10-Q 1 d55670_10-q.txt CURRENT REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 From the transition period from ____________ to ____________ Commission File Number 001-14015 U.S. HOME & GARDEN INC. (Exact name of registrant as specified in its charter) Delaware 77-0262908 (State or other jurisdiction IRS Employer of incorporation or organization) (Identification Number) 655 Montgomery Street San Francisco, California 94111 (Address of Principal Executive Offices) (Zip Code) (415) 616-8111 (Registrant's Telephone Number, Including Area Code) Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. As of May 12, 2003 there were 17,951,090 shares of the issuer's common stock, par value $.001 per share, outstanding. Part I. - Financial Information Item 1. - Consolidated Financial Statements Consolidated balance sheets as of March 31, 2003 (Unaudited) 1-2 and June 30, 2002 Consolidated statements of operations for the three months and 3 nine months ended March 31, 2003 and 2002 (Unaudited) Consolidated statements of cash flows for the nine months 4-5 ended March 31, 2003 and 2002 (Unaudited) Notes to consolidated financial statements 6-11 Item 2. - Management's Discussion and Analysis of Financial 12-20 Condition and Results of Operations Item 3. - Quantitative and Qualitative Disclosures About Market Risk 20 Item 4. - Controls and Procedures 20 Part II. - Other Information Item 5. - Other Information 20-21 Item 6. - Exhibits and Reports on Form 8-K 21 Signatures 21 Certifications 22-23 U.S. Home & Garden Inc. and Subsidiaries Consolidated Balance Sheets ================================================================================
March 31, 2003 June 30, 2002 -------------- ------------- (Unaudited) Assets Current Cash and cash equivalents $ 479,000 $ 219,000 Accounts receivable, less allowance for doubtful accounts and sales returns of $1,131,000 and $1,635,000 27,261,000 26,243,000 Inventories 12,498,000 8,023,000 Prepaid expenses and other current assets 877,000 988,000 Refundable income taxes 137,000 405,000 Deferred tax asset 688,000 688,000 Current assets of discontinued operations 214,000 1,052,000 ----------------------------------------------------------------------------------------------------- Total Current Assets 42,154,000 37,618,000 Property and Equipment, net 4,317,000 4,850,000 Intangible Assets Goodwill, net 49,878,000 49,861,000 Deferred financing costs, net of accumulated amortization of $939,000 and $578,000 4,093,000 3,570,000 Non-compete agreements, net of accumulated amortization of $676,000 and $407,000 834,000 1,103,000 Package tooling costs, net of accumulated amortization of $2,266,000 and $1,860,000 1,237,000 1,216,000 Product rights, patents and trademarks, net of accumulated amortization of $195,000 and $163,000 477,000 509,000 Officer Receivables 512,000 512,000 Property and Equipment of Discontinued Operations Held For Sale -- 100,000 Other Assets 23,000 26,000 ----------------------------------------------------------------------------------------------------- Total Assets $103,525,000 $99,365,000 =====================================================================================================
See accompanying notes to consolidated financial statements. 1 U.S. Home & Garden Inc. and Subsidiaries Consolidated Balance Sheets ================================================================================
March 31, 2003 June 30, 2002 -------------- ------------- (Unaudited) Liabilities and Stockholders' Equity (Deficit) Current Revolving credit facility $ 20,013,000 $ 15,036,000 Accounts payable 12,008,000 7,180,000 Accrued rebates 1,086,000 931,000 Accrued commissions 1,059,000 1,437,000 Accrued co-op advertising 908,000 740,000 Accrued expenses 1,728,000 1,577,000 Current portion of long-term debt 12,080,000 7,712,000 Current liabilities of discontinued operations 116,000 277,000 ------------------------------------------------------------------------------------------------------ Total Current Liabilities 48,998,000 34,890,000 Deferred Tax Liability 542,000 542,000 Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures 57,035,000 56,951,000 ------------------------------------------------------------------------------------------------------ Total Liabilities 106,575,000 92,383,000 ------------------------------------------------------------------------------------------------------ Stockholders' Equity (Deficit) Preferred stock, 1,000,000 shares authorized and unissued -- -- Common stock, $0.001 par value - shares authorized, 75,000,000; 21,841,000 and 21,641,000 shares issued 22,000 22,000 Additional paid-in capital 52,441,000 52,351,000 Retained deficit (42,685,000) (32,563,000) ------------------------------------------------------------------------------------------------------ 9,778,000 19,810,000 Less: Treasury Stock, 3,890,000 shares at cost (12,828,000) (12,828,000) ------------------------------------------------------------------------------------------------------ Total Stockholders' Equity (Deficit) (3,050,000) 6,982,000 ------------------------------------------------------------------------------------------------------ Total Liabilities and Stockholders' Equity (Deficit) $ 103,525,000 $ 99,365,000 ======================================================================================================
See accompanying notes to consolidated financial statements. 2 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Operations ================================================================================
Three Months Ended Nine Months Ended March 31, March 31, 2003 2002 2003 2002 Unaudited Unaudited ------------------------------------------------------------------ Net Sales $ 24,036,000 $ 23,913,000 $ 49,538,000 $ 49,158,000 Cost of Sales 12,758,000 12,559,000 28,111,000 27,512,000 ------------------------------------------------------------------------------------------------------------------------------- Gross Profit 11,278,000 11,354,000 21,427,000 21,646,000 ------------------------------------------------------------------------------------------------------------------------------- Operating Expenses Selling and shipping 5,413,000 4,983,000 12,969,000 12,200,000 General and administrative 2,028,000 2,081,000 6,108,000 6,121,000 Depreciation 176,000 187,000 539,000 561,000 Other amortization 278,000 204,000 751,000 492,000 ------------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 7,895,000 7,455,000 20,367,000 19,374,000 ------------------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations 3,383,000 3,899,000 