U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-KSB/A (Amendment No. 1)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal year ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 of (IRS Employer
incorporation or organization) Identification No.)
655 Montgomery Street, San Francisco CA 94111
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (415) 616-8111
Securities registered pursuant to Section 12(b) of the Act
None.
Securities registered pursuant to Section 12(g) of the Act
Common Stock, $.001 par value and Class A Common Stock Purchase Warrants
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
The issuer's revenues for its fiscal year ended June 30, 1996 were
$27,030,924.
The aggregate market value of the Common Stock held by non-affiliates of
the issuer (based upon the closing sale price) on September 30, 1996 was
approximately $32,800,000.
As of September 30, 1996, 13,914,516 shares of the issuer's Common Stock,
par value $.001 per share were outstanding.
Transitional Small Business Disclosure Format
Yes _____ No X
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Item 6 Management's Discussion and Analysis or Plan of Operation
Year Ended June 30, 1996 Compared to Year Ended June 30, 1995
During the year ended June 30, 1996 the Company had consolidated net sales
of $27,030,924 compared to consolidated net sales of $19,691,859 for the fiscal
year ended June 30, 1995. Approximately $3,760,000 of the increase in net sales
for the year ended June 30, 1996 resulted from the introduction of new products.
In addition, 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 and products. Furthermore, the increase in
net sales also resulted from the inclusion of twelve months of net sales of
EGAC's products in the 1996 period compared to ten month period in the prior
fiscal year.
The Company's consolidated cost of goods sold and gross profit generated
during the year ended June 30, 1996 were also higher than the comparable period
in 1995 primarily due to the increase in net sales and the inclusion of twelve
months of EGAC's cost of goods sold in the 1996 period compared to ten months in
the 1995 period. Gross profit, as a percentage of net sales, for the year ended
June 30, 1996 and 1995 was 53% and 54%, respectively. The decrease in the gross
profit percentage was due to a change in the product mix sold and to higher
costs, during the 1996 period, of resin and corrugated cardboard, which are the
principal materials used in the manufacturing and packaging of EGAC's main
product, Weedblock(R).
The Company's consolidated selling and shipping expenses increased to
$6,264,025 during the year ended June 30, 1996 from $4,373,681 in the comparable
period in 1995 primarily as a result of the increase in net sales. In addition,
the increase in selling and shipping expenses was a result of the inclusion of
twelve months of EGAC's selling and shipping expenses in 1996 compared to ten
months in 1995. Selling and shipping expenses as a percentage of net sales
increased from 22% to 23% for the year ended June 30, 1996 compared to the
comparable period in 1995. This increase was primarily due to introductory
advertising on new products.
The Company's consolidated general and administrative expenses increased to
$4,347,741 during the year ended June 30, 1996 from $2,777,666 during the
comparable period in 1995 primarily as a result of the inclusion of twelve
months of EGAC's general and administrative expenses in 1996 compared to ten
months in 1995. Furthermore, the increase in general and administrative expenses
was due to approximately $208,000 of additional amortization and depreciation
expense together with other additional related 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 year ended June 30, 1996 and
1995, was 16% and 14%.
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The Company's consolidated interest expense increased to $2,009,157 during
the year ended June 30, 1996 from $1,809,901 during the comparable period in
1995 primarily as a result of the inclusion in the 1995 period of only ten
months of interest of EGAC's outstanding indebtedness which was incurred in
connection with the purchase of the assets of EGI in September 1994. This
increase was partially offset by the February 1995 conversion of $2 million of
convertible notes into common stock and principal payments of $1,600,000 on
other notes payable. The convertible notes and other notes payable were incurred
in connection with the purchase of the assets of EGI in September 1994.
During the year ended June 30, 1996, the Company recorded a $715,000 tax
benefit compared to $38,000 tax expense during the comparable period in 1995
primarily due to the Company's recognition of a deferred tax asset associated
with the Federal net operating loss carryforwards. See "Liquidity and Capital
Resources."
As a result of the foregoing, the Company achieved a consolidated net
income of $2,523,666 in the year ended June 30, 1996 compared to a consolidated
net income of $1,574,779 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 June 30, 1996, the Company had consolidated cash and short-term
investments totalling $679,850 and working capital of $5,327,886 compared to
June 30, 1995 when the Company had consolidated cash and short-term investments
totalling $970,310 and working capital of $3,325,674. The increase in working
capital from June 30, 1995 is due primarily to the increase in net income for
the year ended June 30, 1996.
Net cash provided by operating activities for the year ended June 30, 1996
was $617,718 consisting primarily of net income plus depreciation, an increase
in accounts payable and, offset in part by, an increase in inventory,
receivables, and the deferred tax asset. Net cash used in investing activities
for the year ended June 30, 1996 was $2,102,788, consisting primarily of cash
used for the acquisition of the assets of Emerald Products LLC and the
additional purchase price of the assets of EGI and, to a lesser extent, capital
expenditures primarily for the EGAC facility. Net cash provided by financing
activities for the year ended June 30, 1996 was $1,194,609, consisting primarily
of the exercising of warrants to purchase common stock and proceeds from the
bank line of credit and, offset in part by payments of notes payable.
