U.S. SECURITIES AND EXCHANGE COMMISSION |
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WASHINGTON, D.C. 20549 |
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FORM 10-Q |
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| x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
For the quarterly period ended March 31, 2005 |
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OR |
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| o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
| From the transition period from _________________ to__________________ | |||
| Commission File Number 333-102296 | |||
Easy Gardener Products, Ltd. |
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(Exact name of registrant as specified in its charter) |
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| Texas | 37-1433686 | ||
| (State or other jurisdiction of incorporation or organization) |
IRS Employer (Identification Number) |
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| 3022 Franklin Avenue Waco, Texas |
76710 | ||
| (Address of Principal Executive Offices) | (Zip Code) | ||
(254) 753-5353 |
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(Registrant’s Telephone Number, Including Area Code) |
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| Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | |||
Yes x No o Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date. Not applicable, registrant is a limited partnership |
| Part I. - Financial Information |
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Item 1. - Consolidated Financial Statements |
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Consolidated balance sheets as of March 31, 2005 |
1-2 |
Consolidated statements of operations for the three months ended March 31, 2005 and March 31, 2004 |
3 |
4 |
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5-6 |
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7-9 |
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Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations |
10-19 |
Item 3. - Quantitative and Qualitative Disclosures About Market Risk |
19 |
Item 4. – Controls and Procedures |
19 |
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Part II. - Other Information |
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Item 1. – Legal Proceedings |
20 |
Item 6. - Exhibits and Reports on Form 8-K |
20 |
20 |
Easy Gardener Products, Ltd. and Subsidiaries |
| March 31, 2005 |
June 30, 2004 |
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|---|---|---|---|---|---|---|
| (Unaudited) | ||||||
| Assets | ||||||
| Current: | ||||||
| Cash and cash equivalents | $ | 629,000 | $ | 441,000 | ||
| Accounts receivable, less allowance for doubtful accounts of $126,000 and $193,000 |
26,763,000 | 26,753,000 | ||||
| Inventories | 8,628,000 | 5,428,000 | ||||
| Prepaid expenses and other current assets | 1,237,000 | 583,000 | ||||
| Current assets of discontinued operations | — | 275,000 | ||||
| Total Current Assets | 37,257,000 | 33,480,000 | ||||
| Property and Equipment, net of accumulated depreciation of $1,575,000 and $697,000 |
3,537,000 | 3,395,000 | ||||
| Deferred Financing Costs, net of accumulated amortization of $330,000 and $130,000 |
1,228,000 | 1,333,000 | ||||
| Intangible Assets: | ||||||
| Goodwill | 48,174,000 | 48,174,000 | ||||
| Trademarks | 23,587,000 | 23,565,000 | ||||
| Non-compete agreements, net of accumulated amortization of $287,000 and $135,000 |
1,283,000 | 1,435,000 | ||||
| Package tooling costs, net of accumulated amortization of $774,000 and $352,000 |
885,000 | 902,000 | ||||
| Other intangible assets, net of accumulated amortization of $129,000 and $61,000 |
847,000 | 915,000 | ||||
| Other Assets | 3,785,000 | 3,538,000 | ||||
| Total Assets | $ | 120,583,000 | $ | 116,737,000 | ||
|
See accompanying notes to consolidated financial statements. |
1 |
Easy Gardener Products, Ltd. and Subsidiaries Consolidated Balance Sheets |
| March 31, 2005 |
June 30, 2004 |
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|---|---|---|---|---|---|---|
| (Unaudited) | ||||||
| Liabilities and Capital | ||||||
| Current: | ||||||
| Revolving credit facility | $ | 17,400,000 | $ | 13,525,000 | ||
| Accounts payable | 13,656,000 | 11,158,000 | ||||
| Accrued expenses | 5,312,000 | 4,536,000 | ||||
| Current portion of long-term debt | 2,874,000 | 1,646,000 | ||||
| Current liabilities of discontinued operations | 76,000 | 1,230,000 | ||||
| Total Current Liabilities | 39,318,000 | 32,095,000 | ||||
| Long Term Debt | 22,952,000 | 25,928,000 | ||||
| Deferred Tax Liability | 9,660,000 | 10,862,000 | ||||
| Junior Subordinated Debentures, net of discount of $20,718,000 and $20,797,000 |
48,685,000 | 44,403,000 | ||||
| Total Liabilities | 120,615,000 | 113,288,000 | ||||
| Commitments and Contingencies | ||||||
| Partners’ Capital (Deficit): | ||||||