1,060,000 2,272,000 Other Expenses Refinancing and transaction costs (116,000) -- (4,179,000) (254,000) Interest expense, net (1,998,000) (1,811,000) (5,658,000) (5,318,000) ------------------------------------------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations Before Income Tax and Cumulative Effect of a Change in Accounting Principle 1,269,000 2,088,000 (8,777,000) (3,300,000) Income Tax Expense (3,000) -- (111,000) -- ------------------------------------------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations Before Cumulative Effect of a Change in Accounting Principle 1,266,000 2,088,000 (8,888,000) (3,300,000) Discontinued Operations - Loss from discontinued operations (41,000) (39,000) (1,234,000) (797,000) ------------------------------------------------------------------------------------------------------------------------------- Income (Loss) Before Cumulative Effect of a Change In Accounting Principle 1,225,000 2,049,000 (10,122,000) (4,097,000) Cumulative effect of a change in accounting principle -- -- -- (9,882,000) ------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ 1,225,000 $ 2,049,000 $(10,122,000) $(13,979,000) =============================================================================================================================== Per Share Amounts: Weighted Average Common Shares Outstanding - Basic 17,951,000 17,543,000 17,863,000 17,543,000 Weighted Average Common Shares Outstanding - Diluted 18,124,000 17,915,000 17,863,000 17,543,000 Income (Loss) from Continuing Operations per Common Share Before Cumulative Effect of a Change in Accounting Principle - Basic and Diluted $ 0.07 $ 0.12 $ (0.50) $ (0.19) Discontinued operations -- -- (0.07) (0.05) Cumulative effect of a change in accounting principle -- -- -- (0.56) ------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ 0.07 $ 0.12 $ (0.57) $ (0.80) ===============================================================================================================================
See accompanying notes to consolidated financial statements. 3 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Cash Flows ================================================================================
Nine months ended March 31, 2003 2002 -------------------------------------------------------------------------------------------------------- Unaudited ---------------------------- Cash Flows from Operating Activities: Net loss from continuing operations before cumulative effect of a change in accounting principle $(8,888,000) $(3,300,000) Adjustments to reconcile net loss from continuing operations before cumulative effect of a change in accounting principle to net cash used in operating activities: Depreciation and amortization 2,374,000 2,203,000 Write-off of deferred finance costs and discounts 1,928,000 254,000 Trust Preferred payments retained and applied against note receivable 84,000 -- Compensation related to stock options 90,000 89,000 Payment-in-kind interest 80,000 -- Changes in operating assets and liabilities: Accounts receivable (1,018,000) (4,610,000) Inventories (4,475,000) (1,494,000) Prepaid expenses and other current assets 111,000 (157,000) Accounts payable and accrued expenses 4,924,000 3,347,000 Refundable income taxes 268,000 1,375,000 Other assets 3,000 279,000 -------------------------------------------------------------------------------------------------------- Net Cash Used In Operating Activities (4,519,000) (2,014,000) -------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Payments related to purchase of business (17,000) -- Increase in officer receivables -- (31,000) Purchase of property and equipment (707,000) (586,000) Purchase of intangibles (427,000) (329,000) -------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (1,151,000) (946,000) ========================================================================================================
See accompanying notes to consolidated financial statements. 4 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Cash Flows ================================================================================
Nine months ended March 31, 2003 2002 ------------------------------------------------------------------------------------------- Unaudited ----------------------------- Cash Flows from Financing Activities: Deferred finance costs $ (1,974,000) $(1,059,000) Net borrowings (payments) on lines-of-credit 4,977,000 (5,729,000) Proceeds from long-term debt 12,000,000 8,250,000 Principal payments on long-term debt (8,616,000) (133,000) ------------------------------------------------------------------------------------------- Net Cash Provided By Financing Activities 6,387,000 1,329,000 ------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents from continuing operations 717,000 (1,631,000) Cash used in discontinued operations (457,000) (1,093,000) ------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 260,000 (2,724,000) Cash and Cash Equivalents, beginning of period 219,000 2,724,000 ------------------------------------------------------------------------------------------- Cash and Cash Equivalents, end of period $ 479,000 $ -- =========================================================================================== Supplemental Disclosure of Cash Flow Information Cash paid for interest $ 5,556,000 $ 5,230,000 Cash paid (refund received) for taxes - net $ (157,000) $ 58,000 =========================================================================================== Non-Cash Investing and Financing Activities Issuance of 16% subordinated notes at 90% of face amount $ -- $ 600,000 Issuance of warrants and options in conjunction with debt refinancing $ -- $ 402,000 ===========================================================================================
