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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
(Mark One)
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal period ended June 30, 2004
Or
|_| Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________ to __________
Commission File Number 333-102296
Easy Gardener Products, Ltd.
(Exact Name of Registrant as specified in its charter)
Texas 37-1433686
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
3022 Franklin Avenue,
Waco, Texas 76710
(Address of Principal Executive (Zip Code)
Offices)
(254) 753-5353
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of each class on Which Registered
- ------------------- ---------------------
None Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
9.4% Cumulative Trust Preferred Securities of Easy Gardener Products Trust I
(Title of Class)
Indicate by check mark 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).Yes |_| No |X|
The aggregate market value of the Common Stock held by non-affiliates of
the registrant (based upon the closing sale price)
Not applicable, registrant is a limited partnership and the registered
securities are not common stock.
Documents Incorporated By Reference: None Part I.
2
Easy Gardener Products, Ltd.
and Subsidiaries
Consolidated Financial Statements
June 30, 2004 and 2003 and for the periods ended
June 30, 2004, and October 31, 2003 (Predecessor),
and years ended June 30, 2003 and 2002 (Predecessor)
Easy Gardener Products, Ltd. and Subsidiaries
Contents
Reports of Independent Registered Public Accounting Firms
June 30, 2004 3
June 30, 2003 4
Consolidated Financial Statements
Consolidated balance sheets as of June 30, 2004 and 2003 (Predecessor) 5 and 6
Consolidated statements of operations for the eight months
ended June 30, 2004 and the four months ended October
31, 2003 (Predecessor)(Unaudited), and years ended
2003 and 2002
(Predecessor) 7
Consolidated statement of partners' capital for the eight months ended
June 30, 2004, and Consolidated statements of stockholders',
deficit for the years ended June 30, 2003 and 2002 (Predecessor) 8 and 9
Consolidated statements of cash flows for the eight months
ended June 30, 2004, and the four months ended
October 31, 2003 (Predecessor) (Unaudited), and years
ended 2003 and 2002
(Predecessor) 10 and 11
Summary of accounting policies 12 - 17
Notes to consolidated financial statements 18 - 38
Consolidated Financial Statement Schedule
Schedule II-Valuation and Qualifying Accounts 40
Note: All other schedules have been omitted since the required information is
contained in the Consolidated Financial Statements or such schedules are
not required.
2
Report of Independent Registered Public Accounting Firm
Board of Directors
Easy Gardener Products, Ltd.
We have audited the accompanying consolidated balance sheet of Easy Gardener
Products, Ltd. (a Texas limited partnership) and subsidiaries as of June 30,
2004, and the related consolidated statements of income, partners' capital, and
cash flows for the eight months then ended. We have also audited Schedule II
[Schedule]. These financial statements and Schedule are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements and Schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and Schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and Schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements and Schedule.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Easy Gardener
Products, Ltd. and subsidiaries as of June 30, 2004, and the results of their
operations and their cash flows for the eight months then ended in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, the Schedule presents fairly, in all material respects,
the information set forth therein.
/s/ GRANT THORNTON LLP
Dallas, TX
August 20, 2004
3
Report of Independent Registered Public Accounting Firm
Board of Directors
U.S. Home & Garden Inc. and Subsidiaries
San Francisco, California
We have audited the accompanying consolidated balance sheets of U.S. Home &
Garden Inc. and Subsidiaries as of June 30, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended June 30, 2003. We have
also audited Schedule II - Valuation and Qualifying Accounts (Schedule). These
financial statements and Schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and Schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and Schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and Schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements and Schedule.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Home & Garden
Inc. and Subsidiaries at June 30, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2003 in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 7 to the 2003 consolidated financial statements, the
Company changed its method of accounting for goodwill during the year ended June
30, 2002.
Also, in our opinion, the Schedule presents fairly, in all material respects,
the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 11 to the 2003
financial statements, the Company is in violation of certain loan covenants,
which raises substantial doubt about its ability to continue as a going concern.
As a result of the default, the bank can demand payment of the debt at any time.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ BDO Seidman, LLP
Certified Public Accountants
Kalamazoo, Michigan
August 23, 2003
4
Easy Gardener Products, Ltd. and Subsidiaries
Consolidated Balance Sheets
June 30, 2004 | 2003
- -----------------------------------------------------------------------------------|--------------
| (Predecessor)
Assets (Note 1) |
|
Current: |
Cash and cash equivalents $ 441,000 | $ 822,000
Accounts receivable, less allowance for doubtful accounts |
of $193,000 and $630,000 (Note 4) 26,753,000 | 24,467,000
Inventories (Note 5) 5,428,000 | 9,138,000
Prepaid expenses and other current assets 583,000 | 721,000
Refundable income taxes -- | 137,000
Deferred tax asset (Note 16) -- | 385,000
Current assets of discontinued operations (Note 3) 275,000 | 62,000
- -----------------------------------------------------------------------------------|--------------
|
Total Current Assets 33,480,000 | 35,732,000
|
Property and Equipment, net (Note 6) 3,395,000 | 4,018,000
|
Deferred financing costs, net of accumulated amortization of |
$130,000 and $807,000 1,333,000 | 3,975,000
|
Intangible Assets: |
Goodwill 48,174,000 | 49,878,000
Trademarks 23,565,000 | --
Non-compete agreements, net of accumulated amortization of |
$135,000 and $766,000 1,435,000 | 744,000
Package tooling costs, net of accumulated amortization of |
$352,000 and $2,418,000 902,000 | 1,204,000
Other intangible assets, net of accumulated |
amortization of $61,000 and $205,000 915,000 | 467,000
|
Officer's Receivable (Note 8) -- | 512,000
|
Other Assets 3,538,000 | 29,000
- -----------------------------------------------------------------------------------|--------------
|
$116,737,000 | $96,559,000
===================================================================================|==============
See accompanying summary of accounting policies and notes to consolidated
financial statements.
5
Easy Gardener Products, Ltd. and Subsidiaries
Consolidated Balance Sheets
June 30, 2004 | 2003
- --------------------------------------------------------------------------------------------------|----------------
| (Predecessor)
Liabilities and Capital |
|
Current: |
Revolving credit facility (Notes 9 & 11) $ 13,525,000 | $ 15,085,000
Accounts payable (Note 4) 11,158,000 | 8,954,000
Accrued rebates 1,848,000 | 1,433,000
Accrued commissions 1,111,000 | 1,074,000
Accrued co-op advertising 587,000 | 774,000
Accrued income taxes payable 325,000 |
Accrued other expenses 665,000 | 1,786,000
Current portion of long-term debt (Notes 9 and 11) 1,646,000 | 12,142,000
Current liabilities of discontinued operations (Note 3) 1,230,000 | 16,000
- --------------------------------------------------------------------------------------------------|----------------
|
Total Current Liabilities 32,095,000 | 41,264,000
|
Long Term Debt (Notes 9 & 11) 25,928,000 | --
Deferred Tax Liability (Note 16) 10,862,000 | 239,000
Junior Subordinated Debentures, net of discount of $20,797,000 in 2004/ |
Company Obligated Mandatorily Redeemable Preferred |
Securities of Subsidiary Trust Holding Solely Junior |
Subordinated Debentures (Note 10) 44,403,000 | 57,092,000
- --------------------------------------------------------------------------------------------------|----------------
|
Total Liabilities 113,288,000 | 98,595,000
- --------------------------------------------------------------------------------------------------|----------------
|
Commitments and Contingencies (Notes 12 & 13) -- | --
|
Partners' Capital/Stockholders' (Deficit) (Note 14): |
Preferred stock, 1,000,000 shares authorized and unissued -- | --
Common stock, $.001 par value - shares authorized, 75,000,000; |
21,841,000 shares issued in 2003 -- | 22,000
Additional paid-in capital -- | 52,470,000
Capital 2,675,000 | --
Retained earnings/(accumulated deficit) 774,000 | (41,700,000)
- --------------------------------------------------------------------------------------------------|----------------
|
3,449,000 | 10,792,000
|
Less: Treasury stock, (3,890,000 shares at cost) in 2003 -- | (12,828,000)
- --------------------------------------------------------------------------------------------------|----------------
|
Total Partners'Capital/Stockholders' (Deficit) 3,449,000 | (2,036,000)
- --------------------------------------------------------------------------------------------------|----------------
|
Total Liabilities and Capital $116,737,000 | $ 96,559,000
==================================================================================================|================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
6
Easy Gardener Products, Ltd. and Subsidiaries
Consolidated Statements of Operations
Eight Months | Four Months
Ended | Ended Year Ended Year Ended
June 30, 2004 | Oct 31, 2003 June 30, 2003 June 30, 2002
- ----------------------------------------------------------------------------|-------------------------------------------------------
| (Predecessor) (Predecessor) (Predecessor)
| (Unaudited)
| (Note 19)
Net Sales (Note 4) $ 60,061,000 | $ 17,473,000 $ 76,244,000 $ 78,947,000
Cost of Sales (Note 4) 33,454,000 | 10,953,000 43,453,000 43,358,000
- ----------------------------------------------------------------------------|-------------------------------------------------------
|
Gross Profit 26,607,000 | 6,520,000 32,791,000 35,589,000
- ----------------------------------------------------------------------------|-------------------------------------------------------
|
Operating Expenses: |
Selling and shipping 13,401,000 | 5,838,000 18,639,000 18,240,000
General and administrative 3,378,000 | 2,557,000 7,636,000 7,888,000
Depreciation and amortization 610,000 | 431,000 1,750,000 1,558,000
- ----------------------------------------------------------------------------|-------------------------------------------------------
Total Operating Expenses 17,389,000 | 8,826,000 28,025,000 27,686,000
- ----------------------------------------------------------------------------|-------------------------------------------------------
|
Income (Loss) From Operations 9,218,000 | (2,306,000) 4,766,000 7,903,000
|
Other Expense: |
Refinance and transaction costs (Note 15) (410,000) | (159,000) (4,291,000) (254,000)
Interest expense, net (6,878,000) | (2,868,000) (7,994,000) (7,291,000)
- ----------------------------------------------------------------------------|-------------------------------------------------------
|
Income (Loss) From Continuing Operations Before |
Income Taxes and Cumulative Effect of a Change |
in Accounting Principle 1,930,000 | (5,333,000) (7,519,000) 358,000
|
Income Tax Expense (Note 16) (698,000) | (44,000) (133,000) (228,000)
- ----------------------------------------------------------------------------|-------------------------------------------------------
|
Income (Loss) From Continuing Operations |
Before Cumulative Effect of a Change in |
Accounting Principle 1,232,000 | (5,377,000) (7,652,000) 130,000
|
Discontinued Operations (Note 3): |
Loss from discontinued operations, net of tax benefit of |
$236,000 in 2004 (458,000) | (75,000) (1,436,000) (1,760,000)
Gain (loss) on disposal of discontinued operations, |
net of minority interest of $1,240,000 in 2002 -- | -- (49,000) 20,000
|
- ----------------------------------------------------------------------------|-------------------------------------------------------
Income (Loss) Before Cumulative Effect of a Change |
in Accounting Principle 774,000 | (5,452,000) (9,137,000) (1,610,000)
Cumulative Effect of a Change in Accounting Principle |
(Note 7) -- | -- -- (9,882,000)
|
- ----------------------------------------------------------------------------|-------------------------------------------------------
|
Net Income (Loss) $ 774,000 | $ (5,452,000) $ (9,137,000) $(11,492,000)
============================================================================|=======================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements
7
Easy Gardener Products, Ltd. and Subsidiaries
Consolidated Statement of Partners' Capital
Total
Partners' Retained Partners'
Capital Earnings Capital
- --------------------------------------------------------------------------------
Balance, November 1, 2003 $2,675,000 $ -- $2,675,000
Net Income -- 774,000 774,000
- --------------------------------------------------------------------------------
Balance, June 30, 2004 $2,675,000 $774,000 $3,449,000
================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
8
Easy Gardener Products, Ltd. and Subsidiaries
Consolidated Statements of Stockholders' (Deficit)
Common Stock
-------------------- Additional Retained Total
Number of Paid-In Earnings Treasury Stockholders'
Shares Amount Capital (Deficit) Stock (Deficit)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 (Predecessor) 21,433,000 21,000 51,846,000 (21,071,000) (12,828,000) 17,968,000
Compensation related to repriced stock
options -- -- 103,000 -- -- 103,000
Issuance of options and warrants to note
holders -- -- 402,000 -- -- 402,000
Release of shares from Non-Qualified
Deferred Compensation Plan (Note 13) 208,000 1,000 -- -- -- 1,000
Net loss (Predecessor) -- -- -- (11,492,000) -- (11,492,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2002 (Predecessor) 21,641,000 22,000 52,351,000 (32,563,000) (12,828,000) 6,982,000
Compensation related to repriced stock
options -- -- 119,000 -- -- 119,000
Exercise of options 200,000 -- -- -- -- --
Net loss -- -- -- (9,137,000) -- (9,137,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2003 (Predecessor) 21,841,000 $22,000 $52,470,000 $(41,700,000) $(12,828,000) $ (2,036,000)
====================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
9
Easy Gardener Products, Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
Eight |
Months | Four Months
Ended | Ended Year Ended Year Ended
June 30, | October 31, June 30, June 30,
2004 | 2003 2003 2002
- -------------------------------------------------------------------------------|----------------------------------------------------
| (Predecessor) (Predecessor) (Predecessor)
| (Unaudited)
| (Note 19)
Cash Flows from Operating Activities: |
Net income (loss) from continuing operations before |
cumulative effect of a change in accounting principle $ 1,232,000 | $ (5,377,000) $(7,652,000) $ 130,000
Adjustments to reconcile net income (loss) to net cash |
Changes in operating assets and liabilities: |
Accounts receivable (17,046,000) | 14,509,000 1,751,000 (7,256,000)
Inventories 364,000 | 492,000 (1,115,000) 1,195,000
Prepaid expenses, refundable income taxes and |
other current assets (18,000) | 51,000 267,000 (94,000)
Other assets (31,000) | 50,000 (3,000) 278,000
Accounts payable and accrued expenses 4,635,000 | (3,511,000) 2,424,000 2,434,000
Income taxes payable 325,000 | -- -- --
Provision for losses on accounts receivable -- | -- 25,000 425,000
Non-cash interest expense 949,000 | 75,000 283,000 --
Depreciation and other amortization 1,442,000 | 886,000 3,113,000 2,768,000
Write-off of deferred financing costs 410,000 | -- 1,928,000 254,000
Deferred income taxes 92,000 | -- -- (146,000)
Compensation related to repriced stock options -- | 40,000 119,000 103,000
Loan discount amortization -- | -- 67,000 97,000
- -------------------------------------------------------------------------------|----------------------------------------------------
|
Net Cash Provided by (Used in) Operating Activities (7,646,000) | 7,215,000 1,207,000 188,000
- -------------------------------------------------------------------------------|----------------------------------------------------
|
Cash Flows From Investing Activities: |
Sale of asset 6,000 | -- -- --
Purchase of equipment (139,000) | (91,000) (797,000) (791,000)
Purchase of package tooling and other intangibles (248,000) | (76,000) (555,000) (384,000)
Decrease in officer receivable -- | -- -- 34,000
Payment for purchase of businesses, net of cash |
acquired -- | -- (17,000) (111,000)
Net Assets Acquired (2,675,000) | -- -- --
10
Easy Gardener Products, Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
Eight |
Months | Four Months
Ended | Ended Year Ended Year Ended
June 30, | October 31, June 30, June 30,
2004 | 2003 2003 2002
- -------------------------------------------------------------------------------|----------------------------------------------------
| (Predecessor) (Predecessor) (Predecessor)
| (Unaudited)
| (Note 19)
- -------------------------------------------------------------------------------|----------------------------------------------------
|
Net Cash Used in Investing Activities $ (3,056,000) | $ (167,000) $ (1,369,000) $(1,252,000)
- -------------------------------------------------------------------------------|----------------------------------------------------
|
Cash Flows From Financing Activities: |
Net proceeds from (payments on) revolving |
credit facility $ 8,256,000 | $(6,736,000) $ 49,000 $(6,614,000)
Proceeds from issuance of long-term debt -- | -- 12,000,000 8,250,000
Payments on long-term debt (938,000) | (21,000) (8,616,000) (233,000)
Changes in other long-term liabilities and purchase |
of mandatorily redeemable preferred securities -- | -- -- (20,000)
Equity invested 2,675,000 | -- -- --
Deferred financing costs (344,000) | (227,000) (2,012,000) (1,119,000)
Release of shares -- | -- -- 1,000
- -------------------------------------------------------------------------------|----------------------------------------------------
|
Net Cash Provided by (Used In) Financing Activities $ 9,649,000 | $(6,984,000) $ 1,421,000 $ 265,000
- -------------------------------------------------------------------------------|----------------------------------------------------
|
Net increase (decrease) in cash and cash |
equivalents from continuing operations (1,053,000) | 64,000 1,259,000 (799,000)
|
Net cash provided by (used in) discontinued operations 1,027,000 | (14,000) (656,000) (1,723,000)
- -------------------------------------------------------------------------------|----------------------------------------------------
|
Net increase (decrease) in cash and cash equivalents (26,000) | 50,000 603,000 (2,522,000)
|
Cash and Cash Equivalents, beginning of period $ 467,000 | 822,000 $ 219,000 $ 2,741,000
- -------------------------------------------------------------------------------|----------------------------------------------------
|
Cash and Cash Equivalents, end of period $ 441,000 | $ 872,000 $ 822,000 $ 219,000
===============================================================================|====================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
11
Easy Gardener Products, Ltd. and Subsidiaries
Summary of Accounting Policies
General
Effective November 1, 2003, Easy Gardener Products, Ltd., (the "Company"),
acquired substantially all of the operating assets and assumed substantially all
of the liabilities of U.S. Home & Garden Inc., (the "Predecessor"). These assets
comprised approximately 99% of the consolidated sales, 98% of the consolidated
assets and 99% of the consolidated liabilities of the Predecessor and represent
all of the operations of the Company.
The Company is a Texas limited partnership. The Company is 1% owned by a
general partner, EG Product Management, L.L.C., and is 99% owned by a limited
partner, EG, L.L.C. EG Product Management, L.L.C. and EG, L.L.C. are wholly
owned subsidiaries of EYAS International, Inc.
Nature of Business
The Company, through its own operations and through its subsidiaries, is a
leading manufacturer and marketer of a broad range of consumer lawn and garden
products. The Company's products include weed preventive landscape fabrics,
fertilizer spikes, decorative landscape edging, shade cloth and root feeders,
which are sold under recognized brand names, such as WeedBlock(R), Jobe's(R),
Emerald Edge(R), Sun Screen Fabric(TM), Ross(R), Tensar(R), and Landmaster(R).
The Company markets its products through most large national home improvement
and mass merchant retailers ("Retail Accounts"), including Home Depot, Lowe's,
Kmart, Wal-Mart, Ace Hardware and Tru-Serv in North America, B & Q, and other
outlets in Europe.
Basis of Presentation
The Company effectively began operations on November 1, 2003 with the
acquisition of operations from U. S. Home & Garden Inc. (the "Predecessor"). In
accordance with the requirements of purchase accounting, the opening balance
sheet reflects all acquired assets and liabilities were recorded at their
respective fair values at the date of purchase.
