chief Operating 2003 345,300 28,000 - - Officer (3) 2002 345,300 - - 11,000 2001 340,000 100,000 150,000 (2) 12,000 Richard Kurz, Chief Financial Officer 2003 176,000 22,000 - 5,763 2002 128,000 - 10,000 (4) -
(1) Represents our contributions to the Named Officers 401(k)/profit sharing accounts. Excludes certain perquisites that did not exceed the lesser of $50,000 or 10% of their combined bonus and salary. (2) Represents options that were originally granted to the respective officers in prior fiscal years, the expiration dates of which were extended in fiscal 2001. (3) Mr. Grandy's termination date was effective July 1, 2003. (4) Represents options granted to Mr. Kurz in October 2001. 46 There were no new option grants to any Named Officers of the Company during the fiscal year ended June 30, 2003. The following table sets forth information concerning the number of options owned by the Named Officers and the value of any in-the-money unexercised options as of June 30, 2003. No options were exercised by any Named Officer during the fiscal year ended June 30, 2003: AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES ---------------------------------
SHARES ACQUIRED VALUE REALIZED NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY ON EXERCISE(#) ($) UNEXERCISED OPTIONS AT JUNE 30, 2003 OPTIONS AT JUNE 30, 2003(1) --------------- -------------- ------------------------------------ ---------------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE -------------------- ------------------- --------------- ----------------- ---------------- Robert Kassel -- -- 1,973,402 255,931 0 0 Richard Grandy -- -- 150,000 -- 0 0 Richard Kurz -- -- 10,000 -- $1,200 0
------- (1) Year-end values for unexercised in-the-money options represent the positive spread between the exercise price of such options and the fiscal year end market value of the common stock. An Option is "in-the-money" if the fiscal year end fair market value of the common stock exceeds the option exercise price. The last sale price (the fair market value) of the common stock on June 30, 2003 was $0.37 per share. EMPLOYMENT AGREEMENTS OF EXECUTIVE OFFICERS We have entered into an employment agreement with Mr. Kassel dated as of April 1, 1996. Mr. Kassel currently serves as Chief Executive Officer and President of U.S. Home & Garden Inc. for a term which expires on March 31, 2004, which is subject to automatic renewal unless terminated. His current annual salary is $450,000, and is subject to such bonuses and increases as are approved at the discretion of the Board of Directors or the Compensation Committee of the Board, as the case may be. The employment agreement requires that substantially all of Mr. Kassel's business time be devoted to us and that he not compete, or engage in a business competitive with, our current or anticipated business for the term of the agreement and for two years thereafter (although he may own not 47 more than 5% of the securities of any publicly traded competitive company). Mr. Kassel is, in addition to salary, entitled to certain fringe benefits, including the use of an automobile and payment of related expenses. Mr. Kassel's agreement also provides that if his employment is terminated under certain circumstances, including termination of Mr. Kassel's employment upon a change of control of U.S. Home & Garden Inc, (as defined in the agreement) a failure by U.S. Home & Garden Inc. to comply with its obligations under the agreement, the failure of U.S. Home & Garden Inc. to obtain the assumption of the agreement by any successor corporation, or a change in Mr. Kassel's duties and obligations from those contemplated by the agreement, and termination by U.S. Home & Garden Inc. of Mr. Kassel's employment other than for disability or cause, he will be entitled to receive severance pay equal to the greater of (i) $350,000 ($3,500,000 in the event of a change of control) or (ii) the total compensation earned by Mr. Kassel from the Company during the one-year period (multiplied by ten in the event of a change of control or termination without cause) prior to the date of his termination. COMMITTEES OF THE BOARD OF DIRECTORS We have established an Audit Committee which is comprised of Messrs. Heiden, Holsworth and Schulberg. The Audit Committee, among other things, makes recommendations to the Board of Directors with respect to the engagement of our independent certified public accountants and the review of the scope and effect of the audit engagement. We have also established a Compensation Committee which is comprised of Messrs. Heiden, Raleigh and Schulberg. The Compensation Committee, among other things, makes recommendations to the Board of Directors with respect to the compensation of the executive officers of U.S. Home & Garden Inc. We maintain a Stock Option Committee comprised of Messrs. Schulberg and Heiden, which determines the persons to whom options should be granted under the 1995 and 1997 Stock Option Plans and the number and other terms of options be granted to each person under such plans. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS The Compensation Committee of U.S. Home & Garden Inc.'s Board of Directors consists of Messrs. Heiden, Raleigh and Schulberg. During the fiscal 48 year ended June 30, 2003, none of our executive officers served on the Board of Directors or the compensation committee of any other entity, any of whose officers served on the Board of Directors or Compensation Committee of U.S. Home & Garden Inc. STOCK OPTION PLANS In September 1991, we adopted a stock option plan (the "1991 Plan") pursuant to which 700,000 shares of Common Stock have been reserved for issuance upon the exercise of options designated as either (i) options intended to constitute incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as amended (the "Code") or (ii) non-qualified options ("NQO's"). ISOs may be granted under the 1991 Plan to our employees and officers. NQO's may be granted to consultants, directors (whether or not they are employees), and to our employees or officers. The purpose of the 1991 Plan is to encourage stock ownership by certain of our directors, officers and employees and certain other persons instrumental to our success and give them a greater personal interest in our success. The 1991 Plan is administered by the Board of Directors. The Board, within the limitations of the 1991 Plan, determines the persons to whom options will be granted, the number of shares to be covered by each option, whether the options granted are intended to be ISOs, the duration and rate of exercise of each option, the option purchase price per share and the manner of exercise, the time, manner and form of payment upon exercise of an option, and whether restrictions such as repurchase rights in U.S. Home & Garden Inc. are to be imposed on shares subject to options. ISOs granted under the 1991 Plan may not be granted at a price less than the fair market value of the common stock on the date of grant (or 110% of fair market value in the case of persons holding 10% or more of the voting stock of U.S. Home & Garden Inc.). The aggregate fair market value of shares for which ISOs granted to any employee are exercisable for the first time by such employee during any calendar year (under all of our stock option plans and those of any related corporation) may not exceed $100,000. NQO's granted under the 1991 Plan may not be granted at a price less than the fair market value of the Common Stock on the date of grant. Options granted under the 1991 Plan will expire not more than ten years from the date of grant (five years in the case of ISOs granted to persons holding 10% or more of our voting stock). 48 We have adopted a Non-Employee Director Stock Option Plan (the "Director Plan"). Only non-employee directors of U.S. Home & Garden Inc. are eligible to receive grants under the Director Plan. The Director Plan provides that eligible directors automatically receive a grant of options to purchase 5,000 shares of common stock at fair market value upon first becoming a director and, thereafter, an annual grant, in January of each year, of 5,000 options at fair market value. Options to purchase an aggregate of up to 100,000 shares of Common Stock are available for automatic grants under the Director Plan. We have adopted a 1995 Stock Option Plan ("1995 Plan") which provides for grants of options to purchase up to 1,500,000 shares of common stock. The Board of Directors or the Stock Option Committee (the "Committee"), as the case may be, will have discretion to determine the number of shares subject to each NQO (subject to the number of shares available for grant under the 1995 Plan and other limitations on grant set forth in the 1995 Plan), the exercise price thereof (provided such price is not less than the par value of the underlying shares of Common Stock), the term thereof (but not in excess of 10 years from the date of grant, subject to earlier termination in certain circumstances), and the manner in which the option becomes exercisable (amounts, intervals and other conditions). Directors who are also employed by us will be eligible to be granted ISOs or NQOs under such plan. The Board or Committee, as the case may be, also has discretion to determine the number of shares subject to each ISO, the exercise price and other terms and conditions thereof, but their discretion as to the exercise price, the term of each ISO and the number of ISOs that may vest in any calendar year is limited by the same Code provisions applicable to ISOs granted under the 1991 Plan. We have adopted a 1997 Stock Option Plan ("1997 Plan") which provides for grants of options to purchase up to 1,500,000 shares of Common Stock. The Board of Directors or the Committee of the 1997 Plan, as the case may be, will have discretion to determine the number of shares subject to each NQO (subject to the number of shares available for grant under the 1997 Plan and other limitations on grant set forth in the 1997 Plan), the exercise price thereof (provided such price is not less than the par value of the underlying shares of Common Stock), the term thereof (but not in excess of 10 years from the date of grant, subject to earlier termination in certain circumstances), and the manner in which the option becomes exercisable (amounts, intervals and other conditions). Directors who are also our employees will be eligible to be granted ISOs or NQOs under such plan. The Board or Committee, as the case may be, also 50 has discretion to determine the number of shares subject to each ISO, the exercise price and other terms and conditions thereof, but their discretion as to the exercise price, the term of each ISO and the number of ISOs that may vest in any calendar year is limited by the same Code provisions applicable to ISOs granted under the 1991 Plan. We have also adopted a 1999 Stock Option Plan ("1999 Plan") which provides for grants of options to purchase up to 900,000 shares of common stock. The Board of Directors or the Committee of the 1999 Plan, as the case may be, will have discretion to determine the number of shares subject to each NQO (subject to the number of shares available for grant under the 1999 Plan and other limitations on grant set forth in the 1999 Plan), the exercise price thereof (provided such price is not less than the fair market value of the underlying shares of Common Stock), the term thereof (but not in excess of 10 years from the date of grant, subject to earlier termination in certain circumstances), and the manner in which the option becomes exercisable (amounts, intervals and other conditions). Directors who are also our employees will be eligible to be granted ISOs or NQOs under such plan. The Board or Committee, as the case may be, also has discretion to determine the number of shares subject to each ISO, the exercise price and other terms and conditions thereof, but their discretion as to the exercise price, the term of each ISO and the number of ISOs that may vest in any calendar year is limited by the same Code provisions applicable to ISOs granted under the 1991 Plan. We have adopted the Non-Qualified Deferred Compensation Plan for Select Employees of U.S. Home & Garden Inc. ("Deferred Plan") and have amended our stock option plans, as well as certain option agreements which we had with Robert Kassel. Under the Deferred Plan and such amended stock option plans and agreements, the Board of Directors or its committee which administers the relevant stock option may grant permission to optionees to exercise their options with shares of U.S. Home & Garden Inc.'s common stock in which they have a holding period, for income tax purposes, of a least six months and defer the receipt of a portion of the shares subject to the option so exercised. The optionee has the right to designate the time or times of receipt of those shares pursuant to the Deferred Plan. The Deferred Plan does contain provisions for earlier issuance of those deferred shares on death, disability and other termination of employment (e.g., on a change of control of U.S. Home & Garden Inc.). We have, from time to time, also granted non-plan options to certain officers, employees and consultants. 51 DIRECTOR COMPENSATION During the fiscal year ended June 30, 2003 each of our three non-employee directors who served as directors during that fiscal year, Messrs. Heiden, Holsworth and Schulberg, received $5,000 for serving on our Board of Directors and received a grant of 5,000 options under the Non-Employee Director Plan. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. VOTING SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information at September 15, 2003, based on information obtained from the persons named below, with respect to the beneficial ownership of shares of common stock by (i) each person known by us to be the owner of more than 5% of the outstanding shares of common stock, (ii) each director, (iii) each Named Officer, and (iv) all executive officers and directors of U.S. Home & Garden Inc. as a group. 