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, 2000
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) (Zip Code)
(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 1, 2000 there were 18,290,309 shares of the issuer's common
stock, par value $.001 per share, outstanding.
<PAGE>
Part I. - Financial Information
Item 1. - Consolidated Financial Statements
Consolidated balance sheets as of June 30, 2000
and September 30, 2000 (Unaudited) 1-2
Consolidated statements of income for the three months
ended September 30, 1999 and 2000 (Unaudited) 3
Consolidated statements of cash flows for the three months
ended September 30, 1999 and 2000 (Unaudited) 4-5
Notes to consolidated financial statements 6-8
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations. 9-14
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 14-15
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
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
June 30, 2000 September 30, 2000
------------------- -------------------
(Unaudited)
<S> <C> <C>
Assets
Current
Cash and cash equivalents $ 7,338,000 $ 6,344,000
Restricted cash 1,582,000 1,582,000
Accounts receivable, less allowance for doubtful accounts
and sales returns of $1,199,000 and $597,000 19,972,000 10,855,000
Inventories 12,843,000 14,185,000
Prepaid expenses and other current assets 606,000 623,000
Deferred tax asset 210,000 210,000
-----------------------------------------------------------------------------------------------------------------
Total Current Assets 42,551,000 33,799,000
Deferred Tax Asset -- 955,000
Property and Equipment, net 13,622,000 13,964,000
Intangible Assets
Excess of cost over net assets acquired, net 73,395,000 72,629,000
Deferred financing costs, net of accumulated
amortization of $372,000 and $422,000 3,093,000 3,041,000
Product rights, patents and trademarks, net of
accumulated amortization of $47,000 and $55,000 555,000 571,000
Non-compete agreement, net of accumulated
amortization of $106,000 and $114,000 1,404,000 1,396,000
Package tooling costs, net of
accumulated amortization of $929,000 and $1,040,000 1,359,000 1,298,000
Exclusivity agreements, net of accumulated
amortization of $62,000 and $163,000 1,398,000 1,455,000
Officer Receivables 655,000 645,000
Other Assets 513,000 465,000
-----------------------------------------------------------------------------------------------------------------
Total Assets $138,545,000 $130,218,000
-----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
June 30, 2000 September 30, 2000
------------------ ------------------
(Unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current
Current portion of acquisition line-of-credit $ 3,125,000 $ 2,250,000
Accounts payable 6,187,000 5,503,000
Income taxes payable 2,413,000 1,658,000
Accrued expenses 2,260,000 1,288,000
Accrued commissions 1,296,000 753,000
Accrued co-op advertising 1,143,000 946,000
Accrued rebates 1,075,000 1,158,000
--------------------------------------------------------------------------------------------------------------
Total Current Liabilities 17,499,000 13,556,000
Acquisition Line-of-Credit, less current portion 13,875,000 12,750,000
Deferred Tax Liability 185,000 --
Other Long Term Liabilities 792,000 1,040,000
Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust Holding
Solely Junior Subordinated Debentures 56,980,000 56,950,000
--------------------------------------------------------------------------------------------------------------
Total Liabilities 89,331,000 84,296,000
--------------------------------------------------------------------------------------------------------------
Minority Interest in Equity of Affiliate 4,111,000 3,857,000
--------------------------------------------------------------------------------------------------------------
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; 21,751,000 and 21,433,000 shares
issued at June 30, 2000 and September 30, 2000 22,000 21,000
Additional paid-in capital 51,409,000 51,615,000
Retained earnings 4,359,000 1,608,000
--------------------------------------------------------------------------------------------------------------
55,790,000 53,244,000
Less: Treasury Stock, 2,554,000 and 2,760,000 shares
at cost at June 30, 2000 and September 30, 2000 (10,687,000) (11,179,000)
--------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 45,103,000 42,065,000
--------------------------------------------------------------------------------------------------------------
$ 138,545,000 $ 130,218,000
--------------------------------------------------------------------------------------------------------------
</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 September 30, 1999 2000
--------------------------------------------------------------------------------------------
(Unaudited)
---------------------------------
<S> <C> <C>
Net Sales $ 12,985,000 $ 13,111,000
Cost of Sales 7,176,000 7,424,000
--------------------------------------------------------------------------------------------
Gross Profit 5,809,000 5,687,000
--------------------------------------------------------------------------------------------
Operating Expenses
Selling & shipping 3,468,000 4,331,000
General and administrative 2,969,000 4,043,000
Depreciation 383,000 662,000
Goodwill amortization 721,000 783,000
Other amortization 104,000 278,000
--------------------------------------------------------------------------------------------
Total Operating Expenses 7,645,000 10,097,000
--------------------------------------------------------------------------------------------
Loss from Operations (1,836,000) (4,410,000)
Other Income (Expense)
Investment income 73,000 135,000
Interest expense (1,818,000) (1,663,000)
