U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
From the transition period from __________ to __________
Commission File Number 0-19899
U.S. HOME & GARDEN INC.
(Exact name of registrant as
specified in its charter)
Delaware 77-0262908
(State or other jurisdiction IRS Employer
of incorporation or organization) (Identification Number)
655 Montgomery Street, Suite 830
San Francisco, California 94111
(Address of Principal Executive Offices)
(415) 616-8111
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No___
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
As of February 11, 1997 there were 14,007,841 shares of the issuer's common
stock, par value $.001 per share, outstanding.
<PAGE>
Part l. - Financial Information
Item 1. Consolidated Financial Statements
Consolidated balance sheet as of December 31, 1996
and June 30, 1996 (unaudited) 1-3
Consolidated statements of operations for the three months
and six months ended December 31, 1996 and 1995 (unaudited) 4-5
Consolidated statements of cash flows for the six months
ended December 31, 1996 and 1995 (unaudited) 6-7
Notes to consolidated financial statements 8-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 10-17
Part II. - Other Information
Item 2. Changes in Securities 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
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<TABLE>
<CAPTION>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheet
===================================================================================================================
December 31, June 30,
1996 1996
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current
Cash and cash equivalents $ 256,054 $ 679,850
Accounts receivable, less allowance for doubtful
accounts and sales returns of $310,000 and
$155,000 6,332,883 7,109,392
Inventories 9,661,344 3,391,553
Prepaid expenses and other current assets 354,010 462,246
Income tax receivable 764,547 --
Deferred tax asset 1,333,000 1,333,000
- -------------------------------------------------------------------------------------------------------------------
Total current assets 18,701,838 12,976,041
Furniture, fixtures and equipment, net 2,090,766 1,215,660
Intangible assets
Excess of cost over net assets acquired of Weatherly
Consumer Products Group, Inc., net of accumulated
amortization of $280,037 20,550,598 --
Excess of cost over net assets acquired of Easy
Gardener, Inc., net of accumulated amortization
of $1,065,215 and $828,289 13,106,992 13,343,918
Excess of cost over net assets acquired of Golden
West Chemical Distributors, Inc., net of accumu-
lated amortization of $459,489 and $406,903 1,638,114 1,690,700
Excess of cost over net assets acquired of Emerald
Products, LLC, net of accumulated amortization of
$49,944 and $29,356 746,143 749,375
Deferred financing costs, net of accumulated amor-
tization of $97,181 and $467,193 1,652,226 1,004,614
Product rights, patents and trademarks, net of
accumulated amortization of $107,879 and $56,500 1,933,666 198,500
</TABLE>
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<TABLE>
<CAPTION>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheet
====================================================================================================================
December 31, June 30,
1996 1996
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets (continued)
Intangible assets (continued)
Non-compete agreement, net of accumulated amortiza-
tion of $9,812 $ 490,188 $ --
Package design, net of accumulated amortization of
$90,790 and $56,016 192,291 180,293
Deferred tax asset 2,171,918 --
Trade credits 1,289,120 1,294,560
Officer receivables 753,266 617,204
Other assets 226,188 313,117
- --------------------------------------------------------------------------------------------------------------------
$65,543,314 $33,583,982
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
2
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<TABLE>
<CAPTION>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheet
===================================================================================================================
December 31, June 30,
1996 1996
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Shareholders' Equity
<S> <C> <C>
Current
Line of credit $ 7,197,371 $ 1,288,146
Current maturities of notes payable 3,840,000 2,361,798
Accounts payable 2,625,864 1,285,585
Accrued expenses 2,816,422 1,085,797
Accrued commissions 153,255 545,670
Accrued interest 276,168 592,271
Accrued purchase consideration 1,116,054 488,888
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 18,025,134 7,648,155
Deferred tax liability 328,000 328,000
Notes payable, less current maturities 20,840,000 6,238,200
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 39,193,134 14,214,355
- -------------------------------------------------------------------------------------------------------------------
Commitments, contingency and subsequent event
Shareholders' equity
Preferred stock, $.001 par value - shares authorized,
1,000,000; no shares outstanding -- --
Common stock, $.001 par value - shares authorized,
30,000,000; 10,507,381 and 13,917,266 shares issued
and outstanding at June 30, 1996 and December 31,
1996 13,917 10,507
Additional paid-in capital 30,452,992 21,413,422
Accumulated deficit (4,116,729) (2,054,302)
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 26,350,180 19,369,627
- -------------------------------------------------------------------------------------------------------------------
$ 65,543,314 $ 33,583,982
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statement of Operations