52 AMOUNT AND NATURE OF BENEFICIAL PERCENTAGE NAME OF BENEFICIAL OWNER OWNERSHIP(1)(2) OF CLASS ------------------------ --------------- -------- Robert Kassel 2,736,131(3)(4) 13.5 Richard Raleigh 2,000 * Richard Grandy 934,396(5) 5.2 Richard Kurz 10,000 (6) * Fred Heiden 15,258(7) * Brad Holsworth 11,000(8) * Jon Schulberg 15,258(7) * Joseph Owens, II 914,396(9) 5.1 Parker Martin 1,049,335(10) 5.8 All executive officers and directors as a group (seven persons) 2,947,647(3)(4)(6) 14.4 _____________ (7)(8)(11) *less than 1% ----------------------------------------------------------------------------- (1) Unless otherwise noted, we believe that all persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them. (2) A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from September 15, 2003 upon the exercise of warrants or options. Each beneficial owner's percentage ownership is determined by assuming that options or warrants that are held by such person (but not those held by any other person) and which are exercisable within 60 days from September 15, 2003 have been exercised. (3) Of such shares, (i) 138,650 are owned of record by Mr. Kassel's wife; however, because Ms. Kassel has appointed her husband as her proxy and attorney-in-fact to vote all 138,650 of the shares owned of record by her, Robert Kassel may also be deemed to have beneficial ownership of such shares. The address of Mr. Kassel is c/o U.S. Home & Garden Inc. 53 (4) Includes 2,313,693 shares of Common Stock issuable to Mr. Kassel upon exercise of options and warrants. (5) The address of Mr. Grandy is c/o Easy Gardener Products, Ltd. 3022 Franklin Avenue, Waco, TX 76710 (6) Represents shares issuable upon exercise of options. (7) Includes 15,000 shares of Common Stock issuable upon exercise of options. (8) Includes 10,000 shares of Common Stock issuable upon exercise of options. (9) The address of Mr. Owens is 8 Hillandale Road, Waco, Texas. (10) According to Schedule 13G filed by Mr. Martin with the SEC, the address for Mr. Martin is 121 S. Hope Street, #106, Los Angeles, California 90112. (11) Includes 2,513,693 shares of common stock issuable upon exercise of options. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS From time to time Mr. Kassel has borrowed monies from U.S. Home & Garden Inc. which borrowings are represented by an unsecured note. The note bears interest at the lower of the prime lending rate or 6% (effectively 4.00% at June 30, 2003). At June 30, 2003 and 2002, the balance on the outstanding note was $537,000. Total related interest income amounted to $24,000, $41,000 and $43,000 for the years ended June 30, 2003, 2002 and 2001, respectively. Principal payments are due in annual installments of $50,000 in 2004 through 2007 with the balance due in April 2008. As of the date of this report, the balance was $512,000. As noted under "Item 1-Business--Recent Developments" during the fiscal year ended June 30, 2003 we and our primary operating subsidiaries, Easy Gardener and Ampro, entered into an asset purchase agreement with Easy Gardener Products, an entity formed by current and former members of management of those subsidiaries, including Richard Grandy, our former Chief Operating Officer. Richard Kurz, our current Chief Financial Officer, will become an equity owner and a member of management of Easy Gardener Products after the consummation of the asset sale. Under the terms of the asset purchase agreement, Easy Gardener and Ampro are to sell their operations, including substantially all of their assets to this management buy-out group. These operations comprise approximately 99% of our consolidated sales and 98% of our consolidated assets. The proposed management buyout, which is expected to close in October 2003, is also 54 structured to include Easy Gardener Products' assumption of substantially all of the selling subsidiaries liabilities and the transfer by us of our obligations relating to the Trust. These liabilities comprise approximately 99% of our consolidated liabilities. Easy Gardener Products will pay us a total purchase price of $11,950,000, less certain expenses related to the transaction for the assets it is acquiring. Of this amount, $10,350,000 will be paid to us in cash at the closing and $1,600,000 will be paid to us in the form of a subordinated promissory note. The note will mature in 2009 subject to certain prepayments from excess cash flow. Interest on the principal amount outstanding from time to time will accrue at the rate of 9% per annum and will be capitalized by increasing the principal amount of the note. The note will be subordinated to the indebtedness of Easy Gardener Products under its senior credit facility and under its note to be issued to Central Garden & Pet Company. It will be senior to the debentures underlying the trust preferred securities issued by the Trust. In addition, Easy Gardener Products is to pay or assume our senior credit facility, including all borrowings outstanding under the facility as of the closing. In connection with this payment or assumption we are to be discharged from any future obligations under the facility. Easy Gardener Products will also assume our obligations under the Trust-related documents, including its issuance of a Guarantee and new debentures in the aggregate principal amount of $57,035,000, each identical to the current Guarantee and debentures. In connection with this assumption, we will be discharged from any further obligations under the Trust-related documents; and Easy Gardener Products will assume our obligations under an outstanding option granted by us in November 2001, which is exercisable for 94,875 of the trust preferred securities currently owned by us. In addition, in connection with the transaction Easy Gardener Products will pay Robert Kassel, our Chairman, Chief Executive Officer and President, $1,250,000 for entering into a non-compete agreement. 55 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Not applicable pursuant to SEC Release No. 33-8183 (as corrected by Release No. 33-8183A), which provides that the disclosure requirements of this Item are not effective until the Annual Report on Form 10-K for the first fiscal year ending after December 15, 2003. PART IV. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) (1) Financial Statements. The Financial Statements and Index follow this (2) Financial Statement Schedule. Schedule II-Valuation and Qualifying Accounts. (3) Exhibits Exhibit No. 2.1 Asset Purchase Agreement, dated December 11, 2002, by and between Easy Gardener Products, Ltd., EYAS International, Inc., U.S. Home & Garden Inc., Easy Gardener, Inc., Ampro Industries, Inc., and Weed Wizard Acquisition Corp, as amended (incorporated by reference to Exhibit 2.1 and Annex A to the Registration Statement on Form S-4 of Easy Gardener Products, Ltd. and U.S. Home & Garden Trust I (SEC File no. 333-102296). 3.1 Certificate of Incorporation, as amended.* 3.2 By-laws of the registrant, incorporated by reference to Exhibit 3(b) of the registrant's Registration Statement on Form S-1 (Registration No. 33-45428). 4.1 Form of certificate evidencing Common Stock, $.001 par value, of the registrant, incorporated by reference to Exhibit 4.1 of the registrant's Registration Statement on Form S-1 (Registration No. 333-38483). 56 4.2 Rights Agreement dated as of October 1, 1998 between the registrant and Continental Stock Transfer & Trust Company, incorporated by reference to Exhibit 4.1 filed with the registrant's Current Report on Form 8-K for the event dated October 1, 1998. 10.1 Employment Agreement of Robert Kassel. +# 10.2 1991 Stock Option Plan, incorporated by reference to Exhibit 10.5 of the registrant's Registration Statement on Form S-1 (Registration No. 33-45428).# 10.3 1995 Stock Option Plan, as amended.** # 10.4 Non-Employee Director Stock Option Plan.* # 10.5 1997 Stock Option Plan, as amended. ** # 10.6 Lease with respect to the registrant's executive offices, incorporated by reference to Exhibit 10.14 of the registrant's Form 10-KSB for the fiscal year ended June 30, 1992. 10.7 February 8, 1995 modification to lease with respect to the registrant's executive offices.* 10.8 May 6, 1997 modification to lease with respect to the registrant's executive offices. ++ 10.9 1999 Stock Option Plan (incorporated by reference to Exhibit A filed with the registrant's Proxy Statement dated May 14, 1999 filed on Schedule 14A).# 10.10 Lease and lease extension agreements between Crawford-Austin Mfg. Co. and Easy Gardener. * 10.11 Leases with respect to Weatherly's warehouse facilities in Paris, Kentucky. (Incorporated by reference to Exhibit 10.12 filed with the registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002). 10.12 Lease Extension, dated February 14, 2002, between Easy Gardener and Crawford-Austin Mfg. Co. (Incorporated by reference to Exhibit 10.13 filed with the registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002). 57 10.13 Asset Purchase Agreement dated as of February 25, 1998 by and among the registrant, Weed Wizard, Weed Wizard, Inc and the Weed Wizard stockholders (incorporated by reference to Exhibit 10.1 filed with the registrant's Form 8-K for the event dated February 26, 1998). 10.14 Commercial Building Lease, dated June 12, 1998 between Easy Gardener, Inc. and Norman Adams, James Anderson, Donald Bryan and Pamela Butler (incorporated by reference to Exhibit 10.24 filed with the registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1998). 10.15 Form of Indenture between the registrant and Wilmington Delaware Subordinated Trust, as trustee.+++ 10.16 Deferred Compensation Plan for Select Employees ** # 10.17 Note and Warrant Purchase, Guaranty and Security Agreement dated as of November 15, 2001 among, U.S. Home & Garden Inc., Easy Gardener, Inc. each of the direct or indirect subsidiaries of U.S. Home & Garden Inc. which are signatories to the Note and Warrant Purchase Agreement and the purchasers listed on the signature page of the Note and Warrant Purchase Agreement. ++++ 10.18 The Loan and Security Agreement between U.S. Home & Garden, Inc., Ampro Industries, Inc., Easy Gardener, Inc., Wells Fargo Foothill, and Abelco Finance, LLC dated October 30, 2002. (Incorporated by reference to Exhibit 10.1 filed with the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002). 10.19 Settlement Agreement, dated as of November 1, 2002 by and between U.S. Home & Garden Inc., Easy Gardener, Inc., LEG Partners Debenture SBIC, L.P., a Delaware limited partnership, LEG Partners III SBIC, L.P., a Delaware limited partnership, LEG Co-Investors, LLC, a Delaware limited liability company, 555 Madison Investors II LLC, f/k/a LEG Co-Investors II, LLC, a Delaware limited liability company, 555 Madison Investors, LLC, a Delaware limited liability company, Golub Associates LLC, a New York limited liability company and Golub Associates Incorporated, a New York corporation. (incorporated by reference to Exhibit 10.1 filed with the registrant's Quarterly Report on Form 10-Q for the qaurter ended December 31, 2002). 58 10.20 Non-plan option agreements, as amended, between the Registrant and Robert Kassel with respect to options originally granted on September 8, 1993, July 1, 1994, August 30, 1996, and December 24, 1996. # 10.21 Class B Warrant agreement between the Registrant and Robert Kassel.# 10.22 Amendment No. 2 to the November 1, 2002 Settlement Agreement between U.S. Home & Garden Inc., Easy Gardener, Inc. LEG Partners Debenture SBIC, L.P., a Delaware limited partnership, LEG Partners III SBIC, L.P., a Delaware limited partnership, LEG Co-Investors, LLC, a Delaware limited liability company, 555 Madison Investors II LLC, f/k/a LEG Co-Investors II, LLC, a Delaware limited liability company, 555 Madison Investors, LLC, a Delaware limited liability company, Golub Associates LLC, a New York limited liability company and Golub Associates Incorporated, a New York corporation. 21 Subsidiaries. (Incorporated by reference to Exhibit 21 filed with the registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002). 23 Consent of BDO Seidman, LLP. 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002 32.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Incorporated by reference to the comparable exhibit filed with the registrant's Form 10-KSB for the fiscal year ended June 30, 1995. ** Incorporated by reference to the applicable exhibit filed with the registrant's Form 10-K for the fiscal year ended June 30, 1999. # Denotes management compensatory contract or plan or arrangement. 59 + Incorporated by reference to the applicable exhibit contained in the registrant's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1996. ++ Incorporated by reference to the exhibit filed with the registrant's Form 10-K for the fiscal year ended June 30, 1997. +++ Incorporated by reference to the exhibit filed with the registrant's Registration Statement on Form S-1 (File No. 333-48519). ++++ Incorporated by reference to the exhibit filed with the registrant's Form 10-Q for the period ended December 31, 2001. (b) Report on Form 8-K. No reports on Form 8-K were filed by the registrant during its fiscal quarter ended June 30, 2003. 60 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. U.S. Home & Garden Inc. ------------------------------------------- (Registrant) By:/s/ Robert Kassel ----------------------------------------- Robert Kassel, Chief Executive Officer Dated: October 14, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Robert Kassel Chairman of the Board of Directors, Chief October 14, 2003 ------------------ Executive Officer, President, Secretary Robert Kassel and Treasurer (Chief Executive Officer) /s/ Richard Kurz Chief Financial Officer (Principal October 14, 2003 ------------------ Financial and Accounting Officer) Richard Kurz /s/ Richard Raleigh Director October 14, 2003 --------------------------- Richard Raleigh /s/ Brad Holsworth Director October 14, 2003 --------------------------- Brad Holsworth /s/ Jon Schulberg Director October 14, 2003 ------------------ Jon Schulberg /s/ Fred Heiden Director October 14, 2003 ------------------ Fred Heiden