| Capital | 2,675,000 | 2,675,000 | ||||
| Retained earnings (deficit) | (2,707,000 | ) | 774,000 | |||
| Total Partners’ Capital (Deficit) | (32,000 | ) | 3,449,000 | |||
| Total Liabilities and Partners’ Capital (Deficit) | $ | 120,583,000 | $ | 116,737,000 | ||
|
See accompanying notes to consolidated financial statements. |
2 |
Easy Gardener Products, Ltd. and Subsidiaries |
| Three Months Ended March 31, 2005 |
Three Months Ended March 31, 2004 |
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|---|---|---|---|---|---|---|
| Net Sales | $ | 27,774,000 | $ | 23,638,000 | ||
| Cost of Sales | 16,389,000 | 12,636,000 | ||||
| Gross Profit | 11,385,000 | 11,002,000 | ||||
| Operating Expenses: | ||||||
| Selling and shipping | 6,115,000 | 4,680,000 | ||||
| General and administrative | 1,144,000 | 1,351,000 | ||||
| Depreciation and amortization | 249,000 | 477,000 | ||||
| Total Operating Expenses | 7,508,000 | 6,508,000 | ||||
| Income From Operations | 3,877,000 | 4,494,000 | ||||
| Interest expense | (2,615,000 | ) | (2,628,000 | ) | ||
| Income From Continuing Operations Before Income Taxes |
1,262,000 | 1,866,000 | ||||
| Income Tax Expense | (439,000 | ) | (699,000 | ) | ||
| Income from Continuing Operations | 823,000 | 1,167,000 | ||||
| Income from discontinued operations, net of tax expense of $173,000 in 2005 and $64,000 in 2004 |
336,000 | 124,000 | ||||
| Net Income | $ | 1,159,000 | $ | 1,291,000 | ||
|
See accompanying notes to consolidated financial statements. |
3 |
Easy Gardener Products, Ltd. and Subsidiaries |
| Nine Months Ended March 31, 2005 |
Five Months Ended March 31, 2004 |
Four Months Ended October 31, 2003 |
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|---|---|---|---|---|---|---|---|---|---|
| (Predecessor) | |||||||||
| Net Sales | $ | 52,872,000 | $ | 30,623,000 | $ | 17,473,000 | |||
| Cost of Sales | 32,204,000 | 16,994,000 | 10,953,000 | ||||||
| Gross Profit | 20,668,000 | 13,629,000 | 6,520,000 | ||||||
| Operating Expenses: | |||||||||
| Selling and shipping | 13,809,000 | 6,725,000 | 5,838,000 | ||||||
| General and administrative | 3,730,000 | 2,207,000 | 2,557,000 | ||||||
| Depreciation and amortization | 698,000 | 803,000 | 431,000 | ||||||
| Total Operating Expenses | 18,237,000 | 9,735,000 | 8,826,000 | ||||||
| Income (Loss) From Operations | 2,431,000 | 3,894,000 | (2,306,000 | ) | |||||
| Other Expense: | |||||||||
| Refinancing and transaction costs | — | — | (159,000 | ) | |||||
| Interest expense | (7,948,000 | ) | (4,219,000 | ) | (2,868,000 | ) | |||
| Loss From Continuing Operations Before Income Taxes |
(5,517,000 | ) | (325,000 | ) | (5,333,000 | ) | |||
| Income Tax Benefit (Expense) | 1,700,000 | 59,000 | (44,000 | ) | |||||
| Loss from Continuing Operations | (3,817,000 | ) | (266,000 | ) | (5,377,000 | ) | |||
| Income (loss) from discontinued operations, net of tax expense of $173,000 in 2005 and $64,000 in 2004 |
336,000 | 85,000 | (75,000 | ) | |||||
| Net Loss | $ | (3,481,000 | ) | $ | (181,000 | ) | $ | (5,452,000 | ) |
| See accompanying notes to consolidated financial statements. | |||||||||
4 |
Easy Gardener Products, Ltd. and Subsidiaries |
| Nine months Ended March 31, 2005 |
Five Months Ended March 31, 2004 |
Four months Ended October 31, 2003 |
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|---|---|---|---|---|---|---|---|---|---|
| (Predecessor) | |||||||||
| Cash Flows from Operating Activities: | |||||||||
| Net loss from continuing operations | $ | (3,817,000 | ) | $ | (266,000 | ) | $ | (5,377,000 | ) |
| Adjustments to reconcile net loss to net cash | |||||||||
| provided by (used in) operating activities | |||||||||
| Non-cash interest expense | 4,847,000 | 590,000 | 75,000 | ||||||
| Depreciation and other amortization | 1,720,000 | 1,370,000 | 886,000 | ||||||
| Deferred income tax benefit | (1,202,000 | ) | (10,000 | ) | — | ||||
| Compensation related to repriced stock options | — | — | 40,000 | ||||||
| Changes in operating assets and liabilities: | |||||||||
| Accounts receivable | (10,000 | ) | (12,891,000 | ) | 14,509,000 | ||||
| Inventories | (3,199,000 | ) | 188,000 | 492,000 | |||||
| Prepaid expenses, refundable income taxes and other current assets |
(655,000 | ) | (138,000 | ) | 51,000 | ||||
| Other assets | 57,000 | (31,000 | ) | 50,000 | |||||
| Accounts payable and accrued expenses | 3,103,000 | 3,619,000 | (3,511,000 | ) | |||||
| Reversal of income taxes payable | (325,000 | ) | 83,000 | — | |||||
| Trademarks | (22,000 | ) | — | — | |||||
| Net Cash Provided by (Used in) Operating Activities of Continuing Operations |
497,000 | (7,486,000 | ) | 7,215,000 | |||||
| Cash Flows From Investing Activities: | |||||||||
| Purchase of equipment | (1,021,000 | ) | (116,000 | ) | (91,000 | ) | |||
| Purchase of package design and tooling | (405,000 | ) | (134,000 | ) | (76,000 | ) | |||
| Net Cash Used in Investing Activities | (1,426,000 | ) | (250,000 | ) | (167,000 | ) | |||