See accompanying notes to consolidated financial statements. 5 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 1. The accompanying consolidated financial statements at March 31, 2003 and for the three months and nine months ended March 31, 2003 and 2002 are unaudited, but, in the opinion of management, include all adjustments necessary for a fair presentation of consolidated financial position and results of operations for the periods presented. The results for the nine months ended March 31, 2003 are not necessarily indicative of the results of operations for a full year. 2. Refer to the audited consolidated financial statements for the year ended June 30, 2002, for details of accounting policies and detailed notes to the consolidated financial statements. 3. Inventories consist of: March 31, 2003 June 30, 2002 ---------------------------------------------------------------------- Raw materials $ 5,751,000 $4,025,000 Finished goods 6,747,000 3,998,000 ---------------------------------------------------------------------- $12,498,000 $8,023,000 ====================================================================== 4. All shipping and handling expenses are included in the selling and shipping caption and totaled approximately $1,936,000 and $1,622,000 for the three months ended March 31, 2003 and 2002 respectively and $4,369,000 and $3,633,000 for the nine months ended March 31, 2003 and 2002 respectively. 5. The Company entered into a senior credit facility dated as of October 30, 2002 for the Company and its material subsidiaries. Foothill Capital Corporation, 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 interest rate on the term loan increases 2% each year the balance is outstanding. Borrowings on the revolving credit facility are limited based on eligible borrowing bases, effectively $23,000,000 at March 31, 2003, the maximum on the revolving credit facility. The Company and its material subsidiaries' obligations 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 and March by 2.5% points, to 14.25%. At March 31, 2003, the Company was in violation of a covenant and received a waiver from the lenders for the March 31, 2003 violation. The Company was in violation of a covenant at April 30, 2003 and will request a waiver from the lenders for the violation. Amounts outstanding under the new credit facility have been classified as short-term debt, as the bank waiver does not cover the period subsequent to March 31, 2003. 6 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The Company 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 the Company 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. The Company also had a financing agreement to provide $6,250,000 of subordinated debt. At June 30, 2002, the Company 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, the Company issued to the purchasers of the notes warrants to purchase up to 3.75% of the fully diluted common stock of the Company and an option to purchase from the Company certain Trust Preferred Securities of the Company's subsidiary, U.S. Home and Garden Trust I, that are owned by the Company, 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, the Company continues 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, the Company will issue the underlying Trust Preferred Securities. 6. 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, Chief Operating Officer of the Company. Under the terms of the agreement, 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 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 transaction is subject to the approval of the holders of the Trust Preferred Securities and a proxy statement seeking such approval has been filed with the SEC as part of a registration statement of Easy Gardener Products Ltd. and U.S. Home & Garden Trust I that is subject to SEC review and effectiveness. The proposed sale is also subject to a number of additional conditions including the buyer obtaining the required financing. The Asset Purchase Agreement provides that the proposed transaction must be completed on or before June 30, 2003. 7 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ After 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 $18,700,000 upon the following terms: net cash of $17,100,000 paid at closing, and an additional $1,600,000 in the form of a subordinated promissory note delivered at closing. 7. Refinancing and transaction costs included in the Consolidated Statements of Operations for the nine month period ended March 31, 2003 relate to the refinancing described in note 5 to the financial statements and the proposed asset sale described in note 6 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 $2,251,000 in the nine months ended March 31, 2003. The Company incurred $116,000 of costs during the quarter ended March 31, 2003 related to the proposed asset sale. The Company capitalized $1,974,000 of deferred financing costs related to the new financing during the nine months ended March 31, 2003. 8. In June 2002, the Company announced that is was discontinuing the operations conducted through its subsidiary Weed Wizard Acquisition Corp. ("Weed Wizard") 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 plans to liquidate the assets and liabilities of Weed Wizard during fiscal 2003. Revenues for Weed Wizard for the three months and nine months ended March 31, 2003 and 2002 were not material. The Company had a net loss from the discontinued operations of Weed Wizard of $41,000 and $39,000 for the three months ended March 31, 2003 and 2002, respectively, and $1,234,000 and $797,000 for the nine months ended March 31, 2003 and 2002, respectively. In June 2001, the Company announced that it was discontinuing its e-commerce initiative, which it was conducting though its subsidiary, Egarden, Inc. (Egarden), effective June 30, 2001. All severance payments were made by June 30, 2002. No adjustments were required to the liability recorded for severance payments since June 30, 2001. 8 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The assets and liabilities of discontinued Weed Wizard and Egarden operations reported in the consolidated balance sheets consist of the following: March 31, 2003 ================================================================== Weed Wizard Egarden Total ================================================================== Current Assets: Cash and cash equivalents $ -- $63,000 $ 63,000 Accounts receivable - Trade 117,000 -- 117,000 Other current assets 34,000 -- 34,000 ------------------------------------------------------------------ Total Current Assets $151,000 $63,000 $ 214,000 ================================================================== Current Liabilities: Accounts payable $ 2,000 $ -- $ 2,000 Accrued expenses 98,000 16,000 114,000 ------------------------------------------------------------------ Total Current Liabilities $100,000 $16,000 $ 116,000 ================================================================== June 30, 2002 ------------------------------------- Weed Wizard Egarden Total ------------------------------------------------------------------ Current Assets: Cash and cash equivalents $ -- $62,000 $ 62,000 Accounts receivable: Trade 385,000 -- 385,000 Settlement 195,000 -- 195,000 Inventories 274,000 -- 274,000 Other current assets 136,000 -- 136,000 ------------------------------------------------------------------ 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 ================================================================== 9 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Pursuant to Statement of Financial Accounting Standards (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 current assets and current liabilities of the discontinued components have been separately stated and the property and equipment of discontinued operations has been classified as "Held for Sale" on the balance sheet. The net losses and net cash flows have been reported as "Discontinued Operations" in the accompanying consolidated financial statements. The notes have been restated to exclude amounts related to these discontinued components. 