The accompanying consolidated financial statements includes the
consolidated balance sheet of the Company at June 30, 2004 and the consolidated
statements of operations, and cash flows for the eight months ended June 30,
2004. The accompanying consolidated financial statements include the previously
issued consolidated balance sheet of U.S. Home & Garden Inc. (the "Predecessor")
at June 30, 2003 and the consolidated statements of operations and cash flows
for the years ended June 30, 2003 and 2002. The accompanying consolidated
financial statements also include the consolidated statements of operations and
cash flows for the four months ended October 31, 2003 for U. S. Home & Garden
Inc. before transaction costs
12
Easy Gardener Products, Ltd. and Subsidiaries
Summary of Accounting Policies
for October and the gain on the sale of the operations. The U.S. Home & Garden
Inc. consolidated financial statements and related disclosures described above
and included herein are referred to as "Predecessor" information.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of the Company and its subsidiaries, Weatherly Consumer Products Group, Inc. and
its wholly owned subsidiary Weatherly Consumer Products, Inc., Easy Gardener
U.K., and NBU Group, LLC. All significant intercompany accounts and transactions
have been eliminated.
Cash Equivalents
The Company considers all short-term investments purchased with an initial
maturity of three months or less to be cash equivalents.
Inventories
Inventories, which consist of raw materials, finished goods, and packaging
materials, are stated at the lower of cost or market; cost is determined by the
average cost method. Market was determined based on anticipated selling prices
and utilization of products.
Property and Equipment
Property and equipment are stated at cost. Assets acquired from the
Predecessor were recorded at fair value as determined by an independent
appraisal. Depreciation is computed by the straight-line method over the
estimated useful lives of the assets ranging from 3 to 7 years or, in the case
of leasehold improvements, over the life of the lease, if shorter. Maintenance
and repairs are charged to expense as incurred. Major improvements are
capitalized.
Intangible Assets
Goodwill
Goodwill represents the excess of the purchase price over the fair value
of net assets acquired from the Predecessor. Goodwill in future years will be
tested annually for impairment by comparing the fair value with its carrying
value.
13
Easy Gardener Products, Ltd. and Subsidiaries
Summary of Accounting Policies
Trademarks
Due to the long life of the trademarks, the continued investment in the
trademarks and the Company's intent to continue to leverage the trademarks, the
trademarks are estimated to have an indefinite life and are not being amortized.
Deferred Financing Costs
Direct costs associated with the Company's borrowings are capitalized and
amortized over the life of the related debt.
Non-Compete Agreements
The non-compete agreements acquired from the Predecessor valued at the
date of acquisition by an independent appraisal. The fair market value of the
agreements was $1,575,000 and they are being amortized over the remaining lives
of the agreements at 7 and 13 years.
Package Tooling Costs
Package tooling costs, primarily consisting of the design and construction
of printing plates and cutting dies used for the production of packaging, are
being amortized over three years using the straight-line method.
Other Intangible Assets
Other intangible assets identified in connection with the transaction with
the Predecessor were patents having a value of $590,000 and an estimated
remaining life of 9 years and channel partner relationships having a value of
$386,000 and an estimated remaining life of 15 years.
Long-Lived Assets
Long-lived assets with definite useful lives are tested for recoverability
when circumstances suggest a possible impairment. Recovery is evaluated by
comparing undiscounted estimated future cash flows to the current carrying
value.
Revenue Recognition
Sales are recorded as products are shipped to customers. Sales are free on
board (FOB) shipping point. Consequently when products are accepted by the
applicable freight carrier at our facilities, we record the sale.
14
Easy Gardener Products, Ltd. and Subsidiaries
Summary of Accounting Policies
Sales Incentives
The Company enters into contractual agreements with its customers for
rebates on certain products it sells. The Company records the rebates as
reductions of revenue and records a liability reflected as accrued rebates on
the consolidated balance sheets. Rebate percentages are determined when
contracts are entered into. These revenue reductions are recorded at the time
the related revenue is recognized.
Income Taxes
The Company is a Texas limited partnership. There are two partners, each
of which are limited liability companies, whose single member is EYAS
International, Inc., a corporation and a taxable entity. Accordingly the Company
is treated as a division of EYAS International , Inc. for federal income tax
purposes, and income taxes are provided in the financial statements.
The Company provides deferred income taxes based on enacted income tax
rates in effect on the dates temporary differences between the financial
reporting and tax bases of assets and liabilities reverse. The effect on
deferred tax assets and liabilities of a change in income tax rates is
recognized in income in the period that includes the enactment date. To the
extent that available evidence about the future raises doubt about the
realization of a deferred tax asset, a valuation allowance is established.
Income Statement Classifications
Cost of Goods Sold
Generally, cost of goods sold are comprised of all of the costs incurred
to complete the finished inventory making it ready for delivery to customers
including depreciation and amortization. Depreciation and amortization included
in cost of goods sold totaled $833,000, $496,000, $1,476,000, and $1,446,000 for
the eight months ended June 30, 2004, the four months ended October 31, 2003
(Predecessor), and for the years ended June 30, 2003 (Predecessor) and 2002
(Predecessor), respectively.
Selling and Shipping
The caption selling and shipping expenses includes the cost of the sales
and marketing departments, the cost of the shipping, handling and warehousing
functions, cooperative advertising, commissions on sales, in store service
representatives costs and outbound freight, excluding depreciation and
amortization which is reflected in a separate income statement caption. Amounts
billed to customers for shipping are immaterial and are recorded as a reduction
in freight costs. Shipping and handling expenses totaled $5,498,000, $2,075,000,
15
Easy Gardener Products, Ltd. and Subsidiaries
Summary of Accounting Policies
$6,816,000 and $5,363,000 for the eight months ended June 30, 2004, the four
months ended October 31, 2003 (Predecessor) and for the years ended June 30,
2003 (Predecessor) and 2002 (Predecessor), respectively.
General and Administrative
The caption general and administrative includes all other costs of the
operation including customer service, finance, general management, foreign
exchange and uncollectible balances and excludes depreciation and amortization.
Depreciation and Amortization
The caption depreciation and amortization includes all such costs incurred
by all of the Company's operations except those amounts included in Cost of
Goods Sold.
Advertising Costs
The Company incurs advertising expense primarily relating to cooperative
advertising credits granted to customers based on qualified expenses incurred by
the customers to advertise the Company's products. Cooperative advertising
credits are usually limited to a percentage of an agreed-upon sales volume.
Cooperative advertising credits are accrued based on sales volume and
advertising frequency, pursuant to specific agreements. The Company also incurs
advertising expense relating to the distribution of catalogs and the
broadcasting of radio and television commercials. Advertising costs are expensed
as incurred. Advertising expense was approximately $2,068,000, $742,000,
$2,592,000, and $2,934,000 for the eight months ended June 30, 2004, the four
months ended October 31, 2003 (Predecessor), and the years ended June 30, 2003
(Predecessor) and 2002 (Predecessor), respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
16
Easy Gardener Products, Ltd. and Subsidiaries
Summary of Accounting Policies
Segment Information
The Company's operations are in one reportable segment - the manufacture
and sale of consumer lawn and garden products. See disclosure regarding
significant customers and product lines in Note 4.
Financial Instruments
The Company's and its Predecessor's financial instruments consist of cash
and cash equivalents, accounts receivable, debt and the Junior Subordinated
Debentures. The carrying value of cash and cash equivalents and accounts
receivable approximate fair value based upon the liquidity and short-term nature
of the assets. The Predecessor also had an officer's receivable. The carrying
value of the officer's receivable and the Company's and Predecessor's debt
approximate the fair value based upon short-term and long-term borrowings at
interest rates which approximate current rates. The Company's Junior
Subordinated Debentures have a fair value of $57,026,000 at June 30, 2004.
Cash and cash equivalents are held principally at three high quality
financial institutions. At times, such balances may be in excess of the FDIC
insurance limit.
Reclassifications
Certain amounts previously reported in the Predecessor's financial
statements have been reclassified to conform to the Company's current year
classifications.
17
Easy Gardener Products, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
1. Acquisition
Effective November 1, 2003 the Company acquired substantially all of the
operating assets and liabilities of U.S. Home & Garden Inc. (the "Predecessor").
These operations have been included in the consolidated financials statements of
the Company since that date.
The operations consist of the manufacturing and marketing of a broad range of
brand-name consumer lawn and garden products in the United States, Canada, and
in Europe and other minor international locations.
The aggregate price was $15,402,000 which includes expenses of $2,658,000, the
cost of a non-compete agreement of $1,250,000 and $11,494,000 to the seller of
which $1,600,000 was a subordinated note. The Company also assumed debt of the
Predecessor having a fair value of $61,008,000 and accounts payable and accrued
expenses of the Seller of $10,734,000 and recorded deferred taxes on certain
fair value adjustments of $10,770,000. The total purchase price including the
assumption of debt was $98,117,000.
The following table summarized the estimated fair values of assets acquired and
liabilities assumed and new debt incurred at the date of the acquisition.
Current assets $ 17,178,000
Property and equipment 4,050,000
Trademarks 23,565,000
Non-compete agreements 1,570,000
Other Intangible assets 1,980,000
Deferred financing costs 1,592,000
Goodwill 48,174,000
Other assets 8,000
--------------------------------------------------------------------
Total assets acquired 98,117,000
--------------------------------------------------------------------
Accounts payable and accruals assumed 10,937,000
Deferred taxes 10,770,000
Debt assumed 61,008,000
--------------------------------------------------------------------
Total liabilities assumed 82,715,000
--------------------------------------------------------------------
Purchase Price 15,402,000
Debt incurred, net (12,727,000)
--------------------------------------------------------------------
Cash $ 2,675,000
====================================================================
18
Easy Gardener Products, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
The Company incurred debt of $12,727,000 and raised capital of $2,675,000 to pay
for the net assets acquired.
The identifiable intangible assets acquired have been valued at the date of
acquisition. Due to the long life of the trademarks, the continued investment in
trademarks and the Company's intent to continue to leverage the trademarks, the
trademarks are estimated to have an indefinite life and are not being amortized.
Deferred financing costs are being amortized over the life of the loans which
have a weighted average life of 11 years. The non-compete agreements, package
tooling costs and other intangible assets are being amortized and have a
weighted average useful life of 8, 3, and 11 years, respectively.
The Company assumed no residual value in the computation of the amortization of
these intangible assets. Total amortization was $739,000 and $531,000 for the
eight months ended June 30, 2004 and the four months ended October 31, 2003
(Predecessor), respectively and $1,483,000 and $1,111,000 for the years ended
June 30, 2003 (Predecessor) and 2002 (Predecessor), respectively. Estimated
amortization expense for each of the five succeeding fiscal years is as follows:
Year ended June 30, Amount
------------------------------------------------
2005 $ 989,000
2006 989,000
2007 989,000
2008 989,000
2009 989,000
The Company assigned $48,174,000 of the purchase price of the acquired
operations to goodwill which is not being amortized but will be subject to
annual testing for impairment losses in the future. Of the total goodwill, the
Company expects approximately three-quarters to be deductible for tax purposes.
The amounts assigned to assets and liabilities acquired and the related
computation of amortization were based on preliminary estimates for the two
months ended December 31, 2003 and the five months ended March 31, 2004. Final
adjustments to the assets and liabilities acquired and related amortization have
been reflected in the June 30, 2004 financial statements.
19
Easy Gardener Products, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
2. Pro Forma Data
The following unaudited pro forma financial information presents a summary of
the consolidated results of operations of the Company as if the purchase of the
operations had occurred at the beginning of the periods presented.
Four Months
Ended Year Ended Year Ended
October 31, June 30, June 30,
2003 2003 2002
------------- ------------- -------------
(Predecessor) (Predecessor) (Predecessor)
Net Sales $ 17,258,000 $ 75,698,000 $ 78,428,000
Gross Margin 6,367,000 32,419,000 35,232,000
Income (loss) from operations (1,774,000) 6,204,000 8,801,000
- --------------------------------------------------------------------------------------------
Net loss $ (5,000,000) $ (1,747,000) $ (1,079,000)
============================================================================================
These unaudited pro forma results have been prepared for comparative purposes
only and primarily include adjustments to reflect only the operations acquired
and adjustments for interest expense and amortization of intangible assets
acquired in the purchase. Excluded from the pro forma net loss are the expenses
of the Predecessor related to its refinancing of debt and costs associated with
the sale of the Predecessor's assets of $159,000, $4,291,000 and $254,000 for
the four months ended October 31, 2003, the years ended June 30, 2003 and 2002,
respectively. Also excluded from the pro forma net loss are the Predecessor's
discontinued operations which were not acquired by the Company of $75,000,
$1,436,000 and $1,760,000 for the four months ended October 31, 2003, and the
years ended June 30, 2003 and 2002, respectively, and the gain (loss) on
disposal of discontinued operations of $(49,000) and $20,000 for the years ended
June 30, 2003 and 2002, respectively.
These pro forma results do not purport to be indicative of the results of
operations which actually would have resulted had the purchase occurred at the
beginning of each of the periods presented or of the future operations of the
Company.
20
Easy Gardener Products, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
3. Discontinued Operations
The Company, as part of the acquisition of operations from the Predecessor, was
required to also take the product line produced by the Ampro Division. The
product line consisted of mixtures of seed, fertilizer and mulch. The Company
did not intend to maintain this operation going forward but felt a need to meet
its commitments to customers to provide the products for the fiscal 2004 growing
season. In June 2004 the Company entered into an agreement with its converter of
Ampro products to settle its obligation under the supply contract with the
converter acquired from the Predecessor. Under the agreement, the Company
transferred all of the assets of the Ampro Division, excluding accounts
receivable, to the converter and made a payment of $240,000 in settlement of its
contractual obligation to the converter. This transaction was consummated in
July 2004.
The operations of Ampro have been reflected in the financial statements as a
discontinued operation leaving a pre-tax loss of $691,000 net of tax benefits of
$233,000 for a net loss of $458,000.
Net revenues for Ampro were not material for the eight months ended June 30,
2004, four months ended October 31, 2003 (Predecessor) and years ended June 30,
2003 (Predecessor) and 2002 (Predecessor).
In June 2002, the Predecessor announced that is was discontinuing its Weed
Wizard operations effective September 30, 2002. Despite the Predecessor's
efforts to increase sales and return to profitability, Weed Wizard experienced
continued erosion of its business.
The Predecessor recorded an estimated net loss on disposal of the Weed Wizard
component of $49,000 and $1,116,000 for the years ended June 30, 2003 and 2002,
respectively, relating to the write-down of all assets to fair value less cost
to sell. In addition to the loss on disposal, the Company had a net loss from
operations of Weed Wizard of $1,436,000 for the year ended June 30, 2003 and
$1,760,000 for the year ended June 30, 2002.
Revenues for Weed Wizard for the years ended June 30, 2003 and 2002 were $7,000
and $672,000, respectively.
The assets and liabilities of discontinued operations held for sale reported in
the consolidated balance sheets of the Company and the Predecessor consist of
the following:
21
Easy Gardener Products, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 June 30, 2003
Ampro (Predecessor)
- ------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ -- $62,000
Accounts Receivable 275,000
- ------------------------------------------------------------------------
Total Current Assets $ 275,000 $62,000
========================================================================
Current Liabilities:
Accrued expenses $ 850,000 $16,000
Accounts Payable 380,000 --
- ------------------------------------------------------------------------
Total Current Liabilities $1,230,000 $16,000
========================================================================
Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company's previously issued financial statements and
notes have been restated to reflect its discontinued components. The
Predecessor's consolidated financial statements have been restated for all
periods presented to reflect its discontinued components. The assets,
liabilities, net operations, and net cash flows have been reported as
"Discontinued Operations" in the accompanying consolidated financial statements.
4. Concentration of Credit Risk and Significant Relationships
Trade accounts receivable are due from numerous customers located in many
geographic regions throughout the United States, Canada and Europe. The Company
performs ongoing credit evaluations of its customers' financial condition and
establishes an allowance for doubtful accounts based upon the credit risk of
specific customers, historical trends and other information. The Company does
not require collateral from its customers. Accounts receivable balances that are
determined to be uncollectible are included in the allowance for doubtful
accounts. After all attempts to collect a receivable have failed, the receivable
is written off against the allowance. Based on the information available,
management believes the allowance for doubtful accounts is adequate. However,
actual write-offs might exceed the recorded allowances.
The Company's two largest customers during the eight months ended June 20, 2004
and the four months ended October 31, 2003 and the years ended June 30, 2003 and
2002, each accounted for the following percentage of the Company's revenues:
22
Easy Gardener Products, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
Eight months
ended Four months ended Year ended Year ended
Customer June 30, 2004 October 31, 2003 June 30, 2003 June 30, 2002
- ------------------------------------------------------------------------------------------------------
(Predecessor) (Predecessor) (Predecessor)
A 52% 66% 54% 49%
B 8% 6% 6% 10%
======================================================================================================
Included in accounts receivable at June 30, 2004 and 2003 (Predecessor) is
approximately $18,226,000 and $16,452,000, respectively, due from the two
largest customers.
Sales of each of the Company's three significant product lines comprised the
following percentages of the Company's total revenues for the eight months ended
June 30, 2004 and the four months ended October 31, 2003 (Predecessor) and the
years ended June 30, 2003 (Predecessor) and 2002 (Predecessor):
Eight months
ended Four months ended Year ended Year ended
Product Line June 30, 2004 October 31, 2003 June 30, 2003 June 30, 2002
- ---------------------------------------------------------------------------------------------------------------------
(Predecessor) (Predecessor) (Predecessor)
Landscape fabric 52% 59% 48% 51%
Fertilizer plant food 13% 5% 12% 14%
Landscape edging 14% 8% 10% 10%
=====================================================================================================================
International sales, primarily in Europe and Canada, were approximately 10%, 9%,
10%, and 6% of the Company's revenues for the eight months ended June 30, 2004
and the four months ended October 31, 2003 (Predecessor) and the years ended
June 30, 2003 (Predecessor) and 2002 (Predecessor), respectively.
Substantially all raw material purchases for WeedBlock(R) landscape fabric are
from one vendor, representing approximately 21%, 28%, 22% and 25% of the
Company's consolidated raw material purchases during the eight months ended June
30, 2004 and the four months ended October 31, 2003 (Predecessor) and the years
ended June 30, 2003 (Predecessor) and 2002 (Predecessor), respectively.
Management believes that other suppliers could provide a similar product on
comparable terms. A change in suppliers, however, could cause delays and a
possible loss of sales, which would adversely affect operating results. Included
in accounts payable at June 30, 2004, 2003 and 2002 is $2,265,000, $1,723,000
and $1,609,000, due to this vendor, respectively.
23
Easy Gardener Products, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
5. Inventories
Inventories consist of:
June 30, 2004 2003
- --------------------------------------------------------------------------------
(Predecessor)
Raw and packaging materials $2,025,000 $4,834,000
Finished goods 3,403,000 4,304,000
- --------------------------------------------------------------------------------
$5,428,000 $9,138,000
================================================================================
6. Property and Equipment
Property and equipment consist of:
June 30, 2004 2003
- --------------------------------------------------------------------------------
(Predecessor)
Furniture, fixtures and equipment $ 3,784,000 $11,423,000
Leasehold improvements 308,000 858,000
- --------------------------------------------------------------------------------
4,092,000 12,281,000
Less accumulated depreciation (697,000) 8,263,000
- --------------------------------------------------------------------------------
$ 3,395,000 $ 4,018,000
================================================================================
Furniture, fixtures and equipment acquired in the acquisition are being
depreciated over the estimated remaining useful lives of 3.5 to 4.5 years. New
equipment is depreciated over 5 to 7 years. Leasehold improvements acquired have
been valued at historic cost and are being depreciated over the remainder of the
original estimated useful lives at the date of acquisition, which results in an
weighted average life of 1 year.
Depreciation expense was $703,000, $355,000, $1,630,000 and $1,657,000 during
the eight months ended June 30, 2004 and the four months ended October 31, 2003
(Predecessor) and the years ended June 30, 2003 (Predecessor) and 2002
(Predecessor), respectively.
7. Intangible Assets
The Company recorded goodwill of $48,174,000 as a result of the acquisition of
the operations. Goodwill in future years will be tested annually for impairment
by comparing the fair market value with its carrying value.
