U.S. SECURITIES AND EXCHANGE COMMISION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
From the transition period from ____________ to __________________
Commission File Number 0-19899
U.S. HOME & GARDEN INC.
(Exact name of registrant as
specified in its charter)
Delaware 77-0262908
(State or other jurisdiction IRS Employer
of incorporation or organization) (Identification Number)
655 Montgomery Street
San Francisco, California 94111
(Address of Principal Executive Offices)
(415) 616-8111
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant : (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
As of May11, 1998 there were 20,116,197 shares of the issuer's common stock, par
value $.001 per share, outstanding.
<PAGE>
Part 1.- Financial Information
Item 1. Consolidated Financial Statements
Consolidated balance sheet as of June 30, 1997
and March 31, 1998 (Unaudited) 1-2
Consolidated statements of Income for the three months
and nine months ended March 31, 1997 and 1998 (unaudited) 3-4
Consolidated statements of cash flows for the nine months
ended March 31, 1997 and 1998 (Unaudited) 5-6
Notes to consolidated financial statements 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 10-16
Part II.- Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
June 30, March 31,
1997 1998
- ---------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current
Cash and cash equivalents $ 2,083,000 $ 1,931,000
Accounts receivable, less allowance for doubtful
accounts and sales returns of $314,000 and $361,000 11,542,000 25,708,000
Inventories 5,254,000 13,209,000
Prepaid expenses and other current assets 419,000 2,176,000
Deferred tax asset 448,000 200,000
- ---------------------------------------------------------------------------------------
Total current assets 19,746,000 43,224,000
Furniture, fixtures and equipment, net 2,315,000 3,266,000
Intangible assets
Excess of cost over net assets acquired, net of
accumulated amortization of $2,579,000 and $3,807,000 41,834,000 53,763,000
Deferred financing costs, net of accumulated amor-
tization of $302,000 and $609,000 1,621,000 1,436,000
Product rights, patents and trademarks, net of
accumulated amortization of $75,000 and $88,000 180,000 169,000
Non-compete agreement, net of accumulated
amortization of $22,000 and $41,000 478,000 469,000
Package design, net of accumulated amortization
of $110,000 and $194,000 251,000 601,000
Trade credits 1,149,000 984,000
Officer receivables 694,000 848,000
Other assets 207,000 176,000
- ---------------------------------------------------------------------------------------
$ 68,475,000 $104,936,000
=======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
June 30, March 31,
1997 1998
- -----------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current
Line of credit $ -- $ 8,166,000
Current maturities of notes payable 8,990,000 3,500,000
Accounts payable 1,774,000 5,432,000
Accrued expenses 3,983,000 7,039,000
Accrued co-op advertising 1,098,000 1,267,000
Accrued commissions 859,000 1,115,000
Accrued interest 261,000 460,000
Accrued purchase consideration 489,000 978,000
- -----------------------------------------------------------------------------------------
Total current liabilities 17,454,000 27,957,000
Accrued purchase consideration 978,000 --
Deferred tax liability 547,000 700,000
Notes payable, less current maturities 17,570,000 25,770,000
- -----------------------------------------------------------------------------------------
Total liabilities 36,549,000 54,427,000
- -----------------------------------------------------------------------------------------
Commitments, contingency and subsequent
events (Note 4)
Stockholders' equity
Preferred stock, $.001 par value - shares authorized,
1,000,000; no shares outstanding -- --
Common stock, $.001 par value - shares authorized,
30,000,000; 14,073,000 and 20,049,000 shares issued and
outstanding at June 30, 1997 and March 31, 1998 14,000 20,000
Additional paid-in capital 30,783,000 49,974,000
Retained earnings 1,129,000 515,000
- -----------------------------------------------------------------------------------------
Total stockholders' equity 31,926,000 50,509,000
- -----------------------------------------------------------------------------------------
$ 68,475,000 $104,936,000
=========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Income
================================================================================
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
1997 1998 1997 1998
- ------------------------------------------------------------------------------------------------
Unaudited Unaudited
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net sales $ 20,558,000 $ 23,520,000 $ 33,497,000 $ 39,058,000
Cost of sales 9,025,000 10,482,000 14,849,000 17,861,000
- ------------------------------------------------------------------------------------------------
Gross profit 11,533,000 13,038,000 18,648,000 21,197,000
- ------------------------------------------------------------------------------------------------
Operating expenses
Selling and shipping 3,704,000 3,797,000 7,694,000 8,458,000
General and administrative 1,834,000 2,170,000 5,157,000 6,061,000
- ------------------------------------------------------------------------------------------------
5,538,000 5,967,000 12,851,000 14,519,000
- ------------------------------------------------------------------------------------------------
Income from operations 5,995,000 7,071,000 5,797,000 6,678,000
Other income expense
Investment income 16,000 245,000 59,000 349,000
