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, 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 stock, as of the latest practicable date.
As of February 8, 1999 there were 19,349,787 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, 1998
and December 31, 1998 (Unaudited) 1-2
Consolidated statements of income for the three
months and six months ended December 31, 1997
and 1998 (Unaudited) 3
Consolidated statements of cash flows for the
three months and six months ended December 31,
1997 and 1998 (Unaudited) 4-5
Notes to consolidated financial statements 6-7
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations. 8-14
Part II. - Other Information
Item 2. - Changes in Securities 15
Item 6. - Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
<TABLE>
<CAPTION>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
====================================================================================================================================
June 1998 December 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
-------------
<S> <C> <C>
Assets
Current
Cash and cash equivalents $ 27,130,000 $ 3,439,000
Accounts receivable, less allowance for doubtful accounts and
sales returns of $399,000 and $340,000 17,350,000 13,377,000
Inventories 11,763,000 21,606,000
Prepaid expenses and other current assets 1,130,000 1,260,000
Deferred tax asset 522,000 522,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 57,895,000 40,204,000
Property and Equipment, net 3,590,000 12,299,000
Intangible Assets
Excess of cost over net assets acquired, net 58,864,000 75,132,000
Deferred financing costs, net of accumulated amortization of
$21,000 and $84,000 3,186,000 3,533,000
Product rights, patents and trademarks, net of accumulated
amortization of $93,000 and $103,000 165,000 493,000
Non-compete agreement, net of accumulated amortization of
$48,000 and $79,000 462,000 1,431,000
Package design, net of accumulated amortization of $247,000
and $369,000 718,000 1,117,000
Trade Credits 944,000 944,000
Officer Receivables 850,000 718,000
Other Assets 139,000 132,000
- ------------------------------------------------------------------------------------------------------------------------------------
$126,813,000 $136,003,000
====================================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
====================================================================================================================================
June 1998 December 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
--------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current
Line of credit $ -- $ 2,500,000
Accounts payable 4,501,000 3,186,000
Accrued expenses 3,922,000 4,329,000
Accrued co-op advertising 645,000 863,000
Accrued commissions 1,106,000 893,000
Accrued purchase consideration 978,000 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 11,152,000 11,771,000
Deferred Tax Liability 812,000 950,000
Line of Credit -- 15,500,000
Other Long-Term Liabilities -- 866,000
Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures
63,250,000 63,250,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 75,214,000 92,337,000
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments, Contingency and Subsequent Events -- --
Stockholders' Equity
Preferred stock, $.001 par value-shares authorized, 1,000,000;
no shares outstanding -- --
Common stock, $.001 par value-shares authorized,
75,000,000; 20,133,000 and 20,196,000 shares issued at
June 30, 1998 and December 31, 1998 20,000 20,000
Additional paid-in capital 50,153,000 50,162,000
Retained earnings 2,733,000 762,000
- ------------------------------------------------------------------------------------------------------------------------------------
52,906,000 50,944,000
Less: Treasury Stock, 236,000 and 1,522,000 shares at cost (1,307,000) (7,278,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 51,599,000 43,666,000
- ------------------------------------------------------------------------------------------------------------------------------------
$ 126,813,000 $ 136,003,000
====================================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Income
====================================================================================================================================
Three Months Ended December 31, Six Months Ended December 31,
------------------------------- --------------------------------
1997 1998 1997 1998
- ------------------------------------------------------------------------------------------------------------------------
Unaudited Unaudited
------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 8,513,000 $ 15,985,000 $ 15,538,000 $ 26,753,000
Cost of Sales 3,857,000 7,751,000 7,379,000 13,063,000
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Profit 4,656,000 8,234,000 8,159,000 13,690,000
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Selling and shipping 2,357,000 3,724,000 4,661,000 6,945,000
General and administrative 2,232,000 4,006,000 3,891,000 7,224,000
- ------------------------------------------------------------------------------------------------------------------------------------
4,589,000 7,730,000 8,552,000 14,169,000
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Operations 67,000 504,000 (393,000) (479,000)
Other Income Expense
Investment income 57,000 116,000 104,000 497,000
Interest expense (744,000) (1,798,000) (1,597,000) (3,339,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Loss before Income Taxes (620,000) (1,178,000) (1,886,000) (3,321,000)
Income tax benefit 250,000 510,000 800,000 1,430,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net Loss $ (370,000) $ (668,000) $ (1,086,000) $ (1,891,000)
====================================================================================================================================
Basic and Diluted Loss per Common Share
$ (.02) $ (.03) $ (.07) $ (.09)