====================================================================================================================
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ---------------------------
1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Unaudited Unaudited
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net sales $ 7,415,940 $ 2,714,702 $ 12,938,733 $ 5,979,338
Cost of sales 3,217,234 1,289,524 5,824,401 2,844,710
- --------------------------------------------------------------------------------------------------------------------
Gross profit 4,198,706 1,425,178 7,114,332 3,134,628
- --------------------------------------------------------------------------------------------------------------------
Operating expenses
Selling and shipping 2,230,228 1,120,081 3,989,708 2,317,506
General and administrative 1,817,837 1,274,306 3,322,368 2,287,811
- --------------------------------------------------------------------------------------------------------------------
4,048,065 2,394,387 7,312,076 4,605,317
- --------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 150,641 (969,209) (197,744) (1,470,689)
Other income (expense)
Investment income 16,531 10,053 42,458 33,924
Interest expense (812,479) (472,844) (1,375,247) (930,102)
- --------------------------------------------------------------------------------------------------------------------
Loss before income taxes
and extraordinary expense (645,307) (1,432,000) (1,530,533) (2,366,867)
Income tax benefit 195,000 80,000 475,000 180,000
- --------------------------------------------------------------------------------------------------------------------
Loss before extraordinary
expense (450,307) (1,352,000) (1,055,533) (2,186,867)
Extraordinary expense of
$1,459,266 on debt refinancing,
net of income taxes of $452,372 -- -- (1,006,894) --
- --------------------------------------------------------------------------------------------------------------------
Net loss $ (450,307) $ (1,352,000) $ (2,062,427) $ (2,186,867)
====================================================================================================================
</TABLE>
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<TABLE>
<CAPTION>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statement of Operations
====================================================================================================================================
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------------------- --------------------------------------
1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Unaudited Unaudited
--------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
Loss per common share
before extraordinary
expense $ (.03) $ (.13) $ (.08) $ (.22)
Extraordinary expense -- -- (.07) --
Net loss per share $ (.03) $ (.13) $ (.15) $ (.22)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average common
and common equivalent
shares outstanding 13,917,000 10,200,000 13,437,000 10,073,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
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<TABLE>
<CAPTION>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated statements of Cash Flows
===================================================================================================================
Increase (Decrease) in Cash
Six months ended December 31, 1996 1995
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss $ (2,062,427) $ (2,186,867)
Adjustments to reconcile net loss to net
cash used in operating activities:
Extraordinary expense 1,006,894 --
Depreciation and amortization 958,324 416,657
Amortization of deferred financing costs 119,274 125,214
Changes in operating assets and liabilities, net of
assets acquired and liabilities assumed:
Accounts receivable 2,118,948 2,117,805
Inventories (4,463,763) (2,631,032)
Prepaid expenses and other current assets 540,579 (137,408)
Accounts payable and accrued expenses 1,084,013 1,261,356
Other assets 92,369 (263,785)
Deferred tax asset (934,015) --
- --------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,539,804) (1,298,060)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Payment for purchase of business, net of cash acquired (23,801,258) (1,007,016)
Payment for non-compete (500,000) --
Increase in officer receivables (136,062) (43,176)
Purchase of furniture, fixtures and equipment (229,472) (136,863)
Purchase of package design -- (93,234)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (24,666,792) (1,280,289)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from warrants exercised 5,192,980 1,265,998
Proceeds from bank line of credit 17,883,851 4,044,065
Payment on bank line of credit (11,974,626) (2,312,698)
Proceeds from notes payable 16,783,335 --
Payments of notes payable (703,333) (800,000)
Acquisition finance costs (1,399,407) --
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 25,782,800 2,197,365
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
6
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U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
=========================================================================
Six months ended December 31, 1996 1995
- ------------------------------------------------------------------------
(Unaudited)
Net decrease in cash $(423,796) $(380,984)
Cash and cash equivalents, beginning of period 679,850 970,310
- ------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 256,054 $ 589,326
========================================================================
See accompanying notes to consolidated financial statements.