61 U.S. Home & Garden Inc. and Subsidiaries ================================================================================ Consolidated Financial Statements June 30, 2003 and 2002 and for the Years Ended June 30, 2003, 2002 and 2001 U.S. Home & Garden Inc. and Subsidiaries Contents ================================================================================ Report of Independent Certified Public Accountants 3 Consolidated Financial Statements Consolidated balance sheets as of June 30, 2003 and 2002 4 and 5 Consolidated statements of operations for the years ended June 30, 2003, 2002 and 2001 6 and 7 Consolidated statements of stockholders' equity (deficit) for the years ended June 30, 2003, 2002 and 2001 8 Consolidated statements of cash flows for the years ended June 30, 2003, 2002 and 2001 9 and 10 Summary of accounting policies 11 - 17 Notes to consolidated financial statements 18 - 43 Consolidated Financial Statement Schedule Schedule II-Valuation and Qualifying Accounts 44
Note: All other schedules have been omitted since the required information is contained in the Consolidated Financial Statements or such schedules are not required. 2 Report of Independent Certified Public Accountants Board of Directors U.S. Home & Garden Inc. and Subsidiaries San Francisco, California We have audited the accompanying consolidated balance sheets of U.S. Home & Garden Inc. and Subsidiaries as of June 30, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended June 30, 2003. We have also audited Schedule II - Valuation and Qualifying Accounts (Schedule). These financial statements and Schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and Schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and Schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and Schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and Schedule. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of U.S. Home & Garden Inc. and Subsidiaries at June 30, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2003 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 7 to the consolidated financial statements, the Company changed its method of accounting for goodwill during the year ended June 30, 2002. Also, in our opinion, the Schedule presents fairly, in all material respects, the information set forth therein. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 9 to the financial statements, the Company is in violation of certain loan covenants, which raises substantial doubt about its ability to continue as a going concern. As a result of the default the bank can demand payment at anytime. Management's plans in regard to this matter are described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ BDO Seidman, LLP Certified Public Accountants Kalamazoo, Michigan August 23, 2003 3 U.S. Home & Garden Inc. and Subsidiaries Consolidated Balance Sheets ================================================================================
June 30, 2003 2002 ---------------------------------------------------------------------------------------------------------------------- Assets (Notes 1,3, and 9) Current: Cash and cash equivalents $ 822,000 $ 219,000 Accounts receivable, less allowance for doubtful accounts of $630,000 and $1,381,000 (Note 4) 24,467,000 26,243,000 Inventories (Note 5) 9,138,000 8,023,000 Prepaid expenses and other current assets 721,000 988,000 Refundable income taxes 137,000 405,000 Deferred tax asset (Note 16) 385,000 688,000 Current assets of discontinued operations (Note 2) 62,000 1,052,000 ---------------------------------------------------------------------------------------------------------------------- Total Current Assets 35,732,000 37,618,000 Property and Equipment, net (Note 6) 4,018,000 4,850,000 Intangible Assets: Goodwill (Note 7) 49,878,000 49,861,000 Deferred financing costs, net of accumulated amortization of $807,000 and $578,000 3,975,000 3,570,000 Product rights, patents and trademarks, net of accumulated amortization of $205,000 and $163,000 467,000 509,000 Non-compete agreements, net of accumulated amortization of $766,000 and $407,000 744,000 1,103,000 Package tooling costs, net of accumulated amortization of $2,418,000 and $1,860,000 1,204,000 1,216,000 Officer's Receivable (Note 8) 512,000 512,000 Long-Term Assets of Discontinued Operations (Note 2) -- 100,000 Other Assets 29,000 26,000 ---------------------------------------------------------------------------------------------------------------------- $ 96,559,000 $ 99,365,000 ======================================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. 4 U.S. Home & Garden Inc. and Subsidiaries Consolidated Balance Sheets ================================================================================
June 30, 2003 2002 --------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current: Revolving credit facility (Note 9) $ 15,085,000 $ 15,036,000 Accounts payable (Note 4) 8,954,000 7,180,000 Accrued rebates 1,433,000 931,000 Accrued commissions 1,074,000 1,437,000 Accrued co-op advertising 774,000 740,000 Accrued other expenses 1,786,000 1,577,000 Current portion of long-term debt (Note 9) 12,142,000 7,712,000 Current liabilities of discontinued operations (Note 2) 16,000 277,000 --------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 41,264,000 34,890,000 Deferred Tax Liability (Note 16) 239,000 542,000 Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures (Note 10) 57,092,000 56,951,000 --------------------------------------------------------------------------------------------------------------------- Total Liabilities 98,595,000 92,383,000 --------------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Notes 11 and 12) Stockholders' Equity (Deficit) (Note 13): Preferred stock, 1,000,000 shares authorized and unissued -- -- Common stock, $.001 par value - shares authorized, 75,000,000; 21,841,000 and 21,641,000 shares issued 22,000 22,000 Additional paid-in capital 52,470,000 52,351,000 Retained deficit (41,700,000) (32,563,000) --------------------------------------------------------------------------------------------------------------------- 10,792,000 19,810,000 Less: Treasury stock, 3,890,000 shares at cost (12,828,000) (12,828,000) --------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity (Deficit) (2,036,000) 6,982,000 --------------------------------------------------------------------------------------------------------------------- $ 96,559,000 $ 99,365,000 =====================================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. 5 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Operations ================================================================================
Year ended June 30, 2003 2002 2001 ----------------------------------------------------------------------------------------------------------------------------------- Net Sales (Note 4) $ 76,244,000 $ 78,947,000 $ 78,863,000 Cost of Sales (Note 4) 43,453,000 43,358,000 44,065,000 ----------------------------------------------------------------------------------------------------------------------------------- Gross Profit 32,791,000 35,589,000 34,798,000 ----------------------------------------------------------------------------------------------------------------------------------- Operating Expenses: Selling and shipping 18,710,000 18,302,000 16,389,000 General and administrative 9,315,000 9,384,000 14,249,000 Restructuring charges (Note 15) -- -- 2,860,000 ----------------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 28,025,000 27,686,000 33,498,000 ----------------------------------------------------------------------------------------------------------------------------------- Income From Operations 4,766,000 7,903,000 1,300,000 Other Income (Expense): Refinance and transaction costs (Note 14) (4,291,000) (254,000) -- Interest expense, net (7,994,000) (7,291,000) (7,331,000) ----------------------------------------------------------------------------------------------------------------------------------- Income (Loss) From Continuing Operations Before Income Taxes and Cumulative Effect of a Change in Accounting Principle (7,519,000) 358,000 (6,031,000) Income Tax Benefit (Expense) (Note 16) (133,000) (228,000) 1,406,000 ----------------------------------------------------------------------------------------------------------------------------------- Income (Loss) From Continuing Operations Before Cumulative Effect of a Change in Accounting Principle (7,652,000) 130,000 (4,625,000) Discontinued Operations (Note 2): Loss from discontinued operations, net of tax benefit of $2,491,000 in 2001 and net of minority interest of $1,754,000 in 2001 (1,436,000) (1,760,000) (16,253,000) Gain (loss) on disposal of discontinued operations, net of minority interest of $1,239,000 and $1,118,000 in 2002 and 2001, respectively (49,000) 20,000 (4,551,000) ----------------------------------------------------------------------------------------------------------------------------------- Loss Before Cumulative Effect of a Change in Accounting Principle (9,137,000) (1,610,000) (25,429,000) Cumulative Effect of a Change in Accounting Principle (Note 7) -- (9,882,000) -- ----------------------------------------------------------------------------------------------------------------------------------- Net Loss $ (9,137,000) $(11,492,000) $(25,429,000) ===================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. 6 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Operations ================================================================================
Year ended June 30, 2003 2002 2001 ----------------------------------------------------------------------------------------------------------------- Basic Earnings(loss)per Share (Note 17): Income (loss) from continuing operations per common share before cumulative effect of a change in accounting principle $ (0.43) $ 0.01 $ (0.26) Discontinued operations (0.08) (0.10) (1.14) Cumulative effect of a change in accounting principle -- (0.57) -- ----------------------------------------------------------------------------------------------------------------- Net Loss per Common Share $ (0.51) $ (0.66) $ (1.40) ----------------------------------------------------------------------------------------------------------------- Diluted Earnings (loss)per Share (Note 17): Income (loss) from continuing operations per common share before cumulative effect of a change in accounting principle $ (0.43) $ 0.01 $ (0.26) Discontinued operations (0.08) (0.10) (1.14) Cumulative effect of a change in accounting principle -- (0.55) -- ----------------------------------------------------------------------------------------------------------------- Net Loss per Common Share $ (0.51) $ (0.64) $ (1.40) =================================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. 7 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity (Deficit) ================================================================================
Common Stock ------------------------ Additional Retained Total Number of Paid-In Earnings Treasury Stockholders' Shares Amount Capital (Deficit) Stock Equity ---------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 2000 21,751,000 $ 22,000 $ 51,410,000 $ 4,358,000 $(10,687,000) $ 45,103,000 Compensation related to repriced stock options -- -- 261,000 -- -- 261,000 Issuance of stock options for consulting services -- -- 175,000 -- -- 175,000 Retirement of shares (318,000) (1,000) -- -- -- (1,000) Repurchase of common stock for treasury -- -- -- -- (2,141,000) (2,141,000) Net loss -- -- -- (25,429,000) -- (25,429,000) ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 2001 21,433,000 21,000 51,846,000 (21,071,000) (12,828,000) 17,968,000 Compensation related to repriced stock options -- -- 103,000 -- -- 103,000 Issuance of options and warrants to note holders -- -- 402,000 -- -- 402,000 Release of shares from Non-Qualified Deferred Compensation Plan (Note 13) 208,000 1,000 -- -- -- 1,000 Net loss -- -- -- (11,492,000) -- (11,492,000) ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 2002 21,641,000 22,000 52,351,000 (32,563,000) (12,828,000) 6,982,000 Compensation related to repriced stock options -- -- 119,000 -- -- 119,000 Exercise of options 200,000 -- -- -- -- -- Net loss -- -- -- (9,137,000) -- (9,137,000) ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 2003 21,841,000 $ 22,000 $ 52,470,000 $(41,700,000) $(12,828,000) $ (2,036,000) ===================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. 8 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Cash Flows ================================================================================
