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 December 31, 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 February 3, 2000 there were 18,823,381 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 sheet as of June 30, 1999
and December 31, 1999 (Unaudited) 1-2
Consolidated statements of income for the three months and
six months Ended December 31, 1998 and 1999 (Unaudited) 3
Consolidated statements of cash flows for the six months
Ended December 31, 1998 and 1999 (Unaudited) 4-5
Notes to consolidated financial statements 6-8
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations. 9-16
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 16
Part II. - Other Information
Item 1. - Legal Proceedings 17
Item 2. - Changes in Securities 17
Item 6. - Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheet
================================================================================
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1999
------------- -----------------
(Unaudited)
<S> <C> <C>
Assets
Current
Cash and cash equivalents $ 2,936,000 $ 807,000
Restricted cash 1,000,000 1,000,000
Accounts receivable, less allowance for doubtful accounts
and sales returns of $991,000 and $574,000 20,242,000 11,769,000
Inventories 16,986,000 18,792,000
Prepaid expenses and other current assets 1,137,000 988,000
Deferred tax asset 500,000 3,029,000
- -----------------------------------------------------------------------------------------------
Total Current Assets 42,801,000 36,385,000
Property and Equipment, net 11,634,000 12,723,000
Intangible Assets
Excess of cost over net assets acquired, net 75,573,000 74,263,000
Deferred financing costs, net of accumulated
amortization of $167,000 and $291,000 3,524,000 3,462,000
Product rights, patents and trademarks, net of
accumulated amortization of $271,000 and $31,000 571,000 556,000
Non-compete agreement, net of accumulated
amortization of $77,000 and $92,000 1,433,000 1,418,000
Package design, net of accumulated amortization of
$533,000 and $705,000 1,096,000 1,293,000
Officer Receivables 725,000 718,000
Other Assets 107,000 340,000
- -----------------------------------------------------------------------------------------------
$137,464,000 $131,158,000
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheet
================================================================================
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1999
------------- -----------------
(Unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current
Working capital line of credit $ -- $ 500,000
Accounts payable 4,432,000 6,056,000
Accrued expenses 2,314,000 2,080,000
Accrued co-op advertising 1,499,000 325,000
Accrued commissions 1,682,000 540,000
- --------------------------------------------------------------------------------------------------
Total Current Liabilities 9,927,000 9,501,000
Deferred Tax Liability 1,600,000 2,000,000
Other Liabilities 703,000 602,000
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 90,353,000
- --------------------------------------------------------------------------------------------------
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 22,050,000 shares
issued at June 30, 1999 and December 31, 1999 21,000 22,000
Additional paid-in capital 50,542,000 50,595,000
Retained earnings 4,703,000 758,000
- --------------------------------------------------------------------------------------------------
55,266,000 51,375,000
Less: Treasury Stock, 1,805,000 and 2,509,000 shares
at cost at June 30, 1999 and December 31, 1999 (8,782,000) (10,570,000)
- --------------------------------------------------------------------------------------------------
Total Stockholders' Equity 46,484,000 40,805,000
- --------------------------------------------------------------------------------------------------
$ 137,464,000 $ 131,158,000
- --------------------------------------------------------------------------------------------------
</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 Six Months Ended
December 31, December 31,
--------------------------------- ---------------------------------
1998 1999 1998 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Unaudited Unaudited
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 15,985,000 $ 14,145,000 $ 26,753,000 $ 27,130,000
Cost of Sales 7,751,000 7,420,000 13,063,000 14,596,000
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Profit 8,234,000 6,725,000 13,690,000 12,534,000
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Selling and shipping 3,724,000 3,904,000 6,945,000 7,372,000
General and administrative 2,861,000 3,206,000 5,241,000 6,174,000
Depreciation 379,000 400,000 590,000 783,000
Goodwill amortization 672,000 731,000 1,231,000 1,452,000
Other amortization 94,000 105,000 162,000 209,000
- ------------------------------------------------------------------------------------------------------------------------------------
7,730,000 8,346,000 14,169,000 15,990,000
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Operations 504,000 (1,621,000) (479,000) (3,456,000)
Other Income (Expense)
Investment income 116,000 59,000 497,000 162,000
Interest expense (1,798,000) (2,003,000) (3,339,000) (3,851,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Loss before Income Taxes (1,178,000) (3,565,000) (3,321,000) (7,145,000)
