U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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 November 8, 1999 there were 18,861,963 shares of the issuer's common
stock, par value $.001 per share, outstanding.
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Part I. - Financial Information
Item 1. - Consolidated Financial Statements
Consolidated balance sheet as of June 30, 1999
and September 30, 1999 (Unaudited) 1-2
Consolidated statements of income for the three months
Ended September 30, 1998 and 1999 (Unaudited) 3
Consolidated statements of cash flows for the three months
Ended September 30, 1998 and 1999 (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
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 14
Part II. - Other Information
Item 1. - Legal Proceedings 15
Item 2. - Changes in Securities 15
Item 6. - Exhibits and Reports on Form 8-K 15
Signatures 16
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<CAPTION>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheet
=============================================================================================================================
June 30, 1999 September 30, 1999
------------- ------------------
(Unaudited)
<S> <C> <C>
Assets
Current
Cash and cash equivalents $ 2,936,000 $ 6,578,000
Restricted cash 1,000,000 1,000,000
Accounts receivable, less allowance for doubtful accounts
and sales returns of $991,000 and $476,000 20,242,000 8,560,000
Inventories 16,986,000 16,369,000
Prepaid expenses and other current assets 1,137,000 1,071,000
Deferred tax asset 500,000 2,100,000
- ---------------------------------------------------------------------------------------------------------------------------
Total Current Assets 42,801,000 35,678,000
Property and Equipment, net 11,634,000 12,147,000
Intangible Assets
Excess of cost over net assets acquired, net 75,573,000 75,002,000
Deferred financing costs, net of accumulated
amortization of $167,000 and $233,000 3,524,000 3,458,000
Product rights, patents and trademarks, net of
accumulated amortization of $271,000 and $279,000 571,000 563,000
Non-compete agreement, net of accumulated
amortization of $77,000 and $84,000 1,433,000 1,426,000
Package design, net of accumulated amortization of
$533,000 and $619,000 1,096,000 1,185,000
Officer Receivables 725,000 738,000
Other Assets 107,000 211,000
- ---------------------------------------------------------------------------------------------------------------------------
$137,464,000 $130,408,000
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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<CAPTION>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheet
=======================================================================================================================
June 30, 1999 September 30, 1999
------------- ------------------
(Unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current
Accounts payable $ 2,394,000 $ 3,410,000
Accrued expenses 4,352,000 1,408,000
Accrued co-op advertising 1,499,000 556,000
Accrued commissions 1,682,000 787,000
- -------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 9,927,000 6,161,000
Deferred Tax Liability 1,600,000 1,800,000
Other Liabilities 703,000 651,000
Acquisition Line of Credit 15,500,000 15,000,000
Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust
Holding Solely Junior Subordinated
Debentures 63,250,000 63,250,000
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities 90,980,000 86,862,000
- -------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock, $.001 par value - shares authorized,
1,000,000; no shares outstanding -- --
Common stock, $0.001 par value-shares authorized,
75,000,000; 21,219,000 and 21,653,000 shares
issued at June 30, 1999 and September 30, 1999 21,000 22,000
Additional paid-in capital 50,542,000 50,574,000
Retained earnings 4,703,000 2,722,000
- -------------------------------------------------------------------------------------------------------------------
55,266,000 53,318,000
Less: Treasury Stock, 1,805,000 and 2,177,000 shares
at cost at June 30, 1999 and September 30, 1999 (8,782,000) (9,772,000)
- -------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 46,484,000 43,546,000
- -------------------------------------------------------------------------------------------------------------------
$ 137,464,000 $ 130,408,000
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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<CAPTION>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Income
==================================================================================================
Three Months Ended September 30,
-----------------------------------------
1998 1999
---- ----
<S> <C> <C>
Net Sales $ 10,768,000 $ 12,985,000
Cost of Sales 5,312,000 7,176,000
- --------------------------------------------------------------------------------------------------
Gross profit 5,456,000 5,809,000
- --------------------------------------------------------------------------------------------------
Operating expenses
Selling & shipping 3,221,000 3,468,000
General and administrative 2,380,000 2,969,000
Depreciation 211,000 383,000
Goodwill amortization 559,000 721,000