--------------------------------------------------------------------------------------------
Loss before Income Taxes, Minority Interest
and Extraordinary Gain (3,581,000) (5,938,000)
Income Tax Benefit 1,600,000 2,966,000
Minority Interest in Loss of Affiliate -- 217,000
--------------------------------------------------------------------------------------------
Loss Before Extraordinary Gain (1,981,000) (2,755,000)
Extraordinary gain on purchase of Trust
Preferred Securities, net of income taxes -- 4,000
--------------------------------------------------------------------------------------------
Net Loss $ (1,981,000) $ (2,751,000)
--------------------------------------------------------------------------------------------
Basic and Diluted Loss per Common Share $ (0.10) $ (0.15)
--------------------------------------------------------------------------------------------
Weighted Average Common and Common
Equivalent Shares Outstanding 19,335,000 18,807,000
--------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
=======================================================================================================
Three months ended September 30, 1999 2000
-------------------------------------------------------------------------------------------------------
(Unaudited)
-------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (1,981,000) $ (2,751,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Minority interest in loss of affiliate -- (217,000)
Extraordinary gain -- (4,000)
Depreciation and other amortization 1,274,000 1,723,000
Deferred income taxes (1,400,000) (1,140,000)
Compensation related to stock options -- 30,000
Changes in operating assets and liabilities, net of
assets acquired and liabilities assumed in business
acquisitions:
Accounts receivable 11,682,000 9,117,000
Inventories 617,000 (1,342,000)
Prepaid expenses and other current assets 66,000 (17,000)
Accounts payable and accrued expenses (3,818,000) (3,096,000)
Other assets (104,000) 48,000
------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 6,336,000 2,351,000
------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Payment for purchase of businesses, net of cash
acquired (153,000) (16,000)
Increase in officer receivables (13,000) (10,000)
Purchase of property and equipment (896,000) (1,003,000)
Purchase of intangibles (175,000) (74,000)
------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,237,000) (1,103,000)
------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from issuances of stock 33,000 --
Purchases of mandatorily redeemable preferred
securities -- (22,000)
Repurchase of common stock for treasury (990,000) (492,000)
Net proceeds from notes payable -- 272,000
</TABLE>
4
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
===================================================================================================
Three Months Ended September 30, 1999 2000
---------------------------------------------------------------------------------------------------
(Unaudited)
---------------------------------
<S> <C> <C>
Payment on bank line-of-credit (500,000) (2,000,000)
---------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (1,457,000) (2,242,000)
---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,642,000 (994,000)
Cash and Cash Equivalents, beginning of period 2,936,000 7,338,000
---------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of period $ 6,578,000 $ 6,344,000
===================================================================================================
Supplemental disclosure of Cash Flow Information
Cash paid for interest $ 1,774,000 $ 1,635,000
Cash paid for taxes $ 22,000 $ --
---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
1. The accompanying consolidated financial statements at September 30, 2000
and for the three months ended September 30, 1999 and 2000 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, 2000 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, 2000, for details of accounting policies and detailed notes to the
consolidated financial statements.
3. Inventories consist of:
June 30, 2000 September 30, 2000
--------------------------------------------------------------------------
(000) (000)
Raw materials $ 8,390 $ 6,358
Finished goods 4,453 7,827
----------------------------------------------------------------------
$ 12,843 $ 14,185
----------------------------------------------------------------------
4. The Company completed a financing agreement with Bank of America (the
"Bank") 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 June 30,
2001 and the outstanding balance is payable in quarterly payments starting
on June 30, 2001 and ending on March 31, 2004. The Working Capital Facility
terminates with the balance due on September 30, 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. Moreover, 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 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
6
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
the occurrence of an 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. At September
30, 2000, the Company was in violation of certain financial covenants;
however, a waiver was obtained from the Bank.
5. Subsequent to September 30, 2000, the Company repurchased 382,000 shares of
its common stock for approximately $748,000.
6. Segment Reporting. The Company operates in two distinctive reportable
segments: (1) the lawn and garden industry and, (2) the
business-to-business electronic commerce (E-Commerce) industry. The
Company's reportable segments are business units that offer different
products and services and are managed separately due to different types of
customers, technology, methods of distribution and marketing strategies.