9. Effective July 1, 2001, the Company adopted SFAS No. 141 and SFAS No. 142 and completed a reassessment of the useful lives of all intangible assets other than goodwill which total $6,641,000 and $6,398,000 (net of accumulated amortization of $4,081,000 and $3,008,000) at March 31, 2003 and June 30, 2002, respectively. No adjustments to previously determined amortization periods were considered necessary. The Company has no intangible assets with indefinite useful lives other than goodwill at March 31, 2003. Amortization expense for all intangible assets having definite useful lives during the three months ended March 31, 2003 and 2002 was $442,000 and $301,000, respectively, and for the nine months ended March 31, 2003 and 2002 was $1,214,000 and $809,000, respectively. Estimated amortization expense for continuing operations for each of the five succeeding fiscal years is as follows: Year Ended June 30, Amount --------------------------------------------- 2003 $1,600,000 2004 $1,600,000 2005 $ 877,000 2006 $ 667,000 2007 $ 667,000 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 and $49,861,000, net of accumulated amortization, at March 31, 2003 and June 30, 2002, respectively. In conjunction with the adoption of SFAS No. 141 and SFAS No. 142, the Company completed its transitional goodwill impairment test. Ampro Industries, Inc. ("Ampro") and Golden West Agri-Products, Inc. ("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 at the end of the prior fiscal year of $9,390,000. 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 was recorded at the end of the prior fiscal year of $492,000. In accordance with the applicable accounting literature, for interim reporting purposes these impairment losses were reflected as of July 1, 10 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 2001 and were reported as a cumulative effect of a change in accounting principle in the Consolidated Statements of Operations. 10. In the normal course of business, the Company is subject to proceedings, lawsuits, and other claims, including proceedings under laws and government regulations related to product safety and other matters. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. 11. The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations 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 fiscal 2002: no dividend yield, expected volatility of approximately 75%, risk-free interest rate of 3.5%, and expected lives of approximately three to five years. The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:
Three Months Ended Nine Months Ended March 31, March 31, 2003 2002 2003 2002 ================================================================== Net income (loss), as reported $ 1,225,000 $ 2,049,000 $(10,122,000) $(13,979,000) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards -- -- (1,000) (2,000) ------------------------------------------------------------------ Pro forma net income (loss) $ 1,225,000 $ 2,049,000 $(10,123,000) $(13,981,000) ================================================================== Earnings (loss) per share - Basic and Diluted As reported $ 0.07 $ 0.12 $ (0.57) $ (0.80) Pro forma $ 0.07 $ 0.12 $ (0.57) $ (0.80)
11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Report contains statements that are forward-looking, such as statements relating to plans for the Company's future activities. Such forward-looking information involves important known and unknown risks and uncertainties that could significantly affect actual results, performance or achievements in the future and, accordingly, such actual results, performance or achievements may materially differ from those expressed or implied in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to the Company's growth strategy, customer concentration, outstanding indebtedness, dependence on weather conditions, seasonality, expansion and other activities of competitors, ability to successfully integrate acquired companies and product lines, dependence on a limited number of suppliers, changes in federal or state environmental laws and the administration of such laws, protection of trademarks and other proprietary rights, the listing of the Company's common stock on the over-the-counter market via the Electronic Bulletin Board, and the general condition of the economy and its effect on the securities markets and other risks detailed in the Company's other filings with the Securities and Exchange Commission. The words "believe," "expect," "anticipate," "intend" and "plan" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. General U.S. Home & Garden Inc., ("the Company"), manufactures and markets a broad range of brand-name consumer lawn and garden products through its wholly owned subsidiaries, Ampro, Easy Gardener, Inc. ("Easy Gardener"), and Golden West and Easy Gardener's wholly owned subsidiaries, Weatherly Consumer Products Group, Inc. and Weed Wizard. In June 2002, the Company announced the discontinuation of the Weed Wizard operations effective September 30, 2002. Since 1992, the Company consummated eleven acquisitions of complementary lawn and garden companies and product lines for an aggregate consideration of approximately $111,000,000 in cash, notes and equity securities. As a result of such acquisitions, the Company recognized a significant amount of goodwill, which, in the aggregate, was $49,878,000 and $49,861,000, net of accumulated amortization, at March 31, 2003 and June 30, 2002, respectively. The consumer lawn and garden market continues to become more consolidated with fewer retailers accounting for an increasing percentage of all lawn and garden products sold. This increasing concentration provides the largest retailers with greater leverage over their suppliers, such as the Company. This leverage could result in decreased margins for suppliers, including the Company, which may be required to make greater price concessions to their large retail accounts without being able to reduce the costs of the products sold by them to the retailers. This leverage by the large retailers could also increase sales volatility for the Company as well as other suppliers of lawn and garden products. 12 Results of Operations The following table sets forth, for the periods indicated, certain selected financial data as a percentage of net sales:
Three Months Ended Nine Months Ended March 31, March 31, 2003 2002 2003 2002 =================== =================== Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 53.1 52.5 56.8 56.0 ------------------- ------------------- Gross profit 46.9 47.5 43.2 44.0 Selling and shipping expenses 22.5 20.8 26.2 24.8 General and administrative expenses 8.4 8.7 12.3 12.5 Depreciation and amortization 1.9 1.7 2.6 2.1 ------------------- ------------------- Income from continuing operations 14.1 16.3 2.1 4.6 Refinancing and transaction costs (0.5) -- (8.4) (0.5) Interest expense, net (8.3) (7.6) (11.4) (10.8) ------------------- ------------------- Income (loss) from continuing operations before cumulative effect of a change in accounting principle 5.3 8.7 (17.7) (6.7) Income tax expense -- -- (0.2) -- ------------------- ------------------- Income (loss) from continuing operations before cumulative effect of a change in accounting principle 5.3 8.7 (17.9) (6.7) Loss from discontinued operations (0.2) (0.2) (2.5) (1.6) =================== =================== Income (loss) before cumulative effect of a change in accounting principle 5.1 8.5 (20.4) (8.3) Cumulative effect of a change in accounting principle -- -- -- (20.1) =================== =================== Net income (loss) 5.1% 8.5% (20.4%) (28.4%) =================== ===================
13 Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002 Net sales. Net sales increased by $123,000, or 0.5%, to $24,036,000 during the three months ended March 31, 2003, from $23,913,000 during the comparable period in 2002. The increase in net sales was the result of an increase in volume of products sold to existing customers, offset in part by increased discounts, rebates and allowances granted by the Company. Cost of sales. Cost of sales increased by $199,000, or 1.6% to $12,758,000 for the three months ended March 31, 2003 from $12,559,000 during the comparable period in 2002. The increase was partially a result of the increase in sales. Cost of sales as a percentage of net sales increased to 53.1% during the three months ended March 31, 2003 from 52.5% during the comparable period in 2002. The percentage increase is primarily a result of increased discounts, rebates and allowances. Cost of sales as a percent of sales before rebates and discounts decreased slightly. Gross profit. Gross profit decreased by $76,000, or 0.7%, to $11,278,000 for the three months ended March 31, 2003 from $11,354,000 during the comparable period in 2002. Gross profit as a percentage of net sales decreased to 46.9% during the three months ended March 31, 2003, from 47.5% during the comparable period in 2002. This decrease in gross profit dollars and as a percentage of net sales resulted from the increased discounts, rebates and allowances as noted above. Selling and shipping expenses. Selling and shipping expenses increased by $430,000, or 8.6% to $5,413,000 during the three months ended March 31, 2003 from $4,983,000 during the comparable period in 2002. This increase in expense was attributable to the increased number of smaller shipments and increased outbound freight costs. As a percentage of net sales, selling and shipping expenses increased to 22.5% during the three months ended March 31, 2003 from 20.8% during the comparable period in 2002. General and administrative expenses. General and administrative expenses decreased by $53,000 or 2.5%, to $2,028,000 during the three months ended March 31, 2003 from $2,081,000 during the comparable period in 2002 due primarily to cost reduction measures. As a percentage of net sales, general and administrative expenses decreased to 8.4% during the three months ended March 31, 2003 from 8.7% during the comparable period in 2002. Depreciation and amortization. Depreciation and amortization expenses increased by $63,000 or 16.1% to $454,000 during the three months ended March 31, 2003 from $391,000 during the comparable period in 2002. This increase is primarily due to increased amortization of deferred financing costs. As a percentage of net sales, depreciation and amortization expenses increased to 1.9% during the three months ended March 31, 2003 from 1.7% during the comparable period in 2002. Income from continuing operations. Income from continuing operations decreased by $516,000 or 13.2% to $3,383,000 during the three months ended March 31, 2003, from $3,899,000 during the comparable period in 2002. The decrease in income from continuing operations was primarily due to increased discounts, rebates and allowances and outbound freight costs being greater than the increased sales volume as noted above. As a percentage of net sales, income from operations decreased to 14.1% for the three months ended March 31, 2003 from 16.3% during the comparable period in 2002. Refinancing and transaction costs. The Company incurred $116,000 in transaction costs during the quarter ended March 31, 2003. The Company did not incur any refinancing and transaction costs in the comparable quarter in 2002. Interest expense. Net interest expense increased $187,000, or 10.3% to $1,998,000 during the three months ended March 31, 2003, from $1,811,000 during the comparable period in 2002. The increase in interest expense is related to an increase in borrowing levels. 