Year ended June 30, 2003 2002 2001 ---------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income (loss) from continuing operations before cumulative effect of a change in accounting principle $(7,652,000) $ 130,000 $(4,625,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for losses on accounts receivable 25,000 425,000 646,000 Depreciation and other amortization 3,113,000 2,768,000 5,686,000 Write-off of deferred financing costs 1,928,000 254,000 -- Trust Preferred payments retained and applied against note receivable 141,000 -- -- Payment-in-kind interest 142,000 -- -- Restructuring charges, net of cash -- -- 2,708,000 Deferred income taxes -- (146,000) (1,148,000) Compensation related to repriced stock options 119,000 103,000 261,000 Loan discount amortization 67,000 97,000 -- Consulting expenses related to stock options -- -- 175,000 Changes in operating assets and liabilities: Accounts receivable 1,751,000 (7,256,000) (474,000) Inventories (1,115,000) 1,195,000 1,635,000 Prepaid expenses, refundable income taxes and other current assets 267,000 (94,000) (790,000) Other assets (3,000) 278,000 259,000 Accounts payable and accrued expenses 2,424,000 2,434,000 (5,799,000) ---------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Operating Activities 1,207,000 188,000 (1,466,000) ---------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities: Decrease in restricted cash -- -- 1,582,000 Proceeds on sale of property and equipment -- -- 3,527,000 Purchase of equipment (797,000) (791,000) (1,311,000) Purchase of package tooling and other intangibles (555,000) (384,000) (631,000) Decrease in officer receivable -- 34,000 84,000 Payment for purchase of businesses, net of cash acquired (17,000) (111,000) (863,000) ---------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Investing Activities (1,369,000) (1,252,000) 2,388,000 ----------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements. 9 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Cash Flows ================================================================================
Year ended June 30, 2003 2002 2001 ------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net proceeds from (payments on) revolving credit facility $ 49,000 $ (6,614,000) $ 4,650,000 Proceeds from issuance of long-term debt 12,000,000 8,250,000 -- Payments on long-term debt (8,616,000) (233,000) -- Changes in other long-term liabilities and purchase of mandatorily redeemable preferred securities -- (20,000) (801,000) Deferred capitalization of finance costs (2,012,000) (1,119,000) (99,000) Proceeds from issuance of stock -- -- -- Repurchase of common stock for treasury -- -- (2,141,000) Release (retirement) of shares -- 1,000 (1,000) ------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 1,421,000 265,000 1,608,000 ------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents from continuing operations 1,259,000 (799,000) 2,530,000 Cash used in discontinued operations (656,000) (1,723,000) (3,318,000) ------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 603,000 (2,522,000) (788,000) Cash and Cash Equivalents, beginning of year 219,000 2,741,000 3,529,000 ------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents, end of year $ 822,000 $ 219,000 $ 2,741,000 -------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements. 10 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ Nature of Business U.S. Home & Garden Inc. (the "Company"), through its subsidiaries, is a leading manufacturer and marketer of a broad range of consumer lawn and garden products. The Company's products include weed preventive landscape fabrics, fertilizer spikes, decorative landscape edging, grass and flower seed products, shade cloth and root feeders, which are sold under recognized brand names, such as WeedBlock(R), Jobe's(R), Emerald Edge(R), Shade Fabric(TM), Ross(R), Tensar(R), Amturf(R), and Landmaster(R). The Company markets its products through most large national home improvement and mass merchant retailers ("Retail Accounts"), including Home Depot, Lowe's, Kmart, Wal-Mart, Ace Hardware and Tru-Serv in North America and other outlets in Europe. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries over which it has financial or management control including Weatherly Consumer Products Group, Inc. (Weatherly), Easy Gardener, Inc. (Easy Gardener), Golden West Agri-Products, Inc. (Golden West), Ampro Industries, Inc. (Ampro), and its discontinued operations Weed Wizard Acquisition Corp. (Weed Wizard) and Egarden Inc. (EGarden) since their dates of acquisition (See Notes 1 and 2). Additionally, U.S. Home & Garden Trust I (See Note 10) has been included since its formation in April 1998. All significant intercompany accounts and transactions have been eliminated. Inventories Inventories, which consist of raw materials, finished goods, and packaging materials, are stated at the lower of cost or market; cost is determined by the first-in, first-out (FIFO) cost method. Property and Equipment Property and equipment are stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets or, in the case of leasehold improvements, over the life of the lease, if shorter. Maintenance and repairs are charged to expense as incurred. Major improvements are capitalized. Intangible Assets Goodwill Goodwill, which relates to the Company's acquisitions, represents the excess of cost over net assets acquired. For the year ended June 30, 2001 goodwill was amortized over periods of five to thirty years using the straight-line method. Effective July 1, 2001, the Company ceased the amortization of goodwill in conjunction with the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. See New Accounting Pronouncements and Note 7. Goodwill is tested for impairment annually by comparing the fair value of each reporting unit with its carrying value. 11 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ Deferred Financing Costs Direct costs associated with the Company's debt borrowings are being capitalized and amortized over the life of the related debt. Product Rights Product rights are being amortized over estimated useful lives of fifteen to twenty years. Non-Compete Agreements The non-compete agreements were entered into with the acquisitions of Ampro and Weatherly. The Weatherly agreement is being amortized over its twenty-year term. The Ampro non-compete agreement, which was triggered when an officer of Ampro was terminated, is being amortized over a three-year period from the date of such termination. Package Tooling Costs Package tooling costs associated with Easy Gardener and Weatherly products, primarily consisting of the design and construction of printing plates and cutting dies used for the production of packaging, are being amortized over three years using the straight-line method. Long-Lived Assets Long-lived assets with definite useful lives are tested for recoverability when circumstances suggest a possible impairment. Recovery is evaluated by comparing undiscounted estimated future cash flows to the current carrying value. Revenue Recognition Sales are recorded as products are shipped to customers. Sales are free on board (FOB) shipping point. Sales Incentives The Company enters into contractual agreements with its customers for rebates on certain products it sells. The Company records the amounts as reductions of revenue and records a liability reflected as accrued rebates on the consolidated balance sheets. As these rebate percentages are determined when the contracts are entered into, these revenue reductions are recorded at the time the related revenue is recorded based upon the expected sales levels for the period covered by the rebate. Earnings Per Share Basic earnings (loss)per share includes no dilution and is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution of securities that could share in the earnings (loss) of an entity. 12 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ Income Taxes The Company provides 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. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in income in the period that includes the enactment date. To the extent that available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance is established (See Note 16). Income Statement Cost of Goods Sold Classifications The caption cost of goods sold is comprised of standard material costs, including a factor for inbound freight, standard labor costs, and standard overheads applied with variation accounts for material consumption variances and material purchase price variances, labor usage and labor consumption variances and overhead absorption and expenses variances as well as obsolete inventory. Generally, cost of goods sold are the costs incurred to complete the finished inventory ready for delivery to customers. Selling and Shipping The caption selling and shipping expenses includes the cost of the sales and marketing departments, the cost of the shipping, handling and warehousing functions, co-op advertising, commissions on sales, in store service representatives costs and outbound freight. General and Administrative The caption general and administrative includes all other costs of the operation including customer service, finance, general management and uncollectible balances. Shipping and Handling Amounts billed to customers for shipping and handling are recorded as revenue. All shipping and handling expenses are included in the selling and shipping caption and totaled approximately $6,816,000, $5,363,000 and $4,698,000 for the years ended June 30, 2003, 2002 and 2001, respectively. Advertising Costs The Company incurs advertising expense primarily relating to cooperative advertising credits granted to customers based on qualified expenses incurred by the customers to advertise the Company's products. Cooperative advertising credits are usually limited to a percentage of an agreed-upon sales volume. Cooperative advertising credits are accrued based on sales volume and advertising frequency, pursuant to specific agreements. Such costs are classified as selling expenses. The Company also incurs advertising expense relating to the distribution of catalogs and the broadcasting of radio and television commercials. Advertising costs are expensed as incurred. Advertising expense was approximately $2,592,000, $2,934,000 and $3,012,000 during the years ended June 30, 2003, 2002 and 2001. 13 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents The Company considers all short-term investments purchased with an initial maturity of three months or less to be cash equivalents. Stock-Based Compensation The Company has adopted the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, with respect to non-employee stock-based compensation. The fair value method is required for all stock-based compensation issued to nonemployees. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Companies are permitted to continue to account for employee stock-based compensation under Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, but are required to disclose pro forma net income and earnings per share as if the fair value method had been adopted. The Company has elected to continue to account for employee stock-based compensation under APB No. 25. Under the accounting provisions of SFAS No. 123, the Company's net loss and net loss per common share for 2003, 2002 and 2001 would have been adjusted to the pro forma amounts indicated below:
Year ended June 30, 2003 2002 2001 ---------------------------------------------------------------------------------------------------------------- Net Loss: As reported $ (9,137,000) $ (11,492,000) $ (25,429,000) Pro forma (net of tax effect) (9,140,000) (11,494,000) (25,442,000) Net Loss per common share: Basic, as reported (.51) (.66) (1.40) Basic, pro forma (.51) (.66) (1.40) Dilutive, as reported (.51) (.64) (1.40) Dilutive, pro forma (.51) (.64) (1.40) ----------------------------------------------------------------------------------------------------------------
14 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ Segment Information The Company's primary continuing operations are in one reportable segment - the manufacture and sale of consumer lawn and garden products. The Company has aggregated its operating segments into a single reportable segment. See disclosure regarding revenue from external customers for each significant type of product and service at Note 4. Financial Instruments The Company's financial instruments consist of cash and cash equivalents, accounts receivable, officer's receivable, debt and mandatorily redeemable preferred securities. The carrying value of cash and cash equivalents and accounts receivable approximate fair value based upon the liquidity and short-term nature of the assets. The carrying value of the officer's receivable and debt approximates the fair value based upon short-term and long-term borrowings at interest rates which approximate current rates. See Note 10 regarding valuation of mandatorily redeemable preferred securities. Cash and cash equivalents are held principally at three high quality financial institutions. At times, such balances may be in excess of the FDIC insurance limit. Reclassifications Certain amounts as previously reported have been reclassified to conform to current year classifications. New Accounting Pronouncements In April 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No 13, and Technical Corrections. SFAS No. 4 required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. SFAS No. 145 requires any gain or loss from the extinguishment of debt to meet the requirements of APB No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions to be classified as an extraordinary item, otherwise the item would be classified in the results of continuing operations. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods that does not meet the criteria of APB No. 30 for classification as an extraordinary item shall be reclassified. The provisions of the statement related to the rescission of SFAS No. 4 were adopted in fiscal 2003 and the effect was not material. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits 15 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ and Other Costs to Exit an Activity. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. SFAS No. 146 did not have an effect on the Company's financial statements. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted SFAS No. 148 during the year ended June 30, 2003. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The provisions of this statement are effective for contracts entered into or modified after June 30, 2003. The Company does not expect SFAS No. 149 to have an effect on the financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the Company for periods ending after June 30, 2003. SFAS No. 150 did not have an effect on the Company's financial statements. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of the Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in the Interpretation were effective for the Company for the period ended March 31, 2003, and did not have an effect on the Company's financial statements. 16 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. This Interpretation addresses consolidation by business enterprises of variable interest entities. The Interpretation will apply to the Company for the periods ended after June 30, 2003. The Company does not expect the Interpretation to have an effect on the financial statements. 17 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 1. Business The Company has consummated the following eleven acquisitions of lawn and garden Acquisitions companies or product lines for a total of approximately $111 million in consideration: o Golden West Chemical Distributors, Inc. - A manufacturer of humic acid-based products designed to improve crop yield, which was acquired in August 1992 for approximately $1.1 million in cash and $1.1 million of promissory notes. o Easy Gardener, Inc. - A manufacturer of multiple fabric landscaping products including Weedblock(R), which was acquired in September 1994 for approximately $21.3 million consisting of $8.8 million in cash, a $10.5 million promissory note and two convertible notes each in the principal amount of $1.0 million. Approximately $2.2 million of additional purchase price was contingent on Easy Gardener meeting certain income requirements. All of these amounts have been paid. o Emerald Products LLC - Manufacturer of decorative landscaping edging, which was acquired in August 1995 for $835,000 in cash and a $100,000 promissory note. o Weatherly Consumer Products Group, Inc. - a manufacturer of fertilizer spikes and other lawn and garden products, which was acquired in August 1996 for 1,000,000 shares of common stock valued at $3.0 million and approximately $22.9 million in cash. o Plasti-Chain product line of Plastic Molded Concepts, Inc. - A line of plastic chain links and decorative edgings, which was acquired from Plastic Molded Concepts, Inc. in May 1997 for approximately $4.3 million in cash. o Weed Wizard, Inc. - A manufacturer and distributor of weed trimmer replacement heads, all of whose assets were acquired in February 1998 for approximately $16.0 million, plus an additional $1.7 million for excess working capital and acquisition expenses. Operations were discontinued during 2002 - see Note 2. o Landmaster Products, Inc. - A manufacturer and distributor of polyspun landscape fabrics for use by consumers and professional landscapers, substantially all of whose assets were acquired in March 1998 for approximately $3.0 million, plus an additional $600,000 for certain assets and acquisition expenses. 18 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ o Tensar(R) consumer products line of The Tensar Corporation - A line of lawn and garden specialty fencing, which was acquired from The Tensar Corporation in May 1998 for approximately $5.4 million, plus an additional $1 million for inventory. o Ampro Industries, Inc. - A manufacturer and distributor of lawn and garden products including specialty grass and flower seeds. The Company acquired all of the outstanding stock of Ampro for approximately $24.6 million in October 1998. o E-Garden, Inc. (now Egarden, Inc.) - The Company's business-to-business Internet subsidiary was acquired in June 1999 for approximately $400,000 plus expenses of approximately $100,000. Operations were discontinued during 2001 - see Note 2. o Findplants.com - An electronic horticulture catalogue and locator that provides business-to-business service for commercial growers and wholesalers which was acquired by Egarden, Inc. in May 2000 for approximately $537,000. Operations were discontinued during 2001 - see Note 2. All of the above acquisitions were accounted for as purchases and, accordingly, the results of operations of the acquired companies have been included in the consolidated statements of income since their respective acquisition dates. 2. Discontinued Operations In June 2002, the Company announced that is was discontinuing its Weed Wizard operations effective September 30, 2002. Despite the Company's efforts to increase sales and return to profitability, Weed Wizard experienced continued erosion of its business. The Company recorded an estimated net loss on disposal of the Weed Wizard component of $49,000 and $1,116,000 for the years ended June 30, 2003 and 2002, respectively, relating to the write-down of all assets to fair value less cost to sell. In addition to the loss on disposal, the Company had a net loss from operations of Weed Wizard of $1,436,000 for the year ended June 30, 2003, $1,760,000 for the year ended June 30, 2002, and $9,124,000, net of income tax benefit of $2,491,000 for the year ended June 30, 2001. An impairment charge of $8,500,000, net of tax effect of $2,320,000, was recorded in June 2001 to write off the net goodwill balance associated with Weed Wizard. The Company's policy is to periodically evaluate its long-lived assets for possible impairment. If the evaluation determines that the long-lived assets have been impaired, the assets are written down to their estimated fair value. Due to the recurring operating losses of Weed Wizard, the product recall in a prior year, and the subsequent unsuccessful product launch of the replacement product through a complete sales season, the evaluation was performed and the estimated impairment loss was recognized during 2001. Revenues for Weed Wizard for the years ended June 30, 2003, 2002, and 2001, were $7,000, $672,000 and $1,912,000, respectively. In June 2001, the Company announced that it was discontinuing its e-commerce imitative, which it was conducting though its subsidiary, Egarden, Inc. (Egarden), effective June 30, 2001. During the year ended June 30, 2001, the Company recorded an estimated net loss on disposal of Egarden 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. 19 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ All severance payments have been made, and no adjustments were made to the liability previously recorded for severance payments. All of the assets of Egarden, including amounts written off, were sold during the year ended June 30, 2002. During the year ended June 30, 2002, the Company recorded a net gain on the disposal of Egarden of $1,136,000, as a result of the write off of minority interest of $1,239,000 as the subsidiary was liquidated. In addition to the net loss on disposal in 2001, the Company had a net loss from the operations of Egarden of $7,129,000, net of minority interest of $1,754,000 for the year ended June 30, 2001. Revenues of Egarden for the year ended June 30, 2001 were not material. The assets and liabilities of discontinued operations held for sale reported in the consolidated balance sheets consist of the following: June 30, 2003 Egarden ------------------------------------------------------------ Current Assets: Cash and cash equivalents $ 62,000 ------------------------------------------------------------ Current Liabilities: Accrued expenses $ 16,000 ------------------------------------------------------------
June 30, 2002 --------------------------------------------------------- Weed Wizard Egarden Total ------------------------------------------------------------------------------------------------- Current Assets: Cash and cash equivalents $ -- $ 62,000 $ 62,000 Accounts receivable 385,000 -- 385,000 Inventories 274,000 -- 274,000 Other current assets 331,000 -- 331,000 ------------------------------------------------------------------------------------------------- Total Current Assets $ 990,000 $ 62,000 $ 1,052,000 ------------------------------------------------------------------------------------------------- Long-Term Assets- Property and Equipment, net $ 100,000 $ -- $ 100,000 ------------------------------------------------------------------------------------------------- Current Liabilities: Accounts payable $ 98,000 $ -- $ 98,000 Accrued expenses 163,000 16,000 179,000 ------------------------------------------------------------------------------------------------- Total Current Liabilities $ 261,000 $ 16,000 $ 277,000 -------------------------------------------------------------------------------------------------
20 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company's consolidated financial statements and notes have been restated for all periods presented to reflect the discontinued components. The assets, liabilities, net operations, and net cash flows have been reported as "Discontinued Operations" in the accompanying consolidated financial statements. The restated notes exclude amounts related to these discontinued components. 3. Proposed Asset Sale Management has been actively pursuing a plan to sell substantially all of the assets of the Company as discussed below. In December 2002, the Company announced an agreement to sell assets comprising substantially all of its assets on a consolidated basis to a management group led by Richard Grandy, the former Chief Operating Officer of the Company. Under the terms of the Asset Purchase Agreement, as amended, Easy Gardener Products Ltd., a new entity owned by the management group will acquire substantially all of the assets and assume substantially all of the liabilities of Easy Gardener, Inc. and its subsidiaries, Easy Gardener, UK, Ltd, Weatherly Consumer Products Group, Inc. and Weatherly Consumer Products, Inc. and Ampro Industries, Inc. The new company will pay or assume our senior credit facility, including all borrowings outstanding under the facility at closing. The new company will also assume the obligations of the parent company, US Home & Garden, Inc., (USHG) to U.S. Home & Garden Trust I, including the obligation to make monthly payments, which will allow the Trust to make distributions to holders of its Trust Preferred Securities. The proposed sale is subject to a number of conditions including the buyer obtaining the required financing. Before subtracting costs of the transaction including certain estimated costs which the Company agrees to pay at closing, the Company expects to receive net cash of $11,950,000 upon the following terms: net cash of $10,350,000 paid at closing, and an additional $1,600,000 in the form of a subordinated promissory note delivered at closing. The Asset Purchase Agreement provides that the proposed transaction must be completed on or before October 31, 2003. 21 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 4. Concentration of Credit Risk and Significant Relationships Trade accounts receivable are due from numerous customers located in many geographic regions throughout the United States. The Company performs ongoing credit evaluations of its customers' financial condition and establishes an allowance for doubtful accounts based upon credit risk of specific customers, historical trends and other information. The Company does not require collateral from its customers. Accounts receivable balances that are determined to be uncollectible are included in the allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available, management believes the allowance for doubtful accounts is adequate. However, actual write-offs might exceed the recorded allowances. The Company's two largest customers during the years ended June 30, 2003, 2002 and 2001, each accounted for the following percentage of the Company's revenues:
Customer 2003 2002 2001 -------------------------------------------------------------------------------------- A 54% 49% 43% B 6% 10% 14% --------------------------------------------------------------------------------------
Included in accounts receivable at June 30, 2003 and 2002 is approximately $16,452,000 and $16,520,000, respectively, due from the two largest customers. Sales of each of the Company's three significant product lines comprised the following percentages of the Company's total net sales for the years ended June 30, 2003, 2002 and 2001:
Product Line 2003 2002 2001 -------------------------------------------------------------------------------------- Landscape fabric 48% 51% 48% Fertilizer, plant food, and insecticide spikes 12% 14% 17% Landscape edging 10% 10% 9% --------------------------------------------------------------------------------------
International sales, primarily in Europe and Canada, were approximately 10%, 6%, and 3% of the Company's net sales for the years ended June 30, 2003, 2002, and 2001, respectively. Substantially all raw material purchases for WeedBlock(R) landscape fabric inventory are from one vendor, representing approximately 22%, 25% and 23% of the Company's consolidated raw material purchases during the years ended June 30, 2003, 2002 and 2001, respectively. Management believes that other suppliers could provide a similar product on comparable terms. A change in suppliers, however, could cause delays and a possible loss of sales, which would adversely affect operating results. Included in accounts payable at June 30, 2003 and 2002, respectively is $1,723,000 and $1,609,000, due to this vendor. No amounts were due to this vendor at June 30, 2001. 5. Inventories Inventories consist of: 22 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================