|
See accompanying notes to consolidated financial statements. |
5 |
Easy Gardener Products, Ltd. and Subsidiaries Consolidated Statements of Cash Flows |
| Nine months Ended March 31, 2005 |
Five Months Ended March 31, 2004 |
Four months Ended October 31, 2003 |
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|---|---|---|---|---|---|---|---|---|---|---|
| (Predecessor) | ||||||||||
| Cash Flows From Financing Activities: | ||||||||||
| Net proceeds (payments) on revolving credit facility | $ | 3,875,000 | $ | 10,017,000 | $ | (6,736,000 | ) | |||
| Payments on long-term debt | (2,618,000 | ) | (625,000 | ) | (21,000 | ) | ||||
| Deferred financing costs | (94,000 | ) | (29,000 | ) | (227,000 | ) | ||||
| Net Cash Provided by (Used In) Financing Activities |
1,163,000 | 9,363,000 | (6,984,000 | ) | ||||||
| Net increase in cash and cash equivalents from continuing operations |
234,000 | 1,627,000 | 64,000 | |||||||
| Net cash used in discontinued operations | (46,000 | ) | (1,582,000 | ) | (14,000 | ) | ||||
| Net increase in cash and cash equivalents | 188,000 | 45,000 | 50,000 | |||||||
| Cash and Cash Equivalents, beginning of period | 441,000 | 467,000 | 822,000 | |||||||
| Cash and Cash Equivalents, end of period | $ | 629,000 | $ | 512,000 | $ | 872,000 | ||||
| Supplemental Disclosure of Cash Flow Information |
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| Cash paid for interest | $ | 3,011,000 | $ | 3,625,000 | $ | 3,960,000 | ||||
| Cash received for taxes | $ | 53,000 | $ | 78,000 | $ | 36,000 | ||||
|
See accompanying notes to consolidated financial statements. |
6 |
| Easy Gardener Products, Ltd. and Subsidiaries |
| Notes to Consolidated Financial Statements (Unaudited) |
| 1. | The accompanying consolidated financial statements include the unaudited consolidated statements of
operations and cash flows for the four months ended October 31, 2003 of U.S. Home & Garden, Inc.
(the “Predecessor”) from whom Easy Gardener Products, Ltd., (the “Company”) acquired
its operations effective November 1, 2003. The accompanying consolidated financial statements at
March 31, 2005 and for the three and nine months ended March 31, 2005 and the five months ended March
31, 2004 are unaudited, but, in the opinion of management, include all adjustments necessary for
a fair presentation of consolidated financial position and results of operations for the periods
presented. The results for the nine months ended March 31, 2005 are not necessarily indicative of
the results of operations for a full year. |
| 2. | Refer to the audited consolidated financial statements for the year ended June 30, 2004, for details
of accounting policies and detailed notes to the consolidated financial statements. |
|
3. |
Inventories consist of: |
| March 31, 2005 | June 30, 2004 | ||||||
|---|---|---|---|---|---|---|---|
| Raw and packaging materials | $ | 3,342,000 | $ | 2,025,000 | |||
| Finished goods | 5,286,000 | 3,403,000 | |||||
| $ | 8,628,000 | $ | 5,428,000 | ||||
| 4. | All shipping and handling expenses are included in the selling and shipping caption and totaled approximately
$2,677,000, $5,724,000, $1,851,000, and $2,587,000 for the three and nine months ended March 31,
2005 and the three and five months ended March 31, 2004, respectively, and $2,075,000, and the four
months ended October 31, 2003 (Predecessor). |
| 5. | The Company and its parent, EYAS International, Inc., and their subsidiaries have a revolving credit
facility with LaSalle Business Credit, L.L.C. who is the Agent for and one of the lenders on the
facility, and two term loans with CapitalSource Finance, L.L.C. The revolving credit facility has
a maximum borrowing level of $25 million. Interest is at variable annual rates based upon the prime
rate plus 0.5% or LIBOR plus 3.25%. The interest rate on the revolving credit facility was 5.75%
at March 31, 2005. The revolving credit facility has various financial covenants including minimum
EBITDA, minimum EBITDA to pay interest on the Junior Subordinated Debentures, Fixed Charge Coverage
Ratio, Maximum Senior Leverage Ratio and limits on Capital Expenditures. The Company did not meet
the financial covenant of the Maximum Senior Leverage Ratio at March 31, 2005. The senior lenders
have waived this matter at March 31, 2005. It is possible that the Company could miss this and other
covenants at June 30, 2005. If it misses any covenants at June 30, 2005, it would have to resolve
the matter with its senior lenders. Borrowings on the revolving credit facility were $17,400,000
at March 31, 2005 and are based on eligible borrowing base of $22,814,000. Term loan A had $9,950,000 outstanding |
7 |
| Easy Gardener Products, Ltd. and Subsidiaries |
| Notes to Consolidated Financial Statements (Unaudited) |
at March 31, 2005 and term loan B had $9,500,000 outstanding at March 31, 2005 plus accrued interest.