The accounting policies of the segments are the same as those described in
the summary of accounting policies. The Company evaluates performance based
on operating income or loss of each segment. Transactions between
reportable segments are eliminated.
7
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
The revenues, operating income and identifiable assets of the reportable
segments are as follows for the period ended September 30, 2000 (in
thousands).
Revenues:
Lawn and Garden $ 13,111
E-Commerce --
---------
Total Revenue $ 13,111
=========
Operating (Loss):
Lawn and Garden $ (2,055)
E-Commerce (2,355)
---------
Total Operating (Loss) $ (4,410)
=========
Identifiable Assets:
Lawn and Garden $ 128,631
E-Commerce 12,365
Intercompany Eliminations (10,778)
---------
Total Assets $ 130,218
=========
The Company does not have material revenue, operating income or assets
outside the United States
8
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Report
contains statements that are forward-looking, such as statements relating to
plans for the Company's future activities. Such forward-looking information
involves important known and unknown risks and uncertainties that could
significantly affect actual results, performance or achievements in the future
and, accordingly, such actual results, performance or achievements may
materially differ from those expressed or implied in any forward-looking
statements made by or on behalf of the Company. These risks and uncertainties
include, but are not limited to, those relating to the Company's growth
strategy, customer concentration, outstanding indebtedness, dependence on
weather conditions, seasonality, expansion and other activities of competitors,
ability to successfully integrate recently acquired companies and products
lines, the Company's ability to successfully commercialize its new
business-to-business e-commerce website, changes in federal or state
environmental laws and the administration of such laws, protection of trademarks
and other proprietary rights, and the general condition of the economy and its
effect on the securities markets and other risks detailed in the Company's other
filings with the Securities and Exchange Commission. The words "believe,"
"expect," "anticipate," "intend" and "plan" and similar expressions identify
forward-looking statements. 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, Egarden.com, 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 eleven
acquisitions of complementary lawn and garden companies and product lines for an
aggregate consideration of approximately $111 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 $72.6
million, net of accumulated amortization, at September 30, 2000. The Company is
currently amortizing such goodwill using the straight-line method over various
time periods ranging from 5 to 30 years.
9
<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
September 30,
-------------
1999 2000
Net sales 100.0% 100.0%
Cost of sales 55.3 56.6
-----------------------
Gross profit 44.7 43.4
Selling and shipping expenses 26.7 33.0
General and administrative expenses 22.9 30.8
Depreciation and amortization 9.3 13.1
--- ----
Loss from operations (14.2) (33.5)
Interest expense, net (13.4) (11.7)
Income tax benefit 12.3 22.6
Minority interest in loss of affiliate -- 1.6
-----------------------
Loss before extraordinary items (15.3) (21.0)
Extraordinary items -- --
-----------------------
Net Loss (15.3)% (21.0)%
-----------------------
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Net sales. Net sales increased by $126,000, or 1.0%, to $13.1 million during the
three months ended September 30, 2000 from $13.0 million during the comparable
period in 1999. The increase in net sales was primarily a result of internal
growth of the Company's pre-existing product lines.
Gross profit. Gross profit decreased by $122,000, or 2.1%, to $5.7 million for
the three months ended September 30, 2000 from $5.8 million during the
comparable period in 1999. Gross profit as a percentage of net sales decreased
to 43.4% during the three months ended September 30, 2000 from 44.7% during the
comparable period in 1999. The decrease in gross profit was primarily
attributable to reduced pricing on certain products sold to major retailers when
compared to the September 30, 1999 period.
Selling and shipping expenses. Selling and shipping expenses increased $863,000,
or 24.9% to $4.3 million during the three months ended September 30, 2000 from
$3.5 million during the comparable period in 1999. Selling and shipping expenses
as a percentage of net sales increased to 33.0% during the three months ended
September 30, 2000 from 26.7% during the comparable period in 1999. This
increase was primarily as a result of start-up selling and development costs for
the Company's business-to-business e-commerce initiative Egarden.com, included
in the three months ended September 30, 2000.
10
<PAGE>
General and administrative expenses. General and administrative expenses
increased $1.1 million or 36.2%, to $4.0 million during the three months ended
September 30, 2000 from $3.0 million during the comparable period in 1999. This
increase is primarily due to start-up and administrative costs for Egarden.com.
As a percentage of net sales, general and administrative expenses increased to
30.8% during the three months ended September 30, 2000 from 22.9% during the
comparable period in 1999.