24
Easy Gardener Products, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
Other intangible assets, comprised of non-compete agreements, packaging tool
costs and other intangible assets are being amortized over their respective
estimated lives.
Effective July 1, 2001, the Predecessor adopted SFAS No. 141 and SFAS No. 142.
and completed a reassessment of the useful lives of all intangible assets other
than goodwill. No adjustments to previously determined amortization periods were
considered necessary. The Predecessor had no intangible assets with indefinite
useful lives other than goodwill at June 30, 2003. Remaining useful lives of
intangible assets range from less than a year to 25 years. In conjunction with
the adoption of SFAS No. 141 and SFAS No. 142, the Predecessor completed its
transitional goodwill impairment test during 2002. Ampro and Golden West
subsidiaries were the only reporting units where the carrying value exceeded the
fair value of their net assets including goodwill. As of July 1, 2001, the net
goodwill related to Ampro was $17,078,000. The Predecessor hired an independent
valuation professional to assist in measuring the amount of the impairment.
Based on the valuation, the Predecessor recorded an impairment loss of
$9,390,000 during the year ended June 30, 2002 in the Consolidated Statement of
Operations, as a cumulative effect of a change in accounting principle.
The net goodwill related to Golden West at July 1, 2001 was approximately
$1,165,000. Based on a valuation prepared by Predecessor's management, an
impairment loss of $492,000 was recorded during the year ended June 30, 2002 and
was reported as a cumulative effect of a change in accounting principle in the
Consolidated Statement of Operations.
The Predecesor's previous business combinations were accounted for using the
purchase method. As a result of such combinations, the Predecessor recognized a
significant amount of goodwill, which, in the aggregate, was $49,878,000, net of
prior years' accumulated amortization at June 30, 2003.
Amortization expense for all intangible assets and deferred financing costs
during the eight months ended June 30, 2004 and the four months ended October
31, 2003 (Predecessor) and the years ended June 30, 2003 (Predecessor) and 2002
(Predecessor) was $739,000, 531,000, $1,483,000 and $1,111,000, respectively.
8. Officer's Receivable
The Predecessor's officer's receivable represents an unsecured note which bore
interest at the lower of the prime lending rate or 6.0% (effectively 4.0% at
June 30, 2003). At June 30, 2003 and 2002, the balance on the outstanding note
was $537,000, of which $25,000 was classified as current. Total related interest
income amounted to $24,000 and $41,000 for the years ended June 30, 2003 and
2002, respectively. Principal payments on the note were due in annual
installments.
25
Easy Gardener Products, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
9. Revolving Credit Facility and Long-Term Debt
The Company and its parent, EYAS International, Inc., and their subsidiaries
entered into four credit arrangements on October 29, 2003 to finance the
acquisition of the assets of the Predecessor and to provide working capital. The
Company also assumed from the Predecessor its obligation under the Junior
Subordinated Debentures and related obligations.
The first credit facility was the amended and restated Loan and Security
Agreement with Wells Fargo Foothill, Inc., which was a three year asset based
lending revolving credit facility. This facility had a maximum borrowing level
of $25 million, which was limited based upon having eligible accounts receivable
and inventory. Interest was at variable annual rates based upon the prime rate
plus 0.5% or LIBOR plus 2.75%, but not less than 5.25%. The facility had various
covenants including minimum EBITDA, minimum EBITDA to pay the interest on the
Trust Preferred Securities, a Funded Senior Debt Ratio, a Fixed Charge Coverage
Ratio, and limits on Capital Expenditures. EBITDA is defined as Earnings Before
Interest, Taxes, Depreciation and Amortization. The facility had a term ending
October 29, 2006 and was secured by all of the assets of the Company and it's
parents and subsidiaries.
On April 27, 2004 the Company and its parents and subsidiaries entered into a
new senior revolving credit facility replacing the Wells Fargo Foothill, Inc.
facility described in the previous paragraph. The new facility is with the
LaSalle Business Credit, L.L.C. who is the Agent for and one of the lenders on
the facility. The new asset based lending revolving credit facility has an
original term of three years and then is automatically renewable from year to
year at the option of the lenders and the Company. The facility has a maximum
borrowing level of $25 million. The facility is secured by all the assets of the
Company and it's parents and subsidiaries. The actual borrowing level is limited
based upon having eligible accounts receivable, inventory and for parts of the
year, the seasonal availability amount. Interest is at variable annual rates
based upon the prime rate plus 0.5% or LIBOR plus 3.25%. The new facility has
various financial covenants identical to the replaced facility including minimum
EBITDA, minimum EBITDA to pay interest on the Trust Preferred Securities, a
Fixed Charge Coverage Ratio, a Funded Senior Debt Ratio/Leverage Ratio and
limits on Capital Expenditures. The current portion of long-term debt at June
30, 2004 includes the revolving credit facility balance of $13,525,000, although
this obligation does not mature until April, 2007. The credit facility agreement
requires that collections from customers be deposited into cash collateral
accounts that directly pay down the revolving note payable. The credit facility
agreement also contains a clause that would allow acceleration of payment of the
revolving note payable in case of a "material adverse change." Management does
not believe that any such acceleration will occur and that the revolving note
payable will provide long-term liquidity; however, Emerging Issues
26
Easy Gardener Products, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
Task Force Issue 95-22 requires a revolving credit agreement that includes both
a subjective acceleration clause and a requirement to maintain an arrangement
whereby cash collections from the borrower's customers directly reduce the debt
outstanding, to be classified as a short-term obligation.
The second credit facility is with CapitalSource Finance LLC and includes two
term loans. Term Loan A is in the amount of $14,315,000 of which $14,000,000 was
borrowed and $13,063,000 was outstanding at June 30, 2004 and Term Loan B is in
the amount of $9,713,750 of which $9,500,000 was borrowed and outstanding at
June 30, 2004 plus accrued interest. Both Term Loans A and B mature on October
29, 2008 and are secured by all of the assets of the Company and it's parents
and subsidiaries. Term Loan A bears interest at the greater of 5.75% over the
prime rate or 10.00% and has monthly repayment of principal of $104,167 per
month in year one, $166,667 per month in year two, $291,667 per month in years
three and four and $312,500 per month in year five. The principal repayment
schedule has the loan principal fully repaid at maturity. Term Loan B bears
interest at the greater of 8.75% over the prime rate or 13.00% plus 7.00% of
non-cash interest which is to be paid at the maturity of Term Loan B. Term Loans
A and B also require mandatory pre-payments from the excess cash flow as defined
in the loan agreement. The principal pre-payments ranges from 50% to 75% of the
excess cash flow. The facility has financial covenants identical to those of the
revolving credit facility described above.
At June 30, 2004, the Company exceeded its Fixed Charge Coverage Ratio and for
the twelve months ending July 2004 and August 2004 the Company was below its
minimum EBITDA level. The lenders have waived these defaults. The Company also
was below the minimum EBITDA level required by the lenders to continue to pay
the interest on the Junior Subordinated Debentures. As permitted by the Amended
and Restated Junior Subordinated Indenture, the Company has notified the Trustee
that it has exercised its right to defer the monthly interest payment commencing
with the August 2004 payment.
The third credit facilities the Company entered into were two subordinated loan
agreements, one with the Predecessor aggregating $1,600,000 and one with Central
Garden & Pet Company aggregating $2,675,000. The subordinated Predecessor loan
is the more junior of the subordinated loans. Both of these subordinated loans
bear interest at 9% per annum due at maturity except for the repayment feature
described in the following sentence, the loans mature, April 29, 2008, interest
is payable at maturity and is reflected in the financial statements as non-cash
interest. The Predecessor loan has a repayment feature based upon excess cash
flow as defined in the second credit facility described in the second preceding
paragraph. The $2,675,000 subordinated loan gives Central Garden & Pet Company
the right to convert the loan plus accrued interest into a 49% ownership
interest in the Company.
The fourth credit facility the Company entered into is described in Note 10.
27
Easy Gardener Products, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
10. Trust Preferred Securities
The Company assumed from the Predecessor, certain of the Predecessor's
obligations under the Junior Subordinated Debentures which were originally
issued to U.S. Home & Garden Trust I, a wholly owned subsidiary of the
Predecessor. Concurrent with this assumption, the name of U.S. Home & Garden
Trust I was changed to Easy Gardener Products Trust I (the "Trust"), which is a
wholly owned subsidiary of the Company. The purpose of the Trust is to hold as
an asset, the Junior Subordinated Debentures which is a liability of the Company
owed to the Trust and to reflect the Trust's obligation to the Company for the
78,000 common securities with a liquidation value of $25 per common share, with
a face value of $1,950,000 and the obligation of the Trust for the 2,530,000 of
9.40% Cumulative Trust Preferred Securities outstanding with a liquidation value
of $25 per security (the "Trust Preferred Securities"), having a total face
value at the date of issuance to the public of $63,250,000. The common
securities and Trust Preferred Securities are collectively referred to as the
"Trust Securities". In accordance with FASB Interpretation No. 46 with
Revisions, the Trust has not been consolidated in the Company's financial
statements at June 30, 2004. Accordingly, the Company's financial statements
include in other assets, its interest in the common shares of the Trust, the
9.40% Cumulative Trust Preferred Securites it acquired and the amounts due from
the prior lender of the Predecessor as described in the following paragraph and
its liability to the Trust for the Junior Subordinated Debentures. The Trust
Preferred Securities were first issued in a public offering in 1998. The Junior
Subordinated Debentures are the only assets of the Trust and have a face value
outstanding of $65,200,000, and interest rate of 9.40% and mature on April 15,
2028. Distribution of interest on the Junior Subordinated Debentures is payable
monthly in arrears by the Trust. The Trust Preferred Securities are subject to
mandatory redemption upon the repayment of the Subordinated Debentures at a
redemption price equal to the aggregate liquidation amount of the securities
plus any accumulated and unpaid distributions. The Subordinated Debentures
mature in total on April 15, 2028, but may be redeemed at the option of the
Company at any time.
The Company has entered into two agreements with a prior lender of the
Predecessor giving the prior lender the rights to acquire up to 189,750 of the
9.40% Cumulative Trust Preferred Securities acquired by the Company. Under the
first agreement, the prior lender can purchase up to 94,875 of the redeemed
shares at an exercise price of $9.00 per share. Under the second agreement, the
prior lender is forgoing monthly cash interest on an additional 94,875 of the
redeemed shares until the exercise price of such shares is reduced to $0 at
which point the underlying securities will be transferred to the prior lender
and cash interest will begin being paid to the prior lender on such securities.
The prior lender can also use option shares as consideration for the exercise
price. The exercise price on these securities at the date of purchase of the
operations was $4.30 and is reduced by approximately $.20 each month. The
options expire on May 19, 2009. The fair value of the total 189,750 options
granted have been reflected at the average quoted market price of
28
Easy Gardener Products, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
$17.00 per share reduced by the proceeds to be received on the exercise of the
options of $1,262,000. The $17.00 per share calculation is described in the
second following paragraph.
During the quarter ended March 31, 2004, the prior lender of U.S. Home & Garden,
Inc. exercised their right under the first option agreement, to acquire 94,875
shares of the Trust Preferred Securities at an exercise price of $9.00 per
share. The option agreement provided for a cashless exercise which was used for
this transaction. The Company received back 37,620 shares of the option
securities, which based on the market value of such shares at the exercise date
of $22.70 per share, represents the total exercise price of the option of
$854,000. The 37,620 shares are now reflected as Treasury shares owned by the
Company.
The fair value of the Junior Subordinated Debentures on November 1, 2003 was
approximately $44,336,000. The value was based on the average quoted market
prices of $17.00 of the 9.40% Cumulative Trust Preferred Securities on the five
days before and five days after the acquisition date. The Junior Subordinated
Debentures have been reflected in the opening balance sheet of the Company at
fair value and the discount from the face value is being amortized, using the
constant yield to maturity method of amortization, over 25 years to the maturity
date. Deferred taxes have been recorded on the discount amount. The amortization
of discount for the eight months ended June 30, 2004 was $67,000. As a result of
the exercise of options described in the preceding paragraph, the number of
treasury shares increased 37,620 shares with a value of $854,000 and the
consideration on the exercise of the options was reduced by an equal amount. As
a result of the foregoing of monthly cash interest as described in the second
preceding paragraph, the amount due at the exercise of the options was reduced
by the forgone interest of $149,000 for the eight months ended June 30, 2004.
Distributions of interest on the Junior Subordinated Debentures is payable
monthly in arrears by the Trust and recorded as interest expense.
The Junior Subordinated Debentures are unsecured obligations of the Company and
are subordinate and junior in right to certain other indebtedness of the
Company. Currently, the Company does not have any indebtedness outstanding which
ranks equal to or junior to such securities.
The Company's more senior lenders have required the deferral of the payment of
interest on the Junior Subordinated Debentures. If interest on the Junior
Subordinated Debentures is deferred, the distributions on the Trust Securities
and by definition, the Trust Preferred Securities is also deferred. The deferral
of interest can be done for a period not to exceed 60 consecutive months with no
change in the rights of the lenders. During any such deferral period, interest
on the Junior Subordinated Debentures and distributions on the Trust Securities
will accrue and compound monthly at an annualized rate of 9.40% and, subject to
certain exceptions, the Company may not declare or pay distributions on its
capital or debt securities that rank equal to or junior to the Subordinated
Debentures.
29
Easy Gardener Products, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
The Company announced in early August 2004 that it had informed the Trustee for
the Amended and Restated Junior Subordinated Indenture, under which the Trust
Preferred Securities were issued, that in accordance with Section 3.11 of the
Indenture, it has exercised its right to defer (not cancel) the monthly interest
payments commencing with the August 2004 payment. The deferral of interest
payments does not change the Company's obligation to pay the monthly interest
payment but allows the payments to be made at a later date. Deferred payments
earn interest monthly at the annualized rate of 9.40%. The Company has not
determined the length of time it will exercise its rights to defer the monthly
interest. It does not believe that payments will be deferred for the maximum 60
consecutive months allowed. The deferred interest plus interest thereon will be
included in the financial statements as non-cash interest.
The Trust Preferred Securities are subject to mandatory redemption upon the
repayment of the Junior Subordinated Debentures at a redemption price equal to
the aggregate liquidation amount of the securities plus any accumulated and
unpaid distributions. The Junior Subordinated Debentures mature in total on
April 15, 2028, but may be redeemed at the option of the Company at any time.
The Company effectively provides a full and unconditional guarantee of the
Trust's obligations under the Trust Securities to the extent that the Trust has
funds sufficient to make such payments.
11. Predecessor's Revolving Credit Facility and Long-Term Debt
The Predecessor entered into a senior credit facility dated as of October 30,
2002 for the Predecessor and its material subsidiaries. Wells Fargo Foothill,
Inc., which was the administrative agent for the facility, was also the
revolving credit lender, and Ableco Finance LLC provided a term loan. The total
amount of the credit facility was $35 million, of which $23 million was a
revolving credit facility and $12 million was a term loan. The credit facility
matured October 30, 2005. Interest on the revolving credit facility was at
variable annual interest rates based on the prime rate or LIBOR plus applicable
marginal rates. Interest on the term loan was at variable annual interest rates
based on the prime rate with a minimum rate of 9.75% plus 2% of accrued interest
payable upon maturity (non-cash). The balance of the term loan at June 30, 2003
including non-cash interest, was $12,142,000. The interest rate on the term loan
increased 2% each year the balance was outstanding. Borrowings on the revolving
credit facility were $15,085,000 at June 30, 2003 and are limited based on
eligible borrowing bases, effectively $17,659,000 at June 30, 2003.
The Predecessor's obligations and the obligations of its material subsidiaries
under the credit facility were secured by a security interest in favor of the
lenders in substantially all of the assets of the Predecessor and its material
subsidiaries. The Predecessor and its material subsidiaries were subject to
certain financial and other covenants under the credit facility. At the end of
January 2003, the Predecessor's financial performance created a "Triggering
Event"
30
Easy Gardener Products, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
which increased the interest rate on the term loan in February 2003 through June
2003 by 2.5% points, to 14.25%. At June 30, 2003, the Predecessor was in
violation of certain covenants which continued until the term loan was repaid.
Due to the covenant violations, the interest rates on both the term loan and the
revolving credit facility increased by 3% points, to 17.25%, and the lender
could require the Predecessor to pay all principal and accrued interest at any
time. Consequently, the Predecessor reclassified all of the revolving credit
facility and long-term debt as short term obligations.
The completion of the transaction described in Note 1 resulted in the repayment
of the term loan and assumption of the revolving credit facility by the Company.
12. Commitments
Operating Leases
The Company leases office and warehouse space, certain office equipment and
automobiles under operating leases expiring through 2006. The future minimum
lease payments under these non-cancelable operating leases are as follows:
Year ended June 30, Amount
---------------------------------------------------------
2005 $ 602,000
2006 268,000
2007 9,000
2008 6,000
---------------------------------------------------------
$ 885,000
=========================================================
Rent expense was approximately $443,000, and $370,000 for the eight months ended
June 30, 2004 and the four months ended October 31, 2003 (Predecessor),
respectively, and $944,000 and $891,000 for the years ended June 30, 2003 and
2002 (Predecessor), respectively.
Defined Contribution Plan
The Predecessor through its subsidiary Easy Gardener, Inc. had established an
employee defined contribution benefit plan (the Plan). The Company assumed the
Plan for all of its eligible employees. The Company and its Predecessor
(collectively, "the Employer") both match the first 60% of employee
contributions up to 5% of the employee's wage base. The Plan also allows
discretionary contributions by the Employer. The Employer contributions vest
over a five-year period. Total expense associated with the plans for the eight
months ended June 30, 2004 and the four months ended October 31, 2003
(Predecessor), and for the years ended
31
Easy Gardener Products, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002 was approximately $81,000, $73,000, $174,000 and
$321,000, respectively.
13. Contingencies
In the normal course of business, the Company is subject to proceedings,
lawsuits and other claims. Such matters are subject to many uncertainties, and
outcomes are not predictable with assurance. Consequently, the ultimate amount
of any monetary liability or financial impact with respect to these matters at
June 30, 2004 cannot be ascertained.
14. Capital/ Stockholders' Equity - Predecessor
As described in Note 9, the Company has given Central Garden & Pet Company the
right to convert it's subordinated loan plus accrued interest into a 49%
ownership interest in the Company. The Company has also given Central Garden &
Pet Company an option, which is exercisable after October 29, 2006, to purchase
the remaining 51% interest in the Company based upon a multiple of EBITDA less
any debt assumed.
Preferred Stock
The Predecessor was authorized to issue 1,000,000 shares of preferred stock with
such designations, rights and preference as may be determined from time to time
by its Board of Directors. No shares of the preferred stock were outstanding.
Common Stock
The Predecessor was authorized up to 75,000,000 common shares having a par value
of $0.001 per share. In September 1998, the Predecessor adopted a Stockholders'
Rights Agreement commonly known as a "poison pill", which provided that in the
event an individual or entity becomes a beneficial holder of 12% or more of the
shares of the Predecessor's capital stock, other stockholders shall have the
right to purchase shares (or in some cases, the acquirer's) common stock at 50%
of its then market value.