On August 11, 1995, Emerald Products Corporation, a newly-
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formed wholly-owned subsidiary of EGAC, acquired from Emerald Products, LLC
("Emerald") all of the assets, including product rights and all other intangible
assets, of Emerald used in connection with Emerald's home lawn and garden care
distribution business. The cash purchase price was $935,000, subject to upward
adjustment based upon the Company achieving certain annual gross sales levels of
acquired product lines through September 2002. This additional consideration is
payable in cash quarterly and based upon 2.5% of annual Emerald gross sales of
up to $4,000,000, 1.5% of annual gross sales between $4,000,001 and $5,000,000
and 1% of annual gross sales grater than $5,000,000.
Subsequent to June 30, 1996, warrants to purchase common stock were
exercised resulting in net proceeds to the Company of approximately $5,300,000.
The proceeds of these warrant exercises were used to fund a portion of the
Weatherly acquisition.
In connection with the acquisition of the assets of Easy Gardener, Inc.
("EGI") consummated on September 1, 1994, a sum of approximately $2,200,000 in
addition to the purchase price was made contingently payable to EGI over the
four years following the closing date based upon the acquired business
generating certain specified levels of the net income. As of June 30, 1996,
$733,332 has been added to the excess of cost over net assets acquired of Easy
Gardener based upon operating results obtained through June 30, 1996. As of June
30, 1996, approximately $489,000 is payable for this additional purchase price.
As of June 30, 1996, EGI is still eligible to receive approximately $1.47
million in additional future contingent consideration.
As part of the finacing of the EGI acquisition, EGAC obtained from certain
institutional lenders a $8,000,000 five year term loan, a $3,000,000 seven year
term loan and a $6,000,000 revolving credit facility. At June 30, 1996, the
outstanding principal amounts owing under the term loans and revolving credit
facilities were $8,599,998 and $1,288,146, respectively.
In August 1996, 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. As of September 30, 1996, based on this formula, approximately
$4,978,384 was available for borrowing and $942,394 aggregate principal amount
of revolving credit loans 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 September 30, 1996, the effective
annual rate for 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
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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 may from time to time, subject to certain
restrictions, 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 of 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 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, interest on, 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 guaranties 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 and the security interests of the lenders in the assets of EGAC and
its subsidiaries may be foreclosed.
Under the Credit Agreement (a) EGAC is required, among other things, to
comply with certain limitations on incurring additional indebtedness, liens,
guaranties, 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
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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 EGACS, 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 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 plantings, 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 operations of EGAC will generate sufficient
cash flow to service the debt incurred in connection with the acquisitions of
EGI's assets and 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 $780,000 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 a result of the debt refinancing occurring in the
first quarter of fiscal 1997 associated with the Weatherly acquisition, the
Company will record as an extraordinary expense approximately $1.4 million
relating to the write off of the old loan fees plus certain prepayment
penalties.
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, as well as, the manufacturing rights and manufacturing molds relating
to Power Gardener in consideration for $1,600,000 of trade credits. To the
extent the unaffiliated company sells Power Gardener units it will remit a
specified
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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 and expire
three years from the date of the agreement.
As of June 30, 1996, the Company has a net deferred tax asset of
$1,333,000, the majority relating to the tax benefit associated with the
accumulated net operating losses of approximately $3,498,000 for Federal income
tax purposes which expire in 2009. The Company believes that with the successful
implementation of the September 1994 acquisition of the assets of EGI and the
most recent Weatherly Consumer Products acquisition in August 1996, realization
of this asset is more likely than not. Because taxable income in the next fiscal
year is estimated to be in excess of the net operating loss carryforward, the
Company has recognized the estimated $1,190,000 benefit of federal net operating
loss carryovers as a current deferred tax asset. For California income tax
purposes, the Company has accumulated net operating losses of approximately
$2,097,000 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 $148,000 relating to the estimated $200,000
benefit associated with the California net operating loss carryovers.
The Company believes that the cash generated from operations, available
borrowings and net proceeds from warrants exercised to purchase common stock,
will be sufficient to fund its operations at least through fiscal 1997.
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board ("FASB"), issued
a Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," which requires that companies measure the cost of
stock-based employee compensation at the grant date based on the value of the
award and recognize this cost over the service period. The value of the
stock-based award is determined using the intrinsic method whereby compensation
cost is the excess of the quoted market price of the stock at the date of grant
or other measurement date over the amount an employee must pay to acquire the
stock. SFAS No. 123 is effective for financial statements issued for fiscal
years beginning after December 15, 1995, and is not expected to have a
significant impact on the Company's financial statements.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This
statement requires that long-lived assets and certain intangibles be held and
used by an entity and be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. The
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measurement of an impairment loss for long-lived assets and indemnifiable
intangibles that an entity expects to hold and use should be based on the fair
value of the asset. SFAS No. 121 is effective for financial statements for
fiscal years beginning after December 15, 1995, and is not expected to have a
significant impact on the Company's financial statements.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this amendment to the report to be signed on its behalf by the
undersigned duly authorized.
U.S. Home & Garden Inc.
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(Registrant)
By:/s/Robert Kassel
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Robert Kassel, President
Dated: May 20, 1997
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