Interest expense (993,000) (922,000) (2,368,000) (2,519,000)
- ------------------------------------------------------------------------------------------------
Income before income taxes
and extraordinary expense 5,018,000 6,394,000 3,488,000 4,508,000
Income tax (expense) (2,075,000) (2,700,000) (1,600,000) (1,900,000)
- ------------------------------------------------------------------------------------------------
Income before extraordinary
expense 2,943,000 3,694,000 1,888,000 2,608,000
Extraordinary expense of
$1,459,000 on debt refinancing,
net of income taxes of $452,000 -- -- (1,007,000) --
- ------------------------------------------------------------------------------------------------
Net income $ 2,943,000 $ 3,694,000 $ 881,000 $ 2,608,000
================================================================================================
</TABLE>
3
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Income
================================================================================
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
1997 1998 1997 1998
- --------------------------------------------------------------------------------
Unaudited Unaudited
------------------ -----------------
Basic earnings per share:
Income per common share
before extraordinary expense $.21 $.19 $.14 $.15
Extraordinary expense -- -- (.07) --
Net income per common share $.21 $.19 $.07 $.15
================================================================================
Diluted earnings per share:
Income per common share
before extraordinary expense $.18 $.15 $.12 $.12
Extraordinary expense -- -- (.06) --
Net income per share $.18 $.15 $.06 $.12
================================================================================
See accompanying notes to consolidated financial statements.
4
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Nine months ended March 31, 1997 1998
- -------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income $ 881,000 $ 2,608,000
Adjustments to reconcile net income to net cash
used in operating activities:
Extraordinary expense 1,007,000 --
Depreciation and amortization 1,513,000 1,921,000
Amortization of deferred financing costs 216,000 301,000
Changes in operating assets and liabilities, net of
assets acquired and liabilities assumed:
Accounts receivable (12,939,000) (11,966,000)
Inventories (2,427,000) (2,658,000)
Prepaid expenses and other current assets 225,000 (1,716,000)
Accounts payable and accrued expenses 5,120,000 6,037,000
Other assets 227,000 203,000
Deferred tax asset 1,092,000 401,000
- -------------------------------------------------------------------------------------------
Net cash used in operating activities (5,085,000) (4,869,000)
- -------------------------------------------------------------------------------------------
Cash flows from investing activities
Payment for purchase of business, net of cash acquired (23,265,000) (20,274,000)
Payment for non-compete (500,000) --
Increase in officer receivables (148,000) (154,000)
Purchase of furniture, fixtures and equipment (476,000) (799,000)
Purchase of package design -- (435,000)
- -------------------------------------------------------------------------------------------
Net cash used in investing activities (24,389,000) (21,662,000)
- -------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Nine months ended March 31, 1997 1998
- -------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities
Proceeds from issuances of stock $ 5,297,000 $ 18,847,000
Buyout of unit purchase options -- (3,221,000)
Proceeds from bank line of credit 27,944,000 18,808,000
Payment on bank line of credit (16,919,000) (10,643,000)
Proceeds from notes payable 16,783,000 10,000,000
Payments of notes payable (2,623,000) (7,290,000)
Acquisition finance costs (1,399,000) (122,000)
- -------------------------------------------------------------------------------------
Net cash provided by financing activities 29,083,000 26,379,000
- -------------------------------------------------------------------------------------
Net decrease in cash (391,000) (152,000)
Cash and cash equivalents, beginning of period 680,000 2,083,000
- -------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 289,000 $ 1,931,000
=====================================================================================
Supplemental disclosure of cash flow information
Cash paid for interest, including deferred financing
costs $ 4,098,000 $ 2,223,000
Cash paid for taxes $ 13,000 $ 238,000
=====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. The accompanying consolidated financial statements at March 31, 1998, and
for the three and nine months ended March 31, 1997 and 1998 are unaudited,
but, in the opinion of management, include all adjustments necessary for a
fair presentation of consolidated financial position and results of
operations for the periods presented.
2. Refer to the audited consolidated financial statements for the year ended
June 30, 1997, for details of accounting policies and accounts.
3. On August 9, 1996, Easy Gardener, Inc., a wholly-owned subsidiary of the
Company, acquired all of the outstanding stock of Weatherly Consumer
Products Group, Inc. (Weatherly), a lawn and garden care company, for
1,000,000 shares of the Company's common stock (valued at $3 per share) and
approximately $22.9 in cash. On February 28, 1998, Weed Wizard Acquisition
Corporation, a wholly owned subsidiary of the Company, acquired
substantially all the assets and assumed certain liabilities of Weed
Wizard, Inc., a lawn and garden company, for approximately $16.3 million.