Income tax benefit 510,000 1,600,000 1,430,000 3,200,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net Loss $ (668,000) $ (1,965,000) $ (1,891,000) $ (3,945,000)
====================================================================================================================================
Basic and Diluted Loss per
Common Share $ (.03) $ (.10) $ (.09) $ (.20)
====================================================================================================================================
Weighted Average Common and
Common Equivalent Shares
Outstanding 19,837,000 19,213,000 19,926,000 19,290,000
====================================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Six months ended December 31, 1998 1999
- -----------------------------------------------------------------------------------------
(Unaudited)
-----------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $ (1,891,000) $ (3,945,000)
Adjustments to reconcile net loss to net cash
(used in) or provided by operating activities:
Depreciation and amortization 1,988,000 2,444,000
Proceeds from disposal of assets -- 8,000
Loss on disposal of assets -- 12,000
Amortization of deferred financing costs 50,000 124,000
Changes in operating assets and liabilities,
net of assets acquired and liabilities assumed:
Accounts receivable 3,740,000 8,473,000
Inventories (6,494,000) (1,806,000)
Prepaid expenses and other current assets (179,000) 149,000
Accounts payable and accrued expenses (4,262,000) (978,000)
Other assets 288,000 (233,000)
Deferred tax asset 138,000 (2,129,000)
- ----------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Operating Activities (6,622,000) 2,119,000
- ----------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Payment for purchase of business, net of cash acquired (26,202,000) (150,000)
Purchase of noncompete agreement (1,000,000) --
Decrease (increase) in officer receivables 3,000 7,000
Purchase of furniture, fixtures and equipment (1,040,000) (1,940,000)
Purchase of package design (521,000) (369,000)
- ----------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (28,760,000) (2,452,000)
- ----------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Six months ended December 31, 1998 1999
- -------------------------------------------------------------------------------------------
(Unaudited)
----------------------------
<S> <C> <C>
Cash Flows from Financing Activities
Proceeds from issuances of stock $ 137,000 $ 54,000
Repurchase of common stock for treasury (5,970,000) (1,788,000)
Repurchase of unit purchase options (79,000) --
Payment of acquisition line of credit -- (500,000)
Acquisition finance cost (397,000) (62,000)
Proceeds from working capital line of credit 18,000,000 500,000
- -------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 11,691,000 (1,796,000)
- -------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (23,691,000) (2,129,000)
Cash and Cash Equivalents, beginning of period 27,130,000 2,936,000
------------
Cash and Cash Equivalents, end of period $ 3,439,000 $ 807,000
===========================================================================================
Supplemental Disclosure of Cash Flow Information
Cash paid for interest, including deferred financing costs
and extraordinary expense $ 3,498,000 $ 3,491,000
Cash paid for taxes / (refund of taxes) $ 18,000 ($ 1,093,000)
===========================================================================================
</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 December 31, 1999 and
for the six months ended December 31, 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 six months ended December
31, 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 December 31, 1999
---------------------------------------------------------------------------
(000) (000)
Raw materials 10,103 10,504
Finished goods 6,883 8,288
---------------------------------------------------------------------------
16,986 18,792
---------------------------------------------------------------------------
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
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Six months ended December 31, 1998
--------------------------------------------------------------------------
(000)
Net sales 27,903
Net loss (3,111)
Diluted net loss per common share (0.16)
--------------------------------------------------------------------------
5. The Company completed a financing agreement with Bank of America N.A. (the
"Bank") on October 13, 1998 (the "Credit Agreement"). The Credit 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 Credit 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 substantially all of 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 did
not meet one of its financial covenants at December 31, 1999. However, the
Bank has waived this violation.
7
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
6. In December 1999, the Company commenced a tender offer to purchase up to
700,000 of the outstanding 9.4% Cumulative Trust Preferred Securities
issued by its subsidiary, U.S. Home & Garden Trust I, at $15.00 per Trust
Preferred Security. The tender offer expired on January 14, 2000. A total
of 183,281 Trust Preferred Securities were purchased by the Company. As of
February 1, 2000, approximately 2,327,900 Trust Preferred Securities were
outstanding.