====================================================================================================================================
Weighted Average Common and
Common Equivalent Shares
Outstanding 16,384,000 19,837,000 15,552,000 19,926,000
====================================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
====================================================================================================================================
Increase (Decrease) in Cash and Cash Equivalents
Six months ended December 31, 1997 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $ (1,086,000) $ (1,891,000)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 1,263,000 1,988,000
Amortization of deferred financing costs 232,000 50,000
Changes in operating assets and liabilities, net of assets
acquired and liabilities assumed:
Accounts receivable 4,008,000 3,740,000
Inventories (2,419,000) (6,494,000)
Prepaid expenses and other current assets (255,000) (179,000)
Accounts payable and accrued expenses (651,000) (4,262,000)
Other assets 118,000 288,000
Deferred tax asset (528,000) 138,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities 682,000 (6,622,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Payment for purchase of business, net of cash acquired (561,000) (26,202,000)
Purchase of noncompete agreement -- (1,000,000)
Decrease (increase) in officer receivables (135,000) 3,000
Purchase of furniture, fixtures and equipment (486,000) (1,040,000)
Purchase of package design (232,000) (521,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,414,000) (28,760,000)
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
====================================================================================================================================
Six months ended December 31, 1997 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Cash Flows from Financing Activities
Proceeds from issuances of stock $ 18,648,000 $ 137,000
Repurchase of common stock for treasury -- (5,970,000)
Repurchase of unit purchase options (3,221,000) (79,000)
Payments of notes payable (6,290,000) --
Acquisition finance cost -- (397,000)
Proceeds from bank line of credit 2,246,000 18,000,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 11,383,000 11,691,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net (increase) decrease in cash and cash equivalents 10,651,000 (23,691,000)
Cash and Cash Equivalents, beginning of period 2,083,000 27,130,000
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of period $ 12,734,000 $ 3,439,000
====================================================================================================================================
Supplemental Disclosure of Cash Flow Information
Cash paid for interest, including deferred financing costs and
extraordinary expense $ 1,358,000 $ 3,498,033
Cash paid for taxes $ 30,000 $ 18,000
====================================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. The accompanying consolidated financial statements at December 31, 1998,
and for the six months ended December 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, 1998, for details of accounting policies and detail notes to the
consolidated financial statements.
3. On February 28, 1998, Weed Wizard Acquisition Corporation, a wholly-owned
subsidiary of the Company, acquired all the assets and assumed certain
liabilities of Weed Wizard Inc., a lawn and garden company, for
approximately $16.3 million.
On October 16, 1998, the Company completed the acquisition of Ampro
Industries, Inc., a lawn and garden company, for approximately $24.6
million with additional purchase price payments over the next two years
based upon its future operating cash flow. An additional $1 million was
paid for a non compete agreement.
The acquisitions were accounted for as purchases and, accordingly, the
results of operations have been included in the consolidated statement of
the operations since the acquisition dates. The value of intangibles
purchased and the excess of the purchase price over the fair value of
assets acquired totaled approximately $28 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 Ampro, 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 Weed Wizard, Inc. and Ampro 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 Ampro 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, 1997 1998
---------------------------------------------------------------------------
(000)
Net sales 20,022 27,903
Net loss (3,403) (3,240)
Diluted net loss per common share (.22) (.16)
===========================================================================
6
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
During the quarter ended December 31, 1998, the Company completed a
financing agreement with Bank of America. The agreement provides for a $25
million revolving acquisition line of credit ("the Acquisition Facility")
to finance acquisitions and a $20 million working capital revolving line of
credit ("the Working Capital Facility"). Borrowings under such credit
facilities bear interest at variable annual rates chosen by the Company
based on either (i) the London Interbank Offered Rate ("LIBOR") plus an
applicable marginal rate, or (ii) the higher of 0.5% above the then current
Federal Funds Rate or the Prime Rate of Bank of America, in each case, plus
an applicable marginal rate. The Acquisition Facility terminates at October
15, 2001 and the outstanding balance is payable in quarterly payments
starting with December 31, 2001 and ending with December 31, 2004. The
Working Capital Facility terminates with the balance due on October 15,
2001. The Company is required to maintain a zero balance, under the Working
Capital Facility, for at least 30 consecutive days during the period from
July 1 to December 1 of each year. However, if the Company elects to
terminate the financing agreement prior to the expiration date, the
outstanding balance must be prepaid together with a premium of 1% to 0.5%
of the total facility.