June 30, 2003 2002 ------------------------------------------------------------------------- Raw and packaging materials $ 4,834,000 $ 4,025,000 Finished goods 4,304,000 3,998,000 ------------------------------------------------------------------------- $ 9,138,000 $ 8,023,000 -------------------------------------------------------------------------
At June 30, 2003 and 2002, the inventory balance has been reduced by a provision for possible obsolescence of $191,000 and $225,000, respectively. The Company disposed of $1,209,000 of previously reserved inventory during the year ended June 30, 2002. 6. Property and Equipment Property and equipment consist of:
Estimated Useful June 30, Life in Years 2003 2002 ---------------------------------------------------------------------------------------------- Furniture, fixtures and equipment 5 - 7 $ 11,423,000 $ 10,703,000 Leasehold improvements 7 - 10 858,000 791,000 ---------------------------------------------------------------------------------------------- 12,281,000 11,494,000 Less accumulated depreciation 8,263,000 6,644,000 ---------------------------------------------------------------------------------------------- $ 4,018,000 $ 4,850,000 ----------------------------------------------------------------------------------------------
Depreciation expense was $1,630,000, $1,657,000 and $2,113,000 during the years ended June 30, 2003, 2002 and 2001, respectively. 7. Goodwill Goodwill consists of the following:
June 30, 2003 2002 ------------------------------------------------------------------------------------------------ Weatherly Consumer Products Group, Inc. $ 22,948,000 $ 22,948,000 Easy Gardener, Inc. 15,639,000 15,639,000 Ampro Industries, Inc. 9,303,000 9,303,000 Tensar consumer products line 5,226,000 5,226,000 Plasti-Chain product line 2,810,000 2,810,000 Landmaster Products, Inc. 2,292,000 2,292,000 Golden West Chemical Distributions, Inc. 1,606,000 1,606,000 Emerald Products, LLC 1,483,000 1,466,000 ------------------------------------------------------------------------------------------------ 61,307,000 61,290,000 Less accumulated amortization, prior to July 1, 2001 11,429,000 11,429,000 ------------------------------------------------------------------------------------------------ $ 49,878,000 $ 49,861,000 ------------------------------------------------------------------------------------------------
23 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Effective July 1, 2001, the Company adopted SFAS No. 141 and SFAS No. 142. During 2002, the Company completed a reassessment of the useful lives of all intangible assets other than goodwill which total $6,382,000 (net of accumulated amortization of $4,196,000) at June 30, 2003. No adjustments to previously determined amortization periods were considered necessary. The Company has no intangible assets with indefinite useful lives other than goodwill at June 30, 2003. Remaining useful lives of intangible assets range from less than a year to 25 years. In conjunction with the adoption of SFAS No. 141 and SFAS No. 142, the Company completed its transitional goodwill impairment test during 2002. Ampro and Golden West were the only reporting units where the carrying value exceeded the fair value of their net assets including goodwill. As of July 1, 2001, the net goodwill related to Ampro was $17,078,000. The Company hired an independent valuation professional to assist the Company in measuring the amount of the impairment. Based on the valuation, the Company recorded an impairment loss of $9,390,000 during the year ended June 30, 2002 in the Consolidated Statement of Operations, as a cumulative effect of a change in accounting principle. The net goodwill related to Golden West at July 1, 2001 was approximately $1,165,000. Based on a valuation prepared by management, an impairment loss of $492,000 was recorded during the year ended June 30, 2002 and is reported as a cumulative effect of a change in accounting principle in the Consolidated Statement of Operations. 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 $49,878,000, net of accumulated amortization, from prior years. Amortization expense for all intangible assets during the years ended June 30, 2003, 2002 and 2001 was $1,483,000, $1,111,000 and $3,573,000, respectively. Goodwill amortization, including amounts reported as discontinued operations, was $2,809,000 for the year ended June 30, 2001. Estimated amortization expense for continuing operations for each of the five succeeding fiscal years is as follows: Year Ended June 30, Amount ------------------------------------------- 2004 $ 1,434,000 2005 $ 1,170,000 2006 $ 1,086,000 2007 $ 1,086,000 2008 $ 1,086,000 24 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 year ended June 30, 2001, which excludes goodwill amortization expense, net of tax benefit: Year Ended June 30, 2001 ------------------------------------------------------------------------ Reported Net Loss $(25,429,000) Goodwill Amortization, net of tax benefit of $620,000 2,189,000 ------------------------------------------------------------------------ Adjusted Net Loss $(23,240,000) ------------------------------------------------------------------------ Per Share Amounts - Basic: Reported Net Loss $ (1.40) Goodwill amortization, net of tax benefit .12 ------------------------------------------------------------------------ Adjusted Net Loss $ (1.28) ------------------------------------------------------------------------ Per Share Amounts - Diluted: Reported Net Loss $ (1.40) Goodwill Amortization, net of tax benefit .12 ------------------------------------------------------------------------ Adjusted Net Loss $ (1.28) ------------------------------------------------------------------------ 25 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 8. Officer's Receivable The officer's receivable represents an unsecured note which bears interest at the lower of the prime lending rate or 6% (effectively 4.00% at June 30, 2003). At June 30, 2003 and 2002, the balance on the outstanding note was $537,000, of which $25,000 is classified as current. Total related interest income amounted to $24,000, $41,000 and $43,000 for the years ended June 30, 2003, 2002 and 2001, respectively. Principal payments on the note are due in annual installments as follows with the balance due upon maturity in April 2008: 2004 - 2007 $ 50,000 9. Revolving Credit Facility and Long-Term Debt The company entered into a senior credit facility dated as of October 30, 2002 for the company and its material subsidiaries. Wells Fargo Foothill, which is the administrative agent for the facility, is also the revolving credit lender, and Ableco Finance LLC is providing a term loan. The total amount of the new credit facility is $35 million, of which $23 million is a revolving credit facility and $12 million is a term loan. The new credit facility matures October 30, 2005. Interest on the revolving credit facility is at variable annual interest rates based on the prime rate or LIBOR plus applicable marginal rates. Interest on the term loan is at variable annual interest rates based on the prime rate with a minimum rate of 9.75% plus 2% of accrued interest payable upon maturity (payment in kind interest). The balance of the term loan at June 30, 2003 including payment in kind interest, was $12,142,000. The interest rate on the term loan increases 2% each year the balance is outstanding. Borrowings on the revolving credit facility were $15,085,000 at June 30, 2003 and are limited based on eligible borrowing bases, effectively $17,659,000 at June 30, 2003. The company's obligations and the obligations its our material subsidiaries under the new credit facility are secured by a security interest in favor of the lenders in substantially all of the assets of the Company and its material subsidiaries. The company and its material subsidiaries are subject to certain financial and other covenants under the new credit facility. At the end of January 2003, the company's financial performance created a "Triggering Event" which increased the interest rate on the term loan in February through June by 2.5% points, to 14.25%. At June 30, 2003, the company was in violation of certain covenants. Due to the covenant violations, the interest rates on both the term loan and the revolver increased by 3% points, to 17.25%, and the lender could require the company to pay all principal and accrued interest at any time. Consequently the company has reclassified all of the revolving credit facility and long-term debt as short term obligations. The completion of the proposed asset sale as described in Note 3 would result in the payment or assumption of these obligations by the buyer in that transaction. In the event the asset sale is not completed, management believes they will be able to obtain financing arrangements at commercially reasonable terms that will allow the Company to continue as a going concern. We had a financing agreement to provide $25,000,000 in senior secured financing. The agreement provided for a $23,000,000 revolving credit facility and a $2,000,000 term loan due in monthly installments of $33,000 plus interest. The term loan balance outstanding at June 30, 2002 was $1,767,000. Interest on borrowings was calculated at variable annual rates based on either 26 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ the bank's prime rate plus an applicable marginal rate or the federal funds rate plus an applicable marginal rate. At June 30, 2002 we had $15,036,000 of borrowings outstanding under the revolving credit facility. These borrowings were paid in full on November 1, 2002 with proceeds from the new financing agreements discussed above. We also had a financing agreement to provide $6,250,000 of subordinated debt. At June 30, 2002, we had borrowings outstanding of $5,945,000, net of discounts of $905,000, pursuant to the subordinated secured notes. Interest was charged on the face of the notes at 16% and 14% per annum, payable monthly. The issue price of the 16% notes was 90% of the face amount of the notes resulting in a discount of $600,000. In connection with this financing, we issued to the purchasers of the notes warrants to purchase up to 3.75% of the fully diluted common stock and an option to purchase from us certain Trust Preferred Securities of our subsidiary, U.S. Home and Garden Trust I, that are owned by us, which resulted in an additional discount of $402,000. These borrowings were paid in full on November 1, 2002 with proceeds from the new financing agreements discussed above. Upon repayment of the $6,250,000 subordinated debt, we continue to have certain ongoing obligations under the subordinated debt financing agreement to the holders of the warrants to purchase common stock of the Company and option to purchase Trust Preferred Securities described above by virtue of these agreements. Under the option agreement, payments of interest on the Trust Preferred option securities is used to reduce the option price and is recorded as additional Trust Preferred liability. When the option price is reduced to zero, we will issue the underlying Trust Preferred Securities. If the proposed asset sale to Easy Gardener is consummated the obligation under the option agreement will be assumed by Easy Gardener. See Note 14 for costs related to the refinancing. 10. Mandatorily Redeemable Preferred Securities 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 and completed a public offering of 2,530,000 of 9.40% Cumulative Trust Preferred Securities with a liquidation amount of $25 per security to the Company for a total of $65,200,000 (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 proceeds therefrom to acquire the subordinated debentures described below. Concurrent with the issuance of the Trust Securities, the Trust invested the net proceeds therefrom in $65.2 million aggregate principal amount of 9.40% Junior Subordinated Deferrable Interest Debentures (the "Subordinated 27 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Debentures") issued by the Company. The Company has since redeemed 251,981 shares leaving 2,278,019 shares outstanding with a face value of $57,092,000. See note 17. The fair value of the mandatorily redeemable preferred securities is approximately $29,159,000 based on quoted market prices of $12.80 per security at June 30, 2003. Distributions of interest 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 Debentures for a period not to exceed 60 consecutive months. If interest payments on the Subordinated Debentures 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 in total on April 15, 2028, but may be redeemed at the option of the Company at any time. The Company effectively provides a full and unconditional guarantee of the Trusts' obligations under the Trust Securities to the extent that the Trust has funds sufficient to make such payments. 11. Commitments Employment Agreements The Company has entered into an employment agreement with one of its officers. The agreement is for a one-year period but is automatically renewed unless specifically terminated by the Company or the employee. If the employment agreement is terminated by the Company without cause, the officer will be entitled to an additional ten years of annual compensation. Annual base compensation under the employment agreement is $450,000. The employment agreement also provides for certain lump sum payments in the event of a change in control equal to approximately $7.3 million. 