The acquisitions were accounted for as a purchase and, accordingly, the
results of operations have been included in the consolidated statement of
the operations since the respective acquisition dates. The value of
intangibles purchased and the excess of the purchase price over the fair
value of assets acquired totalled approximately $34 million and will be
amortized on a straight line basis over the estimated useful life of thirty
years.
The following unaudited pro forma summary combines the consolidated results
of operations of the Company, Weed Wizard Inc. and Weatherly as if the
acquisition had occurred at the beginning of fiscal 1997, after giving
effect to certain adjustments, including the amortization of excess costs
over assets acquired increased interest expense and the elimination of
certain expenses incurred by Weatherly related to the acquisition. This pro
forma summary does not necessarily reflect the results of operations as
they would have been if the Company, Weed Wizard Inc. and and Weatherly had
constituted a single entity during such period and is not necessarily
indicative of results which may be obtained in the future.
7
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Nine months ended March 31, 1997 1998
- --------------------------------------------------------------------------------
(000) (000)
Net sales $ 36,809 $ 41,360
Net (loss) income before extraordinary expense (42) 1,500
Net (loss) income (1,569) 1,500
Diluted net (loss) income per common share before
extraordinary expense (.01) .07
Diluted net (loss) income per common share (.11) .07
================================================================================
4. The following is a reconciliation of the weighted average number of shares
used to compute basic and dilutive earnings per share before extraordinary
expense:
Three months Nine months
ended March 31, ended March 31,
------------------------ -----------------------
1997 1998 1997 1998
- --------------------------------------------------------------------------------
Basic earnings per
common share 13,973,000 19,943,000 13,552,000 16,987,000
Options and warrants 2,086,000 5,095,000 2,339,000 4,900,000
- --------------------------------------------------------------------------------
Diluted earnings per
common share 16,059,000 25,038,000 15,891,000 21,887,000
================================================================================
5. Company Obligated Mandatorily Redeemable Preferred Securities of a
Subsidiary Trust Holding Solely Subordinated Debt Securities of the Company
In April 1998, U.S. Home & Garden Trust I (the "Trust"), a newly created
Delaware business trust and a wholly-owned subsidiary of the Company,
issued 78,000 common securities with a liquidation amount of $25 per common
security to the Company for $1,950,000 and completed a public offering of
2,530,000 9.40% Cumulative Trust Preferred Securities with a liquidation
amount of $25 per security (the "Trust Preferred Securities" and together
with the common securities the "Trust Securities"). The Trust exists for
the sole purpose of issuing Trust Securities and using the proceeds
therefrom to acquire the Subordinated Debentures described below.
Concurrent with the issuance of the Trust Securities, the Trust invested
the proceeds therefrom in $65.2 million aggregate principal amount of 9.40%
Junior Subordinated Deferrable Interest Debentures (the "Subordinated
Debentures") issued by the Company.
8
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Distributions on the Trust Securities are payable monthly in arrears by the
Trust.
The Subordinated Debentures are unsecured obligations of the Company and
are subordinate and junior in right of payment to certain other
indebtedness of the Company.
The Company may under certain circumstances defer the payment of interest
on the Subordinated Debenture for a period not to exceed 60 consecutive
months. If interest payments on the Subordinated Debenture are so deferred,
distributions on the Trust Securities will also be deferred. During any
such deferral period, interest on the Subordinated Debentures and
distributions on the Trust Securities will accrue and compound monthly, and
subject to certain exceptions, the Company may not declare or pay
distributions on its capital stock or debt securities that rank equal or
junior to the Subordinated Debentures.
The Trust Securities are subject to mandatory redemption upon the repayment
of the Subordinated Debentures at a redemption price equal to the aggregate
liquidation amount of the Securities plus any accumulated and unpaid
distributions. The Subordinated Debentures mature on April 15, 2028, but
may be redeemed at the option of the Company at any time after April 15,
2003 and earlier under certain circumstances. The Company effectively
provides a full and unconditional guarantee of the Trust's obligations
under the Trust Securities to the extent that the Trust has funds
sufficient to make such payments.
Approximately $39 million of the proceeds received by the Company from the
sale of the Subordinated Debentures to the Trust were used by the Company
to repay outstanding long-term debt and line of credit advances.
In December 1997, the Company completed a public offering of 4,290,000
shares of common stock which generated net proceeds to the Company of
approximately $16 million. Approximately $3.2 million of the proceeds were
used to repurchase approximately 1.7 million shares of stock underlying
unit purchase options and warrants.