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 beginning November 1, 2003, $166,667 per month beginning
November 1, 2004, and $291,667 per month beginning November 1, 2005. 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 on October 29, 2008. The variable interest rates on term loans
A and B were 11.33% and 14.33%, respectively, at March 31, 2005. Term loans A and B also require
mandatory prepayments from the excess cash flow as defined in the loan agreement. The principal prepayments
range from 50% to 75% of the excess cash flow. The Company made a mandatory prepayment from excess
cash flow of $1,800,000 prior to March 31, 2005 for the quarter ended March 31, 2005. This payment
was due on May 10, 2005. The Company was required to pay an additional amount of $500,000 for the
quarter ended March 31, 2005 by May 10, 2005. The facility has financial covenants identical to those
of the revolving credit facility described above. As noted above, the Company did not meet the Maximum
Senior Leverage Ratio at March 31, 2005 and the matter was waived by the senior lenders. | |
The Company is also below the minimum EBITDA level required by the senior 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
(not cancel) the monthly interest payment commencing with the August 2004 payment. The Trustee uses
the interest on the Junior Subordinated Debentures to pay the interest on the 9.40% Cumulative Trust
Preferred Securities. The deferred interest and interest on the deferred interest are included in
the caption, Junior Subordinated Debentures, net of discount. | |
| 6. | The Company, as part of the acquisition of operations from the Predecessor, was required to also take
the product line produced by Ampro. 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 Ampro, 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 Company accrued $1,230,000 for expected liabilities
at June 30, 2004. From June 30, 2004 through March 31, 2005, the Company paid obligations of $645,000,
leaving an accrued liability at March 31, 2005 of $585,000 primarily representing the liability for
expected returns of inventory. The Company reassessed its estimate of the outstanding obligation
at March 31, 2005, and determined that the obligation would not exceed $76,000. Consequently, a reduction
of $509,000 was made to the accrued liability at March 31, 2005 and the matter was waived by the senior lenders. |
8 |
| Easy Gardener Products, Ltd. and Subsidiaries |
| Notes to Consolidated Financial Statements (Unaudited) |
The operations of Ampro have been reflected in the financial statements as a discontinued operation
leaving pre-tax income of $509,000 net of tax expense of $173,000 for a net income of $336,000 for
the three and nine months ended March 31, 2005. The income is due to the reduction in expected liabilities noted above. | |
| 7. | The Company’s previous business combinations were accounted for using the purchase method. As
a result of such combinations, the Company has recognized a significant amount of goodwill, which,
in the aggregate, was $48,174,000 at March 31, 2005 and June 30, 2004. The balance of intangible
assets acquired and related accumulated amortization were as follows: |
| March 31, 2005 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Gross Carrying Amount |
Accumulated Amortization |
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| Amortized Intangible Assets | ||||||||
| Non-compete agreements | $ | 1,570,000 | $ | 287,000 | ||||
| Package Tooling Costs | 1,659,000 | 774,000 | ||||||
| Other Intangible Assets | 976,000 | 129,000 | ||||||
| Total | $ | 4,205,000 | $ | 1,190,000 | ||||
| Unamortized Intangible Assets | ||||||||
| Trademarks | $ | 23,587,000 | $ | — | ||||
Amortization expense for all intangible assets and deferred financing amortization expense during the
three and nine months ended March 31, 2005 and the three and five months ended March 31, 2004 was
$286,000, $813,000, $569,000 and $927,000, respectively, and for the four months ended October 31,
2003 (Predecessor) was $89,000. These amounts include deferred financing amortization expense during
the three and nine months ended March 31, 2005 and the three and five months ended March 31, 2004
of $69,000, $171,000, $70,000 and $117,000, respectively, and the four months ended October 31, 2003
(Predecessor) of $69,000. Estimated amortization expense for each of the five succeeding fiscal years
is as follows, such amounts include annual deferred financing amortization expense of $260,000: | |
| Year Ended June 30, | Amount | |||||
|---|---|---|---|---|---|---|