28 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Operating Leases The Company leases office and warehouse space, certain office equipment and automobiles under operating leases expiring through 2006. The future minimum lease payments under these non-cancelable operating leases are as follows: Year ended June 30, Amount --------------------------------------------------- 2004 $ 819,000 2005 595,000 2006 214,000 --------------------------------------------------- $ 1,628,000 --------------------------------------------------- Rent expense was approximately $944,000, $891,000 and $860,000 for the years ended June 30, 2003, 2002 and 2001, respectively. Defined Contribution Benefit Plan Easy Gardener has established an employee defined contribution benefit plan (the Plan). Employees of the Company, Weatherly, Easy Gardener and Golden West are eligible to participate. The Company is required to match the first 60% of employee contributions up to 5% of the employee's wage base. The Plan also allows discretionary contributions by the Company. The Company's contribution vests over a seven-year period. Ampro had a separate plan for its employees, with similar terms to the Easy Gardener Plan that was terminated during the year ended June 30, 2001. Total expense associated with the plans for the years ended June 30, 2003, 2002 and 2001 was approximately $174,000, $321,000 and $358,000, respectively. 12. Contingencies In the normal course of business, the Company is subject to proceedings, lawsuits, and other claims, including claims by creditors, 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 June 30, 2003 cannot be ascertained. 13. Stockholders' Preferred Stock Equity The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, rights and preference as may be determined from time to 29 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights, which could adversely affect the voting power or other rights of the holders of the Company's common stock. No shares of the preferred stock are outstanding. Common Stock In September 1998, the Company adopted a Stockholders' Rights Agreement commonly known as a "poison pill", which provides that in the event an individual or entity becomes a beneficial holder of 12% or more of the shares of the Company's capital stock, other stockholders of the Company shall have the right to purchase shares of the Company's (or in some cases, the acquirer's) common stock at 50% of its then market value. Common Stock Repurchase Program The Company is authorized by its Board of Directors ("the Board") to repurchase up to 5,500,000 shares of its common stock through open market purchases and in privately negotiated transactions. Repurchased shares are held by the Company as treasury stock. During 2001, the Company repurchased 1,336,000 shares of treasury stock for $2,141,000. Prior to fiscal 2001 the Company repurchased 2,554,000 shares for $10,687,000. Stock Option Plans The Company adopted the 1991 Stock Option Plan (the "1991 Plan") pursuant to which 700,000 shares of common stock have been reserved for issuance upon the exercise of options designated as either (i) options intended to constitute incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as amended (the "Code") or (ii) non-qualified options. ISOs may be granted under the 1991 Plan to employees and officers of the Company. Non-qualified options may be granted to consultants, directors (whether or not they are employees), employees and officers of the Company. At June 30, 2003, 48,000 options remain available for issuance under the 1991 Plan. During fiscal 1995, the Board adopted two additional stock option plans. The 1995 Stock Option Plan (the "1995 Plan") allows the granting of either ISOs or non-qualified options. The maximum aggregate number of shares reserved for issuance under this plan is 1,500,000. At June 30, 2003, 193,000 options remain available for issuance under the 1995 Plan. The Non-Employee Director Stock Option Plan (the "Non-Employee Director Plan") was established to attract, retain and compensate for their services as directors, highly qualified individuals who are not employees of the Company. 30 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The maximum aggregate number of shares reserved for issue under this plan is 100,000. The 1995 Plan is administered by a committee of the Board and the Non-Employee Director Plan is a formula plan. At June 30, 2003, 40,000 options remain available for issuance under the Non-Employee Director Plan. During May 1997, the Board approved the 1997 Stock Option Plan. The plan allows the granting of either ISOs or non-qualified options. The 1997 Plan reserves the issuance of 1,500,000 shares of common stock. At June 30, 2003, 199,000 options remain available for issuance under the 1997 Plan. During May 1999, the Board approved the 1999 Stock Option Plan. The plan allows for granting of either ISOs or non-qualified options. The 1999 Plan reserves the issuance of 900,000 shares of common stock. At June 30, 2003, 56,000 options remain available for issuance under the 1999 Plan. The plans are administered by the Board or a committee of the Board and are approved by the stockholders. The Board, or committee, as the case may be, within the limitations of the plans, determines the persons to whom options will be granted, the number of shares to be covered by each option, whether the options granted are intended to be ISOs, the duration and rate of exercise of each option, the option purchase price per share and the manner of exercise, the time, manner and form of payment upon exercise of an option, and whether restrictions such as repurchase rights in the Company are to be imposed on shares subject to options. ISOs granted under the plans may not be granted at a price less than the fair market value of the common stock on the date of grant (or 110% of fair market value in the case of persons holding 10% or more of the voting stock of the Company). The aggregate fair market value of shares for which ISOs granted to any employee are exercisable for the first time by such employee during any calendar year (under all stock option plans of the Company and any related corporation) may not exceed $100,000. Non-qualified options granted under the plans may not be granted at a price less than the fair market value of the common stock on the date of grant (not less than par value in the case of the 1995 Plan). Options granted under the plans generally will expire not more than ten years from the date of the grant (five years in the case of ISOs granted to persons holding 10% or more of the voting stock of the Company). All options granted under the plans are not transferable during an optionee's lifetime but are transferable at death by will or by the laws of descent and distribution. 31 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The following is a summary of activity relating to stock options:
Weighted Average Option Price Per Share Outstanding Exercisable ------------------------------------------------------------------------------- 1991 Plan June 30, 2000 $1.69 357,000 210,000 Became exercisable 1.69 -- 18,000(1) ------------------------------------------------------------------------------- June 30, 2001 1.69 357,000 228,000(2) Became exercisable 1.69 -- 26,000(1) ------------------------------------------------------------------------------- June 30, 2002 1.69 357,000 254,000(2) Became exercisable 1.69 -- 18,000(1) ------------------------------------------------------------------------------- June 30, 2003 $1.69 357,000 272,000(2) ------------------------------------------------------------------------------- 1995 Plan June 30, 2000 $2.18 1,459,000 1,409,000 Expired 2.23 (166,000) (166,000) Became exercisable 2.06 -- 25,000 ------------------------------------------------------------------------------- June 30, 2001 2.17 1,293,000 1,268,000(3) Became exercisable 2.06 -- 25,000 Expired 2.06 (10,000) (10,000) ------------------------------------------------------------------------------- June 30, 2002 and 2003 $2.18 1,283,000 1,283,000(3) -------------------------------------------------------------------------------
32 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================
Weighted Average Option Price Per Share Outstanding Exercisable ------------------------------------------------------------------------------- Director Stock Option Plan ------------------------------------------------------------------------------- June 30, 2000 $2.85 30,000 30,000 Granted 1.61 20,000 5,000 ------------------------------------------------------------------------------- June 30, 2001 2.35 50,000 35,000(4) Became exercisable 1.06 -- 15,000 ------------------------------------------------------------------------------- June 30, 2002 2.59 50,000 50,000(4) Granted 0.48 20,000 -- Expired 2.25 (10,000) (10,000) ------------------------------------------------------------------------------- June 30, 2003 $1.90 60,000 40,000(4) ------------------------------------------------------------------------------- 1997 Plan June 30, 2000 $3.12 765,000 624,000 Expired 2.68 (55,000) (55,000) Became exercisable 3.16 -- 82,000 ------------------------------------------------------------------------------- June 30, 2001 3.15 710,000 651,000(5) Issued 3.13 95,000 95,000 Became exercisable 2.56 -- 29,000 ------------------------------------------------------------------------------- June 30, 2002 3.15 805,000 775,000(5) Expired 3.84 (60,000) (60,000) Became exercisable 2.56 -- 30,000 ------------------------------------------------------------------------------- June 30, 2003 $3.10 745,000 745,000(5) -------------------------------------------------------------------------------
33 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================
Weighted Average Option Price Per Share Outstanding Exercisable -------------------------------------------------------------------------- 1999 Plan June 30, 2000 $ 2.33 833,000 699,000 Expired 2.56 (12,000) (12,000) Became exercisable 2.56 -- 110,000 -------------------------------------------------------------------------- June 30, 2001 2.32 821,000 797,000(6) Granted .53 10,000 5,000 Expired 2.83 (171,000) (171,000) Became exercisable 2.14 -- 24,000 -------------------------------------------------------------------------- June 30, 2002 2.16 660,000 655,000(6) Became exercisable .53 -- 5,000 Expired 2.56 (6,000) (6,000) -------------------------------------------------------------------------- June 30, 2003 $ 2.16 654,000 654,000(6) -------------------------------------------------------------------------- Non-Plan Options June 30, 2000 $ 2.34 2,467,000 1,999,000 Expired 3.81 (11,000) (11,000) Became exercisable 3.84 -- 168,000 -------------------------------------------------------------------------- June 30, 2001 2.33 2,456,000 2,156,000(7) Granted .40 89,000 89,000 Expired 3.63 (691,000) (670,000) Became exercisable 1.69 -- 26,000 -------------------------------------------------------------------------- June 30, 2002 1.76 1,854,000 1,601,000(7) Expired .40 (89,000) (89,000) Became exercisable 1.69 -- 36,000 Exercised .001 (200,000) (200,000) -------------------------------------------------------------------------- June 30, 2003 $ 2.06 1,565,000 1,348,000(7) --------------------------------------------------------------------------
34 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ (1) In prior years, the expiration date and vesting period on 545,000 options were extended in periods between nine and ten years. As a result, the Company is recognizing compensation expense for the intrinsic value of the options over the new vesting periods. In 2003, 2002 and 2001 such expense was $119,000, $103,000 and $119,000, respectively. (2) At June 30, 2003, 2002 and 2001, the weighted average exercise option price per share for exercisable options was $1.69 for all periods. (3) At June 30, 2003, 2002 and 2001, the weighted average exercise option price per share for exercisable options was $2.18, $2.18 and $2.17. (4) At June 30, 2003, 2002 and 2001, the weighted average exercise price per share for exercisable options was $2.67, $2.59, and $2.91. (5) At June 30, 2003, 2002 and 2001, the weighted average exercise option price per share for exercisable options was $3.10, $3.18 and $3.20. (6) At June 30, 2003, 2002 and 2001, the weighted average exercise option price per share for exercisable options was $2.16, $2.16 and $2.32. (7) At June 30, 2003, 2002 and 2001, the weighted average exercise option price per share for exercisable options was $2.12, $1.76 and $2.42. During the year ended June 30, 2001, the expiration date of 200,000 options and warrants was extended for two years. The options and warrants remain fully vested. As a result, the Company recognized $142,000 of expense for the value of the options and warrants. The following table summarizes the above stock options outstanding and exercisable at June 30, 2003:
Outstanding Exercisable ---------------------------------------- ----------------------------- Average Weighted Weighted Range of Exercise Remaining Average Average Price Options Life Exercise Price Options Exercise Price --------------------------------------------------------------------------------------------- $0.01 - 1.00 30,000 4.3 years $0.50 10,000 $0.53 1.01 - 2.00 733,000 3.0 years 1.68 431,000 1.67 2.01 - 3.00 3,142,000 1.9 years 2.13 3,142,000 2.13 3.01 - 4.00 699,000 2.0 years 3.23 699,000 3.23 4.01 - 4.69 60,000 .9 years 4.22 60,000 4.22 --------------------------------------------------------------------------------------------- $0.01 - 4.69 4,664,000 1.9 years $2.24 4,342,000 $2.29 ---------------------------------------------------------------------------------------------
35 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Warrants In connection with certain business transactions and stock offerings, the Company has granted various warrants to purchase common stock. The following schedule summarizes the activity:
Weighted Weighted Average Average Remaining Warrant Price Contractual Per Share Outstanding(1) Exercisable Life -------------------------------------------------------------------------------------------- June 30, 2000 3.02 911,000 911,000 1.5 years Issued 5.00 200,000 100,000 -------------------------------------------------------------------------------------------- June 30, 2001 3.31 1,111,000 1,011,000 2 years Granted .70 1,179,000 1,179,000 Expired 3.14 (786,000) (786,000) Became exercisable 7.00 -- 100,000 -------------------------------------------------------------------------------------------- June 30, 2003 and 2002 $1.35 1,504,000 1,504,000 4.3 years --------------------------------------------------------------------------------------------
(1) The warrants contain anti-dilution provisions which could affect the number of shares of common issuable stock upon the exercise of the warrants as well as the per share warrant prices. Additionally, these warrants contain certain redemption provisions. Common Stock Reserved At June 30, 2003, approximately 7,819,000 shares of common stock have been reserved for issuance upon the exercise of warrants and options. 36 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Stock-Based Compensation The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpertations in accounting for its employee and director stock option plans. Under all the Company's option plans, the exercise price of the options equals or exceeds the market price of the underlying stock on the date of the grant and therefore, no compensation cost is recognized. SFAS No. 123, Accounting for Stock-Based Compensation, requires the Company to provide pro forma information regarding net income and earnings per share as if compensation costs for the Company's employee and director stock options and warrants had been determined in accordance with the fair value based method prescribed in SFAS No. 123. The Company estimated the fair value of each stock option and warrant at the grant date by using a Black-Scholes pricing model with the following weighted-average assumptions used for grants in 2003, 2002 and 2001, respectively: no dividend yield for any year; expected volatility of approximately 75%, 75% and 60%; risk-free interest rates of 2.8%, 3.5% and 5.4%; and expected lives of approximately three to five years. Pro forma compensation expense associated with options granted to employees and directors totaled $3,000, $2,000 and $17,000 for 2003, 2002 and 2001, respectively. The per option weighted average fair value was $.30, $.32 and $1.08 for 2003, 2002 and 2001, respectively. 14. Refinancing and Transaction Costs Refinancing and transaction costs included in the Consolidated Statements of Operations for the year ended June 30, 2003 relate to the refinancing described in Note 9 to the financial statements and the proposed asset sale described in Note 3 to the financial statements. As a result of the refinancing, the Company wrote-off $1,928,000 of previously deferred financing costs and discounts related to the replaced financing agreements and also recorded fees and expenses of $2,363,000 in the year ended June 30, 2003. The Company capitalized $2,012,000 of deferred financing costs related to the new financing during the year ended June 30, 2003. 15. Restructuring Charges In 2001, the Company recorded a restructuring charge of $2,860,000 relating to the closing and sale of the Ampro Industries Inc. facility in Michigan. The Company continues to sell products, through a contract manufacturing agreement, being manufactured at the former Ampro facility. As part of this agreement, the Company has firm commitments to purchase minimum amounts of product. The contract includes an exit provision, whereby the maximum cost to the Company for termination of the agreement is $350,000. During the year 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 employees involved with the facility. All severance payments as a result of the restructuring have been paid and no adjustments were made to the liability previously recorded for severance payments. 37 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 16. Income Taxes Deferred tax assets (liabilities) consist principally of the following:
June 30, 2003 2002 ---------------------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforward $ 9,975,000 $ 6,015,000 Accumulated depreciation and amortization 2,752,000 2,971,000 Accounts receivable allowance 220,000 475,000 Inventory allowance 152,000 200,000 Other 13,000 13,000 ---------------------------------------------------------------------------------------- Gross deferred tax assets 13,112,000 9,674,000 Less valuation allowance (9,778,000) (6,922,000) ---------------------------------------------------------------------------------------- Total deferred tax assets $ 3,334,000 $ 2,752,000 ---------------------------------------------------------------------------------------- Deferred tax liabilities- Accumulated depreciation and amortization $ 3,188,000 $ 2,606,000 ----------------------------------------------------------------------------------------
The valuation allowance of $9,778,000 was recorded due to the uncertainty of the Company's ability to generate sufficient future taxable income to realize total gross deferred tax assets. The Company's net operating loss carryforward for federal income tax purposes amounted to $29,339,000 at June 30, 2003, and expires in 2022 if not previously utilized. The net deferred income taxes as of June 30, 2003 and 2002 are presented in the balance sheets as follows:
June 30, 2003 2002 ------------------------------------------------------------------------------------------ Current asset $ 385,000 $ 688,000 Long-term liability $ 239,000 $ 542,000 ------------------------------------------------------------------------------------------
The income tax provision (benefit) consists of: 38 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================
Year ended June 30, 2003 2002 2001 ------------------------------------------------------------------------- Current: Federal $ -- $ -- $ (271,000) State 133,000 374,000 16,000 ------------------------------------------------------------------------- 133,000 374,000 (255,000) ------------------------------------------------------------------------- Deferred: Federal -- (146,000) (1,358,000) State -- -- 210,000 ------------------------------------------------------------------------- -- (146,000) (1,148,000) ------------------------------------------------------------------------- $ 133,000 $ 228,000 $(1,403,000) -------------------------------------------------------------------------
39 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The income tax expense for the year ended June 30, 2003 was due to state income taxes. No income tax benefit was recorded during the year due to the effects of recording the valuation allowance noted above. The following is a reconciliation between the federal statutory income tax rate and the Company's effective tax rate relating to income from continuing operations before minority interest and extraordinary gain:
Year ended June 30, 2002 2001 ------------------------------------------------------------------------- Income tax provision computed at Federal Statutory rate (34.0)% 34.0% State taxes, net of Federal tax effects (62.3) (2.5) Nondeductible amortization and other 1.8 (7.0) Changes in valuation allowance on deferred tax assets 36.9 (1.2) ------------------------------------------------------------------------- Income Tax Benefit (Expense) (57.6) % 23.3% -------------------------------------------------------------------------
17. Loss per Share The following is a reconciliation of the weighted average number of shares used to compute basic and dilutive loss per share:
2003 2002 2001 -------------------------------------------------------------------------------------------- Basic weighted average common shares outstanding 17,868,000 17,555,000 18,181,000 Dilutive effect of stock options and warrants -- 469,000 -- -------------------------------------------------------------------------------------------- Dilutive weighted average common shares outstanding 17,868,000 18,024,000 18,181,000 --------------------------------------------------------------------------------------------
40 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Options and warrants to purchase 5,157,000, 5,332,000 and 6,788,000 shares of common stock in fiscal years 2003, 2002 and 2001, respectively, were not included in the computation of diluted earnings per share because the option or warrant exercise price was greater than the average market price of the stock. Diluted earnings per share for the years ended June 30, 2003 and 2001 is based only on the weighted average number of common shares outstanding as the inclusion of 896,000 and 10,000 common share equivalents, respectively, would have been anti-dilutive.
18. Supplemental Cash Flow Information Year ended June 30, 2003 2002 2001 --------------------------------------------------------------------------------------------- Cash paid (received) during the period for: Interest paid $ 7,846,000 $ 6,696,000 $ 7,314,000 Interest received $ -- $ (83,000) $ (149,000) Income taxes refunded $ (248,000) $ (100,000) $ (790,000) --------------------------------------------------------------------------------------------- Supplemental information regarding non-cash investing and financing activities during the year ended June 30, 2002: Discount on issuance of 16% subordinated notes at 90% of face amount $ 600,000 Discount on issuance of warrants and options in conjunction with debt refinancing $ 402,000
41 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 19. Quarterly Information (Unaudited)
First Second Third Fourth Fiscal 2003 Quarter Quarter Quarter Quarter ---------------------------------------------------------------------------------------------------------------------------- Net sales $ 13,151,000 $ 12,351,000 $ 24,036,000 $ 26,706,000 Gross profit $ 4,965,000 $ 5,184,000 $ 11,278,000 $ 11,364,000 Income (loss) from continuing operations $ (3,878,000) $ (6,276,000) $ 1,266,000 $ 1,236,000 Loss from discontinued operations $ (978,000) $ (215,000) $ (41,000) $ (202,000) Loss on disposal of discontinued operations $ -- $ -- $ -- $ (49,000) Net income (loss) $ (4,856,000) $ (6,491,000) $ 1,225,000 $ 985,000 Basic earnings per share: Income (loss) from continuing operations $ (.22) $ (.35) $ .07 $ .07 Discontinued operations $ (.05) $ (.01) $ -- $ (.01) Net income (loss) per common share $ (.27) $ (.36) $ .07 $ .06 Diluted earnings per share: Income (loss) from continuing operations $ (.22) $ (.35) $ .07 $ .07 Discontinued operations $ (.05) $ (.01) $ -- $ (.01) Net income (loss) per common share $ (.27) $ (.36) $ .07 $ .06 First Second Third Fourth Fiscal 2002 Quarter Quarter Quarter Quarter ---------------------------------------------------------------------------------------------------------------------------- Net sales $ 13,483,000 $ 11,762,000 $ 23,913,000 $ 29,789,000 Gross profit $ 5,540,000 $ 4,752,000 $ 11,087,000 $ 14,210,000 Income (loss) from continuing operations before cumulative effect of a change in accounting principle $ (2,553,000) $ (2,835,000) $ 1,822,000 $ 3,696,000 Income (loss) from discontinued operations $ (268,000) $ (490,000) $ 227,000 $ (1,229,000) Income on disposal of discontinued operations $ -- $ -- $ -- $ 20,000 Cumulative effect of a change in accounting principle $ (9,882,000) $ -- $ -- $ -- Net income (loss) $ (12,703,000) $ (3,325,000) $ 2,049,000 $ 2,487,000 Basic earnings per share: Income (loss) from continuing operations before cumulative effect of a change in accounting principle $ (.15) $ (.16) $ .11 $ .21 Discontinued operations $ (.01) $ (.03) $ .01 $ (.07) Cumulative effect of a change in accounting principle $ (.56) $ -- $ -- $ -- Net income (loss) per common share $ (.72) $ (.19) $ .12 $ .14 Diluted earnings per share: Income (loss) from continuing operations $ (.15) $ (.16) $ .10 $ .21 Discontinued operations $ (.01) $ (.03) $ .01 $ (.07) Cumulative effect of a change in accounting principle $ (.56) $ -- $ -- $ -- Net income (loss) per common share $ (.72) $ (.19) $ .11 $ .14
42 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Differences between amounts included above and amounts previously reported on Form 10-Q are due to the reclassification to discontinued operations as described in Note 2, and the cumulative effect of a change in accounting principle of $9,882,000, related to the loss on impairment of goodwill recorded as of July 1, 2001. See Note 7. The fourth quarter of 2002 includes the write off of minority interest of $1,136,000 net of an estimated loss on disposal of discontinued operations of $1,116,000. See Note 2. 43 Consolidated Financial Statement Schedule ==================================================== U.S. Home & Garden Inc. and Subsidiaries Schedule II - Valuation and Qualifying Accounts
Charged to Beginning Costs and Ending Balance Expenses Writeoffs Balance -------------------------------------------------------------------------------------------------------------------------- Reserves and Allowances Deducted from Asset Accounts (Continuing Operations): Allowance for Doubtful Accounts o Year ended June 30, 2001 $ 575,000 $ 646,000 $ (250,000) $ 971,000 o Year ended June 30, 2002 $ 971,000 $ 425,000 $ (15,000) $ 1,381,000 o Year ended June 30, 2003 $1,381,000 $ 25,000 $ (776,000) $ 630,000 Reserve for Inventory Obsolescence o Year ended June 30, 2001 $ 540,000 $ 943,000 $ (143,000) $ 1,340,000 o Year ended June 30, 2002 $1,340,000 $ 94,000 $ (1,209,000) $ 225,000 o Year ended June 30, 2003 $ 225,000 $ 16,000 $ (50,000) $ 191,000 ----------------------------------------------------------------------------------------------------------------------
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