Other amortization 68,000 104,000
- --------------------------------------------------------------------------------------------------
Loss from Operations (983,000) (1,836,000)
- --------------------------------------------------------------------------------------------------
Investment income (381,000) (73,000)
Interest expense 1,541,000 1,818,000
- --------------------------------------------------------------------------------------------------
Loss before income taxes (2,143,000) (3,581,000)
Income tax benefit 920,000 1,600,000
- --------------------------------------------------------------------------------------------------
Net Loss $ (1,223,000) $ (1,981,000)
- --------------------------------------------------------------------------------------------------
Basic and Diluted Loss per Common Share
(0.06) (0.10)
- --------------------------------------------------------------------------------------------------
Weighted Average Common and Common
Equivalent Shares Outstanding 20,143,000 19,335,000
- --------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
=====================================================================================================================
Increase (Decrease) in Cash and Cash Equivalents
Three months ended September 30, 1998 1999
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited)
------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $ (1,223,000) $ (1,981,000)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and other amortization 838,000 1,208,000
Amortization of deferred financing costs 25,000 66,000
Deferred taxes 63,000 (1,400,000)
Changes in operating assets and liabilities, net of
assets acquired and liabilities assumed:
Accounts receivable 10,413,000 11,682,000
Inventories (1,429,000) 617,000
Prepaid expenses and other current assets (2,000) 66,000
Accounts payable and accrued expenses (4,981,000) (3,818,000)
Other assets (3,000) (104,000)
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 3,701,000 6,336,000
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Payment for purchase of businesses, net of cash acquired (1,167,000) (153,000)
Decrease (increase) in officer receivables 18,000 (13,000)
Purchase of property and equipment (413,000) (896,000)
Purchase of package design (228,000) (175,000)
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,790,000) (1,237,000)
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from issuances of stock 25,000 33,000
Repurchase of unit purchase options (79,000) --
Repurchase of common stock for treasury (2,703,000) (990,000)
Payment on bank line of credit -- (500,000)
Acquisition finance costs (7,000) --
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (2,764,000) (1,457,000)
- ---------------------------------------------------------------------------------------------------------------------
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<CAPTION>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
=====================================================================================================================
<S> <C> <C>
Net increase (decrease) in cash and cash equivalents (853,000) 3,642,000
Cash and Cash Equivalents, beginning of period 27,130,000 2,936,000
- ---------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of period $ 26,277,000 $ 6,578,000
- ---------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of Cash Flow Information
Cash paid for interest, including deferred financing costs $ 1,491,000 $ 1,774,000
Cash paid for taxes $ -- $ 22,000
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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5
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U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. The accompanying consolidated financial statements at September 30, 1999
and for the three months ended September 30, 1998 and 1999 are unaudited,
but, in the opinion of management, include all adjustments necessary for a
fair presentation of consolidated financial position and results of
operations for the periods presented. The results for the three months
ended September 30, 1999 are not necessarily indicative of the results of
operations for a full year.
2. Refer to the audited consolidated financial statements for the year ended
June 30, 1999, for details of accounting policies and detailed notes to the
consolidated financial statements.
3. Inventories consist of:
June 30, 1999 September 30, 1999
---------------------------------------------------------------------------
(000) (000)
Raw materials 10,103 9,575
Finished goods 6,883 6,794
---------------------------------------------------------------------------
16,986 16,369
---------------------------------------------------------------------------
4. 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 acquisition was accounted for as a purchase and, accordingly, the
results of operations have been included in the consolidated statements of
income since the acquisition date. The value of intangibles purchased and
the excess of the purchase price over the fair value of assets acquired
totaled approximately $18 million and will be amortized on a straight line
basis over the estimated useful life of thirty years.