14 Income taxes. Income taxes increased to $3,000 during the three months ended March 31, 2003 from zero during the comparable quarter. Discontinued operations. Loss from discontinued operations increased to $41,000 from $39,000 during the three months ended March 31, 2003, from the comparable period in 2002. Net income. Net income decreased by $824,000, or 40% to $1,225,000 during the three months ended March 31, 2003 from $2,049,000 during the comparable period in 2002. Net income per common share decreased to $0.07 per share for the three months ended March 31, 2003 from net income of $0.12 per share during the comparable period in 2002. The decrease in net income and net income per common share is due to increased discounts, rebates and allowances, selling and shipping costs, refinancing and transaction costs and interest expense as noted above. Nine Months Ended March 31, 2003 Compared to Nine Months Ended March 31, 2002 Net sales. Net sales increased by $380,000, or 0.8%, to $49,538,000 during the nine months ended March 31, 2003, from $49,158,000 during the comparable period in 2002. The increase in net sales was the result of an increase in volume of products sold to existing customers, offset in part by increased discounts, rebates and allowances. Cost of sales. Cost of sales increased by $599,000, or 2.2% to $28,111,000 for the nine months ended March 31, 2003 from $27,512,000 during the comparable period in 2002 due partially to increased sales volume. Cost of sales as a percentage of net sales increased to 56.8% during the nine months ended March 31, 2003 from 56.0% during the comparable period in 2002 due to increased discounts, rebates and allowances noted above. Cost of sales as a percent of sales before rebates and discounts decreased slightly. Gross profit. Gross profit decreased by $219,000, or 1.0%, to $21,427,000 for the nine months ended March 31, 2003 from $21,646,000 during the comparable period in 2002. Gross profit as a percentage of net sales decreased to 43.2% during the nine months ended March 31, 2003, from 44.0% during the comparable period in 2002. This decrease in gross profit dollars and as a percentage of net sales resulted from the increased discounts, rebates and allowances noted above. Selling and shipping expenses. Selling and shipping expenses increased by $769,000, or 6.3% to $12,969,000 during the nine months ended March 31, 2003 from $12,200,000 during the comparable period in 2002. The increase in expense was attributable to the increased number of smaller shipments and to increased outbound freight costs. As a percentage of net sales, selling and shipping expenses increased to 26.2% during the nine months ended March 31, 2003 from 24.8% during the comparable period in 2002. General and administrative expenses. General and administrative expenses decreased by $13,000 or 0.2%, to $6,108,000 during the nine months ended March 31, 2003 from $6,121,000 during the comparable period in 2002. As a percentage of net sales, general and administrative expenses during the nine months ended March 31, 2003 decreased to 12.3% from 12.5% in the comparable period. Depreciation and amortization. Depreciation and amortization expenses increased by $237,000 or 22.5% to $1,290,000 during the nine months ended March 31, 2003 from $1,053,000 during the comparable period in 2002. This increase is primarily due to additional amortization related to a non-compete agreement that the Company began amortizing in October 2001 as well as increased amortization of deferred financing costs. As a percentage of net sales, depreciation and amortization expenses increased to 2.6% during the nine months ended March 31, 2003 from 2.1% during the comparable period in 2002. Income from continuing operations. Income from continuing operations decreased by $1,212,000 or 53.3% to $1,060,000 during the nine months ended March 31, 2003, from $2,272,000 during the comparable period in 2002. The decrease in income from continuing operations was primarily due to 15 increased discounts, rebates and allowances, outbound freight costs and amortization expenses as noted above. As a percentage of net sales, income from continuing operations decreased to 2.1% for the nine months ended March 31, 2003 from 4.6% during the comparable period in 2002. Refinancing and transaction costs. The Company incurred $4,179,000 in refinancing and transaction costs during the nine months ended March 31, 2003. Included in the above is a write-off of $1,928,000 for deferred financing costs and discounts, $1,668,000 of fees and expenses related to the replaced financing arrangements, and $583,000 of transaction costs. In the comparable period in the prior year, the Company incurred a $254,000 write-off of deferred financing costs. See Note 7 to the Consolidated Financial Statements. Interest expense. Net interest expense increased $340,000, or 6.4% to $5,658,000 during the nine months ended March 31, 2003, from $5,318,000 during the comparable period in 2002. The increase in interest expense is related to an increase in borrowing levels. Income taxes. Income taxes increased to $111,000 during the nine months ended March 31, 2003 from zero during the comparable quarter. Discontinued operations. Loss from discontinued operations increased to $1,234,000 from $797,000, or 54.8% during the nine months ended March 31, 2003, from the comparable period in 2002. The $437,000 increase in loss from discontinued operations is primarily due to legal costs associated with settling the U.S. Consumer Products Safety Commission ("CPSC") and A.A.B.B., Inc. litigation and a write-down of assets, offset in part by management's decision to discontinue selling Weed Wizard products as of September 30, 2002. Cumulative effect of a change in accounting principle. The cumulative effect of a change in accounting principle during the nine months ended March 31, 2002 resulted from the transitional goodwill impairment test required in conjunction with the adoption of SFAS No. 142. The recording of an impairment loss of $9,882,000, which is primarily related to the Ampro operations, is reflected as a cumulative effect of a change in accounting principle. See Note 9 to the Consolidated Financial Statements. Net loss. Net loss decreased by $3,857,000 to $10,122,000 during the nine months ended March 31, 2003 from a net loss of $13,979,000 during the comparable period in 2002. Net loss per common share decreased to $0.57 per share for the nine months ended March 31, 2003 from a net loss of $0.80 per share during the comparable period in 2002. The decrease in net loss and net loss per common share is due primarily to the cumulative effect of a change in accounting principle recorded in the three months ended September 30, 2001 of $9,882,000 noted above, offset in part by the refinancing and transaction costs recorded in the nine months ended March 31, 2003 of $4,179,000 and the other matters as noted above. Seasonality The Company's sales are seasonal due to the nature of the lawn and garden business, in parallel with the annual growing season. The Company's sales and shipping are most active from late 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 in mid-summer. Sales of the Company's agricultural products, which were not material during the three and nine months ended March 31, 2003, are also seasonal. Most shipments occur during the agricultural cultivation period from March through October. 