Six months ended December 31, 1996 1995
- ------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid for interest,
including deferred financing costs $3,251,331 $ 646,358
Cash paid for taxes $ 6,644 $ --
========================================================================
7
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. The accompanying consolidated financial statements at December 31, 1996,
and for the three and six months ended December 31, 1996 and 1995 are
unaudited, but, in the opinion of management, include all adjustments
necessary for a fair presentation of consolidated financial position and
results of operations for the periods presented.
2. Refer to the audited financial statements for the year ended June 30, 1996,
for details of accounting policies and accounts.
3. On August 9, 1996, Easy Gardener Acquisition Corporation (EGAC), a
wholly-owned subsidiary of the Company, acquired all of the outstanding
stock of Weatherly Consumer Products Group, Inc. (Weatherly), a lawn and
garden care company, for 1,000,000 shares of the Company's common stock
(valued at $3 per share) and $22,937,321, less an amount required to
discharge certain outstanding indebtedness of the acquired company, and
adjusted dollar for dollar based upon the ultimate value of the acquired
company's net current assets (approximately $2.4 million). The Company
operates the acquired company as a subsidiary of EGAC.
In connection with the above acquisition, the Company's outstanding notes
payable were refinanced and a new line of credit arrangement was
established. Under the terms of the new loan agreement, two promissory
notes were issued in the principal amount of $23,000,000 and $2,250,000,
respectively. The $23,000,000 note requires quarterly principal payments
ranging from $570,000 to $1,350,000 beginning September 30, 1996 through
June 30, 2002 and bears interest at the lower of prime or LIBOR rates, as
defined. The $2,250,000 note requires quarterly principal payments totaling
$140,625 beginning September 30, 1998, through December 30, 1999, and bears
interest at prime plus 6%. The line of credit agreement calls for maximum
borrowings totaling $13,000,000 with interest at the lower of prime or
LIBOR rates. As a result of this refinancing, the entire balance of
deferred finance costs at June 30, 1996, net of accumulated amortization,
plus certain prepayment penalties, was written off as an extraordinary
expense during the six months ended December 31, 1996. Extraordinary
expense, net of $452,000 tax benefit, totaled approximately $1,007,000 in
the six months ended December 31, 1996.
In conjunction with the debt refinancing, a warrant to purchase 400,000
shares of stock at $2.50 per share was issued to certain financial
institutions which provided the financing. The warrant has been valued at
$350,000 and is being amortized over the six-year term of the financing
agreement.
8
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Subsequent to June 30, 1996, warrants and a unit purchase option to
purchase common stock were exercised resulting in net proceeds to the
Company of approximately $5,200,000. These proceeds were used to fund a
portion of the Weatherly acquisition.
Subsequent to June 30, 1996, the Company granted stock options (with an
exercise price equal to the current market price) to purchase 2,115,000
shares of common stock to various employees and consultants primarily as
bonus compensation for fiscal 1996 operating results and the Weatherly
acquisition. In addition, the Company also granted an option to purchase
200,000 shares of common stock to a financial consultant for services
relating to the Weatherly acquisition. The option has a nominal exercise
price and will be recorded as a cost of the acquisition (estimated fair
value approximately $500,000), thus increasing the excess of cost over net
assets acquired of Weatherly.