Subsequent to June 30, 1997, a $350,000 liability was converted into
154,000 shares of common stock.
Subsequent to June 30, 1997, approximately 1,350,000 warrants to purchase
common stock were exercised resulting in net proceeds to the Company of
approximately $2.7 million.
Subsequent to June 30, 1997, the Company granted stock options to acquire
approximately 700,000 shares of common stock under the 1997 and 1995 stock
option plans.
9
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995:
Certain information included in this Item 2. and elsewhere in the Form 10-Q
that are not historical facts contain forward looking statements that involve a
number of known and unknown risks, uncertainties and other factors that could
cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievement
expressed or implied by such forward looking statements. These risks and
uncertainties include, but are not limited to, the Company's growth strategy,
customer concentration, outstanding indebtedness, dependence on weather
conditions, seasonality, expansion and other activities of competitors, changes
in federal or state environmental laws and the administration of such laws,
protection of trademarks and other proprietary rights, the general condition of
the economy and other risks detailed in the Company's Securities and Exchange
Commission filings." Readers are cautioned not to place undue reliance on these
forward looking statements which speak only as of the date the statement was
made.
General
U.S. Home & Garden Inc., ("the Company"), manufactures and markets a broad
range of brand-name consumer lawn and garden products through its wholly-owned
subsidiaries Easy Gardener, Inc., ("Easy Gardener"), and Golden West
Agri-Products, Inc., ("Golden West"), and through Easy Gardener's wholly-owned
subsidiaries, Weatherly Consumer Products Group, Inc., ("Weatherly") and Weed
Wizard Acquisition, Corp. ("Weed Wizard"). Since 1992, the Company has
consummated seven acquisitions of complementary lawn and garden companies and
product lines for an aggregate consideration of over $75 million in cash, notes
and equity securities. As a result of such acquisitions, the Company recognized
a significant amount of goodwill, which, in the aggregate, was approximately
$57.6 million at March 31, 1998. The Company is currently amortizing such
goodwill using the straight-line method over various time periods ranging from
20 to 30 years.
10
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, certain selected
financial data as a percentage of net sales:
Percentage of Net Sales
-----------------------
Three Months Ended Nine Months Ended
------------------ -----------------
March 31, March 31,
--------- ---------
1997 1998 1997 1998
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 43.9 44.6 44.3 45.7
------ ------ ------ ------
Gross profit 56.1 55.4 55.7 54.3
Selling and shipping expenses 18.0 16.1 23.0 21.7
General and administrative expenses 8.9 9.2 15.4 15.5
------ ------ ------ ------
Income from operations 29.2 30.1 17.3 17.1
Interest expense (4.8) (3.9) (7.1) (6.4)
Investment income 1.0 1.0 .2 .9
Income tax expense (10.1) (11.5) (4.8) (4.9)
Extraordinary expense, net -- -- (3.0) --
====== ====== ====== ======
Net Income 14.3% 15.7% 2.6% 6.7%
====== ====== ====== ======
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Net sales. Net sales increased by $3.0 million, or 14.4%, to $23.5 million
during the three months ended March 31, 1998 from $20.6 million during the
comparable period in 1997. The increase in net sales was primarily a result of
the internal growth of the Company's pre-existing product lines combined with
the Company's May 1997 acquisition of the Plasti-Chain product line of plastic
chain links and decorative edgings, and the February 1998 acquisition
substantially all of the assets used in the business of Weed Wizard, Inc.
Gross profit. Gross profit increased by $1.5 million, or 13%, to $13
million for the three months ended March 31, 1998 from $11.5 million during the
comparable period in 1997. This increase was due primarily to the increase in
net sales. Gross profit as a percentage of net sales decreased to 55.4% during
the three months ended March 31, 1998 from 56.1 % during the comparable period
in 1997. The decrease in gross profit as a percentage of net sales was primarily
attributable to a decrease in sales of higher-margin products.
Selling and shipping expenses. Selling and shipping expenses increased
$93,000, or 2.5%, to $3.8 million during the three months ended March 31, 1998
from $3.7 million during the comparable period in 1997. This increase was
primarily the result of an increase in the amount of products shipped, which was
a consequence of the increase in internal growth of the Company's pre-existing
product lines combined with the acquisition of the Plasti-Chain product line of
plastic chain links and decorative edgings and the acquisition of substantially
all of the assets used in the business of Weed Wizard, Inc. Selling and shipping
expenses as a percentage of net sales decreased to 16.1% during the three months
ended March 31, 1998 from 18% during the comparable period in 1997. This
decrease was primarily as a result of economies of scale gained from the sale of
new products to existing customers.