8
<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, 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 $83.1 million at December
31, 1999. The Company is currently amortizing such goodwill using the
straight-line method over various time periods ranging from 20 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:
Three Months Ended Six Months Ended
------------------ ------------------
December 31, December 31,
----------------- -----------------
1998 1999 1998 1999
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 48.5 52.5 48.8 53.8
----- ----- ----- -----
Gross profit 51.5 47.5 51.2 46.2
Selling and shipping expenses 23.3 27.6 26.0 27.2
General and administrative expenses 17.9 22.7 19.6 22.8
Depreciation and amortization 7.2 8.7 7.4 9.0
----------------- -----------------
Income/ (loss) from operations 3.1 (11.5) (1.8) (12.8)
Interest expense, net (10.5) (13.7) (10.6) (13.6)
Income tax benefit 3.2 11.3 5.3 11.8
----------------- -----------------
Net Loss (4.2)% (13.9)% (7.1)% (14.6)%
----------------- -----------------
Three Months Ended December 31, 1999 Compared to Three Months Ended December 31,
1998
Net sales. Net sales decreased by $1.8 million, or 11.5%, to $14.1 million
during the three months ended December 31, 1999 from $16.0 million during the
comparable period in 1998. The decrease in net sales was primarily due to the
discontinuation of certain lower margin products as part of the Company's plan
to focus on strategic long term product mix.
Gross profit. Gross profit decreased by $1.5 million, or 18.3%, to $6.7
million for the three months ended December 31, 1999 from $8.2 million during
the comparable period in 1998. This decrease was due primarily to the decrease
in net sales. Gross profit as a percentage of net sales decreased to 47.5%
during the three months ended December 31, 1999 from 51.5% during the comparable
period in 1998. The decrease in gross profit as a percentage of net sales was
primarily attributable to an increase in net sales of lower-margin products when
compared to the December 31, 1998 period. The Company's decision to adopt a
strategy of just in time inventory resulted in $2.8 million less inventory in
the December 31, 1999 period when compared to the December 31, 1998 period.
Therefore, the lower inventory available to allocate fixed overhead costs
decreased the gross profit percentage during the three months ended December 31,
1999 when compared to the comparable period in 1998.
Selling and shipping expenses. Selling and shipping expenses increased
$180,000, or 4.8% to $3.9 million during the three months ended December 31,
1999 from $3.7 million during the comparable period in 1998. Selling and
shipping expenses as a percentage of net sales increased to 27.6% during the
three months ended December 31, 1999 from 23.3% during the comparable period in
1998. This increase was primarily as a result of increased pricing for shipping
inventory to customers. In addition, there were start-up selling and
10
<PAGE>
development costs for E*Garden, Inc., which the Company acquired in June 1999,
included in this period. Due to the lower inventory and decrease in sales, there
was an under absorption of fixed overhead costs.
General and administrative expenses. General and administrative expenses
increased $345,000 or 12.1%, to $3.2 million during the three months ended
December 31, 1999 from $2.9 million during the comparable period in 1998. This
increase is primarily due to start-up and development expenses relating to
E*Garden, Inc., which the Company acquired in June 1999. As a percentage of net
sales, general and administrative expenses increased to 22.7% during the three
months ended December 31, 1999 from 17.9% during the comparable period in 1998.
Depreciation and amortization. Depreciation and amortization expenses
increased by $91,000 or 7.9% to $1.2 million during the three months ended
December 31, 1999 from $1.1 million during the comparable period in 1998. This
increase is primarily as a result of the acquisition of Ampro Industries, Inc.
in October 1998. As a percentage of net sales, depreciation and amortization
expenses increased to 8.7% during the three months ended December 31, 1999 from
7.2% during the comparable period in 1998.
Loss from operations. During the three months ended December 31, 1999 the
Company recorded losses from operations of $1.6 million compared to, income from
operations of $504,000 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 loss for the 1999 period was primarily
attributable to a full quarter of operating losses from Ampro Industries, Inc.,
and E*Garden, Inc., which were not included in the comparable quarter in 1998.
As a percentage of net sales, loss from operations increased to 11.5% for the
three months ended December 31, 1999 from income from operations of 3.1% during
the comparable period in 1998.
Interest expense. Interest expense increased $205,000, or 11.4% to $2.0
million during the three months ended December 31, 1999, from $1.8 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 acquisitions of Ampro Industries, Inc. and
E*Garden, Inc.
Income taxes. Income tax benefit increased to $1.6 million during the three
months ended December 31, 1999 from $510,000 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 $1.3 million, or 194.2%, to $2.0 million
during the three months ended December 31, 1999 from $668,000 during the
comparable period in 1998. Diluted net loss per common share increased $0.07 to
$0.10 per share for the three months ended December 31, 1999 from $0.03 per
share during the comparable period in 1998. The increase in diluted loss per
common share is primarily attributable to the increase in the net loss in the
three months ended December 31, 1999 compared to the comparable period in the
prior year.