The acquisition was accounted for as a purchase and, accordingly, the
results of operations have been included in the consolidated statement of
the operations since August 9, 1996. The value of intangibles purchased and
the excess of the purchase price over the fair value of assets acquired
totalled approximately $20.8 million and will be amortized on a straight
line basis over the estimated useful life of thirty years.
The following unaudited pro forma summary combines the consolidated results
of operations of the Company and Weatherly as if the acquisition had
occurred at the beginning of fiscal 1995, after giving effect to certain
adjustments, including the amortization of excess costs over assets
acquired and the elimination of certain expenses incurred by Weatherly
related to the acquisition. This pro forma summary does not necessarily
reflect the results of operations as they would have been if the Company
and Weatherly had constituted a single entity during such period and is not
necessarily indicative of results which may be obtained in the future.
Six months ended December 31, 1996 1995
- --------------------------------------------------------------------------------
Net sales $ 13,680,000 $ 12,003,000
Net (loss) before extraordinary expense (1,429,000) (3,308,000)
Net loss (2,955,000) (4,834,000)
Net (loss) per common share before
extraordinary expense (.10) (.25)
Net (loss) per common share (.21) (.36)
================================================================================
9
<PAGE>
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
On August 9, 1996, Easy Gardener Acquisition Corp. ("EGAC"), a subsidiary
of the Company, acquired all of the outstanding stock of Weatherly Consumer
Products Group, Inc., ("Weatherly"), a lawn and garden care company. See Note 3
of Notes to the Consolidated Financial Statements for a description of certain
terms of the acquisition.
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
The Company's consolidated net sales increased to $7,415,940 during the
three months ended December 31, 1996 from $2,714,702 during the comparable
period in 1995. The increase in net sales resulted from the inclusion of
Weatherly's sales of approximately $3,776,000 during the three months ended
December 31, 1996 compared to $0 in the comparable period in 1995. In addition,
approximately $925,000 of the increase in sales resulted from an increase in
shipments of EGAC's products from the comparable period in 1995. The Company
believes that its sales were positively affected by the continued penetration in
existing markets, expansion into new markets and a higher recognition of EGAC's
brand name and products.
The Company's consolidated cost of goods sold and gross profit generated
during the quarter ended December 31, 1996 were also higher than the comparable
period in 1995 primarily due to the increase in net sales and the inclusion of
Weatherly's costs of goods sold and gross profit. Gross profit as a percentage
of net sales, for the three months ended December 31, 1996 and 1995 was 57% and
53%, respectively. This increase is due to the addition of Weatherly's products
which have a higher gross profit percentage.
The Company's consolidated selling and shipping expenses increased to
$2,230,228 during the three months ended December 31, 1996 from $1,120,081
during the comparable period in 1995 primarily as a result of the increase in
net sales and the accompanying increase in selling and shipping expenses as a
result of the acquisition of Weatherly. Selling and shipping expenses as a
percentage of net sales for the three months ended December 31, 1996 decreased
from 41% to 30% compared to the comparable period in 1995 primarily as a result
of economies of scale gained from the sale of new products to existing
customers. The decrease in percentage is also attributable to the commencement
of the consolidation of EGAC and Weatherly.
10
<PAGE>
The Company's consolidated general and administrative expenses increased to
$1,817,837 during the three months ended December 31, 1996 from $1,274,306
during the comparable period in 1995 primarily as a result of the inclusion of
Weatherly expenses of approximately $355,000. In addition, the increase in
general and administrative expenses was due to the overhead expenses associated
with the overall increase in the size of the Company. General and administrative
expenses, as a percentage of net sales, for the three months ended December 31,
1996 decreased from 47% to 25% compared to the comparable period in 1995. The
decrease is attributed to the commencement of the consolidation of EGAC and
Weatherly.
The Company's consolidated interest expense increased to $812,479 during
the three months ended December 31, 1996 from $472,844 during the comparable
period in 1995 primarily due to the increase in outstanding indebtedness which
was incurred in connection with the purchase of Weatherly.
The Company's consolidated income tax benefit increased to $195,000, during
the three months ended December 31, 1996 from $80,000 during the comparable
period in 1995 primarily due to the Company's reduction of the deferred tax
asset valuation allocation associated with the available net operating loss
carryforwards.