Depreciation and amortization. Depreciation and amortization expenses increased
by $515,000 or 42.6% to $1.7 million during the three months ended September 30,
2000 from $1.2 million during the comparable period in 1999. This increase is
primarily as a result of the acquisition of Egarden.com, Inc and amortization
related to certain exclusivity contracts for Egarden.com in conjunction with
depreciation related to the implementation of the Company's new fully integrated
enterprise resource planning system, QAD MFG/PRO. As a percentage of net sales,
depreciation and amortization expenses increased to 13.1% during the three
months ended September 30, 2000 from 9.3% during the comparable period in 1999.
Loss from operations. Loss from operations increased by $2.6 million or 140.2%
to $4.4 million during the three months ended September 30, 2000, from $1.8
million during the comparable period in 1999. The loss from operations was
primarily due to the seasonal nature of the Company's business and the start-up
costs for Egarden.com of approximately $2.4 million. As a percentage of net
sales, loss from operations increased to 33.5% for the three months ended
September 30, 2000 from 14.2% during the comparable period in 1999.
Interest expense. Net interest expense decreased $217,000, or 12.4% to $1.5
million during the three months ended September 30, 2000, from $1.7 million
during the comparable period in 1999. The decrease in interest expense is
primarily related to the Company's repurchase of $6.3 million of the mandatorily
redeemable trust preferred securities of its subsidiary, U.S. Home & Garden
Trust I, during the prior ten months.
Income taxes. Income tax benefit increased to $3.0 million during the three
months ended September 30, 2000 from $1.6 million during the comparable period
in 1999, 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.
Minority interest in loss of affiliate. Minority interest in loss of affiliate
increased $217,000, net of tax expense of $217,000 during the three months ended
September 30, 2000 from the comparable period in 1999. Minority interest relates
to the Company's partial ownership of EGarden.com Inc. EGarden.com's results are
fully consolidated in the Company's financial statements.
Net loss. Net loss increased by $770,000, or 38.9%, to $2.8 million during the
three months ended September 30, 2000 from $2.0 million during the comparable
period in 1999. Diluted net loss per common share increased $0.05 to $0.15 per
share for the three months ended September 30, 2000 from $0.10 per share during
the comparable period in 1999. The increase in diluted loss per common share is
primarily attributable to the $930,000 of Egarden.com's net loss in conjunction
with fewer weighted average common and common equivalent shares outstanding in
the three months ended September 30, 2000 compared to the comparable period in
the prior year due to the Company's repurchase of shares of its common stock.
11
<PAGE>
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. Additionally, since
the Company has better adjusted its operations to respond to the (just-in-time)
inventory management programs increasingly utilized by its major customers, it
expects to ship an increasingly larger proportion of its total orders on an
annual basis in the seasonally strong second half of the year. This shift of
early seasonal product orders from December into January is expected to result
in higher revenues in both the third and fourth quarters compared to the same
period last year and slightly lower revenues in the second quarter compared to
the same period last year. 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, 2000, are also seasonal. Most shipments occur
during the agricultural 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 placements and
public sales of securities and borrowings from lending institutions.
At September 30, 2000, the Company had consolidated cash and short-term
investments totaling $7.9 million, of which $1.6 million is restricted, and
working capital of $20.2 million. At June 30, 2000, the Company had consolidated
cash and short-term investments totaling $8.9 million, of which $1.6 million was
restricted, and working capital of $25.1 million. The decrease in working
capital is in line with the seasonal nature of the Company's business and the
net loss for the period. During the first quarter, $492,000 was used for the
repurchase of common stock for treasury and $2.0 million for repayments on the
Company's acquisition line of credit.
Net cash provided by operating activities during the three months ended
September 30, 2000 was $2.4 million consisting primarily of a decrease in
accounts receivable in conjunction with amortization and depreciation, offset in
part by a decrease in accounts payable, an increase in deferred tax assets and
the net loss for the three months.
Net cash used in investing activities during the three months ended September
30, 2000 was $1.1 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, 2000 was $2.2 million, consisting primarily of the repurchase of
approximately 206,000 shares of common stock for treasury and the $2.0 million
repayment on the Company's acquisition line of credit.
12
<PAGE>
On October 13, 1998, the Company entered into a credit agreement (the "Credit
Agreement") with Bank of America (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"). 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 June 30, 2001 and the
outstanding balance is payable in quarterly payments starting with June 30, 2001
and ending with March 31, 2004. The Working Capital Facility terminates with the
balance due on September 30, 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. Moreover, 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 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.