11
<PAGE>
General and administrative expenses. General and administrative expenses
increased $336,000, or 18.3%, to $2.2 million during the three months ended
March 31, 1998 from $1.8 million during the comparable period in 1997. This
increase was primarily due to increased amortization of goodwill and
depreciation as a result of the acquisition of the Plasti-chain product line and
the asset acquisition of Weed Wizard, Inc. Furthermore, the increase is due to
the addition of certain administrative personnel as part of the Company's
efforts to build an infrastructure that it believes will be able to more readily
integrate any future product lines or businesses that may be acquired. As a
percentage of net sales, general and administrative expenses increased to 9.2%
during the three months ended March 31, 1998 from 8.9% during the comparable
period in 1997.
Income from operations. Income from operations increased by $1.1 million,
or 18%, to $7.1 million during the three months ended March 31, 1998 from $6.0
million during the comparable period in 1997. The increase in the income from
operations for the 1998 period was primarily attributable to the increase in net
sales. As a percentage of net sales, income from operations increased to 30.1%
for the three months ended March 31, 1998 from 29.2% in during the comparable
period in 1997.
Interest expense. Interest expense decreased by $71,000, or 7.1%, to
$922,000 during the three months ended March 31, 1998, from $993,000 during the
comparable period in 1997. The decrease in interest expense was primarily the
result of an aggressive inventory control program put into place in December
1997combined with the decrease in the outstanding principal amount of term debt
associated with the Weatherly acquisition. In addition, the balance outstanding
under the Company's Revolving Credit Facility at March 31, 1998 decreased to
$8.2 million from $12.3 million at March 31, 1997.
Income taxes. Income tax expense increased to $2.7 million during the three
months ended March 31, 1998 from $2.1 million during the comparable period in
1997 primarily due to the increase in net income before taxes. The Income tax
expense for each interim period is based upon the Company's estimated effective
income tax rate for the year.
Net Income. Net income increased by $751,000, or 25.5%, to $3.7 million
during the three months ended March 31, 1998 from $2.9 million during the
comparable period in 1997. Basic net income per common share decreased $.02 to
$.19 per share for the three months ended March 31, 1998 from $.21 per share
during the comparable period in 1997. Diluted net income per common share
decreased $.03 to $.15 per share for the three months ended March 31, 1998 from
$.18 per share during the comparable period in 1997. The decrease in both basic
and diluted earnings per share is primarily attributable to more weighted
average common and common equivalent shares outstanding in the three months
ended March 31, 1998 compared to the comparable period in the prior year due to
the Company selling $4.3 million shares of common stock in a December 1997
public offering.
Nine Months Ended March 31, 1998 Compared to Nine Months Ended March 31,
1997
Net sales. Net sales increased by $5.6 million, or 16.6%, to $39.1 million
during the nine months ended March 31, 1998 from $33.5 million during the
comparable period in 1997. The increase in net sales was primarily a result of
the internal growth of the Company's pre-existing product lines combined with
the August 1996 acquisition of Weatherly, the May 1997 acquisition of the
Plasti-Chain Product line and the February 1998 acquisition asset of Weed
Wizard, Inc.
Gross profit. Gross profit increased by $2.5 million, or 13.7%, to $21.2
million for the nine months ended March 31, 1998 from $18.6 million during the
comparable period in 1997. This increase was due primarily to the increase in
internal growth of the Company's pre-existing product lines combined with the
Weatherly acquisition, the Plasti-Chain product line acquisition and the Weed
Wizard, Inc. asset acquisition. Gross profit as a percentage of net sales
decreased to 54.3% during the nine months ended March 31, 1998 from 55.7 %
during the comparable period in 1997. The decrease in gross profit as a
percentage of net sales was primarily attributable to a decrease in sales of
higher-margin products.
12
<PAGE>
Selling and shipping expenses. Selling and shipping expenses increased
$764,000, or 9.9%, to $8.5 million during the nine months ended March 31, 1998
from $7.7 million during the comparable period in 1997. This increase was
primarily the result of an increase in the amount of products shipped, which was
a consequence of the increase in internal growth of the Company's pre-existing
product lines combined with the acquisition of Weatherly, the Plasti-Chain
product line, and substantially all the assets used in the business of Weed
Wizard, Inc. Selling and shipping expenses as a percentage of net sales
decreased to 21.7% during the nine months ended March 31, 1998 from 23% during
the comparable period in 1997. This decrease was a result of economies of scale
gained from the sale of new products to existing customers.