As a result of the foregoing, the Company incurred a consolidated net loss
of $450,307 in the three months ended December 31, 1996 compared to a
consolidated net loss of $1,352,000 in the comparable 1995 period.
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
The Company's consolidated net sales increased to $12,938,733 during the
six months ended December 31, 1996 from $5,979,338 during the comparable period
in 1995. The increase in net sales resulted primarily from the inclusion of
Weatherly's sales of approximately $4,564,000 during the six months ended
December 31, 1996 compared to $0 in the comparable period in 1995. In addition,
approximately $2,562,000 of the increase in sales resulted from an increase in
shipments of EGAC's products from the comparable period in 1995. Furthermore,
the Company believes that its sales were positively affected by the continued
penetration in existing markets, expansion into new markets and a higher
recognition of EGAC's brand name and products.
The Company's consolidated cost of goods sold and gross profit generated
during the six months ended December 31, 1996 were also higher than the
comparable period in 1995 primarily due to the increase in net sales and the
inclusion of Weatherly's costs of goods sold and gross profit. Gross profit as a
percentage of net
11
<PAGE>
sales, for the six months ended December 31, 1996 and 1995 was 55% and 52%,
respectively. This increase is due to the addition of Weatherly's products which
have a higher gross profit percentage.
The Company's consolidated selling and shipping expenses increased to
$3,989,708 during the six months ended December 31, 1996 from $2,317,506 during
the comparable period in 1995 primarily as a result of the increase in net sales
and the accompanying increase in selling and shipping expenses as a result of
the acquisition of Weatherly. Selling and shipping expenses as a percentage of
net sales for the six months ended December 31, 1996 decreased from 39% to 31%
compared to the comparable period in 1995 primarily as a result of economies of
scale gained from the sale of new products to existing customers. In addition,
the decrease is attributable to the commencement of the consolidation of EGAC
and Weatherly.
The Company's consolidated general and administrative expenses increased to
$3,322,368 during the six months ended December 31, 1996 from $2,287,811 during
the comparable period in 1995 primarily as a result of the inclusion of
Weatherly expenses of approximately $571,000. In addition, the increase in
general and administrative expenses was due to the overhead expenses associated
with the overall increase in the size of the Company. General and administrative
expenses, as a percentage of net sales, for the six months ended December 31,
1996 decreased from 38% to 26% compared to the comparable period in 1995. The
decrease is attributed to the commencement of the consolidation of Easy Gardener
and Weatherly.
The Company's consolidated interest expense increased to $1,375,247 during
the six months ended December 31, 1996 from $930,102 during the comparable
period in 1995 primarily due to the increase in outstanding indebtedness which
was incurred in connection with the purchase of Weatherly.
The Company's consolidated income tax benefit increased to $475,000, during
the six months ended December 31, 1996 from $180,000 during the comparable
period in 1995 primarily due to the Company's reduction of the deferred tax
asset valuation allocation associated with net operating loss carryforwards.
In connection with the Weatherly acquisition, during the six months ended
December 31, 1996, the Company incurred an extraordinary expense on the
refinancing, at a more favorable rate, of outstanding notes payable and an
outstanding revolving credit facility. As a result of the refinancing, the
Company incurred an extraordinary expense of $1,006,894 ($1,459,266 net of
$452,372 of tax benefit), or $.07 per share. There was no comparable expense in
the corresponding 1995 period. The extraordinary expense consists of the balance
of deferred finance costs, net of accumulated amortization, plus certain
prepayment penalties. See " Liquidity and Capital Resources".
12
<PAGE>
As a result of the foregoing, the Company incurred a consolidated net loss
of $2,062,427 in the six months ended December 31, 1996 compared to a
consolidated net loss of $2,186,867 in the comparable 1995 period.
Liquidity and Capital Resources
From inception the Company has financed its operations primarily through
net proceeds from the Company's private and public sales of securities and
borrowings from lending institutions.