The following unaudited pro forma summary combines the consolidated results
of operations of the Company and Ampro Industries, Inc. as if the
acquisitions had occurred at the beginning of fiscal 1999, 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 Ampro Industries, Inc. related to the
acquisitions. This pro forma summary does not necessarily reflect the
results of operations as they would have been if the Company and Ampro
Industries, Inc. had constituted a single entity during such period and is
not necessarily indicative of results which may be obtained in the future.
6
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U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Three months ended September 30, 1998
---------------------------------------------------------------------------
(000)
Net sales 11,444
Net loss (2,806)
Diluted net loss per common share (0.14)
---------------------------------------------------------------------------
5. The Company completed a financing agreement with Bank of America on October
13, 1998. 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.
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.
6. Subsequent to September 30, 1999, the Company repurchased 307,000 shares of
its common stock for approximately $739,000.
7
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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, E-Garden, Inc., Ampro Industries, Inc. ("Ampro"), Easy Gardener,
Inc. ("Easy Gardener"), and Golden West Agri-Products, Inc., and Easy Gardener's
wholly owned subsidiaries, Weatherly Consumer Products Group, Inc. and Weed
Wizard Acquisition Corp. Since 1992, the Company consummated ten acquisitions of
complementary lawn and garden companies and product lines for an aggregate
consideration of over $107 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 $82.7 million at September
30, 1999. The Company is currently amortizing such goodwill using the
straight-line method over various time periods ranging from 20 to 30 years.
8
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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
September 30,
1998 1999
Net sales 100.0% 100.0%
Cost of sales 49.3 55.3
----- -----
Gross profit 50.7 44.7
Selling and shipping expenses 29.9 26.7
General and administrative expenses 29.9 32.2
----- -----
Loss from operations (9.1) (14.2)
Interest expense, net (10.8) (13.4)
Income tax benefit 8.5 12.3
--------------------
Net Loss (11.4)% (15.3)%
--------------------
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Net sales. Net sales increased by $2.2 million, or 20.6%, to $13.0 million
during the three months ended September 30, 1999 from $10.8 million during the
comparable period in 1998. The increase in net sales was primarily a result of
the October 1998 acquisition of Ampro Industries, Inc. and internal growth of
the Company's pre-existing product lines.
Gross profit. Gross profit increased by $353,000, or 6.5%, to $5.8 million
for the three months ended September 30, 1999 from $5.5 million during the
comparable period in 1998. This increase was due primarily to the increase in
net sales. Gross profit as a percentage of net sales decreased to 44.7% during
the three months ended September 30, 1999 from 50.7% during the comparable
period in 1998. 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
$247,000, or 7.7% to $3.5 million during the three months ended September 30,
1999 from $3.2 million during the comparable period in 1998. This increase was
primarily the result of an increase in the amount of products shipped, which was
a consequence of the October 1998 acquisition of Ampro Industries, Inc. along
with an increase in sales of pre-existing product lines. Selling and shipping
expenses as a percentage of net sales decreased to 26.7% during the three months
ended September 30, 1999 from 29.9% during the comparable period in 1998. 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 $959,000 or 29.8%, to $4.2 million during the three months ended
September 30, 1999 from
9
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$3.2 million during the comparable period in 1998. This increase is primarily
due to increased depreciation and amortization of $370,000 as a result of the
acquisition of Ampro Industries, Inc. As a percentage of net sales, general and
administrative expenses, excluding depreciation and amortization, increased to
22.9% during the three months ended September 30, 1998 from 22.1% during the
comparable period in 1998.
Loss from operations. Loss from operations increased by $853,000 or 86.8%
to $1.8 million during the three months ended September 30, 1998, from $983,000
during the comparable period in 1998. The loss from operations in actual dollars
was primarily due to the seasonal nature of the Company's business. Furthermore,
the increase in the loss for the 1999 period was primarily attributable to a
full quarter of operating loss from Ampro Industries, Inc., which was not
included in the comparable quarter in 1998. As a percentage of net sales, loss
from operations increased to 14.2%, for the three months ended September 30,
1999 from 9.1% during the comparable period in 1998.