11
<PAGE>
Six Months Ended December 31, 1999 Compared to Six Months Ended December 31,
1998
Net sales. Net sales increased by $377,000, or 1.4%, to $27.1 million
during the six months ended December 31, 1999 from $26.8 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 decreased by $1.2 million, or 8.4%, to $12.5 million
for the six months ended December 31, 1999 from $13.7 million during the
comparable period in 1998. This decrease was due primarily to the increase in
sales of lower-margin products. Gross profit as a percentage of net sales
decreased to 46.2% during the six months ended December 31, 1999 from 51.2%
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 when compared to the December 31, 1998 period. The
Company's decision to adopt a strategy of just in time inventory resulted in
$2.8 million less inventory in the December 31, 1999 period when compared to the
December 31, 1998 period. Therefore, the lower inventory available to allocate
fixed overhead costs decreased the gross profit percentage during the six months
ended December 31, 1999 when compared to the comparable period in 1998.
Selling and shipping expenses. Selling and shipping expenses increased
$427,000, or 6.1%, to $7.4 million during the six months ended December 31, 1999
from $6.9 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 internal growth of the Company's pre-existing product lines
combined with the acquisition of Ampro Industries, Inc. Selling and shipping
expenses as a percentage of net sales increased to 27.2% during the six months
ended December 31, 1999 from 26% during the comparable period in 1998. This
increase was primarily as a result of increased pricing for shipping inventory
to customers. In addition, there were start-up selling and development costs for
E*Garden, Inc., which the Company acquired in June 1999, during the six months
ended December 31, 1999. Due to lower inventory and decrease in sales, there was
an under absorption of fixed overhead costs.
General and administrative expenses. General and administrative expenses
increased $934,000 or 17.8%, to $6.2 million during the six months ended
December 31, 1999 from $5.2 million during the comparable period in 1998. The
increase is due to start-up selling and development costs for E*Garden, Inc.,
which the Company acquired in June 1999, included in this the six months ended
December 31, 1999. As a percentage of net sales, general and administrative
expenses increased to 22.8% during the six months ended December 31, 1999 from
19.6% during the comparable period in 1998.
Depreciation and amortization. Depreciation and amortization expenses
increased by $461,000 or 23.2% to $2.4 million during the six months ended
December 31, 1999 from $2.0 million during the comparable period in 1998. This
increase is primarily due to the acquisition of Ampro Industries, Inc. As a
percentage of net sales, depreciation and amortization expenses increased to
9.0% during the six months ended December 31, 1999 from 7.4% during the
comparable period in 1998.
12
<PAGE>
Loss from operations. Loss from operations increased by $3.0 million, or
621.7%, to $3.5 million during the six months ended December 31, 1999 from
$479,000 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. The increase in the loss for the 1999 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 increased to 12.8% for the six months ended December 31, 1999 from
1.8% during the comparable period in 1998.
Interest expense. Interest expense increased by $847,000, or 29.8%, to $3.7
million during the six months ended December 31, 1999, from $2.8 million during
the comparable period in 1998. The increase in interest expense is primarily
related to the interest associated with the increase in Company debt in
borrowings under the Company's credit facility to finance the acquisition of
Ampro Industries, Inc. and E*Garden, Inc.
Income taxes. Income tax benefit increased to $3.2 million during the six
months ended December 31, 1999 from $1.4 million during the comparable period in
1998, 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 $2.0 million, or 108.7%, to $3.9 million
during the six months ended December 31, 1999 from $1.9 million during the
comparable period in 1998. Diluted net loss per common share increased $.11 to
$.20 per share for the six months ended December 31, 1999 from $.09 per 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 six months ended December
31, 1999 compared to the comparable period in 1998.
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 six months ended December 31, 1999, 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.
13
<PAGE>
At December 31, 1999, the Company had consolidated cash and short-term
investments totaling $807,000 and working capital of $25.9 million. At June 30,
1999, the Company had consolidated cash and short-term investments totaling $2.9
million and working capital of $31.9 million. The decrease in working capital is
in line with the seasonal nature of the Company's business. In addition, $1.8
million was used for the repurchase of common stock for treasury during the six
months ended December 31, 1999.
Net cash provided by operating activities during the six months ended
December 31, 1999 was $2.1 million consisting primarily of a decrease in
accounts receivable and depreciation and amortization expense for the period,
partially offset by the increase in inventory, deferred tax assets and net loss
for the six months ended December 31, 1999.