At December 31, 1996, the Company had consolidated cash and short-term
investments totalling $256,054 and working capital of $676,704. At June 30,
1996, the Company had consolidated cash and short-term investments totalling
$679,850 and working capital of $5,327,886. The decrease in working capital from
June 30, 1996 is due primarily to the additional notes payable, line of credit
and additional accrued purchase consideration for the acquisition of the
outstanding stock of Weatherly. Additionally, the seasonal fluctuations in the
Company's operations has resulted in a decrease in working capital from June 30,
1996.
Net cash used in operating activities for the six months ended December 31,
1996 was $1,539,804 consisting primarily of a net loss, a decrease in inventory
offset by the extraordinary expense, an increase in accounts payable and accrued
expenses and an increase in accounts receivable. Net cash used in investing
activities for the six months ended December 31, 1996 was $24,666,792 consisting
primarily of cash used for the acquisition of Weatherly. Net cash provided by
financing activities for the six months ended December 31, 1996 was $25,782,800
consisting primarily of the additional proceeds from the notes payable used in
connection with the purchase of Weatherly and the exercising of warrants to
purchase common stock which was substantially used for the purchase of
Weatherly.
At December 31, 1996 the Company had consolidated term debt of $24,680,000
which was incurred in connection with the purchase of Weatherly and the
refinancing of the outstanding notes payable. In connection with the acquisition
of Weatherly, EGAC entered into a new credit agreement ("Credit Agreement") with
certain institutional lenders under which its outstanding term loan and
revolving credit indebtedness were refinanced. Pursuant to the Credit Agreement,
the lenders have provided the Company with the following revolving credit and
term loan facilities:
(a) Revolving Credit Facility: The maximum amount available for borrowing
under this facility from time to time is equal to the lesser of $13 million and
a borrowing base determined by reference to specified percentages of EGAC's
consolidated accounts receivable and inventory deemed to be "eligible" by the
lenders. For the
13
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period of December 1, 1996 through February 28, 1997 the Company has received a
temporary overadvance on the borrowing base for $3,100,000. As of December 31,
1996, based on this formula and including the additional overadvance,
approximately $2,600,000 was available for borrowing and $7,197,371 was
outstanding.
Revolving credit loans bear interest at an annual rate chosen by EGAC based
on the prime rate of one of the lenders or LIBOR (the London inter-bank offered
rate) plus an applicable marginal rate. At December 31, 1996 the effective
annual rate for the outstanding revolving credit loans was 9.5%. The revolving
credit facility expires on June 30, 2002 (the "Expiration Date") and all
outstanding revolving credit loans are then due, unless such loans are required
to be repaid earlier by the terms of the Credit Agreement. In addition, for a 10
day period in each year, all outstanding revolving credit loans must be paid and
no revolving credit loans may be borrowed. Revolving credit loans may be
voluntarily prepaid at any time. Subject to the availability formula and the
Expiration Date, amounts repaid may be reborrowed and, subject to certain
restrictions, outstanding prime rate loans may be converted to LIBOR rate loans.
EGAC is also required to pay certain commitment, service and other fees in
connection with this facility. If EGAC determines to terminate the revolving
credit facility prior to the Expiration Date, the outstanding revolving credit
loan must be prepaid together with a premium from 1% to 3% of the "Average
Yearly Loan Balance" (as defined in the Credit Agreement) of the revolving
credit loans.
(b) Term Loan Facility: Pursuant to this facility, EGAC obtained two term
loans (the "Term Loans"), one in the principal amount of $23 million ("Term Loan
I") and the other in the principal amount of $2.25 million ("Term Loan II"),
each of which matures on the Expiration Date. The Term Loans are payable in
quarterly installments of principal, commencing as to Term Loan I in September
1996 and as to Term Loan II in September 1998. Interest on Term Loan I is
payable, at the election of EGAC, at the adjusted prime rate or LIBOR rate
described above, and EGAC from time to time, subject to certain restrictions,
may convert Term Loan I from a prime rate loan to a LIBOR rate loan. The
effective annual rate of interest for Term Loan I is 9.5%. Term Loan II bears
interest at a floating rate equal to prime rate of one of the lenders plus 6%.