Interest expense. Interest expense increased $277,000, or 18.0% to $1.8
million during the three months ended September 30, 1999, from $1.5 million
during the comparable period in 1998. The increase in interest expense is
primarily related to the interest associated with the increase in debt as a
result of financing the Company's acquisition of Ampro Industries, Inc.
Income taxes. Income tax benefit increased to $1.6 million during the three
months ended September 30, 1999 from $920,000 during the comparable period in
1998, primarily due to the increase in the 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 $758,000, or 62.0%, to $2.0 million during
the three months ended September 30, 1999 from $1.2 million during the
comparable period in 1998. Diluted net loss per common share increased $0.04 to
$0.10 per share for the three months ended September 30, 1999 from $0.06 per
common share during the comparable period in 1998. The increase in diluted loss
per share is primarily attributable to the increase in net loss and less
weighted average common and common equivalent shares outstanding in the three
months ended September 30, 1999 compared to the comparable period in the prior
year due to the Company's repurchase of its common shares.
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 agricultural products, which were not material
during the three months ended September 30, 1999, are also seasonal. Most
shipments occur during the agricultural cultivation period from March through
October.
10
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Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily through
cash generated by operations; net proceeds from the Company's private placements
and public sales of securities and borrowings from lending institutions.
At September 30, 1999, the Company had consolidated cash and short-term
investments totaling $6.6 million and working capital of $29.5 million. At June
30, 1999, the Company had consolidated cash and short-term investments totaling
$2.9 million and working capital of $32.9 million. The decrease in working
capital is in line with the seasonal nature of the Company's business. In
addition, $990,000 was used for the repurchase of common stock for treasury and
repayment of $500,000 on the Company's acquisition line of credit during the
three months ended September 30, 1999.
Net cash provided by operating activities during the three months ended
September 30, 1999 was $6.3 million consisting primarily of a decrease in
accounts receivable, and amortization and depreciation, offset in part by a
decrease in accounts payable, an increase in deferred taxes and the net loss for
the three months.
Net cash used in investing activities during the three months ended
September 30, 1999 was $1.2 million, consisting primarily of cash used for the
purchase of property and equipment and package design.
Net cash used in financing activities during the three months ended
September 30, 1999 was $1.5 million, consisting primarily of the repurchase of
approximately 372,000 shares of common stock for treasury and the $500,000
repayment of the Company's acquisition line of credit.
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 issuance's 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
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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.
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 September 30, 1999, the Company has a net deferred tax liability of
$1.8 million primarily relating to tax depreciation and amortization in excess
of the book amount. The deferred tax asset of $2.1 million relates to the net
operating loss carryforwards, the allowance for accounts receivable, vacation
accrual and certain other balance sheet reserves.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". 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
objective 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, 2000.
Historically the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the adoption
of this new standard on July 1, 2000 will not affect its financial statements.
12
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Inflation
Inflation has historically not had a material effect on the Company's
operations.
Year 2000
OVERVIEW AND BACKGROUND
The Company has implemented a project ("the Project") to address the Year
2000 readiness of its information technology systems (e.g. telephones, alarm
systems, copy machines, computer systems, etc.) which have embedded technology
(collectively referred to as "Systems"). Additionally, the Project includes the
assessment of the Year 2000 readiness of the Company's significant suppliers and
customers.
STATUS OF THE PROJECT
The Project is divided into four separate phases - Planning and Awareness,
Inventory, Assessment, and Remediation.
The Planning and Awareness phase began in October 1997 and has been
completed. This phase included: (i.) development and approval of the Project
charter, (ii.) formation of a Project management team to carry out the Project
charter, (iii.) identification and assessment of overall Project risks and (iv.)
development of a Project budget.
The Inventory phase began in January 1998 and has been completed. This
phase included: (i.) identification of significant Systems to be assessed and
(ii.) identification of all significant suppliers and customers.