Subsequent to December 31, 1998, the Company repurchased 44,000 shares of
its common stock for approximately $210,000.
7
<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,
the effect of recent acquisitions, 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"), Ampro Industries, Inc.
("Ampro"), 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"). Between 1992
and December 31, 1998, the Company consummated nine acquisitions of
complementary lawn and garden companies and product lines for an aggregate
consideration of over $104 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 $80.9 million at December
31, 1998. The Company is currently amortizing such goodwill using the
straight-line method over various time periods ranging from 20 to 30 years.
8
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, certain selected
financial data as a percentage of net sales:
Three Months Ended Six Months Ended
December 31, December 31,
------------------ -----------------
1997 1998 1997 1998
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 45.3 48.5 47.5 48.8
----- ----- ----- -----
Gross profit 54.7 51.5 52.5 51.2
Selling and shipping expenses 27.7 23.3 30.0 26.0
General and administrative expenses 26.2 25.1 25.0 27.0
----- ----- ----- -----
Income / (loss) from operations 0.8 3.1 (2.5) (1.8)
Interest expense, net (8.0) (10.5) (9.6) (10.6)
Income tax benefit 2.9 3.2 5.1 5.3
----- ----- ----- -----
Net loss (4.3)% (4.2)% (7.0)% (7.1)%
===== ===== ===== =====
Three Months Ended December 31, 1998
Compared to Three Months Ended December 31, 1997
Net sales. Net sales increased by $7.5 million, or 87.8%, to $16 million
during the three months ended December 31, 1998 from $8.5 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 Company's acquisition of substantially all of the assets used in the
businesses of Weed Wizard, Inc. in February 1998, Landmaster Products, Inc. in
March 1998, the acquisition in May 1998 of the Tensar(R) consumer products line
from the Tensar Corporation and the acquisition of Ampro Industries, Inc. in
October 1998.
Gross profit. Gross profit increased by $3.6 million, or 76.8%, to $8.2
million for the three months ended December 31, 1998 from $4.7 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 51.5%
during the three months ended December 31, 1998 from 54.7% during the comparable
period in 1997. The decrease in gross profit as a percentage of net sales was
primarily attributable to an increase in sales of lower-margin products.
Selling and shipping expenses. Selling and shipping expenses increased $1.4
million, or 58%, to $3.7 million during the three months ended December 31, 1998
from $2.4 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 internal growth of the Company's pre-existing product lines
combined with the acquisition of the Tensar(R) consumer products line and
substantially all of the assets used in the businesses of Weed Wizard, Inc.,
Landmaster Products, Inc. and Ampro Industries, Inc. Selling and shipping
expenses as a percentage of net sales decreased to 23.3% during the three months
ended December 31, 1998 from 27.7% 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.
9
<PAGE>
General and administrative expenses. General and administrative expenses
increased $1.8 million or 79.5%, to $4 million during the three months ended
December 31, 1998 from $2.2 million during the comparable period in 1997. This
increase was primarily due to increased amortization of goodwill and
depreciation as a result of the asset acquisitions of Weed Wizard, Inc.,
Landmaster Products, Inc. and Ampro Industries, Inc. and the acquisition of the
Tensar(R) consumer product line. Furthermore, the increase is due to the
addition of certain administrative personnel related to the Company's internal
growth and recent acquisitions. As a percentage of net sales, general and
administrative expenses decreased to 25.1% during the three months ended
December 31, 1998 from 26.2% during the comparable period in 1997.
Income from operations. Income from operations increased by $437,000, or
652.2%, to $504,000 during the three months ended December 31, 1998 from $67,000
during the comparable period in 1997. The increase in income from operations for
the 1998 period was primarily attributable to the increase in net sales and
reduced selling and shipping and general and administrative costs resulting from
economies of scale gained from the sale of new products to existing customers.
As a percentage of net sales, income from operations increased to 3.1% for the
three months ended December 31, 1998 from 0.8% during the comparable period in
1997.