General and administrative expenses. General and administrative expenses
increased $904,000, or 17.5%, to $6.1 million during the nine months ended March
31, 1998 from $5.2 million during the comparable period in 1997. This increase
was primarily due to increased amortization of goodwill as a result of the
acquisition of Weatherly, the Plasti-Chain Product line and substantially all of
the assets used in the business of Weed Wizard, Inc. Furthermore, the increase
is due to the addition of certain administrative personnel as part of the
Company's efforts to build an infrastructure that it believes will be able to
more readily integrate any future product lines or businesses that may be
acquired. As a percentage of net sales, general and administrative expenses
increased to 15.5% during the nine months ended March 31, 1998 from 15.4% during
the comparable period in 1997.
Income from operations. Income from operations increased by $881,000, or
15.2%, to $6.7 million during the nine months ended March 31, 1998 from $5.8
million during the comparable period in 1997. The increase in the income from
operations for the 1998 period was primarily attributable to the increase in net
sales. As a percentage of net sales, income from operations decreased to 17.1%
for the nine months ended March 31, 1998 from 17.3% during the comparable period
in 1997.
Interest expense. Interest expense increased by $151,000, or 6.4%, to $2.5
million during the nine months ended March 31, 1998 from $2.4 million during the
comparable period in 1997. The increase in interest expense is primarily related
to the interest associated with the increase in term debt associated with the
Weatherly acquisition and the acquisition of the Plasti-chain product line,
which was partially offset by a decrease in the Company's effective borrowing
rate and certain principal payments made.
Income taxes. Income tax expense increased to $1.9 million during the nine
months ended March 31, 1998 from $1.6 million during the comparable period in
1997 primarily due to the increase in the Company's net income before taxes. The
income tax expense for each interim period is based upon the Company's estimated
effective income tax rate for the year.
Extraordinary expense, net, In connection with the acquisition of Weatherly
in August 1996, the Company refinanced its term debt and its revolving line of
credit. As a result of its refinancing, the Company was required to record an
extraordinary expense of $1.0 million, net of tax benefits of $452,000, during
the nine months ended March 31, 1998. The expense consisted of deferred finance
costs at June 30, 1996, net of accumulated amortization, plus prepayment
penalties.
Net Income. Net income increased by $1.7 million, or 196%, to $2.6 million
during the nine months ended March 31, 1998 from $881,000, during the comparable
period in 1997. This increase was attributable to the $1.0 million extraordinary
expense incurred in the 1997 period related to the debt refinancing. There is no
comparable expense in the 1998 period. In addition, the increase in net income
is attributable to the increase in net sales. Basic net income per common share
increased $0.08 to $.15 during the nine months ended March 31, 1998 from $.07
during the comparable period in 1997. The increase was primarily attributable to
an extraordinary expense of approximately $0.07 per common share incurred
13
<PAGE>
during the 1997 period. Diluted net income per common share increased $.06 to
$.12 during the nine months ended March 31, 1998 from $.06 during the comparable
period in 1997. The increase was primarily attributable to an extraordinary
expense of approximately $.06 per common share incurred during the 1997 period.
There was no corresponding expense in the 1998 period. The number of weighted
average common and common equivalent shares outstanding for the nine months
ended March 31, 1998 was 21,887,000 compared to the comparable period in the
prior year of 15,891,000. This increase was primarily due to the Company
completing a public offering of 4.3 million shares of common stock in December
1997.
Seasonality
The Company's sales are seasonal due to the nature of the lawn and garden
business, in parallel with the annual growing season. The Company's sales and
shipping are most active from late December through May when home lawn and
garden customers are purchasing supplies for spring planting and retail stores
are increasing their inventory of lawn and garden products. Sales typically
decline by early to mid-summer.
Sales of the Company's agriculture products, which were not material during
the nine months ended March 31, 1998, are also seasonal. Most shipments occur
during the agriculture cultivation period from March through October.
Liquidity and Capital Resources
Since inception, the Company had financed its operations primarily through
cash generated by operations, net proceeds from the Company's private and public
sales of securities and borrowings from lending institutions.
At March 31, 1998, the Company had consolidated cash and short-term
investments totaling $1.9 million and working capital of $15.3 million. At June
30, 1997, the Company had consolidated cash and short-term investments totaling
$2.1 million and working capital of $2.3 million. This increase in working
capital was due primarily to the Company selling 4,290,000 shares of common
stock in December 1997, which generated net proceeds to the Company of
approximately $16.0 million. In addition, warrants exercised to purchase common
stock resulted in net proceeds to the Company of $2.9 million during the nine
months ended March 31, 1998.