16 Liquidity and Capital Resources Since inception, the Company has financed its operations primarily through cash generated by operations, net proceeds from the Company's private placements and public sales of securities and borrowings from lending institutions. At March 31, 2003, the Company had consolidated cash and short-term investments totaling $479,000, and a working capital deficit of $6,844,000. At June 30, 2002, the Company had consolidated cash and short-term investments totaling $219,000, and working capital of $2,728,000. The decrease in working capital was attributable to classifying borrowings under the Company's revolving and long-term credit facilities as short term liabilities due to the covenant violations discussed below. Net cash used in operating activities for the nine months ended March 31, 2003 of $4.5 million consisted primarily of the net loss from continuing operations of $8.9 million adjusted for non-cash expenses of $4.6 million and an increase in accounts receivable and inventory of $5.5 million. This was offset in part by an increase in accounts payable and accrued expenses of $4.9 million. The increase in accounts receivable and inventory and accounts payable and accrued expenses is consistent with the seasonal nature of the Company's business. Net cash used in investing activities for the nine months ended March 31, 2003 of $1.2 million is primarily due to capital purchases of equipment and intangible assets. Net cash provided by financing activities for the nine months ended March 31, 2003 of $6.4 million is primarily due to an increase in long-term debt and the line of credit and amounts paid for deferred finance costs in conjunction with the new financing. The Company entered into a senior credit facility dated as of October 30, 2002 for the Company and its material subsidiaries. Foothill Capital Corporation, 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 interest rate on the term loan increases 2% each year the balance is outstanding. Borrowings on the revolving credit facility are limited based on eligible borrowing bases, effectively $23,000,000 at March 31, 2003, the maximum on the revolving credit facility. The Company and its material subsidiaries' obligations 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 and March by 2.5% points, to 14.25%. At March 31, 2003, the Company was in violation of a covenant and received a waiver from the lenders for the March 31, 2003 violation. The Company was in violation of a covenant at April 30, 2003 and will request a waiver from the lenders for the violation. Amounts outstanding under the new credit facility have been classified as short-term debt, as the bank waiver does not cover the period subsequent to March 31, 2003. The Company 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 the Company 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. 17 The Company also had a financing agreement to provide $6,250,000 of subordinated debt. At June 30, 2002, the Company 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, the Company issued to the purchasers of the notes warrants to purchase up to 3.75% of the fully diluted common stock of the Company and an option to purchase from the Company certain Trust Preferred Securities of the Company's subsidiary, U.S. Home and Garden Trust I, that are owned by the Company, 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, the Company continues 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, the Company will issue the underlying Trust Preferred Securities. Commitments The Company leases office and warehouse space, certain office equipment and automobiles under operating leases expiring through 2006. The future minimum annual lease payments under these non-cancelable operating leases are as follows: Year Ended June 30, Amount ------------------------------------------------ 2003 $ 843,000 2004 731,000 2005 484,000 2006 252,000 2007 55,000 ------------------------------------------------ $2,365,000 ------------------------------------------------ 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. The Company has included below a discussion of the more critical accounting policies that are affected by the significant judgments and estimates used in the preparation of the financial statements, how such policies are applied, and how results differing from the estimates and assumptions would affect the amounts presented in the financial statements. Other accounting policies also have a significant effect on the financial statements, and some of these policies also require the use of estimates and assumptions as discussed in the Summary of Accounting Policies in the Company's Consolidated Financial Statements at June 30, 2002. Allowance for Doubtful Accounts Receivable and Sales Returns. The Company maintains an allowance for doubtful accounts receivable, which represents the potential estimated losses resulting from the inability of customers to make required payments for amounts owed. The allowance is estimated based on historical experience of write-offs, the level of past due amounts and information known about specific customers with respect to their ability to make payments at the balance sheet date. If the financial condition of the 18 Company's customers were to change, resulting in an impairment or improvement in their ability to make payments, additional allowances may be required or allowances may be reduced. The Company also maintains an allowance for sales returns. The Company does not have formal agreements with customers that allow the return of product. The Company reviews requests to return product on a case-by-case basis. An accrual is made for authorized returns. Inventories. The Company records inventory reserves for estimated obsolescence of inventory equal to the difference between the cost of inventory owned and the estimated market value. Market value is based upon the age of specific inventory on hand and assumptions about future demand and market conditions. If actual market conditions for the sale of the inventory are less favorable than those anticipated by management, additional reserves may be required. Goodwill. The Company has consummated eleven acquisitions accounted for using the purchase method. The excess of cost over net assets acquired which relates to these acquisitions has been recorded as goodwill. Goodwill is tested for impairment by comparing the carrying value of the assets of 