Interest expense. Interest expense increased by $1.1 million, or 141.7%, to
$1.8 million during the three months ended December 31, 1998, from $744,000
during the comparable period in 1997. The increase in interest expense is
primarily related to the interest associated with the increase in Company debt
in April 1998, associated with the issuance by U.S. Home & Garden Trust I, a
subsidiary of the Company, of certain trust preferred securities, and the
October 1998 borrowings under the Company's credit facility to finance the
acquisition of Ampro Industries, Inc.
Income taxes. Income tax benefit increased to $510,000 during the three
months December 31, 1998 from $250,000 during the comparable period in 1997,
primarily due to the increase in net loss before taxes. The income tax benefit
or expense for each interim period is based upon the Company's estimated
effective income tax rate for the year.
Net loss. Net loss increased by $298,000, or 80.5%, to $668,000 during the
three months ended December 31, 1998 from $370,000 during the comparable period
in 1997. Diluted net loss per common share increased $.01 to $.03 per share for
the three months ended December 31, 1998 from $.02 per share during the
comparable period in 1997. The increase in diluted loss per share is primarily
attributable to the increase in net loss, partially offset by more weighted
average common and common equivalent shares outstanding in the three months
ended December 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.
Six Months Ended December 31, 1998
Compared to Six Months Ended December 31, 1997
Net sales. Net sales increased by $11.2 million, or 72.2%, to $26.8 million
during the six months ended December 31, 1998 from $15.5 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 Company's acquisition of substantially all of the assets used in the
businesses of Weed Wizard, Inc. in February 1998, Landmaster Products, Inc. in
March 1998, the acquisition in May 1998 of the Tensar(R) consumer products line
from the Tensar Corporation and the acquisition of Ampro Industries, Inc. in
October 1998.
Gross profit. Gross profit increased by $5.5 million, or 67.8%, to $13.7
million for the six months ended December 31, 1998 from $8.2 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 51.2% during
the six months ended December 31, 1998 from 52.5% during the comparable period
in 1997. The decrease in gross profit as a percentage of net sales was primarily
attributable to an increase in sales of lower-margin products.
10
<PAGE>
Selling and shipping expenses. Selling and shipping expenses increased $2.3
million, or 49%, to $6.9 million during the six months ended December 31, 1998
from $4.7 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 internal growth of the Company's pre-existing product lines
combined with the acquisition of the Tensar(R) consumer products line and
substantially all of the assets used in the businesses of Weed Wizard, Inc.,
Landmaster Products, Inc. and Ampro Industries, Inc. Selling and shipping
expenses as a percentage of net sales decreased to 26% during the six months
ended December 31, 1998 from 30.0% 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.
General and administrative expenses. General and administrative expenses
increased $3.3 million or 85.7%, to $7.2 million during the six months ended
December 31, 1998 from $3.9 million during the comparable period in 1997. This
increase was primarily due to increased amortization of goodwill and
depreciation as a result of the asset acquisitions of Weed Wizard, Inc.,
Landmaster Products, Inc. and Ampro Industries, Inc. and the acquisition of the
Tensar(R) consumer product line. Furthermore, the increase is due to the
addition of certain administrative personnel related to the Company's internal
growth and recent acquisitions. As a percentage of net sales, general and
administrative expenses increased to 27% during the six months ended December
31, 1998 from 25% during the comparable period in 1997.
Loss from operations. Loss from operations increased by $86,000, or 21.9%,
to $479,000 during the six months ended December 31, 1998 from $393,000 during
the comparable period in 1997. The loss from operations in actual dollars was
primarily due to the seasonal nature of the Company's business. The increase in
the loss for the 1998 period was primarily attributable to the increased general
and administrative costs resulting from increased amortization of goodwill. As a
percentage of net sales, loss from operations decreased to 1.8% for the six
months ended December 31, 1998 from 2.5% during the comparable period in 1997.
Interest expense. Interest expense increased by $1.7, or 109.1%, to $3.3
million during the six months ended December 31, 1998, from $1.6 million during
the comparable period in 1997. The increase in interest expense is primarily
related to the interest associated with the increase in Company debt in April
1998, associated with the issuance by U.S. Home & Garden Trust I, a subsidiary
of the Company, of certain trust preferred securities, and borrowings under the
Company's credit facility to finance the acquisition of Ampro Industries, Inc.