Net cash used in investing activities during the six months ended December
31, 1999 was $2.5 million, consisting primarily of cash used for the purchase of
property and equipment and package design.
Net cash used in financing activities during the six months ended December
31, 1999 was $1.8 million, consisting primarily of the repurchase of
approximately 704,000 shares of common stock for treasury.
On October 13, 1998, the Company entered into a credit agreement (the
"Credit Agreement") with Bank of America N.A. (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
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
14
<PAGE>
assets of the Company and substantially all of 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 did not meet one of its
financial covenants at December 31, 1999. However, the Bank has waived this
violation.
The Company believes that its operations will generate sufficient cash flow
to service the outstanding 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, 1999, the Company has a net deferred tax liability of
$2.0 million primarily relating to tax depreciation and amortization in excess
of the book amount. The deferred tax asset of $3.0 million relates to the net
operating loss carryforwards, the allowance for accounts receivable, vacation
accrual and certain other balance sheet reserves.
In December 1999, the Company commenced a tender offer to purchase up to
700,000 of the outstanding 9.4% Cumulative Trust Preferred Securities issued by
its subsidiary, U.S. Home & Garden Trust I, at $15.00 per Trust Preferred
Security. The tender offer expired on January 14, 2000. A total of 183,281 Trust
Preferred Securities were purchased by the Company. As of February 1, 2000,
approximately 2,327,900 Trust Preferred Securities were outstanding.
Inflation
Inflation has historically not had a material effect on the Company's
operations.
Year 2000
The Company's internal business systems have experienced no material Year
2000 compliance related problems. In addition, the Company is not aware of any
Year 2000 compliance related problems that have been experienced by any of its
customers, suppliers or other third parties with whom it has business
relationships. Although the Company does not expect any significant financial
statement or operational impact due to Year 2000 related issues its business
could be adversely affected if material customers, suppliers or other third
parties with whom it conducts business experience any material Year 2000 related
problems in the future.
15
<PAGE>
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 borrowings on the Company's variable rate revolving
credit agreement.
The following table provides information on the Company's fixed maturity
investments as of December 31, 1999 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 $20 million
interest rate ranging from 6.58% to 8.25% for
the six months ended December 31, 1999
Interest Rate Swaps
Notional amount $15 million
Pay fixed/Receive variable - 6.47625%
Pay fixed interest rate - 6.15%
This swap agreement expires November 1, 2000,
and reverts to a variable interest rate loan.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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 December 31, 1999 the Company granted
options to purchase an aggregate of 612,500 shares of its common
stock at prices ranging from $2.125 to $4.125 per share (or an
average exercise price of $2.32 per share) to certain employees,
consultants and advisors. The options expire between 5 and 10
years from the grant dates. The options were granted in private
transactions pursuant to the exemptions from registration
provided by Sections 2(a)(3) or 4(2) of the Securities Act of
1933.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Third Amendment dated December 17, 1999 to the Credit
Agreement dated October 13, 1998 between the Company and
Bank of America, N.A. (incorporated by reference to Exhibit
(b)(4) to Amendment No. 1 to the Company's Schedule 13E-4
dated January 25, 2000.)
27.1 Financial Data Schedule (For SEC use only)
(b) No reports on Form 8-K were filed during the quarter ended
December 31, 1999.
17
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated February 11, 2000
U.S. Home & Garden Inc.
(Registrant)
/s/ Robert Kassel
------------------------------------
President, Chief Executive Officer
/s/ Lynda Gustafson
------------------------------------
Vice President of Finance (Principal
Accounting Officer)
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AT
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 807,000
<SECURITIES> 0
<RECEIVABLES> 12,343,000
<ALLOWANCES> 574,000
<INVENTORY> 18,792,000
<CURRENT-ASSETS> 36,385,000
<PP&E> 12,723,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 131,158,000
<CURRENT-LIABILITIES> 9,501,000
<BONDS> 78,250,000
<COMMON> 22,000
0
0
<OTHER-SE> 40,783,000
<TOTAL-LIABILITY-AND-EQUITY> 131,158,000
<SALES> 27,130,000
<TOTAL-REVENUES> 27,130,000
<CGS> 14,596,000
<TOTAL-COSTS> 14,596,000
<OTHER-EXPENSES> 2,444,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,851,000
<INCOME-PRETAX> (7,145,000)
<INCOME-TAX> (3,200,000)
<INCOME-CONTINUING> (3,945,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,945,000)
<EPS-BASIC> (.20)
<EPS-DILUTED> (.20)
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