| 2005 | $ | 1,123,000 | ||||
| 2006 | 1,123,000 | |||||
| 2007 | 1,123,000 | |||||
| 2008 | 560,000 | |||||
| 2009 | 560,000 | |||||
9 |
| Item 2. |
| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
| Special Cautionary Notice Regarding Forward-Looking Statements |
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
“believes”, “expects”, “anticipates”, “intends”, “plans”,
“may”, “might”, “could”, “should” 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.,
and Easy Gardener UK Ltd. |
10 |
| Results of Operations |
The following table sets forth, for the periods indicated, certain selected financial data as a percentage
of net sales: | |
| Three months ended March 31, 2005 |
Three months ended March 31, 2004 |
Nine months ended March 31, 2005 |
Five months ended March 31, 2004 |
Four months ended October 31, 2003 |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Predecessor) | ||||||||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
| Cost of sales | 59.0 | % | 53.5 | % | 60.9 | % | 55.5 | % | 62.7 | % | ||||||
| Gross profit | 41.0 | % | 46.5 | % | 39.1 | % | 44.5 | % | 37.3 | % | ||||||
| Selling and shipping | 22.0 | % | 19.8 | % | 26.1 | % | 22.0 | % | 33.4 | % | ||||||
| General and administrative | 4.1 | % | 5.7 | % | 7.1 | % | 7.2 | % | 14.6 | % | ||||||
| Depreciation and amortization | 0.9 | % | 2.0 | % | 1.3 | % | 2.6 | % | 2.5 | % | ||||||
| Income (loss) from operations | 14.0 | % | 19.0 | % | 4.6 | % | 12.7 | % | (13.2 | %) | ||||||
| Refinancing and transaction costs |
— | — | — | — | (0.9 | %) | ||||||||||
| Interest expense | (9.4 | %) | (11.1 | %) | (15.0 | %) | (13.8 | %) | (16.4 | %) | ||||||
| Income (loss) from continuing operations before income tax |
4.6 | % | 7.9 | % | (10.4 | %) | (1.1 | %) | (30.5 | %) | ||||||
| Income tax benefit (expense) | (1.6 | %) | (3.0 | %) | 3.2 | % | 0.2 | % | (0.3 | %) | ||||||
| Income (loss) from continuing operations |
3.0 | % | 4.9 | % | (7.2 | %) | (0.9 | %) | (30.8 | %) | ||||||
| Income (loss) from discontinued operations |
1.2 | % | 0.5 | % | 0.6 | % | 0.3 | % | (0.4 | %) | ||||||
| Net income (loss) | 4.2 | % | 5.4 | % | (6.6 | %) | (0.6 | %) | (31.2 | %) | ||||||
11 |
| Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004 |
Net sales. Net sales increased by $4,136,000, or 17.5%, to $27,774,000 during the three months ended
March 31, 2005, from $23,638,000 during the three months ended March 31, 2004. Net sales are gross
sales less adjustments for discounts, rebates, returns and allowances given to customers. The increase
in net sales was the result of an increase in the volume of products sold and price increases. Notwithstanding
increased sales, sales levels were adversely affected by cool and wet spring weather delaying the
beginning of the gardening season. | |
Cost of sales. Cost of sales increased by $3,753,000, or 29.7% to $16,389,000 for the three months ended March 31,
2005 from $12,636,000 during the three months ended March 31, 2004. The increase was a result of
increases in the volume of products sold of $2,223,000 and increased material costs, primarily purchase
price increases on a number of petroleum based products of $1,530,000. Cost of sales as a percentage
of net sales increased to 59.0% during the three months ended March 31, 2005 from 53.5% during the
comparable period in 2004. Depreciation and amortization expense included in cost of sales for the
three months ended March 31, 2005 and 2004 was $372,000, and $344,000, respectively. | |
Gross profit. Gross profit increased by $383,000, or 3.5%, to $11,385,000 for the three months ended
March 31, 2005 from $11,002,000 during the three months ended March 31, 2004. Gross profit as a percentage
of net sales decreased to 41.0% during the three months ended March 31, 2005, from 46.5% during the
comparable period in 2004. This increase in gross profit dollars and decrease as a percentage
of net sales resulted from the matters described above. | |
Selling and shipping expenses. Selling and shipping expenses increased by $1,435,000, or 30.7% to $6,115,000 during the three
months ended March 31, 2005 from $4,680,000 during the three months ended March 31, 2004. This increase
in expense was attributable to increases in outbound freight costs of $827,000, of which $359,000
is due to increased sales volume, increased commissions and cooperative advertising costs of $310,000,
of which $281,000 is due to increased sales volume, increased warehousing costs of $150,000, increased
marketing and new product development costs of $50,000, and in increased other selling costs of $98,000.