Net cash used in operating activities during the nine months ended March
31, 1998 was $4.9 million consisting primarily of an increase in inventory and
accounts receivable, offset in part by an increase in accounts payable the net
income for the nine months ended, plus depreciation and amortization.
Net cash used in investing activities during the nine months ended March
31, 1998 was $21.7 million consisting primarily of cash used for the asset
acquisition price for Weed Wizard, Inc. and the purchase of certain assets of
Landmaster, Inc.
Net cash provided by financing activities during the nine months ended
March 31, 1998 was $26.4 million consisting of the Company selling 4,290,000
shares of common stock which generated net proceeds to the Company of
approximately $16.0 million, net borrowings of $8.2 million under the Company's
Revolving Credit Facility, borrowings of $10 million in notes payable used for
the purchase of substantially all of the assets used in the business of Weed
Wizard, Inc. and the purchase of certain assets of Landmaster Products, Inc. and
approximately $2.9 million which was received from the exercise of warrants to
purchase common stock. The buyout of unit purchase options for $3.2 million
combined with the $7.3 million payments of notes payable, offset the cash
provided by financing activities.
14
<PAGE>
In connection with the acquisition of Weatherly, Easy Gardener entered into
a credit agreement (the " Credit Agreement") with certain institutional lenders
(the "Lenders"). Pursuant to the Credit Agreement, the Lenders have provided the
Company with the following revolving credit and term loan facilities as amended:
(a) Revolving Credit Facility: the maximum amount available for borrowing
under the revolving credit facility (the "Revolving Credit Facility") from time
to time is equal to the lesser of $20 million and a borrowing base determined by
reference to specified percentages of Easy Gardener's consolidated accounts
receivable and inventory deemed to be "eligible" by the Lenders. As of March 31,
1998 based on this formula, $19.5 million was available for borrowing and $8.2
million was outstanding. At March 31, 1998, the annual rate for borrowings under
the Revolving Credit Facility was 9.75%.
(b) Term Loan Facility: Pursuant to this facility, Easy Gardener obtained
three term loans (the "Term Loans"), one in the principal amount of $23.0
million ("Term Loan I"), $18.0 million of which was outstanding at March 31,
1998, one in the principal amount of $2.25 million ("Term Loan II"), all of
which was outstanding at March 31, 1998, and one in the principal amount of $3.8
million ("Term Loan III"), all of which was paid in full and expired in November
1997. In connection with the Company's acquisition of Weed Wizard, Inc. in
February 1998 Term Loan I and Term Loan II were consolidated into a single term
loan (the "Term Loan") and the balance of the Term Loan was increased to $30.3
million. At March 31, 1998, the effective annual rate of interest for the Term
Loan was 9.75%.
In April 1998, U.S. Home & Garden Trust I (the "Trust"), a newly created
Delaware business trust and a wholly-owned subsidiary of the Company, issued
78,000 common securities with a liquidation amount of $25 per common security to
the Company for $1,950,000 and completed a public offering of 2,530,000 9.40%
Cumulative Trust Preferred Securities with a liquidation amount of $25 per
security (the "Trust Preferred Securities" and together with the common
securities the "Trust Securities"). The Trust exists for the sole purpose of
issuing Trust Securities and using the proceeds therefrom to acquire the
Subordinated Debentures described below. Concurrent with the issuance of the
Trust Securities, the Trust invested the proceeds therefrom in $65.2 million
aggregate principal amount of 9.40% Junior Subordinated Deferrable Interest
Debentures (the "Subordinated Debentures") issued by the Company. Interest only
payments are due through April 15, 2028 when the entire balance is due.
Approximately $39 million of the proceeds received by the Company from the sale
of Subordinated Debentures to the Trust were used to repay outstanding long-term
debt and line of credit advances. As a result of this early repayment, the
Company will write off deferred financing costs of approximately $1.4 million
and incur a prepayment penalty of approximately $735,000 during its quarter
ended June 30, 1998 which will reduce its reported income. Although the Company
is currently negotiating new credit facilities with several banks, there can be
no assurance that the Company will be able to obtain a new credit facility on
terms acceptable to it, or at all. Failure to obtain a new credit facility would
materially adversely affect the Company's operations.
The Company believes that its operations will generate sufficient cash flow
to service the debt incurred in connection with its prior acquisitions. However,
if such cash flow is not sufficient to service such debt, the Company will be
required to seek additional financing which may not be available on commercially
acceptable terms or at all.
As of March 31, 1998, the Company has a net deferred tax liability of
$700,000 primarily relating to depreciation and amortization in excess of the
book amount. The deferred tax asset of $200,000 relates to the allowance of
accounts receivable, vacation accrual and certain other balance sheet reserves.