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. The Company records deferred income taxes based on enacted income tax rates in effect on the dates temporary differences between the financial reporting and tax bases of assets and liabilities reverse. To the extent that available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance is established. The Company has recorded a valuation allowance due to the uncertainty of its ability to generate sufficient future taxable income to realize the gross deferred tax assets. If the Company is able to generate future taxable income, the valuation allowance may be adjusted. New Accounting Pronouncements In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS No. 4 required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. SFAS No. 145 requires any gain or loss from the extinguishment of debt to meet the requirements of APB No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", to be classified as an extraordinary item, otherwise the item would be classified in the results of continuing operations. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods that does not meet the criteria of APB No. 30 for classification as an extraordinary item shall be reclassified. The provisions of the statement related to the rescission of SFAS No. 4 are applicable for the Company for the fiscal year ended June 30, 2003. The adoption of SFAS No. 145 did not have an effect on the Company's financial statements for the periods presented. 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. The adoption of 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 19 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 provisions of the statement are effective for the Company for the quarter ended March 31, 2003. The Company adopted SFAS No. 148 during the quarter ended March 31, 2003. Inflation Inflation has historically not had a material effect on the Company's operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk As a result of its variable rate revolving credit line, the Company is exposed to the risk of rising interest rates. The following table provides information on the Company's fixed maturity debt as of March 31, 2003 that are sensitive to changes in interest rates. The Revolving Credit Facility had an interest rate of 5.25% for the period ended March 31, 2003 $20.0 million The Term Loan had interest rates of 11.75% and 14.25% for the period ended March 31, 2003 $12.1 million Item 4. Controls and Procedures Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), of the effectiveness of the Company's disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, there were no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. PART II - OTHER INFORMATION Item 5. Other Information As previously disclosed, in December 2002 the Company entered into an Asset Purchase Agreement to sell substantially all of the assets of certain of its subsidiaries to a management group led by Richard Grandy, the Chief Operating Officer of the Company. The Asset Purchase Agreement provides that the transaction must be closed on or before June 30, 2003. At the time in November 2002 that the Company repaid all amounts outstanding under its subordinated debt facility the Company also entered into a settlement agreement with the holders of the repaid subordinated debt, in which they irrevocably agreed and consented to the Company's execution of the asset purchase agreement and the consummation of the transactions contemplated by that agreement, provided certain conditions are met prior to the closing. Agreement of these former debt holders to the proposed asset sale was required under the terms of the then existing agreements they had with the Company. 20 The conditions to the consent included the following: o that Easy Gardener Products Ltd. become the obligor under the Trust documents; o that Easy Gardener Products Ltd. acquire the 251,981 Trust Preferred Securities currently owned by the Company; o that Easy Gardener Products Ltd. grant to these former subordinated lenders options to purchase 189,750 of the foregoing Trust Preferred Securities, in replacement of the currently existing options granted to them by the Company which are exercisable for the purchase of only 94,875 of these Trust Preferred Securities; o that the former subordinated debtholders and related parties receive the monies due to them under the settlement agreement (an estimated $1,145,000) at the closing of the asset sale; and o that the Company receive no less than approximately $16.5 million of immediately available cash proceeds at the closing. The settlement agreement also provides for certain amendments to the Trust Preferred options held by these former debtholders and provides that, upon the closing of the proposed asset sale and the satisfaction of the foregoing conditions, the warrants to purchase common stock of the Company held by these former debtholders will be amended and certain obligations of the Company and Easy Gardener Inc. to these holders and related parties that survived the November 2002 repayment of the subordinated loan facility, will expire. Commencing April 18, 2003, the Company's common stock ceased trading on Nasdaq and commenced trading on the over-the-counter bulletin board. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 99.1 Certification of the Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of the Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (b) No reports on Form 8-K were filed during the quarter ended March 31, 2003. SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. May 14, 2003 U.S. Home & Garden Inc. (Registrant) By: /s/ Robert Kassel ------------------------------------ President, Chief Executive Officer By: /s/ Richard Kurz ------------------------------------ Chief Financial Officer 21 U.S. Home & Garden Inc. Certification of Principal Executive Officer I, Robert Kassel, President and Chief Executive Officer of U.S. Home & Garden Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of U.S. Home & Garden Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ Robert Kassel ------------------------------------ Robert Kassel Chief Executive Officer (Principal Executive Officer) 22 U.S. Home & Garden Inc. Certification of Principal Financial Officer I, Richard Kurz, Chief Financial Officer of U.S. Home & Garden Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of U.S. Home & Garden Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ Richard Kurz ------------------------------------ Richard Kurz Chief Financial Officer (Principal Financial Officer) 23