Income taxes. Income tax benefit increased to $1.4 million during the six
months December 31, 1998 from $800,000 during the comparable period in 1997,
primarily due to the increase in net loss before taxes. The income tax benefit
or expense for each interim period is based upon the Company's estimated
effective income tax rate for the year.
Net loss. Net loss increased by $805,000, or 74.1%, to $1.9 million during
the six months ended December 31, 1998 from $1.1 million during the comparable
period in 1997. Diluted net loss per common share increased $.02 to $.09 per
share for the six months ended December 31, 1998 from $.07 per share during the
comparable period in 1997. The increase in diluted loss per share is primarily
attributable to the increase in net loss, partially offset by more weighted
average common and common equivalent shares outstanding in the six months ended
December 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.
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.
11
<PAGE>
Sales of the Company's agriculture products, which were not material during
the three months ended December 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 has 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 December 31, 1998, the Company had consolidated cash and short-term
investments totaling $3.4 million and working capital of $28.4 million. At June
30, 1998, the Company had consolidated cash and short-term investments totaling
$27.1 million and working capital of $46.7 million. In addition to the decrease
in working capital associated with the seasonal nature of the Company's
business, $24.6 million was used for the purchase of substantially all the
assets used in the business of Ampro Industries, Inc. and $6 million was used
for the repurchase of common stock for treasury during the six months ended
December 31, 1998. This decrease was partially offset by proceeds from the
Company's bank line of credit of $18 million.
Net cash used in operating activities during the six months ended December
31, 1998 was $6.6 million consisting primarily of an increase in inventory, a
decrease in accounts payable and accrued expenses and the net loss for the six
months, partially offset by depreciation and amortization and a decrease in
accounts receivable.
Net cash used in investing activities during the six months ended December
31, 1998 was $28.8 million consisting primarily of cash used for the purchase of
Ampro Industries Inc., and cash used for the purchase of furniture, fixtures and
equipment and package design.
Net cash provided by financing activities during the six months ended
December 31, 1998 was $11.7 million consisting primarily of proceeds from the
Company's bank line of credit, partially offset by the repurchase of
approximately 1,286,000 shares of common stock for treasury.
On October 13, 1998, the Company entered into a credit agreement (the
"Credit Agreement") with Bank of America National Trust & Savings Association
(the "Bank"). The credit agreement provides for a revolving credit facility of
up to $25 million to finance the cost of acquisitions by the Company (the
"Acquisition Facility") and a revolving credit facility of up to $20 million to
finance the Company's working capital requirements (the "Working Capital
Facility"). Both of such credit facilities expire on October 15, 2001, at which
time borrowings under the Acquisition Facility are payable on a term loan basis
in quarterly installments commencing December 31, 2001, with the final
installment maturing on September 30, 2004 and, unless refinanced, borrowings
under the Working Capital Facility mature on such expiration date. In addition,
borrowings under the Acquisition Facility are subject to mandatory prepayment
from the net proceeds of certain dispositions of assets, and certain losses or
condemnation of property, from excess cash (as defined in the Credit Agreement)
generated by the Company and its subsidiaries and 50% of the net proceeds of any
new issuances of the Company's capital stock after such expiration date.
Mandatory prepayments by the Company prior to such expiration have the effect of
reducing the Acquisition Facility by the prepayment amount. In addition, during
a period of 30 consecutive days during the period July 1 to December 1 in each
year, no borrowings can be outstanding under the Working Capital Facility. The
Company has the right under the Credit Agreement to terminate or permanently
reduce the Bank's commitments under such credit facilities in the minimum amount
of $1.0 million and multiples thereof subject to the payment to the Bank of
"reduction fees" of 1% of the amount terminated or reduced on or prior to
December 31, 1999 and 0.5% of the amounts terminated or reduced thereafter.
Borrowings under such credit facilities bear interest at variable annual rates
selected by the Company based on LIBOR ("London Interbank Offered Rate"), or the
higher of 0.5% above the then current Federal Funds Rate or the Bank's prime
rate plus, in each case, an applicable marginal rate of interest.
12
<PAGE>
The Company's obligations under the Credit Agreement are guaranteed by its
subsidiaries and secured by a security interest in favor of the Bank in
substantially all of the assets of the Company and its subsidiaries. Upon the
occurrence of an event of default specified in the Credit Agreement, the
maturity of loans outstanding under the Credit Agreement may be accelerated by
the Bank, which may also foreclose its security interest on the assets of the
Company and its subsidiaries.