In January 1997, the Company borrowed $550,000 in the aggregate from
certain lenders. The loans were used to satisfy short-term working capital
requirements. In July 1997, the Company repaid $200,000 of the loans and
$350,000 was converted into 154,000 shares of Common Stock.
15
<PAGE>
In May 1997, the Company purchased from Plastic Molded Concepts, Inc.
certain assets relating to its Plasti-Chain Line of products for approximately
$4.3 million. The purchase price was paid for through the use of the Revolving
Credit Facility and Term Loan III.
In February 1998, Easy Gardener, through its wholly owned subsidiary Weed
Wizard, purchased certain assets of Weed Wizard, Inc. for approximately $16.3
million, of which approximately $5 million was based on the value of certain
current assets acquired.
In March 1998, Easy Gardener completed its acquisition of substantially all
of the assets of Landmaster Products Inc. for the purchase price of
approximately $3.0 million, of which approximately $750,000 was based on the
value of certain net assets acquired.
The Company anticipates spending approximately $4.0 million, including
anticipated use of a portion of existing trade credits, in the fiscal year
ending June 30, 1998 on a combination of media development, print, radio and
television advertising, co-operative advertising (advertising done in
conjunction with retailers), and attendance at trade shows and public relations
to promote awareness, understanding and brand identification of its lawn and
garden products.
On May 14, 1998 the Company acquired the lawn and garden specialty fencing
product lines of the Tensar Coporation for $5.4 million plus an additional
$977,000 for inventory.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
a Statement of Financial Accounting Standards (SFAS") No. 128, "Earnings Per
Share," which is effective for both interim and annual periods ending after
December 15, 1997. SFAS No. 128 requires the calculation and presentation of
basis earnings per share (giving no dilutive effect to derivative securities)
and dilutive earnings per share (reflecting the dilutive effect of all
derivative securities). Accordingly, the Company has adopted SFAS No. 128 in its
December 31, 1997 interim financial statements. As required by SFAS No. 128, all
prior earnings have been restated to reflect the retroactive application of this
pronouncement.
16
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company, Easy Gardener and Dalen Products, Inc. ("Dalen") have
recently settled the July 30, 1997 lawsuit brought by Easy Gardener against
Dalen in the United States District Court for the Western District of Texas,
Waco Division, and the counterclaims and third party complaint brought by Dalen
against Easy Gardener and the Company, respectively. While other terms of the
settlement are confidential, Dalen has agreed to make a minor change on certain
products to reflect Dalen's association with Gardeneer. In addition, Easy
Gardener has agreed to withdraw the WeedShield brand name from the marketplace
as part of the settlement.
Item 2. Changes in Securities
In February 1998, the Company issued (i) five-year options to purchase
50,000 shares of common stock at $4.375 per share to its Vice President of
Finance pursuant to the Company's 1997 stock option plan and (ii) five-year
non-plan options to purchase an aggregate of 140,000 shares of Common Stock at
$5.25 per share to two individuals as an inducement for their employment with
Wizard, a subsidiary of the Company. In addition, in January 1998 five year
options to purchase 2,500 shares of common stock at $4.125 per share were
granted to each of the Company's two outside directors pursuant to the Company's
Non-Employee Director Stock Option Plan. The options were issued by the Company
in private transactions pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act of 1933.
Item 5. Other Information
The Company currently intends to hold its next Annual Meeting of
Stockholders on or about June 22, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (For SEC use only)
(b) During the quarter ended March 31, 1998 the company filed a current
report on Form 8-K, (under Item 2 of Form 8-K) for the event dated February
26, 1998, to report the purchase of certain assets of Weed Wizard, Inc.
17
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated May 15, 1998
U.S. Home & Garden Inc.
(Registrant)
/s/ Robert Kassel
-----------------
President, Chief Executive Officer and
Treasurer
/s/ Lynda Gustafson
-------------------
Vice President of Finance (Principal
Accounting Officer)
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AT
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,931,000
<SECURITIES> 0
<RECEIVABLES> 26,069,000
<ALLOWANCES> 361,000
<INVENTORY> 13,209,000
<CURRENT-ASSETS> 43,224,000
<PP&E> 3,266,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 104,936,000
<CURRENT-LIABILITIES> 27,957,000
<BONDS> 0
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<COMMON> 20,000
<OTHER-SE> 50,489,000
<TOTAL-LIABILITY-AND-EQUITY> 104,936,000
<SALES> 39,058,000
<TOTAL-REVENUES> 39,058,000
<CGS> 17,861,000
<TOTAL-COSTS> 17,861,000
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 2,519,000
<INCOME-PRETAX> 4,508,000
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