The Assessment phase began in November 1998 and was completed in August
1999. This phase involves: (i.) contacting vendors of significant Systems to
assess the Year 2000 readiness of those systems, (ii.) testing of the assertions
made by the vendors of significant Systems', (iii.) contacting significant
suppliers and customers in order to understand their state of Year 2000
readiness, (iv.) assessment of assertions made by significant suppliers and
customers, (v.) determination of the extent of which remediation will be
required to ensure Year 2000 readiness and (vi.) development of contingency
plans to the extent considered necessary. Although the Company's assessment
identified certain systems that were not currently Year 2000 compliant, these
systems have either been corrected or entered the remediation phase.
The Remediation phase began concurrently with the Assessment phase. Systems
identified during the Assessment phase as not Year 2000 compliant immediately
enter the Remediation phase. The Remediation phase was completed in August 1999.
The activities that were undertaken during this phase included: (i.) repairing,
replacing or reprogramming all significant Systems that are not Year 2000
compliant; (ii.) validation and testing of remediated Systems; and (iii.)
establishment and completion of action plans to address any Year 2000 issues
with significant customers or suppliers.
13
<PAGE>
To date, none of the Company's other information technology projects or
initiatives have been delayed or materially affected due to the implementation
of the Project.
COSTS
The Company has and will utilize primarily internal resources to carry out
the Project. Costs incurred to ensure the Company's Systems are Year 2000
compliant have not been and are not expected to be material to the Company's
results of operations, financial position or cash flows. The Project's costs are
expensed as incurred.
RISKS AND CONTINGENCIES
The Company believes the Project has met its Year 2000 objectives. The
ability of suppliers and customers with which the Company interacts to timely
convert their systems to Year 2000 compliant is somewhat uncertain and not
directly under the control of the Company. The Company conducts operations in
various markets worldwide which may not be Year 2000 compliant because of many
factors, including, but not limited to, lack of resources and lack of attention
to the Year 2000 issue. Disruptions in the economy generally resulting from Year
2000 issues could also have an adverse affect on the Company's operations. Such
failures could materially and adversely effect the Company's results of
operations, liquidity and financial position.
The Company is dependent on several single source raw material
manufacturers for supply of such products as weed block fabric and shade cloth
fabric. Additionally, demand for the Company's products by the Company's
customers is dependent on the ability of certain high volume customers to have
effective systems in place such that Year 2000 issues do not negatively affect
demand. In the event of a major economic slowdown as a result of Year 2000
issues, the Company would likely be adversely affected in kind. When the economy
is down, the home and garden industry generally is down as well. Failure in the
systems of the Company's major suppliers or the Company's major customers could
have adverse effects on the Company.
The Company has completed its contingency plans. However, the Company's
contingency plans have not yet been tested to ensure that they will provide
adequate safeguards for Systems that are ultimately not Year 2000 compliant.
There can be no assurance that third parties on which the Company relies
will succeed in their Year 2000 compliance efforts or that failure by a third
party would not have a material adverse effect on the Company's results of
operations or financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proveedings.
On or about October 29, 1999 the Company filed its answer and affirmative
defenses as well as certain counter-claims against the plaintiffs in the action
commenced in the State of Michigan Circuit Court by the former stockholders of
Ampro Industries, Inc. against the Company and Ampro, which action is referenced
in Item 3 of the Company's Form 10-K for the fiscal year ended June 30, 1999.
Item 2. Changes in Securities
(c) During the quarter ended September 30, 1999 the Company issued 54,773
shares of its common stock to an officer of the Company in connection
with the officer's exercise of options. The shares were issued in a
private transaction pursuant to the exemption provided by Section 4(2)
of the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule for the Quarter ended September 30,
1999.*
(b) No reports on Form 8-K were filed during the quarter ended September
30, 1999.
* (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 November 9, 1999
U.S. Home & Garden Inc.
(Registrant)
/s/ Robert Kassel
------------------------------------
President, Chief Executive Officer
/s/ Lynda Gustafson
------------------------------------
Vice President of Finance (Principal
Accounting Officer)
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AT
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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