Under the Credit Agreement, the Company and its subsidiaries are required,
among other things, to comply with (a) certain limitations on incurring
additional indebtedness, liens and guaranties, on dispositions of assets,
payment of cash dividends and cash redemption and repurchases of securities, and
(b) certain limitations on merger, liquidations, changes in business,
investments, loans and advances, affiliate transactions and certain
acquisitions. In addition, the Company must comply with certain financial tests
and ratios. A violation of any of these covenants constitutes an event of
default under the Credit Agreement.
The Company believes that its operations will generate sufficient cash flow
to service the debt incurred. 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 December 31, 1998, the Company has a net deferred tax liability of
$950,000 primarily relating to depreciation and amortization in excess of the
book amount. The deferred tax asset of $522,000 relates to the allowance for
accounts receivable, vacation accrual and certain other balance sheet reserves.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Transactions". SFAS 133
requires companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
object of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings' effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999.
Historically, the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of this new standard on July 1, 1999 to affect its
financial statements.
Inflation
Inflation has historically not had a material effect on the Company's
operations.
Year 2000
The Company has appointed an internal task force to assess its state of
readiness for possible "Year 2000" issues. The task force is evaluating internal
business systems, software and other components which affect the performance of
the Company's products and the Company's vulnerability to possible "Year 2000"
exposures due to suppliers and other third parties lack of preparedness for the
year 2000.
13
<PAGE>
In addition, the Company has been in contact with its suppliers and other
third parties to determine the extent which they may be vulnerable to "Year
2000" issues. As this assessment progresses, matters may come to the Company's
attention which could give rise to the need for remedial measures which have not
yet been identified. The Company cannot currently predict the potential effect
of third parties "Year 2000" issues on its business. It is expected that
assessment, remediation and contingency planning activities will be on-going
throughout 1999 with the goal of appropriately resolving all material internal
systems and third party issues. The Company intends to utilize both internal and
external resources to reprogram, replace and test the systems for the year 2000
modifications.
The Company does not expect expenditures relating to the year 2000 issues
to be material and does not expect costs associated with the year 2000 to have a
significant impact on the Company's results of operations or financial position.
However, there can be no assurance that the Company will not experience
unexpected difficulties in connection with the year 2000 or that the systems of
other companies on which the Company's systems rely will be timely converted.
14
<PAGE>
Part II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
During the quarter ended December 31, 1998 the Company issued to certain of its
officers, employees (including new employees obtained in connection with the
Ampro acquisition) and a consultant and advisor to the Company (i) five-year
options to purchase an aggregate of 43,000 shares of its common stock at an
exercise price of $3.813 per share; (ii) five-year options to purchase an
aggregate of 345,000 shares of its common stock at an exercise price of $3.948
per share and (iii) ten-year options to purchase an aggregate of 470,000 shares
at an exercise price of $4.125 per share. The options were granted in private
transactions which were exempt from the registration requirements of the
Securities Act of 1933 by virtue of Section 4(2) thereunder.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Purchase Agreement, dated as of October 15, 1998, by and
among the Company, Kenneth W. Hilbert, E. Scott Hilbert,
Omer Messer and Charles J. Holton (incorporated by reference
to the exhibit filed with the Company's Current Report on
Form 8-K for the event dated October 16, 1998).
27 Financial Data Schedule*
(b) During the quarter ended December 31, 1998 the Company filed a
current report on Form 8-K (under Item 2 of Form 8-K), for the
event dated October 16, 1998 to report the purchase of Ampro
Industries, Inc. and Amendments Nos. 1 and 2 to said Form 8-K
(under Item 7) to report the financial information of the
business acquired.
----------
* (For SEC use only)
15
<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 February 12, 1999
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)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AT
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 3,439,000
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<ALLOWANCES> 340,000
<INVENTORY> 21,606,000
<CURRENT-ASSETS> 40,204,000
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<TOTAL-ASSETS> 136,003,000
<CURRENT-LIABILITIES> 11,771,000
<BONDS> 63,250,000
0
0
<COMMON> 20,000
<OTHER-SE> 43,666,000
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<SALES> 26,753,000
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<CGS> 13,063,000
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