Stock Option Plans
The Predecessor had 5 stock option plans and a "non-plan". At June 30, 2001 the
Predecessor had outstanding 5,687,000 options with exercise prices ranging from
$0.01 to $4.69, a weight average exercise price of $2.34, and an average
remaining life of 2.0 years. Of such options, 5,135,000 were exercisable at a
weight average exercise price of $2.38. At June 30, 2002 the Predecessor had
outstanding 4,914,000 options with exercise prices ranging from $0.01 to $4.69,
a weighted average exercise price of $2.13 and a weighted average remaining life
of 3.3
32
Easy Gardener Products, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
years. Of such options, 4,604,000 were exercisable at a weighted average
exercise price of $2.16. During fiscal 2002, 99,000 new options were granted and
872,000 options expired and 320,000 additional options became exercisable and
851,000 exercisable options expired decreasing the weighted average exercise
price to $2.16. At June 30, 2003 the Predecessor had outstanding 4,664,000
options with exercise prices ranging from $0.01 to $4.69, with a weighted
average exercise price of $2.29 and a weighted average remaining life of 1.9
years. Of such options, 4,342,000 were exercisable at a weighted average
exercise price of $2.29. During fiscal 2003, 20,000 new options were granted and
270,000 options expired and 89,000 additional options became exercisable,
200,000 options were exercised and 151,000 exercisable options expired
increasing the weighted average exercise price to $2.29 The following table
summarizes the above stock options outstanding and exercisable at June 30, 2003:
Outstanding Exercisable
--------------------------------------- ----------------------
Weighted Weighted
Average Average Average
Range of Exercise Remaining Exercise Exercise
Price Options Life Price Options Price
- ---------------------------------------------------------------------------------------------
$0.01 - 1.00 30,000 4.3 years $0.50 10,000 $0.53
1.01 - 2.00 733,000 3.0 years 1.68 431,000 1.67
2.01 - 3.00 3,142,000 1.9 years 2.13 3,142,000 2.13
3.01 - 4.00 699,000 2.0 years 3.23 699,000 3.23
4.01 - 4.69 60,000 .9 years 4.22 60,000 4.22
- ---------------------------------------------------------------------------------------------
$0.01 - 4.69 4,664,000 1.9 years $2.24 4,342,000 $2.29
=============================================================================================
Warrants
In connection with certain business transactions and stock offerings, the
Predecessor granted various warrants to purchase common stock.
The following schedule summarizes the activity:
Weighted Average Weighted Average
Warrant Price Remaining
Per Share Outstanding (1) Exercisable Contractual Life
- --------------------------------------------------------------------------------------------------------------
June 30, 2001 3.31 1,111,000 1,011,000 2 years
Granted .70 1,179,000 1,179,000
Expired 3.14 (786,000) (786,000)
Became exercisable 7.00 -- 100,000
- --------------------------------------------------------------------------------------------------------------
June 30, 2003 and 2002 $1.35 1,504,000 1,504,000 4.3 years
==============================================================================================================
33
Easy Gardener Products, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
(1) The warrants contain anti-dilution provisions which could affect the
number of shares of common issuable stock upon the exercise of the
warrants as well as the per share warrant prices. Additionally, these
warrants contain certain redemption provisions.
Common Stock Reserved
At June 30, 2003, approximately 7,819,000 shares of the Predecessor's common
stock had been reserved for issuance upon the exercise of warrants and options.
Stock-Based Compensation
The Predecessor applied APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its employee and
director stock option plans. Under all of the option plans, the exercise price
of the options equals or exceeds the market price of the underlying stock on the
date of the grant and therefore, no compensation cost is recognized.
15. Refinancing and Transaction Costs
Refinancing and transaction costs included in the Consolidated Statements of
Operations for the eight months ended June 30, 2004 of $410,000 were related to
deferred cost written-off due to the replacement of the Wells Fargo Foothill,
Inc. revolving credit facility with the LaSalle Business Credit LLC facility.
Such expenses for the four months ended October 31, 2003 were $159,000 and for
the years ended June 30, 2003 and 2002 of the Predecessor relate to the
refinancings described in Note 11 to the financial statements and the asset sale
described in Note 1 to the financial statements. As a result of the refinancing
of the Predecessor, the Predecessor wrote-off $1,928,000 of previously deferred
financing costs and discounts related to the replaced financing agreements and
also recorded fees and expenses of $2,363,000 in the year ended June 30, 2003.
The Predecessor capitalized $2,012,000 of deferred financing costs related to
the new financing during the year ended June 30, 2003.
16. Income Taxes
The deferred tax liability of the Company is comprised of the following:
June 30, 2004
---------------------------------------------------------------------------------------
Discount on the Junior Subordinated Debentures $ 6,610,000
Difference between book and tax basis of Weatherly Companies 4,252,000
---------------------------------------------------------------------------------------
$ 10,862,000
=======================================================================================
34
Easy Gardener Products, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
Deferred tax assets and liabilities of the Predecessor consist principally of
the following:
June 30, 2003
------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforward $ 9,975,000
Accumulated depreciation and
amortization 2,752,000
Accounts receivable allowance 220,000
Inventory allowance 152,000
Other 13,000
------------------------------------------------------------------
Gross deferred tax assets 13,112,000
Less valuation allowance (9,778,000)
------------------------------------------------------------------
Total deferred tax assets $ 3,334,000
==================================================================
Deferred tax liabilities-
Accumulated depreciation and amortization $ (3,188,000)
==================================================================
Net $ 146,000
------------------------------------------------------------------
The valuation allowance of $9,778,000 was recorded due to the uncertainty of the
Predecessor's ability to generate sufficient future taxable income to realize
total gross deferred tax assets.
The Predecessor's net operating loss carryforward for federal income tax
purposes amounted to $29,339,000 at June 30, 2003, and expires in 2022.
The net deferred income taxes of the Predecessor as of June 30, 2003 and 2002
are presented in the balance sheets as follows:
June 30, 2003
------------------------------------------------------------------
Current asset $ 385,000
Long-term liability $ 239,000
==================================================================
35
Easy Gardener Products, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
The income tax provision (benefit) consists of:
Year ended June 30, 2004 (1) 2003 2002
--------------------------------------------------------------------
(Predecessor) (Predecessor)
Current:
Federal $325,000 $ -- $ --
State 45,000 133,000 374,000
--------------------------------------------------------------------
370,000 133,000 374,000
--------------------------------------------------------------------
Deferred 92,000 -- (146,000)
--------------------------------------------------------------------
$462,000 $ 133,000 $ 228,000
====================================================================
- ----------
(1) Net of tax benefit on loss from discontinued operations of $236,000
The income tax expense of the Predecessor for the year ended June 30, 2003 was
due to state income taxes. No income tax benefit was recorded during the year
due to the effects of recording the valuation allowance noted above. The
following is a reconciliation between the federal statutory income tax rate and
the Predecessor's effective tax rate including discontinued operations relating
to income from continuing operations before minority interest and extraordinary
gain:
Year ended June 30, 2004 2003 2002
- ---------------------------------------------------------------------------------------
Income tax provision computed at
Federal Statutory rate 34.0% (34.0)% (34.0)%
State taxes, net of Federal tax effects 0.8 2.4 (62.3)
Nondeductible amortization and other (0.2) 0.4 1.8
Changes in valuation allowance on
deferred tax assets -- 34.0 36.9
- ---------------------------------------------------------------------------------------
Income Tax Expense 34.6% 2.8% (57.6)%
=======================================================================================
36
Easy Gardener Products, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
17. Supplemental Cash Flow Information
Eight Months Four Months
Ended June Ended October Year Ended Year Ended
Year ended June 30, 30, 2004 31, 2003 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------
(Predecessor) (Predecessor) (Predecessor)
(Unaudited)
Cash paid (received) during the period for:
Interest paid $ 5,870,000 $ 7,846,000 $ 7,846,000 $ 6,696,000
Interest received -- -- -- (83,000)
Income taxes refunded $ (38,000) $ (248,000) $ (248,000) $ (100,000)
===========================================================================================================================
Supplemental information regarding non-cash investing and financing activities
of the Predecessor during the year ended June 30, 2002
Discount on issuance of 16% subordinated notes
at 90% of face amount $ 600,000
Discount on issuance of warrants and options
in conjunction with debt refinancing $ 402,000
37
Easy Gardener Products, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
18. Quarterly Information (Unaudited)
First October Nov/Dec Third Fourth
Fiscal 2004 Quarter 2003 2003 Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------------
(Predecessor) (Predecessor)
Net sales $ 14,517,000 $ 2,956,000 $ 6,985,000 $ 23,638,000 $ 29,438,000
Gross profit $ 5,733,000 $ 787,000 $ 2,627,000 $ 11,002,000 $ 12,978,000
Income (loss) from continuing
operations $ (3,422,000) $ (1,955,000) $ (1,432,000) $ 1,102,000 $ 1,562,000
Income (loss) from discontinued
operations $ (74,000) $ (1,000) $ (40,000) $ 189,000 $ (607,000)
Net income (loss) $ (3,496,000) $ (1,956,000) $ (1,472,000) $ 1,291,000 $ 955,000
First Second Third Fourth
Fiscal 2003 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------
(Predecessor) (Predecessor) (Predecessor) (Predecessor)
Net sales $ 13,151,000 $ 12,351,000 $ 24,036,000 $ 26,706,000
Gross profit $ 4,965,000 $ 5,184,000 $ 11,278,000 $ 11,364,000
Income (loss) from continuing
operations $ (3,878,000) $ (6,276,000) $ 1,266,000 $ 1,236,000
Loss from discontinued operations $ (978,000) $ (215,000) $ (41,000) $ (202,000)
Loss on disposal of discontinued
operations $ -- $ -- $ -- $ (49,000)
Net income (loss) $ (4,856,000) $ (6,491,000) $ 1,225,000 $ 985,000
Differences between amounts included above and amounts previously reported on
Form 10-Q are due to reclassification.
19. Predecessor Month of October 2003
The accompanying consolidated financial statements include the previously issued
consolidated financial statements for the Predecessor. The Predecessor `s
financial statements for the month of October, which is included in the 4 months
ended October 31, 2003, does not include any transaction costs for October or
the gain on the sale of the operations.
38
Consolidated Financial
Statement Schedule
Easy Gardener Products Ltd and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
Charged to
Beginning Costs and Ending
Balance Expenses Writeoffs Balance
- -----------------------------------------------------------------------------------------------------------
Reserves and Allowances Deducted
from Asset Accounts (Continuing
Operations):
Allowance for Doubtful Accounts
Predecessor:
Year ended June 30, 2002 $ 971,000 $425,000 $ (15,000) $1,381,000
Year ended June 30, 2003 $1,381,000 $ 25,000 $ (776,000) $ 630,000
Company:
Eight months ended June 30, 2004 $ 365,000 $ -- $ (172,000) $ 193,000
Reserve for Inventory Obsolescence
Predecessor:
Year ended June 30, 2002 $1,340,000 $ 94,000 $(1,209,000) $ 225,000
Year ended June 30, 2003 $ 225,000 $ 16,000 $ (50,000) $ 191,000
Company:
Eight months ended June 30, 2004 $1,777,000 $ -- $ (342,000) $1,435,000
40
Item 1. Business
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 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, changes in interest rates, ability
to service debt, activities of competitors, ability to successfully introduce
new products and product lines, changes in federal or state environmental laws
and the administration of such laws, protection of trademarks and other
proprietary rights, the ability to maintain adequate financing arrangements
necessary to fund operations and the general condition of the economy and its
effect on the securities markets and other risks detailed in 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
Easy Gardener Products, Ltd, (the "Company"), manufactures and
markets a broad range of brand-name consumer lawn and garden products through
its own operations and through its wholly owned subsidiaries, Weatherly Consumer
Products Group, Inc. which owns Weatherly Consumer Products, Inc.("Weatherly"),
and Easy Gardener UK Ltd. The products include weed preventive landscape
fabrics, fertilizer and plant food spikes, decorative landscape edging, shade
cloth and root feeders, which are sold under recognized brand names such as
WeedBlock(R), Easy Gardener(R), Jobe's(R), Emerald Edge(R), Sun Screen
Fabric(TM), Ross(R), Tensar(R), and Landmaster(R). The Company believes it has
significant market share and favorable brand-name recognition in several of its
primary product categories. It markets products through most large national home
improvement
3
and mass merchant retailers ("Retail Accounts"), including Home Depot, Lowe's,
Kmart, Wal-Mart, Ace Hardware and TruServe in North America and Europe. These
operations were acquired from U.S. Home & Garden Inc. (the "Predecessor")
effective November 1, 2003. In accordance with the requirements of purchase
accounting, all acquired assets and liabilities were restated to reflect their
respective fair values at the date of purchase. As a result of the acquisition,
the Company recorded $27,115,000 of acquired intangible assets, $23,565,000 was
assigned to brand values having an indefinite useful life, $976,000 was assigned
to patents and other intangibles having a weighted average useful life of nine
years, $1,570,000 was assigned to non-compete agreements having a weighted
average useful life of eight years, and $1,004,000 was allocated to package
design having a useful life of three years. The Company assigned $48,174,000 of
the purchase price of the acquired operations to goodwill, which is not being
amortized. Goodwill and brand values will be subject to testing for impairment
losses in future years. The amounts assigned to assets and liabilities acquired
and the related computation of amortization were based on preliminary estimates
for prior quarters. The Company has completed its valuation of these assets and
liabilities and all adjustments were reflected in the June 30, 2004 financial
statements.
The acquisition of the operations comprised approximately 99% of the
consolidated sales, 98% of the consolidated assets and 99% of the consolidated
liabilities of (the "Predecessor"), U.S. Home & Garden Inc. The accompanying
consolidated financial statements also include the previously issued audited
consolidated balance sheet of U.S. Home & Garden Inc. at June 30, 2003 and the
consolidated audited statements of operations and audited consolidated
statements of cash flows for the years ended June 30, 2003 and 2002. The
accompanying consolidated financial statements also include the unaudited
consolidated statements of operations and unaudited consolidated statements of
cash flows of U.S. Home & Garden Inc. for the four months ended October 31, 2003
before transaction costs and the gain on the sale of the operations. The U.S.
Home & Garden Inc. consolidated financial statements describe above and include
herein are referred to as the "Predecessor" financial statements.
The consumer lawn and garden market continues to become more
consolidated with fewer retailers accounting for an increasing percentage of all
lawn and garden products sold. This increasing concentration leverage provides
the largest retailers with greater leverage over their suppliers, such as the
Company. This leverage can result in the decreased margins
4
for suppliers, including the Company, who may be required to make greater price
concessions to their large retail accounts without being able to reduce the
costs of products sold by them to the retailers. This leverage by the large
retailers can also increase sales volatility for the Company as well as other
suppliers of lawn and garden products. There also continues to be a
consolidation of the vendors supplying fewer retailers.
The Company is organized under the laws of the State of Texas in
June 2002 and commenced operations in November 2003. The Company conducts
operations directly and through subsidiaries. The fertilizer and plant food
spikes operations are conducted through Weatherly Consumer Products Group, Inc.
and its subsidiary, Weatherly Consumer Products, Inc ("Weatherly"). Most of the
International operations, excluding sales to Canada are conducted through the
Easy Gardener UK Ltd. subsidiary. Unless the context suggests otherwise,
references in this Report to "we", "us", "the Company", or "our" refer to Easy
Gardener Products, Ltd. and its subsidiaries. The executive offices are located
at 3022 Franklin Avenue, Waco, Texas 76710, and the telephone number is (254)
753-5353.
Lawn and Garden Industry
Historically, the lawn and garden industry was comprised of
relatively small regional manufacturers and distributors whose products were
sold to consumers primarily through local nurseries and garden centers. As the
industry has grown, national home improvement and mass merchant retailers have
replaced many of these local garden centers as the primary retail source for
lawn and garden products. In an effort to improve operating margins and reduce
the number of vendors needed to source high volume lawn and garden products, the
preference among home improvement and mass merchant retailers has shifted
towards single source suppliers that offer broad product lines of consumer
brand-name merchandise and the product support necessary to stimulate consumer
demand and ensure timely and cost effective order fulfillment. Smaller regional
suppliers generally lack the capital and other resources necessary to offer the
variety and number of product lines, the product support and the inventory
stocking and tracking capabilities required by national home improvement and
mass merchant retailers. As previously noted, the consolidation of garden
retailers from local nurseries and garden centers to national home improvement
and mass merchant retailers provide the largest retailers with greater leverage
on their suppliers, including the Company.
5
Consumer Lawn and Garden Products
The primary consumer lawn and garden products marketed by the
Company are as follows. Historical sales data includes data of the Predecessor
prior to November 1, 2003.
Landscape Fabric. The Company markets different types of landscape
fabric in varying thicknesses and strengths under the trade names WeedBlock(R),
MicroPore(R), Pro WeedBlock(TM), and Landmaster(R). Landscape fabrics allow
water, nutrients and oxygen to filter through to the soil but prevent weed
growth by blocking sunlight. The Company's primary landscape fabrics are made
from non-woven fabrics, which are generally manufactured with extruded polymers,
pressed or vacuum formed into thin sheets having the feel and texture of light
plastics. For the fiscal years ended June 30, 2004, 2003, and 2002, sales of
landscape fabric represented approximately 54%, 48%, and 51%, respectively, of
consolidated invoiced sales.
Fertilizer and Plant Food. Fertilizer spikes deliver plant food
nutrients directly to the root of the plant, an alternative method of
maintaining plant health to surface-delivered liquid or solid fertilizers. The
Company markets a variety of indoor and outdoor specialty fertilizer and plant
food spikes primarily under the Jobe's(R) tradename, one of the most recognized
brands in the consumer lawn and garden industry. For the years ended June 30,
2004, 2003, and 2002, sales of fertilizer and plant food constituted
approximately 11%, 12%, and 14%, respectively, of consolidated invoiced sales.
Landscape Edging. The Company markets a variety of resin-based
decorative landscape edgings under trade names including Emerald Edge(R), Fiber
Edge(R), and Terra Cotta Tiles(TM). The decorative edgings are used by consumers
to define the perimeter of planting areas with a variety of designs which
include stone, log, terra cotta tiles and picket fences. For the years ended
June 30, 2004, 2003, and 2002, sales of landscape edging constituted
approximately 13%, 10%, and 10%, respectively, of consolidated invoiced sales.
Sun Screen Fabric. The Company markets sun screen fabrics in a
variety of sizes and colors. Sun Screen is utilized generally in conjunction
with some type of outdoor structure such as a patio veranda, and provides shade,
privacy or protection from wind for people, plants and pets.
Fertilizers and Root Feeders. The Company also markets fertilizers
under the Ross(TM) trade name. The Ross fertilizer, when applied through a Ross
Root Feeder, a long steel irrigation tube with a hose connector that is inserted
deep into the
6
ground, provides the homeowner with a means of deep feeding and irrigating trees
and shrubs. The Ross Root Feeder may also be used without fertilizer as a deep
watering device.
Lawn and Garden Fencing. The Company markets resin-based fencing for
lawns and gardens. The fencing products are marketed for use by the consumer for
numerous applications including preventing animals from entering a garden or
orchard.
Other Products. In addition to landscape fabrics, fertilizer and
plant food spikes, landscape edging, sun screen, fertilizers and root feeders,
and lawn and garden fencing the Company also sells complementary lawn and garden
products for the home gardener. The products include a line of animal repellents
that are formulated to deter dogs, cats, deer and rabbits from destroying garden
and landscape environs, a variety of protective plant and tree covers, bird and
animal mesh blocks, protective garden and tree netting to prevent animal damage,
and synthetic mulch and fabric pegs.
Conversion, Manufacturing and Supply
Except for the materials for the WeedBlock(R) landscape fabric,
which are obtained primarily from a single source, the basic materials for
consumer lawn and garden products are purchased from a variety of suppliers. All
of such materials are converted, packaged and shipped by the Company from either
the Waco, Texas facility, the Paris, Kentucky facility or the facility located
in Colorado.
The Company purchases most of the landscape fabric used to
manufacture WeedBlock(R) from Tredegar Industries, Inc. ("Tredegar"). The
Company purchases large rolls of various types of landscape fabric from Tredegar
for shipment to the Waco, Texas facility where it is sized, cut and packaged for
consumer sale. Although the Company has purchased most of its supply from
Tredegar for over 10 years and believes that its relationship with Tredegar is
good, Tredegar is free to terminate its relationship with the Company at any
time and accordingly could market its fabrics to other companies, including
competitors. Nevertheless, the Company owns the registered trademark
"WeedBlock(R)" and to the extent that it establishes alternative supply
arrangements, the Company's rights to market products under the WeedBlock(R)
brand name would continue without restriction.