As a percentage of net sales, selling and shipping expenses increased to 22.0% during the three months
ended March 31, 2005 from 19.8% during the comparable period in 2004 as a result of selling and shipping
expenses increases a greater rate than net sales. | |
General and administrative expenses. General and administrative expenses decreased by $207,000 or 15.3%, to $1,144,000 during the
three months ended March 31, 2005 from $1,351,000 during the three months ended March 31, 2004. This
decrease is the result of reduced employee related costs and other expenses of $72,000 and by a non-recurring
expense of $135,000 related to freight claims processing in the comparable period in 2004. As a percentage
of net sales, general and administrative expenses decreased to 4.1% during the three months ended
March 31, 2005 from 5.7% during the comparable period in 2004. | |
Depreciation and amortization. Depreciation and amortization expenses decreased by $228,000 or 47.8% to $249,000 during the
three months ended March 31, 2005 from $477,000 during the three months ended March 31, 2004. This
decrease was primarily due to depreciable and amortizable assets being valued at preliminary estimates
and lives in 2004, pending a final valuation of the assets acquired from the Predecessor. As a percentage
of net sales, depreciation and amortization expenses decreased to 0.9% during the three months ended
March 31, 2005 from 2.0% during the comparable period in 2004. |
12 |
Income from operations. Income from operations decreased by $617,000 or 13.7% to $3,877,000 during the three months
ended March 31, 2005, from $4,494,000 during the three months ended March 31, 2004. The decrease
in income from continuing operations was primarily due to increased selling and shipping expenses,
offset in part by increased gross profit and reductions in other operating expenses as noted above.
As a percentage of net sales, income from operations decreased to 14.0% for the three months ended
March 31, 2005 from 19.0% during the comparable period in 2004. | |
Interest expense. Interest expense decreased $13,000, or 0.5% to $2,615,000 during the three months ended
March 31, 2005, from $2,628,000 during the three months ended March 31, 2004. Interest on the revolving
credit facility increased $15,000 as a result of increased borrowing levels. Interest expense on
the term loans increased $55,000 as a result of higher interest rates. The Company has approximately
$20,458,000 in term loans outstanding at March 31, 2005 compared to $23,165,000 at March 31, 2004.
The interest expense of the Company on its term loans for the three months ended March 31, 2005 was
$888,000 of which $182,000 is due on October 29, 2008 and is considered non-cash interest in the
current period. Interest expense on the term loans for the three months ended March 31, 2004 was
$833,000, including non-cash interest of $171,000, which is due on October 29, 2008. The Company
also has two subordinated loans, with non-cash interest expense in the current period. The interest
expense increased $13,000, to $112,000 during the three months ended March 31, 2005 from $99,000
during the three months ended March 31, 2004. Interest on the subordinated loans is due in cash on
May 29, 2009 when the loans mature. Net interest on the Junior Subordinated Debentures decreased
$71,000 to $1,388,000 from $1,459,000 in the comparable quarter as a result of an $188,000 adjustment
to the interest income on the shares owned by the Company, offset in part by the interest charge
on the deferred interest. The interest related to the Junior Subordinated Debentures is included
in non-cash interest during the three months ended March 31, 2005. As permitted by the Amended and
Restated Junior Subordinated Indentures, the Company has elected to defer payment of the interest
on the Junior Subordinated Debentures beginning in August 2004. While the interest payment is deferred,
the interest continues to be accrued and is included in the caption Junior Subordinated Debentures.