The effective annual rate of interest for Term Loan II is 14.25%. Interest is
payable monthly in arrears on prime rate loans and at the end of the interest
period for a LIBOR rate loan if the interest period is 3 months or less. If EGAC
elects to prepay Term Loan I in full, at any time prior to the Expiration Date,
EGAC is also obligated to prepay a premium from 1% to 3% of the amount prepaid.
Term Loan I is subject to certain mandatory prepayments of the principal amount
of such Term Loan from "excess cash flow" (as defined in the Credit Agreement)
of EGAC and certain net proceeds of asset sales, condemnation awards and
insurance recoveries. The next mandatory prepayment of the principal amount
14
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of the Term Loan I on account of "excess cash flow", if any, will be due in
October 1997.
EGAC's obligation to pay the principal of, the interest on, and/or premium,
if any, and all other amounts payable on account of the revolving credit loans
and the Term Loans is secured by substantially all of the assets of EGAC and its
subsidiaries and the irrevocable guarantees of the Company and EGAC's
subsidiaries of such obligations. Upon the occurrence of events of default
specified in the Credit Agreement, the maturity of the outstanding principal
amounts of the revolving credit loans and the Term Loans may be accelerated by
the lenders who may also foreclose on the secured assets of EGAC and its
subsidiaries.
Under the Credit Agreement (a) EGAC is required, among other things, to
comply with certain limitations on incurring additional indebtedness, liens,
guarantees, capital and operating lease expenses in excess of a specified amount
per year, and sales of assets and payment of dividends, (b) EGAC and the Company
must comply with certain limitations on merger, liquidations, changes in
business, investments, loans and advances, or certain acquisition of
subsidiaries. In addition, EGAC must comply with certain minimum interest
coverage, debt service and fixed change rates, not permit its Net Worth (as
defined) to be less than certain amounts and generate certain minimum amounts of
income before interest expenses, taxes, depreciation and amortization. A
violation of any of these covenants constitutes an event of default under the
Credit Agreement.
The Company's cash flow and capital requirements are typically affected by
the seasonal nature of its business. Sales of the Company's lawn and garden care
products, including EGAC's, are highly seasonal, with the shipments of products
heavily concentrated in the spring and summer. Sales of the Company's
agricultural products, through its subsidiary Golden West Agri-Products, Inc.,
("Golden West"), are also seasonal. Most shipments of Golden West's products
occur during the period from March through October (the agricultural cultivation
period), with orders by agricultural distributors generally placed a month prior
to shipment. The Company's results of operations may be severely adversely
affected by poor weather conditions. Prolonged periods of poor weather
conditions could result in reduced consumer weekend purchases of do-it-yourself
lawn and garden care products and reduced agricultural planting, thereby
reducing sales of the Company's products. In addition, unexpected production or
transportation difficulties occurring at a time of peak production on sales
could cause sales losses which would not be readily reversed before the
following year.
The Company believes that the consolidated operations of EGAC will generate
sufficient cash flow to service the debt incurred in connection with the
acquisition of the assets of Easy Gardener,
15
<PAGE>
Inc. ("EGI"), and the acquisition of Weatherly. However, if such cash flow is
not sufficient to service the debt, the Company will be required to seek
additional financing which may not be available on commercially acceptable terms
or at all. In addition, the Company has commenced amortizing over 30 years
approximately $14,170,000 of goodwill related to the purchase of the assets of
EGI (being the value of the cost over the value of the assets acquired).
Furthermore, the company has commenced amortizing over 20 years approximately
$792,000 of goodwill related to the purchase of Emerald Products, LLC. The
Company is already amortizing approximately $105,000 per year of goodwill
relating to the acquisition of Golden West. As of August 9, 1996, in connection
with the purchase of Weatherly, the Company has commenced amortizing
approximately $20,083,000 of goodwill over 30 years.