The Company manufactures and packages the Jobe's(R) fertilizer
spikes at its Paris, Kentucky facility. The raw materials that comprise indoor
fertilizer spikes are mixed with
7
a binding agent and then passed through an extrusion process which feeds a
continuous strand of fertilizer through a heat-drying system. The strand is then
cut into ready-to-use fertilizer spikes which are then machine counted and
packaged into shelf-ready blisterpacks. Outdoor fertilizer spikes are
manufactured in a similar manner except rather than passing through an extrusion
process, the outdoor spikes are processed through molds, which shape the spikes
into their final form. The outdoor spikes are packaged in either a foil pouch,
bag or box.
The specifications for the landscape edging and root feeder products
and packaging are designed by the Company and independent design consultants.
The products are then manufactured and packaged by third party manufacturers
according to the Company's specifications and generally are sent to the
Company's facilities for shipment to customers.
The material used in the sun screen fabric and resin-based fencing
is manufactured for the Company pursuant to open purchase orders. The material
is then sized and cut for consumer sale at the Waco, Texas facility.
Customers
Customers include home improvement centers, mass merchandisers,
hardware stores, nurseries, and garden centers and other retail channels
throughout North America and Europe. Using the historical data of the
Predecessor prior to November 1, 2003, the Company's customer profile is as
follows.
The two largest customers for fiscal 2004, Home Depot and Lowes,
accounted for approximately 55% and 8%, respectively, of consolidated invoiced
sales during that period. The two largest customers for fiscal 2003, Home Depot
and Ace Hardware, accounted for approximately 54% and 6%, respectively, of
consolidated invoiced sales during that period. The two largest customers for
fiscal 2002, Home Depot and Lowe's, accounted for approximately 49% and 10%,
respectively, of consolidated invoiced sales during such year. The ten largest
customers as a group accounted for approximately 81%, 77% and 78% of
consolidated invoiced sales during fiscal 2004, 2003, and 2002, respectively.
Sales to such customers are not governed by any contractual arrangement and are
made pursuant to standard purchase orders. Though the Company believes that
relations with its largest customers are good, the loss of any of these
customers could have an adverse effect upon the results of operations.
International sales are subject to certain additional risks in doing business in
foreign countries including, but not limited to, currency exchange rate
fluctuations and tariffs.
8
The sales are concentrated in the United States, with international
sales (primarily in Europe and Canada) accounting for approximately 10%, 10%,
and 6% of invoiced sales for each of fiscal 2004, 2003 and 2002, respectively.
The Company is currently attempting to develop additional relationships with
distributors outside of the United States.
Sales and Marketing
The selling efforts are managed by two Vice Presidents of Sales. One
specializes in national home center customers and the other directs four
regional sales managers responsible for mass merchants, hardware and all other
marketing channels. Because of the service-oriented nature of the business, the
sales managers devote a substantial amount of their time to servicing and
maintaining relationships with the largest customers in addition to managing the
overall sales operations. The Company also utilizes the services of over 36
non-exclusive independent sales organizations. This integrated sales approach is
designed to help achieve sales of all products to all customers in a cost
effective manner.
The marketing activities are coordinated by the National Marketing
Manager. In addition to designing and developing the distinctive packaging and
overall advertising and promotional activities of the product offerings, the
National Marketing Manager works closely with the sales organization to help
develop programs which are tailored to the strategies of the key Retail
Accounts.
The Company expects that the lawn and garden products will continue
to be marketed by retailers primarily through the use of special displays and
in-store consumer promotions in Retail Accounts, hardware stores, nurseries and
garden centers. In addition the Company believes that a substantial portion of
lawn and garden sales are impulse driven and not overly price sensitive.
Therefore the Company seeks to increase consumer awareness, understanding and
brand identification of the products through distinctive packaging and
point-of-sale displays. Retail Accounts and other customers receive the products
in packaging that is easily displayed. The retail product packaging is
informative to the end-user and incorporates attention getting, eye-pleasing
color schemes. The Company also tailors its displays to the evolving needs of
retailers. Because many home improvement and mass merchant retailers maintain
outdoor sales areas for their lawn and garden products, the Company utilizes
waterproof displays for many of the products. In addition, the Company meets the
specific needs of many of its larger customers by tailoring the size of its
displays to the dimensions requested by such customers. The independent sales
representatives periodically visit individual
9
retail outlets to assist Retail Accounts in achieving innovative and optimal use
of the distinctive store displays.
The Company and its Predecessor spent approximately $2.8 million in
fiscal 2004 on a combination of media development, print, radio and television
advertising, cooperative advertising (advertising done in conjunction with
retailers), attendance at trade shows and public relations to promote awareness,
understanding and brand identification of the lawn and garden products.
The Company and its Predecessor utilized a substantial portion of
its marketing budget for fiscal 2004 on cooperative advertising in conjunction
with key retail customers.
New Product Development
The Company believes that new product development is critical to its
long-term success. Accordingly, it has established a new product development
organization using two experienced individuals who are very experienced with all
facets of the Company's operations to lead and coordinate these activities
together with the help of consultants specializing in new product development
research. As a new Company with limited recent experience in new product
development and with limited financial resources, the Company's ability to
execute an aggressive new product development strategy to enhance operating
results and cash flow is unknown.
Information Systems
The Company maintains a sophisticated retail data information
system, which enables it to provide timely and efficient order fulfillment to
its Retail Accounts and other customers. Internally, the information system
tracks orders and deliveries and provides exception reports if product is not
delivered on time. The systems "push" the necessary information to the proper
personnel, allowing them to react quickly to information. The purchase order
process can be paperless, with most Retail Accounts placing their orders through
an electronic data interchange with the Company.
The Company has implemented the QAD Applications e-business
supply-chain enabled enterprise planning software.
Seasonality
The Company's sales are seasonal due to the nature of the lawn and
garden business. The Company's seasonality
10
generally parallels the annual growing season. The Company's sales and shipping
are usually most active from late March through May when home lawn and garden
customers are purchasing supplies for spring planting and retail stores are
replenishing their inventory of lawn and garden products. These patterns are
effected by a number of events; weather being the largest single event. The
buying pattern of retailers, including the Company's retail customers, is
changing. Retailers are buying enough product to begin the season just prior to
the beginning of the season and stores are replenishing their inventory when
sales are made by them rather than buying large quantities of inventory in
advance of the selling season. Sales typically decline in mid-summer.
Due to the seasonality of the Company's business as described above,
a substantial portion of the Company's sales and cash flows are generated in the
peak growing season of the year which are the March 31 quarter and most
significantly the June 30 quarter. Adverse weather in the June 30, 2004 quarter
had a negative impact on sales.
Inventory and Distribution
In order to meet product demand, the Predecessor historically kept
relatively large amounts of product inventory on hand during the months of
highest demand. As a result of changes in customer inventory purchasing patterns
described in the second preceding paragraph and improved communications with
customers and suppliers, the Company improved its ability to meet customer
demands without maintaining high inventory levels. Retail Accounts generally
require delivery within five business days. Orders are normally processed within
48 hours and shipped by common carrier. The Company's shipping and freight costs
have increased due to increasing oil prices, higher costs from the freight
carriers and smaller order size, and increased volume to a significant customer
that stipulates which freight carriers are to be used. The required freight
carriers are frequently not the lowest cost.
Competition
The consumer lawn and garden care industry is highly competitive and
somewhat fragmented. With respect to the Company's sale of consumer lawn and
garden products, the Company competes with a combination of national and
regional companies including catalog and Internet e-commerce businesses
specializing in the marketing of lawn and garden care products. The Scotts
Company, in particular, has captured a significant and controlling share in a
variety of categories as a result of their acquisition of the Ortho brand and
the licensing of the
11
Roundup brand for the consumer market. Scotts also markets products under the
Scotts and Miracle-Gro brands which compete both directly and indirectly with
many of the Company's products. Many of the Company's competitors have achieved
significant national, regional and local brand name and product recognition and
engage in frequent and extensive advertising and promotional programs. Many of
these companies have substantially greater financial, technical, marketing and
other resources than the Company.
Large, dominant manufacturers, which manufacture and sell lawn and
garden products, such as the Scotts Company, and other lawn and garden care
companies have, in the past, manufactured and marketed landscape fabrics.
However, currently few of such competitors compete with the Company in this
product category. Nevertheless, well-capitalized companies and smaller regional
firms may develop and market landscape fabrics and compete with the Company for
customers who purchase such products.
Among the Company's competitors in the lawn and garden market for
the Jobe's spike line of fertilizer products is the Scotts Company, which
markets competing products under the Miracle-Gro brand.
Government Regulation
The Company is subject to many laws and governmental regulations and
the changes in these laws and regulations resulting from their interpretation by
agencies and the courts.
Fertilizer and Pesticide Regulation. Products marketed, or which may
be marketed, by the Company as fertilizers or pesticides, are subject to an
extensive and frequently evolving statutory and regulatory framework, at both
the Federal and state levels. The distribution and sale of pesticides is subject
to regulation by the U.S. Environmental Protection Agency ("EPA") pursuant to
the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), as well as
regulation by many states in a manner similar to FIFRA. Under FIFRA and similar
state laws, all pesticides must be registered with the EPA and the state and
must be approved for their intended use. FIFRA and state regulations also impose
other stringent requirements on the marketing of such products. Moreover, many
states also impose similar requirements upon products marketed for use as
fertilizing materials, which are not typically regulated under FIFRA. Failure to
comply with the requirements of FIFRA and state laws that regulate marketing and
distribution of pesticides and fertilizers could result in the imposition of
12
sanctions, including, but not limited to suspension or restriction of product
distribution, civil penalties or criminal sanctions.
The Company markets certain animal repellent and pesticide products
that are subject to FIFRA and to similar state regulations. The Company believes
that it is in substantial compliance with material FIFRA and applicable state
regulations regarding its material business operations. However, there can be no
assurance that the Company will be able to comply with future regulations in
every jurisdiction in which it conducts material business operations without
substantial cost or interruption of operations. Moreover, there can be no
assurance that future products marketed by the Company will not also be subject
to FIFRA or to state regulations. If future costs of compliance with regulations
governing pesticides or fertilizers exceed the historical costs for such items,
the business could be adversely affected. If any of the products are distributed
or marketed in violation of any of these regulations, the Company could be
subject to a recall of, or a sales limitation placed on, one or more of the
products, or civil or criminal sanctions, any of which could have a material
adverse effect upon the business.
Environmental Regulation. The Company's manufacturing operations are
subject to various evolving federal, state and local laws and regulations
relating to the protection of the environment, which laws govern, among other
things, emissions to air, discharges to ground, surface water, and groundwater,
and the generation, handling, storage, transportation, treatment and disposal of
a variety of hazardous and non-hazardous substances and wastes. Federal and
state environmental laws and regulations often require manufacturers to obtain
permits for these emissions and discharges. Failure to comply with environmental
laws or to obtain, or comply with, the necessary state and federal permits can
subject the manufacturer to substantial civil and criminal penalties. The
Company operates two manufacturing facilities and its wholly-owned subsidiary,
Weatherly, operates one manufacturing facility. Although the Company believes
that its manufacturing facilities are in substantial compliance with applicable
material environmental laws, it is possible that there are material
environmental liabilities of which it is unaware. If the costs of compliance
with the various existing or future environmental laws and regulations including
any penalties which may be assessed for failure to obtain necessary permits,
exceed the historical costs for such items, the Company could be adversely
affected.
13
Potential Environmental Cleanup Liability. The Federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA"),
and many similar state statutes, impose joint and several liability for
environmental damages and cleanup costs on past or current owners and operators
of facilities at which hazardous substances have been discharged, as well as on
persons who generate, transport, or arrange for disposal of hazardous wastes at
a particular site. In addition, the operator of a facility may be subject to
claims by third parties for personal injury, property damage or other costs
resulting from contamination present at or emanating from property on which its
facility is located. As noted above, the Company operates two manufacturing
facilities and Weatherly operates one manufacturing facility. Predecessors of
the Company have owned or operated other manufacturing facilities in the past
and may have liability for remediation of such facilities in the future, to the
extent any is required. In this regard, Weatherly previously owned a facility
that was the subject of certain soil remediation activities. Although this
facility was sold by Weatherly prior to the Company's acquisition of Weatherly,
there can be no assurance that the Company will not be liable for any previously
existing environmental contamination at the facility. Moreover, although the
purchaser of the facility indemnified Weatherly for any environmental liability
and the sellers of Weatherly, in turn, indemnified the Company from such
liability, there can be no assurance that, if required, the indemnifying parties
will be able to fulfill their respective obligations to indemnify the Company.
The Company could also incur liability under CERCLA or similar state statutes
for any damage caused as a result of the mishandling or release of hazardous
substances owned by it but processed and manufactured by others on its behalf.
As a result, there can be no assurance that the manufacture of the products sold
by the Company will not subject it to liability pursuant to CERCLA or a similar
state statute.
Other Regulations. The Company is also subject to various other
federal, state and local regulatory requirements such as worker health and
safety, transportation, and advertising requirements. Failure to comply with
these requirements could result in the imposition of fines by governmental
authorities or awards of damages to private litigants.
Trademarks, Proprietary Information and Patents
Product recognition is an important competitive factor in the lawn
and garden products industry. Accordingly, in connection with the Company's
marketing activities of lawn and
14
garden products, it promotes, and intends to promote, certain trade names and
trademarks, which are believed to have value to it.
In connection with the acquisition, the Company acquired certain
trademarks and copyrights which are being used by it in its business including,
but not limited to, the trademarks, WeedBlock(R), Easy Gardener(R),
MicroPore(R), Landmaster(R), Polyspun 350(R), Nature Shield(R) and
Diamondback(R) and BirdBlock(R). In connection with the Company's acquisition of
Weatherly, it acquired certain patents, as well as certain copyrights and
trademarks used in connection with Weatherly's business including, but not
limited to, Jobe's(R), Ross(R), Green Again(R), Gro-Stakes(R), Tree Guard(R) and
XP-20(R). Tensar Corporation also granted the Company an exclusive royalty-free
perpetual license to use the trademark Tensar(R) in connection with a wide range
of polymeric grid, mesh, net and related products supplied to the Company by The
Tensar Corporation. There can be no assurance that the Company will apply for
any additional trademark or patent protections relating to its products or that
its current trademarks and patents will be enforceable or adequately protect
from infringement of proprietary rights.
Although the Company believes that the products sold do not and will
not infringe upon the patents or violate the proprietary rights of others, it is
possible that such infringement or violation has or may occur. In the event that
products sold by the Company are deemed to infringe upon the patents or
proprietary rights of others, it could be required to pay damages and modify its
products or obtain a license for the manufacture or sale of such products. There
can be no assurance that, in such an event, the Company would be able to do so
in a timely manner, upon acceptable terms and conditions or at all, and the
failure to do any of the foregoing could have a material adverse effect upon the
Company.
Product Liability
The Company, as a manufacturer of lawn and garden products including
pesticide products, may be exposed to significant product liability claims by
consumers. Although the Company has obtained product liability insurance
coverage in the aggregate amount of $2.0 million with all policies limited to
$1.0 million per occurrence, and have obtained an umbrella policy in the amount
of $5.0 million, there can be no assurance that such insurance will provide
coverage for any claim against the Company or will be sufficient to cover all
possible liabilities. In the event a successful suit is brought against the
Company, unavailability or insufficiency of insurance coverage could have
15
a material adverse effect on the Company. Moreover, any adverse publicity
arising from claims made against the Company, even if such claims were not
successful, could adversely affect the reputation and sales of its products.
Employees
As of August 30, 2004 the Company had 157 full-time employees. Of
such employees, 3 are executive officers of the Company, 39 were engaged in
administration and finance, 15 were engaged in sales and marketing, 48 were
engaged in warehouse, shipping and receiving, and 52 were engaged in production.
None of the employees are covered by collective bargaining agreements. The
Company believes that it has a good relationship with its employees.
Segment Information
The Company's operations are in one segment - the manufacture and
sale of consumer lawn and garden products. Product and major customer
information are disclosed separately above.
Item 2. Properties.
The Company leases approximately 250,000 square feet of office and
warehouse space in Waco, Texas for which it pays $19,386 per month in rent,
pursuant to a lease agreement that expires in February 2005. The facility
contains landscape fabric converters, packaging equipment and warehouse and
shipping facilities.
Weatherly leases approximately 72,000 square feet of manufacturing
and warehouse space in Paris, Kentucky for $9,931 per month in rent pursuant to
a lease that expires in June 2006. Weatherly also leases an additional 59,000
feet of warehouse space in Paris, Kentucky for $9,845 per month in rent,
pursuant to a lease agreement that expires in June 2006.
The Company also has entered into a lease with 60,000 square feet of
warehouse space in Colorado, which it uses for the storage, packaging and
distribution of certain of its commercial grade landscape fabric products. The
lease, which expires on May 31, 2005, provides for a rental rate of $16,010 per
month, which increases 5% per year on June 1 of each year.
The Company believes that its current manufacturing and warehouse
space is adequate for its planned future operations and that leases when they
expire can be replaced at acceptable terms.
16
Item 3. Legal Proceedings
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable
17
Part II.
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters.
Not Applicable - Registrant is a limited partnership and the
registered securities are not common stock.
Item 6. Selected Consolidated Financial Data (in thousands, except per
share data).
The following selected consolidated financial data at and for the
eight months ended June 30, 2004 is based upon the Company's audited
consolidated financial statements. The consolidated financial data for the four
months ended October 31, 2003 is the Predecessor's unaudited consolidated
financial data and the financial data at and for the years ended June 30, 2000,
2001, 2002 and 2003 has been derived from the Predecessor's audited consolidated
financial statements. Such information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the notes thereto
appearing elsewhere in this Report. Differences between amounts included below
and amounts previously reported are due to presentation reclassifications.
18
Statement of Operations Data
Year Ended June 30,
---------------------------------------------------------------------------------------
4 Months
Ended 8 Months
2000 2001 2002 2003 Oct 31, 2003 Ended
(Predecessor) (Predecessor) (Predecessor) (Predecessor) (Predecessor) June 30, 2004
------------- ------------- ------------- ------------- ---------------------------
Net sales ..................................... $ 86,919 $ 78,863 $ 78,947 $ 76,244 $ 17,473 $ 60,061
Cost of sales ................................. 47,802 44,065 43,358 43,453 10,953 33,454
----------------------------------------------------------------------------------
Gross profit .................................. 39,117 34,798 35,589 32,791 6,520 26,607
Selling, shipping, general and
administrative expenses ....................... 29,554 30,638 27,686 28,025 8,826 17,389
Restructuring charges (1) ..................... -- 2,860 -- --
----------------------------------------------------------------------------------
Income (loss) from operations ................. 9,563 1,300 7,903 4,766 (2,306) 9,218
Refinancing and transaction costs ............. -- -- (254) (4,291) (159) (410)
Other (2) ..................................... 1,224 -- -- -- -- --
Interest expense, net ......................... (6,692) (7,331) (7,291) (7,994) (2,868) (6,878)
Income tax (expense) benefit .................. (1,213) 1,406 (228) (133) (44) (698)
----------------------------------------------------------------------------------
Income (loss) from continuing operations
before cumulative effect of a change in
accounting principle .......................... 2,882 (4,625) 130 (7,652) (5,377) 1,232
Loss from discontinued operations,
net of tax and minority interest (3) .......... (3,227) (16,253) (1,760) (1,436) (75) (458)
Gain (loss) on disposal of discontinued
operations, net of tax and minority
interest (3) .................................. -- (4,551) 20 (49) -- --
----------------------------------------------------------------------------------
Income (loss) before cumulative effect of a
change in accounting principle ................ (345) (25,429) (1,610) (9,137) (5,452) 774
Cumulative effect of a change in accounting
principle (4) ................................. -- -- (9,882) -- -- --
----------------------------------------------------------------------------------
Net income (loss) ............................. $ (345) $(25,429) $(11,492) $ (9,137) $ (5,452) $ 774
==================================================================================
Balance Sheet Data
-----------------------------------------------------------------
June 30,
-----------------------------------------------------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
Working capital (deficit)....... $ 25,151 $ 4,867 $ 2,728 $ (5,532) $ 1,385
Intangible assets, net.......... 67,839 65,892 56,259 56,268 74,991
Total assets.................... 138,545 109,463 99,365 96,559 116,737
Short-term debt................. 3,125 21,670 22,748 27,227 15,171
Long-term debt.................. 58,338 56,951 56,951 57,092 70,331
Total liabilities............... 89,331 90,256 92,383 98,595 113,288
Equity Capital (deficit)........ 45,103 17,968 6,982 (2,036) 3,449
(1) Amount represents restructuring charges of the Predecessor relating to the
closing and sale of the Ampro facility.