By deferring the interest payment on the Junior Subordinated Debentures, the Company has improved
its cash flow by the amount of interest deferred. This improvement will exist until the deferred
interest is paid. Miscellaneous interest expense decreased $25,000. The total non-cash interest for
the March 31, 2005 quarter was $1,682,000. A portion of the Company’s interest expense is based
upon variable interest rates. Increases in such rates would have a negative impact on operating performance
and cash flow. As a percentage of net sales, interest expense decreased to 9.4% for the three months
ended March 31, 2005 from 11.1% during the comparable period in 2004. | |
Income taxes. The income tax expense decreased by $260,000, or 37.2% to $439,000 during the three months
ended March 31, 2005 from $699,000 during the three months ended March 31, 2004 primarily as a result
of reduced income from continuing operations. | |
Discontinued Operations. Income from discontinued operations increased by $212,000, or 171.0% to $336,000 from $124,000
during the three months ended March 31, 2005, from the comparable period in 2004. Income in the current
quarter results from a reduction in the estimated accrued liability related to Ampro. See Note 6
to the financial statements. | |
Net lncome. Net income decreased by $132,000, or 10.2% to $1,159,000 during the three months ended
March 31, 2005 from a net income of $1,291,000 during the three months ended March 31, 2004. The
decrease in net income is due to the matters described above. As a |
13 |
| percentage of net sales, net income decreased to 4.2% for the three months ended March 31, 2005 from 5.4% during the comparable period in 2004. |
|
Nine Months Ended March 31, 2005 Compared to Five Months Ended March 31, 2004 and the Four Months Ended October 31, 2003 (Predecessor) |
Net sales. Net sales increased by $4,776,000, or 9.9%, to $52,872,000 during the nine months ended
March 31, 2005, from $30,623,000 during the five months ended March 31, 2004 and $17,473,000 during
the four months ended October 31, 2003, for a combined amount of $48,096,000 during the comparable
period in 2004. Net sales are gross sales less adjustments for discounts, rebates, returns and allowances
given to customers. The increase in net sales was the result of an increase in the volume of products
sold of $5,186,000, and by a decrease of $477,000 of returns recorded by the Predecessor for Ampro.
The increase described above was offset in part by $475,000 of additional rebates and discounts of
$197,000 given during the nine months ended March 31, 2005 and by $215,000 of the Predecessor’s
net sales for operations not acquired by the Company. Notwithstanding increased sales, sales levels
were adversely affected by cool and wet spring weather delaying the beginning of the gardening season. | |
Cost of sales. Cost of sales increased by $4,257,000, or 15.2% to $32,204,000 for the nine months ended March 31,
2005 from $16,994,000 during the five months ended March 31, 2004 and $10,953,000 during the four
months ended October 31, 2003, for a combined amount of $27,947,000 during the comparable period
in 2004. The increase was a result of an increase in the volume of products sold of $3,013,000, increases
in material costs, primarily purchase price increases on a number of petroleum based products of
$1,138,000, and by a reduction in cost of sales in the comparable period last year related to the
return of Ampro inventory of $168,000. There were no such returns in the current period. The increase
was offset in part in the current period by a reduction in cost of sales of $62,000 for operations
not acquired by the Company. Cost of sales as a percentage of net sales increased to 60.9% during
the nine months ended March 31, 2005 from 58.1% during the comparable period in 2004. Depreciation
and amortization included in cost of sales for the nine months ended March 31, 2005, the five months
ended March 31, 2004, and the four months ended October 31, 2003 were $1,004,000, $558,000 and $496,000,
respectively. | |
Gross profit. Gross profit increased by $519,000, or 2.6%, to $20,668,000 for the nine months ended
March 31, 2005 from $13,629,000 during the five months ended March 31, 2004 and $6,520,000 during
the four months ended October 31, 2003, for a combined gross profit of $20,149,000 during the comparable
period in 2004. Gross profit as a percentage of net sales decreased to 39.1% during the nine months
ended March 31, 2005, from 41.9% during the comparable period in 2004. The increase in gross profit
dollars and decrease in gross profit as a percentage of net sales results from the matters described
above. | |
Selling and shipping expenses. Selling and shipping expenses increased by $1,246,000, or 9.9% to $13,809,000 during the nine
months ended March 31, 2005 from $6,725,000 during the five months ended March 31, 2004 and $5,838,000
during the four months ended October 31, 2003, for a combined expense of $12,563,000 during the comparable
period in 2004. This increase in expense was attributable to an increase in outbound freight costs
of $983,000, (primarily a result of increased sales), increased marketing and new product development
costs of $299,000, increased warehousing costs of $227,000, offset in part by the elimination of
costs of the Predecessor of $122,000 for the four months ended October 31, 2003 not assumed and by
the Predecessor costs of Ampro of $141,000. As a percentage of net sales, selling and shipping expenses
remained constant at 26.1% during the nine months ended March 31, 2005 and during the comparable
period in 2004. |
14 |
General and administrative expenses. General and administrative expenses decreased by $1,034,000 or 21.7%, to $3,730,000 during the
nine months ended March 31, 2005 from $2,207,000 during the five months ended March 31, 2004 and
$2,557,000 during the four months ended October 31, 2003 for a combined amount of $4,764,000 during