At September 30, 2000, the Company was in violation of certain financial
covenants; however, a waiver was obtained from the Bank.
The Company believes that its operations will generate sufficient cash flow to
service the debt it has 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, 2000, the Company had a net deferred tax asset of $1.2
million primarily relating to start-up costs for Egarden.com which are being
expensed for book purposes, but are capitalized for tax purposes as start-up
costs until Company starts generating revenue, at which time these costs will be
amortized over a five-year period. The start-up costs are largely offset by tax
accumulated depreciation and amortization in excess of the book amount.
Realization of the $1.2 million deferred tax asset depends on U.S. Home & Garden
Inc. maintaining its 80% ownership in Egarden.com.
13
<PAGE>
During the three months ended September 30, 2000, the Company purchased 1,000
shares of the outstanding 9.4% Cumulative Trust Preferred Securities issued by
its subsidiary, U.S. Home & Garden Trust I, at an average price of $17.67. The
shares were originally issued at $25 per share, resulting in a $4,000
extraordinary gain (after provision for income taxes) for the three months ended
September 30, 2000. As of November 9, 2000, there were 2,278,019 shares
outstanding at a market price of $12.94 per share.
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 the Company for the quarter
ending September 30, 2000.
The Company holds a derivative instrument at September 30, 2000, as described in
Item 3. The effects of adoption of SFAS 133 were not considered material to the
Company's financial statements.
In June 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation. Interpretation No. 44 clarifies the
application of APB No. 25 for certain issues including (i) the definition of
employee for purposes of applying APB No. 25, (ii) the criteria for determining
whether a plan qualifies as a non-compensatory plan, (iii) the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award, and (iv) the accounting for an exchange of stock compensation
awards in a business combination. This Interpretation is effective July 1, 2000,
but certain conclusions in this Interpretation cover specific events that occur
after either December 15, 1998 or January 12, 2000. The Company did not
experience a material impact on the financial statements upon the adoption of
Interpretation No. 44.
Inflation
Inflation has historically not had a material effect on the Company's
operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a result of its variable rate revolving credit line, the Company is exposed
to the risk of rising interest rates. To minimize this risk, the Company holds a
derivative instrument in the form of an interest rate swap, which is viewed as a
risk management tool and is not used for trading or speculative purposes. The
intent of the interest rate swap is to effectively fix the interest rate on part
of the borrowing on the Company's variable rate revolving credit agreement.
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The following table provides information on the Company's fixed maturity debt as
of September 30, 2000 that are sensitive to changes in interest rates. The table
also presents the corresponding interest rate swap on this debt. Since the
interest rate swap effectively fixes the interest rate on the notional amount of
debt, changes in interest rates have no current effect on the interest expense
recorded by the Company on the portion of the debt covered by the interest rate
swap.
The Acquisition Line of Credit had an $25 million
interest rate ranging from 7.78% to 8.28%
for the three months ended September 30, 2000
Interests Rate Swaps
Notional amount $15 million
Pay fixed/Receive variable -6.78%
Pay fixed interest rate -6.15%
This swap agreement expires November 1, 2000 and reverts to a variable agreement
rate loan. The Company does not intend to renew the interest rate swap upon its
expiration.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Part I-Item 3 of the Company's Form 10-K for the
fiscal year ended June 30, 2000 for a description of certain litigation in
which the Company is involved.
Item 2. Changes in Securities and Use of Proceeds
(c) During the quarter ended September 30, 2000 the Company issued to a
director under its Non Employee Director Stock Option Plan five-year
options to purchase 5,000 shares of the Company's common stock at $3.25 per
share. The Company also issued to a financial advisor: (i) five-year
warrants to purchase an aggregate of 100,000 shares of the Company's common
stock at an exercise price of $3.00 per share and (ii) five-year warrants
to purchase an aggregate of 100,000 shares of the Company's common stock at
an exercise price of $7.00 per share. The options and warrants referred to
above were issued in private transactions which were exempt from the
registration requirements of the Securities Act of 1933 pursuant to Section
4(2) of the Securities Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule (For SEC use only)
(b) No reports on Form 8-K were filed during the quarter ended September
30, 2000.
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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.
November 14, 2000
U.S. Home & Garden Inc.
(Registrant)
/s/ Robert Kassel
----------------------------
President, Chief Executive Officer
/s/ Donald Rutishauser
----------------------------
Chief Financial Officer
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