(2) Amount represents gain incurred by the Predecessor on the repurchase of
Trust Preferred Securities of U.S. Home & Garden Trust I. Amount was
reclassified from extraordinary gain upon adoption of Statement of Financial
Accounting Standards No. 145.
(3) Amounts represent operations of Ampro which was discontinued by the Company
and for the Predecessor, the amounts reflect the
19
operations and estimated loss on disposal of the Predecessor's Weed Wizard and
Egarden subsidiaries. See further discussion in Note 3 to the Consolidated
Financial Statements included in Part II, Item 8.
(4) Amount represents the cumulative effect of the Predecessor's change in
accounting principle related to goodwill. See further discussion at Note 7 to
the Consolidated Financial Statements included in Part II, Item 8.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
The Company manufactures and markets a broad range of brand-name
consumer lawn and garden products through its own operations and through its
wholly-owned subsidiaries, Weatherly Consumer Products Group, Inc. which owns
Weatherly Consumer Products, Inc.("Weatherly") and Easy Gardener UK Ltd. These
operations were acquired from U.S. Home & Garden, Inc.(the "Predecessor")
effective November 1, 2003. As a result of that acquisition, the Company has
recorded $48.2 million in goodwill.
The Predecessor also recognized a significant amount of goodwill
which, in the aggregate, was approximately $49.9 million as of June 30, 2003.
Effective July 1, 2001 the Predecessor adopted Statement of Financial Accounting
Standards (SFAS) No. 142. Accordingly, no amortization of goodwill was reflected
in the financial statements for the fiscal years ended June 30, 2003 and 2002
compared to $2.5 million for the year ended June 30, 2001. The Predecessor
completed the transitional goodwill impairment test during fiscal 2002 and
recorded an impairment loss of $9.9 million which relates primarily to the Ampro
operations. This loss is reflected as a cumulative effect of a change in
accounting principle. See also "Summary of Accounting Policies - Intangible
Assets" and Note 7 to the Consolidated Financial Statements included in Part II,
Item 8.
The results of operations for the fiscal year ended June 30, 2004
which is the combined total of the Company's eight months ended June 30, 2004
and the Predecessor's four months ended October 31,2003 were adversely affected
by continual pricing pressure from customers, price increases from suppliers and
from adverse weather in the peak gardening season. Many of the Company's
products are petrochemical based and the costs of such products typically
increase when oil prices increase. Also, freight expenses were negatively
impacted by increasing oil prices and other factors. A significant customer with
increasing sales has mandated the freight carriers the Company
20
must use to ship product to them, which frequently is not the lowest cost
freight carrier. That same customer has also decreased the size of their average
order to better manage their inventory levels. Both of these actions have
resulted in increasing freight costs.
Interest expense is a significant expenditure for the Company.
Interest expense is also based upon variable interest rates for a substantial
portion of the Company's debt. An increase in interest rates will have a
negative impact on the Company's operating performance and cash flows.
The Predecessor's results of operations for the fiscal year ended
June 30, 2003 were adversely affected by the prolonged periods of inclement
weather in many portions of the United States during the late spring and early
summer which negatively impacted the lawn and garden industry. Their results
were also adversely affected by the refinancing costs and related write-offs and
transaction expenses related to the proposed sale of assets. Their results were
also adversely affected by the discontinued Weed Wizard operations that
generated a loss of $1.4 million for that year. Results were also impacted in
the third and fourth quarters by changes in the buying pattern of certain of the
key customers who carried less inventory than in prior years and replenished
their lower inventory levels as sales were made by them.
There continues to be a consolidation in the lawn and garden
industry which creates, over time, a downward pressure on operating margins.
21
Historical Results of Operations
The following table sets forth for the periods indicated certain selected income
data as a percentage of net sales:
-----------------------------------------------------------------------------
4 Months
2002 2003 2004 8 Months Combined
Predecessor Predecessor Predecessor 2004 2004
----------- ----------- ----------- ---- ----
Net sales .................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales .............................. 54.9 57.0 62.7 55.7 57.3
----- ----- ----- ----- -----
Gross profit ............................... 45.1 43.0 37.3 44.3 42.7
Selling and shipping ....................... 23.1 24.4 33.4 22.3 24.8
General and Administrative ................. 10.0 10.0 14.6 5.6 7.7
Depreciation and amortization .............. 2.0 2.3 2.5 1.0 1.3
----- ----- ----- ----- -----
Income (loss) from operations .............. 10.0 6.3 (13.2) 15.4 8.9
Refinancing and transaction costs .......... (0.3) (5.6) (0.9) (0.7) (0.7)
Interest expense, net ...................... (9.3) (10.5) (16.4) (11.5) (12.6)
Income tax expense ......................... (0.3) (0.2) (0.3) (1.2) (1.0)
Loss from discontinued operations,
net ........................................ (2.2) (1.9) (0.4) (0.8) (0.7)
Loss on disposal of discontinued
operations, net ............................ -- (0.1) -- -- --
Cumulative effect of a change in
accounting principle ....................... (12.5) -- -- -- --
----- ----- ----- ----- -----
Net income (loss) .......................... (14.6)% (12.0)% (31.2)% 1.2% (6.1)%
----- ----- ----- ----- -----
22
Eight Months Ended June 30, 2004 and Four Months Ended October 31, 2003
(Predecessor) Combined Compared to Year Ended June 30, 2003 (Predecessor)
Net sales. Net sales were $60.1 million for the eight months ended
June 30, 2004 and $17.4 million for the four months ended October 31, 2003 for a
combined twelve month amount of $77.5 million, an increase of $1.3 million, or
1.7%, as compared to the twelve months ended June 30, 2003 of $76.2 million. Net
sales are gross sales less adjustments for discounts, rebates, returns, and
allowances given to customers and such adjustments are collectively referred to
as sales adjustments. Gross sales less discounts equal invoice sales and are the
amounts billed to customer before deductions for rebates, returns, and
allowances. Net sales increased as a result of increases in gross sales
partially offset by increases in sales adjustments.
Cost of sales. Cost of sales of $33.4 million for the eight months
ended June 30, 2004 and $11.0 million for the four months ended October 31,
2003, for a combined twelve month amount of $44.4 million increased $0.9
million, or 2.1% as compared to the twelve months ended June 30, 2003 of $43.5
million. The increase in cost of sales is a result of increased sales and
increased material costs, primarily purchase price increases on a number of
petroleum based products. Cost of sales as a percentage of net sales increased
to 57.3% during the twelve months ended June 30, 2004 up from 57.0% during the
comparable period in 2003. Depreciation and amortization included in cost of
sales for the eight months ended June 30, 2004, the four months ended October
31, 2003 and year ended June 30, 2003 were $833,000, $496,000 and $1,476,000
respectively.
Gross profit. Gross profit of $26.6 million for the eight months
ended June 30, 2004 and $6.5 million for the four months ended October 31, 2003
for a combined twelve month amount of $33.1 million, an increase of $0.3
million, or 1.0%, as compared to the twelve months ended June 30, 2003 of $32.8
million. Gross profit as a percentage of net sales decreased to 42.7% during the
twelve months ended June 30, 2004, from 43.0% during the comparable period in
2003. This decrease in gross profit as a percentage of net sales resulted from
increased costs as noted above.
Selling and shipping expenses. Selling and shipping expenses of
$13.4 million for the eight months ended June 30,
23
2004 and $5.8 million for the four months ended October 31, 2003, for a combined
twelve month amount of $19.2 million an increase of $0.6 million, or 3.2% as
compared to the twelve months ended June 30, 2003 of $18.6 million. The increase
in expense was primarily a result of increased freight costs of $0.8 million,
advertising, commissions and other expenses of $0.3 million partially offset by
decreases in selling and marketing costs of $0.5 million. As a percentage of net
sales, selling and shipping expenses increased to 24.8% during the twelve months
ended June 30, 2004 from 24.4% during the comparable period in 2003.
General and administrative expenses. General and administrative
expenses were $3.3 million for the eight months ended June 30, 2004 and $2.6
million for the four months ended October 31, 2003, for a combined twelve month
amount of $5.9 million, a decrease of $1.7 million or 22.3%, from the twelve
months ended June 30, 2003 of $7.6 million. The decrease is a result of the
elimination of the Predecessor's administrative costs, which aggregated $1.7
million for the eight months ended June 30, 2003. As a percentage of net sales,
general and administrative expenses decreased to 7.7% during the twelve months
ended June 30, 2004 from 10.0% during the comparable period in 2003.
Depreciation and amortization. Depreciation and amortization
expenses were $0.6 million for the eight months ended June 30, 2004 and $0.4
million for the four months ended October 31, 2003 for a combined twelve month
amount of $1.0 million, a decrease of $0.7 million or 40.5% from the twelve
months ended June 30, 2003 of $1.7 million. The decrease is primarily due to
reduced depreciation and amortization during the four months ended October 2003
due to some depreciable and amortizable assets becoming fully depreciated or
amortized and during the eight months ended June 30, 2004 due to the revaluation
of the fixed assets to market value which resulted in less depreciation during
the period. The elimination of the Predecessor's depreciation and amortization
of $0.2 million during the eight months ended June 30, 2004 and $0.1 million of
the Ampro discontinued operations during the same period also contributed to the
reduction in depreciation and amortization. As a percentage of net sales,
depreciation and amortization expenses decreased to 1.3% during the twelve
months ended June 30, 2004, compared to 2.3% during the twelve months ended June
30, 2003.
24
Income (loss) from operations. Income from operations was $9.2
million for the eight months ended June 30, 2004 and a loss of $2.3 million for
the four months ended October 2003 for a combined twelve month income of $6.9
million, an increase of $2.1 million or 45.0% from the twelve months ended June
30, 2003 of $4.8 million. The increase was due to matters described above. As a
percentage of net sales, income from operations increased to 8.9% for the
combined twelve months ended June 30, 2004 from 6.3% during the comparable
period in 2003.
Refinancing and transaction costs. The Company incurred refinancing
costs for the eight months ended June 30, 2004 of $0.4 million related to the
replacement of its revolving credit facility, while the Predecessor incurred
transaction costs during the four months ended October 31, 2003 of $0.2 million,
for a combined twelve month amount of $0.6 million, a decrease of $3.7 million
or 86.7% as compared to the twelve months ended June 30, 2003 of $4.3 million.
Included in such prior year costs is a write-off of $2.0 million for deferred
financing costs and discounts, $1.7 million of fees and expenses related to the
replaced financing arrangements entered into in October 2002 and $0.6 million of
transaction costs related to the sale of the operations to the Company. The
transaction costs incurred in the month of October 2003 by the Predecessor were
reflected in the gain on the sale of the transaction and not reflected in the
income statement presented herein, which is prior to the transaction costs and
gain on the sale.
Interest expense. Net interest expense was $6.9 million for the
eight months ended June 30, 2004 and $2.9 million for the four months ended
October 31, 2003, for a combined twelve month amount of $9.8 million, an
increase of $1.8 million, or 21.9% from the twelve months ended June 30, 2003,
of $8.0 million. Of the increase in interest expense, $0.4 relates to the four
months ended October 31, 2003 when the Predecessor's borrowing levels and
interest rates increased and $1.4 million relates to the increase in debt due to
the purchase of operations of the Company in the eight months ended June 30,
2004. Of the increase in interest expenses, $1.0 million for the eight months
ended June 30, 2004 is deferred (non-cash) and not currently due in cash. A
substantial portion of the Company's interest expense is based upon variable
interest rates. Increases in such rates will have a negative impact on operating
performance and cash flow.
25
Income tax expense. Income tax expense of $0.7 million for the eight
months ended June 30, 2004 and income tax expense of $0.0 million incurred
during the four months ended October 31, 2003 for a combined income tax expense
of $0.7 million increased $0.6 million from the tax expense for the twelve
months ended June 30, 2003 of $0.1 million. The Company does not have a tax loss
carry forward while the Predecessor had a tax loss carry forward which impacted
its taxes for the four months ended October 31, 2003 and year ended June 30,
2003.
Discontinued operations. Loss from discontinued operations related
to the Ampro operations totaled $0.5 million for the eight months ended June 30,
2004. Loss from discontinued operations, which related to the Predecessor's Weed
Wizard operations, was $0.1 million for the four months ended October 31, 2003
and the combined twelve months ended June 30, 2004 totaled $0.6 million. This is
a decrease of $0.9 million or 62.9% from the twelve months ended June 30, 2003
of $1.5 million. The decrease in loss from discontinued operations results from
the Company not assuming any obligations related to Weed Wizard offset by the
loss from the Ampro division for the eight month period ended June 30, 2004.
Net income (loss). Net income was $0.8 million for the eight months
ended June 30, 2004, and the net loss was $5.5 million for the four months ended
October 31, 2003 for a combined twelve month loss of $4.7 million, a decrease of
$4.4 million from the twelve months ended June 30, 2003 loss of $9.1 million.
The decrease in net loss is due to the decreased refinancing and transaction
costs, decrease in loss from discontinued items, and increased income from
operations offset by increases in interest expense and income tax expense as
described above.
Fiscal Year Ended June 30, 2003 (Predecessor) Compared to Fiscal Year Ended June
30, 2002 (Predecessor)
Net sales. Net sales decreased $2.7 million, or 3.4%, to $76.2
million for the fiscal year ended June 30, 2003 from $78.9 million during the
fiscal year ended June 30, 2002. The decline was due to prolonged periods of
inclement weather in many areas of the United States as well as increased
discounts, returns and allowances.
Gross profit. Gross profit decreased by $2.8 million, or 7.9%, to
$32.8 million for the fiscal year ended June 30, 2003 from $35.6 million during
the comparable period in 2002.
26
Gross profit as a percentage of net sales decreased to 43.0% during the fiscal
year ended June 30, 2003 from 45.1% during the comparable period in 2002. The
decrease in gross profit is due to the decrease in sales volume and the
increased discounts, returns and allowances.
Selling and shipping expenses. Selling and shipping expenses
increased $.4 million, or 2.2% to $18.6 million during the fiscal year ended
June 30, 2003 from $18.2 million during the comparable period in 2002. Selling
and shipping expenses as a percentage of net sales increased to 24.5% during the
fiscal year ended June 30, 2003 from 23.1% during the comparable period in 2002.
This increase in expense and percentage was primarily a result of increased out
bound freight costs resulting from a reduction in the average size of shipments,
increase in freight costs, and increase in volume to a significant customer that
stipulated the Predecessor to use a required carrier.
General and administrative expenses. General and administrative
expenses decreased $0.3 million or 3.2% to $7.6 million during the fiscal year
ended June 30, 2003 from $7.9 million during the comparable period in 2002. As a
percentage of net sales, general and administrative expenses remained constant
at 10.0% during the fiscal year ended June 30, 2003 during the comparable period
in 2002.
Depreciation and amortization. Depreciation and amortization
expenses increased $0.2 million or 12.3% to $1.8 million from $1.6 million
during the comparable period in 2002. As a percentage of net sales, depreciation
and amortization expenses increased to 2.3% during the fiscal year ended June
30, 2003 from 2.0% during the comparable period in 2002.
Income from operations. Income from operations decreased by $3.1
million, or 39.7% to $4.8 million during the fiscal year ended June 30, 2003
compared to $7.9 million for the comparable period in 2002. The decrease in
income from operations for the 2003 period is primarily attributable to the
reduction in sales and increase in discounts, returns and allowances. As a
percentage of net sales, income from operations decreased to 6.3% for the fiscal
year ended June 30, 2003 from 10.0% during the comparable period in 2002.
Refinancing and transaction costs. Refinancing and transaction costs
increased $4.0 to $4.3 million during the year ended June 30, 2003 from $0.3
million during the comparable period in 2002. Included in such costs for the
year ended 2003 is $2.0 million of previously deferred finance costs and
27
discounts related to the replaced finance agreements and $2.3 million of
refinancing and transaction expenses. The Predecessor wrote-off $0.3 million of
deferred finance costs during the comparable period in 2002 as a result of
refinancing.
Net interest expense. Net interest expense increased $0.7 million,
or 9.6% to $8.0 million during the fiscal year ended June 30, 2003 compared to
$7.3 million during the comparable period in 2002. The increase in expense is
primarily due to increased borrowings under the term loan and the revolver and
increased borrowing rates at the end of the year due to covenant violations.
Income tax expense. Income tax expense was $0.1 million during the
fiscal year ended June 30, 2003 compared to $0.2 million during the comparable
period in 2002.
Discontinued operations. In June 2002, the Predecessor announced
they were discontinuing the Weed Wizard line of products effective September 30,
2002 due to continued operating losses, the loss of sales due to the product
recall in fiscal 2000, and the current and future prospects for the operation.
The net loss from discontinued operations was $1.4 million during
the year ended June 30, 2003 compared to $1.8 million in fiscal 2002. In fiscal
2002, the Predecessor recorded an estimated net loss on disposal of Weed Wizard
of $1.1 million related to the write-down of inventory and long-lived assets. As
of June 30, 2003, all Weed Wizard assets were written off. The remaining assets
at June 30, 2002 consisted of accounts receivable of $0.4 million, inventory of
$0.3 million, other current assets of $0.3 million, and net property and
equipment of $0.1 million. Remaining liabilities included accounts payable and
accrued expenses of $0.3 million. As of June 30, 2003, the Predecessor recorded
cash of $0.1 million and accrued liabilities of less than $0.1 million for the
discontinued Egarden operation. Such liabilities exclude leases guaranteed
having an unpaid balance of $0.1 million at June 30, 2003.
Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, the consolidated financial statements and notes of the
Predecessor have previously been restated for all periods presented to reflect
the discontinued components. The assets and liabilities of the discontinued
components have been classified as "Held for Sale" and the net operations and
net cash flows have been reported as "Discontinued Operations". See Note 3 to
the Consolidated Financial Statements included in Part II, Item 8.
28
Cumulative effect of a change in accounting principle. The
Predecessor recorded a cumulative effect of a change in accounting principle for
the fiscal year ended June 30, 2002 as a result of the completion of the
transitional goodwill impairment test in conjunction with the adoption of SFAS
No. 142. The recording of an impairment loss of $9.9 million, which is primarily
related to the Ampro operations, is reflected as a cumulative effect of a change
in accounting principle. See Note 7 to the Consolidated Financial Statements
included in Part II, Item 8.
Net loss. Net loss decreased by $2.4 million to $9.1 million during
the fiscal year ended June 30, 2003 from a net loss of $11.5 million during the
comparable period in 2002 due to the matters described above.