In April 1996, the Company entered into an agreement with an unaffiliated
company pursuant to which it sold all of the remaining inventory of Power
Gardener units, as well as, the manufacturing rights and manufacturing molds
relating to the Power Gardener product in consideration for $1,600,000 of trade
credits. To the extent the unaffiliated company sells Power Gardener units it
will remit a specified percentage of the net cash proceeds of such sales to the
Company which will proportionately reduce the value of the trade credits
received by the Company. The trade credits are for advertising media, equipment
and services. The trade credits expire three years from the date of the
agreement.
As of December 31, 1996, the Company has a deferred tax asset of $3,504,918
(of which $1,333,000 is a current asset) the majority relating to the tax
benefit associated with the accumulated net operating losses of approximately
$5,560,000 for Federal income tax purposes which expire in 2009 and
approximately $1.2 million of tax benefits acquired in the Weatherly
acquisition. The Company believes that with the successful implementation of the
September 1994 acquisition of the assets of EGI and the most recent Weatherly
acquisition in August 1996, realization of this asset is more likely than not.
For California income tax purposes, the Company has accumulated net operating
losses of approximately $2,903,000 which expire through 2000. Based upon the
estimated taxable income to be apportioned to California over the next few
fiscal years and considering the expiration date of the net operating loss
carryovers, the Company has established a valuation reserve of $223,000 relating
to the estimated $275,000 benefit associated with the California net operating
loss carryovers.
In January 1997, the Company borrowed $550,000, in the aggregate, from an
individual and an institutional lender. The loans are being used to satisfy
short term working capital requirements.
16
<PAGE>
The Company intends to pursue a growth strategy through the acquisition of
products and/or companies. The Company anticipates that it will require
additional financing to fund any additional acquisitions.
17
<PAGE>
PART II - OTHER INFORMATION
Item 2 Changes in Securities
In December 1996 the Company issued five year options to purchase an
aggregate of 400,000 shares of its Common Stock, consisting of options to
purchase 200,000 and 100,000 shares repectively, at $2.0625 per share, to two
officers of the Company and options to purchase 100,000 shares at $2.0625 per
share to a consultant to the Company. The options were granted to the optionees
for services they rendered to the Company. The issuances of the options
described above were deemed to be exempt from registration under the Securities
Act of 1933 in reliance upon Section 4(2) thereof as transactions not involving
a public offering.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27-Financial Data Schedule (For SEC use only)
b. During the quarter ended December 31, 1996 the Company filed an amended
Current Report on Form 8-K/A, for the event dated August 9, 1996, to include
pursuant to Item 7, the audited financial statements of Weatherly Consumer
Products Group, Inc. and related pro forma financial information.
18
<PAGE>
SIGNATURES
Pursuant to the requirements 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)
Date: February 10, 1997 By: /s/ Robert Kassel
-------------------------
Robert Kassel, President,
Chief Executive Officer and
Treasurer (Duly Authorized
Officer and Principal
Financial and Accounting
Officer)
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AT
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 256,054
<SECURITIES> 0
<RECEIVABLES> 6,332,883
<ALLOWANCES> 310,000
<INVENTORY> 9,661,344
<CURRENT-ASSETS> 18,701,838
<PP&E> 2,090,766
<DEPRECIATION> 0
<TOTAL-ASSETS> 65,543,314
<CURRENT-LIABILITIES> 18,025,134
<BONDS> 0
0
0
<COMMON> 13,917
<OTHER-SE> 26,336,263
<TOTAL-LIABILITY-AND-EQUITY> 65,543,314
<SALES> 12,938,733
<TOTAL-REVENUES> 12,938,733
<CGS> 5,824,401
<TOTAL-COSTS> 5,824,401
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,375,247
<INCOME-PRETAX> (1,530,533)
<INCOME-TAX> (475,000)
<INCOME-CONTINUING> (1,055,533)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,006,894)
<CHANGES> 0
<NET-INCOME> (2,062,427)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