Quarterly Results of Operations and Seasonality
The Company and its Predecessor's sales are seasonal due to the
nature of the lawn and garden business. The Company's seasonality generally
parallels the annual growing season. The Company's sales and shipping are
usually most active from late March through May when home lawn and garden
customers are purchasing supplies for spring planting and retail stores are
replenishing their inventory of lawn and garden products. The patterns are
effected by a number of events; weather being the largest single event. The
buying patterns of retailers, including the Company's retail customers, is
changing. Retailers are buying enough product to begin the season just prior to
the beginning of the season and stores are replenishing their inventory when
sales are made by them rather than buying large quantities of inventory in
advance of the selling season. Sales typically decline by mid-summer.
Related Party Transactions
See discussion regarding the Predecessor's related party transactions in Part
II, Item 13 and Note 8 to the Consolidated Financial Statements included in Part
II, Item 8.
29
Set forth below is certain unaudited quarterly financial information:
Quarter Ended
(in thousands except per share data)
Month Ended
September 30, December 31, March 31, June 30, September 30, October 31,
2002 2002 2003 2003 2003 2003
(Predecessor) (Predecessor) (Predecessor) (Predecessor) (Predecessor) (Predecessor)
--------------------------------------------------------------------------------------------------
Net sales ............ $ 13,151 $ 12,351 $ 24,036 $ 26,706 $ 14,517 $ 2,956
Cost of sales ........ 8,186 7,167 12,758 15,342 8,784 2,169
----------------------------------------------------------------------------------------------
Gross profit ......... 4,965 5,184 11,278 11,364 5,733 787
Selling, shipping,
general and
administrative
expenses ........... 6,815 5,657 7,895 7,658 6,813 2,013
----------------------------------------------------------------------------------------------
Income (loss) from
operations ........... (1,850) (473) 3,383 3,706 (1,080) (1,226)
Refinancing and
transaction
costs ............. (194) (3,869) (116) (112) (159) --
Interest expense ..... (1,834) (1,826) (1,998) (2,336) (2,188) (680)
----------------------------------------------------------------------------------------------
Income (loss) from
continuing operations
before income taxes .. (3,878) (6,168) 1,269 1,258 (3,427) (1,906)
Income tax benefit
(expense) ............ -- (108) (3) (22) 5 (49)
Income (loss) from
discontinued
operations, net of
taxes ................ (978) (215) (41) (202) (74) (1)
Gain (loss) on
disposal of
discontinued
operations, net of
taxes ................ -- -- -- (49) -- --
----------------------------------------------------------------------------------------------
Net income (loss) .... $ (4,856) $ (6,491) $ 1,225 $ 985 $ (3,496) $ (1,956)
==============================================================================================
Net sales ............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ........ 62.2% 58.0% 53.1% 57.4% 60.5% 73.4%
----------------------------------------------------------------------------------------------
Gross profit ......... 37.8% 42.0% 46.9% 42.6% 39.5% 26.6%
Selling, shipping,
general and
administrative ... 51.8% 45.8% 32.8% 28.7% 46.9% 68.1%
----------------------------------------------------------------------------------------------
Income (loss) from
operations ........... (14.0%) (3.8%) 14.1% 13.9% (7.4%) (41.5%)
Refinancing and
transaction
costs ................ (1.5%) (31.3%) (0.5%) (0.4%) (1.1%) --
Interest expense ..... (14.0%) (14.8%) (8.3%) (8.8%) (15.1%) (23.0%)
----------------------------------------------------------------------------------------------
Income (loss) from ... (29.5%) (49.9%) 5.3% 4.7% (23.6%) (64.5%)
continuing operations
before income taxes
Income tax benefit
(expense) ............ -- (0.9%) -- (0.1%) -- (1.7%)
Income (loss) from
discontinued
operations, net of tax (7.4%) (1.7%) (0.2%) (0.7%) (0.5%) --
Gain (loss) on
disposal of
discontinued
operations, net of tax -- -- -- (0.2%) -- --
----------------------------------------------------------------------------------------------
Net income (loss) .... (36.9%) (52.5%) 5.1% 3.7% (24.1%) (66.2%)
==============================================================================================
Quarter Ended
(in thousands except per share data)
2 months
December 31, March 31, June 30,
2003 2004 2004
--------------------------------------------
Net sales ............ $ 6,985 $ 23,638 $ 29,438
Cost of sales ........ 4,358 12,636 16,460
-------------------------------------------
Gross profit ......... 2,627 11,002 12,978
Selling, shipping,
general and
administrative
expenses ........... 3,226 6,508 7,655
-------------------------------------------
Income (loss) from
operations ........... (599) 4,494 5,323
Refinancing and
transaction
costs ............. -- -- (410)
Interest expense ..... (1,593) (2,628) (2,657)
-------------------------------------------
Income (loss) from
continuing operations
before income taxes .. (2,192) 1,866 2,255
Income tax benefit
(expense) ............ 758 (762) (693)
Income (loss) from
discontinued
operations, net of
taxes ................ (38) 187 (607)
Gain (loss) on
disposal of
discontinued
operations, net of
taxes ................ -- -- --
-------------------------------------------
Net income (loss) .... $ (1,472) $ 1,291 955
===========================================
Net sales ............ 100.0% 100.0% 100.0%
Cost of sales ........ 62.4% 53.5% 55.9%
-------------------------------------------
Gross profit ......... 37.6% 46.5% 44.1%
Selling, shipping,
general and
administrative ... 46.2% 27.5% 26.0%
-------------------------------------------
Income (loss) from
operations ........... (8.6%) 19.0% 18.1%
Refinancing and
transaction
costs ................ -- -- (1.4%)
Interest expense ..... (22.8%) (11.1%) (9.0%)
-------------------------------------------
Income (loss) from ... (31.4%) 7.9% 7.7%
continuing operations
before income taxes
Income tax benefit
(expense) ............ 10.9% (3.2%) (2.4%)
Income (loss) from
discontinued
operations, net of tax (0.6%) 0.8% (2.1%)
Gain (loss) on
disposal of
discontinued
operations, net of tax -- -- --
-------------------------------------------
Net income (loss) .... (21.1%) 5.5% 3.2%
===========================================
Differences between amounts included above and amounts previously
reported on Form 10-Q are due to reclassifications.
30
Liquidity and Capital Resources
The Company, which effectively commenced operations on November 1,
2003, has financed its operations through borrowings from lending institutions.
As noted below, the Company's senior lenders have required that the Company
finance part of its operations by deferring the interest on the Junior
Subordinated Debentures since the loan requirements to pay such interest have
not been met.
The Company's cash flow is dependent on its sales which as
previously noted are seasonal and significantly impacted by weather conditions
during the key gardening season. A substantial portion of the Company's sales
are generated in the last two quarters of the Company's fiscal year, and most
significantly the last quarter of the fiscal year which ends June 30.
Interest expense is a significant expenditure for the Company and a
substantial amount of its interest expense is based upon variable interest
rates. Increases in such interest rates would have a negative impact on
operating performance and cash flow.
The Company's cash flow and liquidity levels are driven by sales and
the resulting accounts receivable and their collections, the purchase of
inventory and labor to produce finished inventory, operating expenses and the
related payment of accounts payable and accrued expenses.
The Company has significant fixed expenditures in the form of
principal and interest requirements and believes it will have sufficient cash
flow to meet these obligations as they come due. However, adverse weather and
other factors could leave the Company with insufficient cash flows to meet these
and other obligations.
At June 30, 2004, the Company had consolidated cash and short-term
investments totaling $0.4 million, current assets of $33.5 million and working
capital of $1.4 million. At June 30, 2003, the Predecessor, had consolidated
cash and short-term investments totaling $0.8 million, current assets of $35.7
million and a working capital deficit of $5.5 million. The increase in working
capital of the Company was primarily attributable to the refinancing terms
obtained by the Company
31
during the quarter ended December 31, 2003 as part of it acquisition. The
revolving credit facility has provisions whereby collections from customers be
deposited into cash collateral accounts that directly pay down the revolving
note payable and if the Company has a "Material Adverse Change" as determined by
the lenders, the loan could become currently due and payable. As a result of
these loans provisions, the Company has not classified any portion of the
revolving credit facility as a long term debt.
Net cash used in operating activities for the eight months ended
June 30, 2004 of $7.6 million consisted primarily of an increase in accounts
receivable of $17.0 million, offset in part by increases in accounts payable and
accrued expenses of $4.6 million, a decrease in inventory of $0.4 million,
non-cash charges of $3.1 million and net income of $1.3 million.
Net cash used in investing activities for the eight months ended
June 30, 2004 of $75.2 million is primarily due to the purchase of assets net of
the assumption of accounts payable and accrued liabilities assumed from the
Predecessor and the capital purchases of equipment and intangible assets.
Net cash provided by financing activities for the eight months ended
June 30, 2004 of $81.8 million is primarily due to the assumption of liabilities
from the Predecessor and the additional debt incurred and capital raised to
acquire the Predecessor's operations and the proceeds from the credit facilities
used to fund the cash used in operating and investing activities and the
long-term debt repayment.
The Company's operations are not capital intensive and accordingly
funding capital expenditures does not require high levels of cash flow or
significant financing arrangements. The Company does however require cash flows
to finance new product development.
The Company and its parent, EYAS International, Inc., and their
subsidiaries entered into four credit arrangements on October 29, 2003 to
finance the acquisition of the operations and to provide working capital. The
Company also assumed from the Predecessor an obligation for the Junior
Subordinated Debentures.
The first credit facility was the amended and restated Loan and
Security Agreement with Wells Fargo Foothill, Inc., which was a three year asset
based lending revolving credit facility. This facility had a maximum borrowing
level of $25 million, which was limited based upon having eligible accounts
32
receivable and inventory. Interest was at variable annual rates based upon the
prime rate plus 0.5% or LIBOR plus 2.75%, but not less than 5.25%. The facility
had various covenants including minimum EBITDA, minimum EBITDA to pay interest
on the Junior Subordinated Debentures, a Funded Senior Debt Ratio, a Fixed
Charge Coverage Ratio, and limits on Capital Expenditures. EBITDA is defined as
Earnings Before Interest, Taxes, Depreciation and Amortization. The facility had
a term ending October 29, 2006 and was secured by all of the assets of the
Company and it's parents and subsidiaries.
On April 27, 2004 the Company and its parents and subsidiaries
entered into a new senior credit facility replacing the Wells Fargo Foothill,
Inc. facility described in the previous paragraph. The new facility is with La
Salle Business Credit, L.L.C. who is the Agent for and one of the lenders on the
facility. The new asset based lending revolving credit facility has an original
term of three years and then is automatically renewable from year to year at the
option of the lenders and borrower. The facility has a maximum borrowing level
of $25 million. The facility is secured by all the assets of the Company and
it's parents and subsidiaries. The actual borrowing level is limited based upon
having eligible accounts receivable, inventory and for parts of the year, the
seasonal availability amount. Interest is at variable annual rates based upon
the prime rate plus 0.5% or LIBOR plus 3.25%. The new facility has various
financial covenants identical to the replaced facility including minimum EBITDA,
minimum EBITDA to pay interest on the Junior Subordinated Debentures, a Fixed
Charge Coverage Ratio, a Funded Senior Debt Ratio/Leverage Ratio and limits on
Capital Expenditures.
The second credit facility is with CapitalSource Finance LLC and
includes two term loans. Term Loan A in the amount of $14,315,000 of which
$14,000,000 has been borrowed and Term Loan B in the amount of $9,713,750 of
which $9,500,000 has been borrowed. Both Term Loans A and B mature on October
29, 2008 and are secured by all of the assets of the Company and it's parents
and subsidiaries. Term Loan A bears interest at the greater of 5.75% over the
prime rate or 10% and has monthly repayment of principal of $104,167 per month
in year one, $166,667 per month in year two, $291,667 per month in years three
and four and $312,500 per month in year five. The principal repayment schedule
has the loan principal fully repaid at maturity. Term Loan B bears interest at
the greater of 8.75% over the prime rate or 13% plus 7.0% of non-cash interest
which is to be paid at the maturity of Term Loan B. Term Loans A and B also
require mandatory pre-payments of the excess cash flow as
33
defined in the loan agreements. The principal reduction ranges from 50% to 75%
of the excess cash flow generated by the Company. The facility has financial
covenants identical to those of the revolving credit facility described above.
At June 30, 2004, the Company had exceeded its Fixed Charge Coverage
Ratio and for the months of July 2004 and August 2004 the Company was below its
minimum EBITDA level. The lenders have waived these defaults. The Company also
was below the minimum EBITDA level required by the lenders to continue to pay
the interest on the Junior Subordinated Debentures. As permitted by the Amended
and Restated Junior Subordinated Indenture, the Company has notified the Trustee
that it has exercised its right to defer the monthly interest payment commencing
with the August 2004 payment as described below.
The third credit facility the Company entered into was two
subordinated loan agreements, one with the Predecessor aggregating $1,600,000
and one with Central Garden & Pet Company aggregating $2,675,000. The
subordinated Predecessor loan is the more junior of the subordinated loans. Both
of these subordinated loans bear interest at 9% per annum. Interest is payable
at maturity, on April 29, 2008, and interest is reflected in the financial
statements as non-cash interest. The Predecessor's loan has a repayment feature
based upon excess cash flow as defined in the second credit facility described
in the second preceding paragraph. The $2,675,000 subordinated note gives the
holder of the note the right to convert the note plus accrued interest into a
49% ownership interest in the Company.
The fourth credit facility is the Company's assumption from the
Predecessor, certain of the Predecessor's obligations under the Junior
Subordinated Debentures which were originally issued to U.S. Home & Garden Trust
I, a wholly owned subsidiary of the Predecessor. Concurrent with this
assumption, the name of U.S. Home & Garden Trust I was changed to Easy Gardener
Products Trust I (the "Trust"), which is a wholly owned subsidiary of the
Company. The purpose of the Trust is to hold as an asset, the Junior
Subordinated Debentures which is a liability of the Company owed to the Trust
and to reflect the Trust's obligation to the Company for the 78,000 common
securities outstanding with a liquidation value of $25 per common share, with a
face value of $1,950,000 and the obligation of the Trust for the 2,530,000 of
9.40% Cumulative Trust Preferred Securities with a liquidation value of $25 per
security (the "Trust Preferred Securities"), having a total face value at the
date of issuance to the public of $63,250,000. The common securities and Trust
Preferred Securities are collectively
34
referred to as the "Trust Securities". In accordance with FASB Interpretation
No. 46 with Revisions, the Trust has not been consolidated in the Company's
financial statements at June 30, 2004. Accordingly, the Company's financial
statements include in other assets, its interest in the common shares of the
Trust, the 9.40% Cumulative Trust Preferred Securities it acquired and the
amounts due from the prior lender of the Predecessor as described in the
following paragraph and its liability to the Trust for the Junior Subordinated
Debentures. The Trust Preferred Securities were first issued in a public
offering in 1998. The Junior Subordinated Debentures are the only assets of the
Trust and have a face value outstanding of $65,200,000 and interest rate of
9.40% and mature on April 15, 2028. Distribution of interest on the Junior
Subordinated Debentures are payable monthly in arrears by the Trust. The Trust
Preferred Securities are subject to mandatory redemption upon the repayment of
the Subordinated Debentures at a redemption price equal to the aggregate
liquidation amount of the securities plus any accumulated and unpaid
distributions. The Subordinated Debentures mature in total on April 15, 2028,
but may be redeemed at the option of the Company at any time.
The Company has entered into two agreements with a prior lender of
the Predecessor giving the prior lender the rights to acquire up to 189,750 of
the 9.40% Cumulative Trust Preferred Securities acquired by the Company. Under
the first agreement, the prior lender acquired 94,875 shares of the Trust
Preferred Securities at an exercise price of $9.00 per share. The option
agreement provided for a cashless exercise which was used for this transaction.
The Company received back 37,620 shares of the option securities, which based on
the market value of such shares at the exercise date of $22.70 per share,
represents the total exercise price of the option of $854,000. The effect on
liquidity is to increase interest expense by approximately $11,000 per month as
a result of having 57,255 additional shares outstanding and to reduce the number
of shares outstanding at maturity by 37,620. Under the second agreement, the
prior lender is forgoing monthly cash interest on an additional 94,875 of the
redeemed shares until the exercise price of such shares is reduced to $0 at
which point the underlying securities will be transferred to the prior lender
and the non-cash interest expenses of approximately $19,000 per month will
become cash interest expense. The prior lender can also use option shares as
consideration for the exercise price. The exercise price on these securities at
the date of purchase of the operations was $4.30 and is reduced by approximately
$.20 each month.
Interest on the Subordinated Debentures can be deferred for a period
not to exceed 60 consecutive months with no change in the rights of the lenders.
During any such deferral period, interest on the Trust Preferred Securities will
accrue and compound monthly at an annualized rate of 9.40% and, subject to
35
certain exceptions, the Company may not declare or pay distributions on its
capital or debt securities that rank equal to or junior to the Subordinated
Debentures.
The Company announced in early August that it had informed the
Trustee for the Amended and Restated Junior Subordinated Indenture, under which
the Trust Preferred Securities were issued, that in accordance with Section 3.11
of the Indenture, it has exercised its right to defer (not cancel) the monthly
interest payments commencing with the August 2004 payment. The Company has not
determined the length of time it will exercise its rights to defer the monthly
interest. It does not believe that payments will be deferred for the maximum 60
consecutive months allowed. The deferred interest plus interest thereon will be
included in the financial statements as non-cash interest.
As a result of the Predecessor's loan covenant violations, the
opinion of its certified public accountants on its consolidated financial
statements included in Part II, Item 8 as of June 30, 2003 and 2002 for each of
the three years in the period ended June 30, 2003 included an explanatory
paragraph due to the uncertainty of its ability to obtain financing at a
commercially reasonable rate, which raised doubt about the Predecessor's ability
to continue as a going concern.
Commitments
The Company leases office and warehouse space, certain office
equipment and automobiles under operating leases expiring through 2008. The
future minimum annual lease payments under these non-cancelable operating leases
are as follows:
Year Ended June 30, Amount
------------------------------------------------------------
2005 $ 602,000
2006 268,000
2007 9,000
2008 6,000
------------------------------------------------------------
$ 885,000
------------------------------------------------------------
Critical Accounting Policies
The preparation of financial statements requires the adoption and
implementation of accounting policies and the use of assumptions and estimates
in their presentation. The accounting policies and uncertainties, judgments and
estimates
36
make it likely that materially different amounts would be reported under
different conditions and different assumptions.
The Company has included below a discussion of the more critical
accounting policies that are affected by the significant judgments and estimates
used in the preparation of the financial statements, how such policies are
applied, and how results differing from the estimates and assumptions would
affect the amounts presented in the financial statements. Other accounting
policies also have a significant effect on the financial statements, and some of
these policies also require the use of estimates and assumptions.
Allowance for Doubtful Accounts Receivable. The Company maintains an
allowance for doubtful accounts receivable, that represents the potential
estimated losses resulting from the inability of customers to make required
payments for amounts owed. The allowance is estimated based on historical
experience of write-offs, the level of past due amounts and information known
about specific customers with respect to their ability to make payments at the
balance sheet date. If the financial condition of the Company's customers were
to change, resulting in an impairment or improvement in their ability to make
payments, additional allowances may be required or allowances may be reduced.
Inventories. The Company records inventory reserves for estimated
obsolescence of inventory equal to the difference between the cost of inventory
owned and the estimated market value. Market value is based upon the age of
specific inventory on hand and assumptions about future demand and market
conditions. If actual demand or market conditions for the sale of the inventory
are less favorable than those anticipated by management, additional reserves may
be required.
Accrued Expenses. The Company records its estimated costs for
customer rebates and co-op adverting, freight and commission expenses as the
related sales occur during the year. These accruals involve the use of estimates
as to the expected program costs and the expected sales levels. If the program
costs and / or the expected sales levels were to change from the estimates used
in the accrual process, the accrued amounts might be either overstated or
understated.
Goodwill. The Company under the purchase method has incurred costs
in excess of the value of net assets acquired
37
which has been recorded as goodwill. Goodwill will be tested for impairment by
comparing the carrying value of the assets to their fair value. The fair value
of the assets could vary significantly over time and different assumptions and
estimates will result in different valuations.
Trademarks. The Company obtained trademarks as part of the assets it
acquired. The trademarks are estimated to have an indefinite life and are not
being amortized. The fair value of the assets could vary significantly over time
and different assumptions and estimates will result in different valuations.
Deferred Income Taxes. The Company records deferred income taxes
based on enacted income tax rates in effect on the dates temporary differences
between the financial reporting and tax bases of assets and liabilities reverse.
To the extent that available evidence about the future raises doubt about the
realization of a deferred tax asset, a valuation allowance is established.
Actual results might differ from the estimates used in the computation of
deferred income taxes.
New Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board (FASB)
revised Statements of Financial Accounting Standards (SFAS) No. 132, Employers
Disclosures about Pensions and Other Postretirement Benefits - an amendment of
FASB Statements No. 87, 88, and 106. Amended SFAS No. 132 requires additional
disclosures to those in the original SFAS No. 132 about the assets, obligations,
cash flows and net periodic benefit cost of defined benefit pension plans and
other defined postretirement plans. The provisions of the statement are
effective for fiscal years ending after December 15,2003 and the interim period
disclosures are effective for interim periods beginning after December 31, 2003.
The amendments to SFAS No. 132 did not have an effect on the Company's financial
statements.
Inflation
Inflation has historically not had a material effect on the
Company's or Predecessor's operations.
38
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As a result of its variable rate revolving credit line and term
debt, the Company is exposed to the risk of rising interest rates. The Company
also has minor exposure to changes in foreign exchange rates. The following
table provides information on the Company's fixed maturity debt as of June 30,
2004 that are sensitive to changes in interest rates.
The Revolving Credit Facility with LaSalle Business Credit L.L.C.
had a variable interest rate of 4.25% for the period ended
June 30, 2004 $13.5 million
The Term Loan A with Capital Source Finance, LLC had a variable
interest rate of 10.0% for the period ended
June 30, 2004 $13.1 million
The Term Loan B with Capital Source Finance, LLC had a variable
interest rate component of 13.0% for the period ended
June 30, 2004 $10.0 million
Item 8. Financial Statements and Supplementary Data.
This information appears in a separate section of this report
following Part IV.
Item 9. Changes in and Disagreement with Accountants on Accounting and
Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. As of the end of
the period covered by this report, as carried out an evaluation,
under the supervision and with the participation of the Company's
Chief Executive Officer and Chief Financial Officer of the
effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on the evaluation of the
effectiveness of the design and operation of the Company's
disclosure controls and procedures, the Company's Chief Executive
Officer and
39
Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective in timely alerting them to
material information required to be included in the Company's
periodic SEC filings at the reasonable assurance level.
(b) Changes in internal control over financial reporting. There has been
no changes in the Company's internal control over financial
reporting that occurred during the eight months ended June 30, 2004
that has materially affected or is reasonably likely to materially
affect the internal controls over financial reporting.
Part II.
Item 10. Directors and Executive Officers of the Registrant.
The Registrant is a limited partnership. EG Product Management LLC,
a general partner, owns 1% of the Registrant and EG, LLC (Nevada) a limited
partner, owns 99% of the Registrant. Both EG Product Management LLC and EG, LLC
are wholly owned by EYAS International, Inc.
Name Age Position
- ---- --- --------
Richard M. Grandy 58 Director and President, EYAS International Inc. Manager, EG
Product Management LLC, EG LLC, and Easy Gardener Products, Ltd.
Wayne G. Fethke (1) 58 Director, EYAS International, Inc., Manager EG Product
Management LLC and Easy Gardener Products, Ltd.
Sheila Jones 49 Vice President, EYAS International, Inc., EG Product Management
LLC, and Easy Gardener Products, Ltd.
Richard M. Kurz 62 Director and Chief Financial Officer, EYAS International, Inc.,
Manager and CFO EG Product Management LLC and Easy Gardener
Products, Ltd.
(1) Member, Audit Committee
Richard M. Grandy, has served as president and Chief Operations
Officer of the Company and in the capacities noted
40
above since the entities commenced operations effective November 1, 2003. Prior
to that he served as chief operating officer of U.S. Home & Garden, Inc
(Predecessor) from June 30, 2001 to June 30, 2003 and President of Easy
Gardener, Inc. from July 1997 to June 30, 2003. Prior to such time he served as
vice president of Easy Gardener, Inc. from the date of its acquisition by U.S.
Home & Garden, Inc. in September 1994. Mr. Grandy co-founded Easy Gardener, Inc.
in 1983 after serving as marketing director at International Spike, Inc. from
1977 through 1983. From 1968 through 1977, Mr. Grandy was a sales representative
of lawn and garden products for the Ortho Division of Chevron Chemical Co.
Wayne G. Fethke, has served in the capacities noted above since the
entities commenced operations effective November 1, 2003. Mr Fethke has been
involved with various private equity companies with investments in both consumer
durable and industrial companies since July 2000 and is seeking to acquire
companies in the consumer durable industry. From 1977 to April 2000, Mr. Fethke
was employed as chief executive officer of Fiskars, Inc., a manufacturer of
consumer durables, including scissors, knives, garden products, floor mats and
tools. Mr. Fethke founded Fiskars USA in 1977. From 1974 to 1977, he was the
manufacturing manager of Di-Arco Division, of Houdaille Industries, a
manufacturer of metal forming machine tools. Prior to 1974, he was employed as
the Supervisor of Industrial Engineering of the Browning Division of Emerson
Electric.
Sheila Jones, has served in the capacities noted above since the
entities commenced operations effective November 1, 2003. She has been vice
president of Easy Gardener, Inc. since July 1997 and has also served as its
general manager since U.S. Home & Garden, Inc.'s acquisition of Easy Gardener,
Inc.'s assets in September 1994. Prior to that acquisition, Ms. Jones was
employed by Easy Gardener, Inc.'s predecessor from its inception in September
1983, where she advanced to the positions of vice president and general manger.
From April 1977 to September 1983, she was employed by International Spike,
Inc., a manufacturer and marketer of fertilizer spikes, where she held various
project management positions.
Richard M. Kurz, has served in the capacities noted above since the
entities commenced operations effective November 1, 2003. Prior to that he was
chief financial officer of U.S. Home & Garden, Inc. (Predecessor) since October
2001 and served as its vice president-finance from June 2001 until October 2001.
He has also served as chief financial officer of Easy Gardener,
41
Inc. from October 2001 until October 29, 2003. From 1997 until December 2000, he
was executive vice president and chief financial officer for Aircraft Interior
Resources, Inc, a company that provides products and services to commercial
airlines. From 1994 until 1997, he was senior vice president and chief financial
officer of American Eagle Group, Inc., a service company that provided insurance
services to the aviation and other specialized industries. From 1991 to 1994, he
was chief financial and administrative officer of BDP International, Inc. a
logistics service provider. From 1979 to 1991, he held a variety of senior
financial positions with CIGNA Corporation, a healthcare provider. Mr. Kurz is a
certified public accountant.
All directors hold office until the next annual meeting of the
stockholders of EYAS International, Inc. and the election and qualification of
their successors. The officers are elected by the Board and serve at the
discretion of the Board.
Voting Security Ownership of Principal Beneficial Owners and Management of Easy
Gardener Products, Inc.
EYAS International Inc. has outstanding 267,500 shares of common
stock. The following table sets out the number of shares of EYAS International
Inc. that are beneficially owned, as of the closing, by:
o each person known to be the owner of more than 5% of the outstanding
shares of common stock of EYAS;
o each director;
o each executive officer; and
o all executive officers and directors as a group
Amount and Nature of Percentage of
Name Of Beneficial Owner Beneficial Ownership Class
------------------------ -------------------- -----
Richard M. Grandy.................. 115,800 43.30%
Richard M. Kurz................... 10,000 3.74%
Wayne G. Fethke.................. 25,000 9.35%
Sheila Jones...................... 14,000 5.23%
Andrew Loberger................... 18,000 6.73%
All officers and directors
as a group (four persons)......... 164,8000 61.61%
42
The shares for Mr. Grandy include 88,800 shares owned by the Grandy
Partnership, Ltd. And 27,000 shares held in Mr. Grandy's IRA.
Unless otherwise noted, the Company believes that all of the persons
named in the table have sole voting and investment power with respect to all
shares of common stock of EYAS beneficially owned by them.
As described earlier in this report, Central Garden & Pet Company, a
subordinated lender, has the right to convert it's subordinated loan plus
accrued interest into a 49% ownership interest in the Company. The Company has
also given Central Garden & Pet Company an option, which is exercisable after
October 29, 2006, to purchase the remaining 51% interest in the Company.
Item 11. Executive Compensation.
The following table discloses the compensation awarded by the
Company since it commenced operations on November 1, 2003 through June 30, 2004
to the three executive officers noted below. While these individuals have
various positions within the various affiliates of the Company as noted in Item
10, their only compensation comes from the Company.
Summary Compensation Table
Annual Compensation Long-Term
------------------- Compensation
------------
Securities
Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options (#) Compensation($)(1)
- --------------------------- ---- ---------- --------- -------------- ------------------
Richard M. Grandy 2004 $230,200 -- None $6,146
Sheila Jones 2004 $114,785 $7,022 None --
Richard M. Kurz 2004 $133,333 $8,000 None $5,940
(1) Represents Company contributions to the Named Officers 401(k)/profit
sharing accounts. Excludes certain perquisites that did not exceed the
lesser of $50,000 or 10% of the combined bonus and salary of the named
officers.
43
Committees of the Board of Directors
The Company has established an Audit Committee which is currently
comprised of Mr. Fethke. The Audit Committee, among other things, makes
recommendations to the Board of Directors with respect to the engagement of the
independent certified public accountants and reviews the scope and effect of the
audit engagement.
Director Compensation
For the eight months ended June 30, 2004, Mr. Fethke, the
non-employee director, was compensated under a Consulting Service Agreement in
the amount of $40,000.00.
Item 14. Principal Accountant Fees and Services.
Audit Fees.
Fees billed for professional services by the principal
accountant for the audit of the Company's annual financial
statements as of June 30, 2004 and review of financial statements
included in the Company's December 31, 2003 and March 31, 2004 Form
10-Q's as of June 30, 2004.
Audit-Related Fees
As of June 30, 2004 $110,850
Tax Fees
None
All Other Fees
None
All fees of the principal accountant have been approved
by the Audit Committee.
44
Part IV.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) Financial Statements.
The Financial Statements and Index follow this
(2) Financial Statement Schedule.
Schedule II-Valuation and Qualifying Accounts.
(3) Exhibits
Exhibit No.
2.1 Asset Purchase Agreement, dated December 11, 2002, by and between
USH&G, Easy Gardener, Ampro, Weed Wizard Acquisition Corp., EGP and
EYAS International, Inc., and Amendment thereto dated July 31, 2003,
with lists of exhibits attached.**
3.1 Certificate of Limited Partnership of Easy Gardener Products, Ltd.*
4.1 Amended and Restated junior Subordinated Indenture.**
4.2 Second Amended and Restated Trust Agreement.**
4.3 Trust Preferred Securities Certificate of Easy Gardener Products
Trust I.**
4.4 9.40% Junior Subordinated Deferrable Interest Debenture of Easy
Gardener Products, Ltd.**
4.5 Amended and Restated Guarantee Agreement.**
4.6 Amended and Restated Agreement as to Expense and Liabilities between
Easy Gardener Products, Ltd. and Easy Gardener Products Trust I.**
45
10.1 Easy Gardener Products, Ltd., a Texas Limited Partnership, Amended
and Restated Limited Partnership Agreement dated as of October 29,
2003. ***
10.2 Loan and Security Agreement with LaSalle Business Credit, LLC, as
Agent, certain financial institutions as Lenders and Easy Gardener
Products, Ltd., as Borrower, EYAS International, Inc., as a Credit
Party, EG Product Management, L.L.C., as a Credit Party, EG, L.L.C.,
as a Credit Party, Weatherly Consumer Products Group, Inc., as a
Credit Party, Weatherly Consumer Products, Inc., as a Credit Party,
and NBU Group, LLC, as a Credit Party dated as of April 27, 2004.
***
10.3 Revolving Note executed as of the 27th day of April, 2004 by and
among LaSalle National Bank National Association, as Lender and Easy
Gardener Products, Ltd., as Borrower.***
10.4 Revolving Note executed as of the 27th day of April, 2004 by and
among LaSalle Business Credit, LLC, as Lender and Easy Gardener
Products, Ltd., as Borrower.***
10.5 Patent Security Agreement made as of the 27th day of April, 2004, by
Easy Gardener Products, Ltd., as Borrower, in favor of LaSalle
Business Credit, LLC, as agent for the Lenders party to the Loan
Agreement.***
10.6 Patent Security Agreement made as of the 27th day of April, 2004, by
Weatherly Consumer Products, Inc., in favor of LaSalle Business
Credit, LLC, as agent for the Lenders party to the Loan
Agreement.***
10.7 Trademark Security Agreement made as of the 27th day of April, 2004,
by Easy Gardener Products, Ltd., as Borrower, in favor of LaSalle
Business Credit, LLC., as agent for the Lenders party to the Loan
Agreement.***
10.8 Copyright Security Agreement made as of the 27th day of April, 2004,
by Easy Gardener Products, Ltd., as Borrower, in favor of LaSalle
Business Credit, LLC., as agent for the Lenders party to the Loan
Agreement.***
46
10.9 Copyright Security Agreement made as of the 27th day of April, 2004,
by Weatherly Consumer Products, Inc., in favor of LaSalle Business
Credit, LLC., as agent for the Lenders party to the Loan
Agreement.***
10.10 Master Pledge Agreement made as of April 27, 2004, by Weatherly
Consumer Products, Inc., a Delaware corporation and Easy Gardener
Products, Ltd., in favor of LaSalle Business Credit, LLC., as agent
for itself and the Lenders.***
10.11 Subordination and Intercreditor Agreement dated as of April 27,
2004, by and between CapitalSource Finance, LLC, a Delaware limited
liability company , and in its capacity as a Junior Lender, LaSalle
Business Credit, LLC, a Delaware limited liability company, and in
its capacity as a Senior Lender and LaSalle Bank National
Association, in its capacity as a Senior Lender.***
10.12 Subordination Agreement between Central Garden & Pet Company and
LaSalle Business Credit, LLC, as Agent.***
10.13 Subordination Agreement between U.S. Home & Garden, Inc. and LaSalle
Business Credit, LLC, as Agent.***
10.14 Term Loan and Security Agreement by and among Easy Gardener
Products, Ltd., as Borrower, EYAS International, Inc., E G Product
Management, L.L.C., EG, L.L.C., Weatherly Consumer Products Group,
Inc., Weatherly Consumer Products, Inc. and NBU Group, LLC, each as
Guarantor, and CapitalSource Finance LLC, as Agent and Lender dated
as of October 29, 2003.***
10.15 Term A Loan Note dated as of October 29, 2003 by and between Easy
Gardener Products, Ltd., and CapitalSource Finance LLC.***
10.16 Term B Loan Note dated as of October 29, 2003 by and between Easy
Gardener Products, Ltd., CapitalSource Finance LLC.***
10.17 PIK Note dated as of October 29, 2003 by and between Easy Gardener
Products, Ltd. and CapitalSource Finance LLC.***
47
10.18 Subordination Agreement between Central Garden & Pet Company and
CapitalSource Finance LLC, as Agent.***
10.19 Subordination Agreement between U.S. Home & Garden, Inc. and
CapitalSource Finance LLC, as Agent.***
10.20 Pledge Agreement entered into as of October 29, 2003, by and between
CapitalSource Finance, LLC, as administrative, payment and
collateral agent for the Lenders under the Term Loan and Security
Agreement, and Easy Gardener Products, Ltd.***
10.21 Pledge Agreement entered into as of October 29, 2003, by and between
CapitalSource Finance, LLC, as administrative, payment and
collateral agent for the Lenders under the Term Loan and Security
Agreement, and E G Product Management, LLC.***
10.22 Pledge Agreement entered into as of October 29, 2003, by and between
CapitalSource Finance, LLC, as administrative, payment and
collateral agent for the Lenders under the Term Loan and Security
Agreement, and EG, L.L.C.***
10.23 Pledge Agreement entered into as of October 29, 2003, by and between
CapitalSource Finance, LLC, as administrative, payment and
collateral agent for the Lenders under the Term Loan and Security
Agreement, and EYAS International, Inc.***
10.24 Central Garden Pledge Agreement, as Exhibit B to Subordination
Agreement, entered into as of October 29, 2003, by and between
CapitalSource Finance LLC, as administrative, payment and collateral
agent for the Lenders under the Term Loan and Security Agreement,
and Central Garden & Pet Company.***
10.25 Pledge Agreement entered into as of October 29, 2003, by and between
CapitalSource Finance, LLC, as administrative, payment and
collateral agent for the Lenders under the Term Loan and Security
Agreement, and NBU Group, LLC.***
10.26 Pledge Agreement entered into as of October 29, 2003, by and between
CapitalSource Finance, LLC, as administrative, payment and
collateral agent for the
48
Lenders under the Term Loan and Security Agreement, and Weatherly
Consumer Products, Inc.***
10.27 Acknowledgement of Intellectual Property and Collateral Lien dated
as of October 29, 2003, by and among Easy Gardener Products, Ltd.,
as Borrower, EYAS International, Inc., EG, L.L.C., E G Product
Management, L.L.C., Weatherly Consumer Products Group, Inc.,
Weatherly Consumer Products, Inc., and NBU Group, LLC, each as
Guarantor, in favor of CapiralSource Finance LLC, as administrative
agent and collateral agent under the Loan Agreement.***
10.28 Amendment to Subordination Agreement dated as of October 29, 2003 by
and between Central Garden & Pet Company and CapitalSource Finance,
LLC dated as of April 27, 2004.***
10.29 Amendment to Subordination Agreement dated as of October 29, 2003 by
and between U.S. Home & Garden, Inc. and CapitalSource Finance, LLC
dated as of April 27, 2004.***
10.30 Subordinated Promissory Note by and among Easy Gardener Products,
Ltd. and EG Product Management L.L.C., as general partner and U.S.
Home & Garden, Inc. as Lender dated as of October 29, 2003.***
10.31 Note and Warrant Purchase Agreement made as of October 29, 2003 by
and between Easy Gardener Products, Ltd., and Central Garden & Pet
Company.***
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14 or
15d-14 of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14 or
15d-14 of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes Oxley Act of 2002.
32.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section
1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
49
32.2 Chief Financial Officer Certification pursuant to 18 U.S.C. Section
1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
* Incorporated by reference to the comparable exhibit filed with the Easy
Gardener Products, Ltd. S-4 (Nos 333-102296).
** Incorporated by the reference to the applicable exhibit filed with the
Registrant's Form 8-K November 13, 2003.
*** Incorporated by reference to the applicable exhibit filed with the
registrant's Form 10-Q for the quarter ended March 31, 2004.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned there unto duly authorized.
Easy Gardener Products, Ltd.
(Registrant)
By: /s/ Richard Grandy
----------------------
Manager / CEO
Dated: October 13, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Richard M. Grandy Manager / CEO October 13, 2004
- ----------------------
Richard M. Grandy
/s/ Richard Kurz Manager / CFO October 13, 2004
- ------------------ (Principal Financial
Richard Kurz and Accounting Officer)
/s/ Wayne Fethke Director October 13, 2004
- ------------------
Wayne Fethke
51