the comparable period in 2004. This decrease results from costs related to the operations of the
Predecessor not assumed by the Company of $977,000, the Predecessor costs of Ampro of $27,000, and
by cost decreases during the nine months ended March 31, 2005 of $30,000. As a percentage of net
sales, general and administrative expenses decreased to 7.1% during the nine months ended March 31,
2005 from 9.9% during the comparable period in 2004. | |
Depreciation and amortization. Depreciation and amortization expenses decreased by $536,000 or 43.4% to $698,000 during the
nine months ended March 31, 2005 from $803,000 during the five months ended March 31, 2004 and $431,000
during the four months ended October 31, 2003, for a combined amount of $1,234,000 during the comparable
period in 2004. This decrease is primarily as a result of the Predecessor having a shorter life on
its amortizable intangible assets and by the Company’s depreciable and amortizable assets being
valued at preliminary estimates and lives in the 2004 period, pending a final valuation of the assets
acquired from the Predecessor. As a percentage of net sales, depreciation and amortization expenses
decreased to 1.3% during the nine months ended March 31, 2005 from 2.6% during the comparable period in 2004. | |
Income (loss) from operations. Income from operations increased by $843,000 or 53.1% to $2,431,000 during the nine months ended
March 31, 2005, from income of $3,894,000 during the five months ended March 31, 2004 and a loss
of $2,306,000 during the four months ended October 31, 2003 for a combined income from operations
of $1,588,000 during the comparable period in 2004. The increase in income from continuing operations
was primarily due to increased sales and reduced operating expenses offset in part by increased selling
and shipping expenses as noted above. As a percentage of net sales, income from operations increased
to 4.6% for the nine months ended March 31, 2005 from 3.3% during the comparable period in 2004. | |
Refinancing and transaction costs. The Company did not incur refinancing and transaction costs during the nine months ended March 31,
2005 or the five months ended March 31, 2004. In the four months ended October 31, 2003, the Predecessor
incurred $159,000 in refinancing and transaction costs, related to the sale of assets to the Company. | |
Interest expense. Interest expense increased by $861,000, or 12.1% to $7,948,000 during the nine months
ended March 31, 2005, from $4,219,000 during the five months ended March 31, 2004 and $2,868,000
during the four months ended October 31, 2003 for a combined interest expense of $7,087,000 for the
comparable period in 2004. Interest on the revolving credit facility decreased $130,000 as a result
of reduced borrowing levels and lower interest rates during most of the period. Interest expense
on the term loans increased $595,000 as a result of increased average borrowing levels in the current
period and higher interest rates. The Company has approximately $20,458,000 in term loans outstanding
at March 31, 2005 compared to $23,165,000 at March 31, 2004 and $12,121,000 for the Predecessor at
October 31, 2003. The interest expense of the Company on its term loans for the nine months ended
March 31, 2005 was $2,625,000 of which $544,000 is due on October 29, 2008 and is considered non-cash
interest in the current period. Interest expense on the term loans for the five months ended March
31, 2004 was $1,418,000, including non-cash interest of $290,000. The Predecessor had |
15 |
interest expense of $612,000 on its term loan for the four months ended October 31, 2003. The Company
also has two subordinated loans with non-cash interest expense, which increased $158,000, to $326,000
during the nine months ended March 31, 2005 from $168,000 during the five months ended March 31,
2004. The interest on the subordinated loans is due in cash on May 29, 2009 when the loans mature.
Interest expense on the Junior Subordinated Debentures increased by $234,000 to $4,454,000 from $4,220,000
in the comparable period. The increase is due to the interest charge on the deferred interest. As
permitted by the Amended and Restated Junior Subordinated Indentures, the Company has elected to
defer payment of the interest on the Junior Subordinated Debentures beginning in August 2004. While
the interest payment is deferred, the interest continues to be accrued and together with the interest
on the accrued interest is included in the caption Junior Subordinated Debentures. Deferred interest
and interest thereon of $3,977,000 is included in non-cash interest expense in the current period.
By deferring the interest payment on the Junior Subordinated Debentures, the Company has improved
its cash flow by the amount of interest deferred. This improvement will exist until the deferred
interest is paid. The remaining $4,000 increase in interest is related to miscellaneous interest
expense. The total non-cash interest for the nine months ended March 31, 2005 was $4,847,000. A portion
of the Company’s interest expense is based upon variable interest rates. Increases in such rates
would have a negative impact on operating performance and cash flow. As a percentage of net sales,
interest expense increased to 15.0% for the nine months ended March 31, 2005 from 14.8% during the comparable period in 2004. | |
Income taxes. Income tax benefit increased by $1,685,000 to $1,700,000 during the nine months ended March
31, 2005 from an income tax benefit of $59,000 during the five months ended March 31, 2004 and an
income tax expense of $44,000 during the four months ended October 31, 2003 for a combined income
tax benefit of $15,000 for the comparable period in 2004. The Company has deferred tax credits, which
permits it to currently recognize deferred tax benefits on pre-tax losses. The Predecessor had a
tax loss carry forward and no net deferred tax credits, which impacted its taxes for the four months
ended October 31, 2003. | |
Discontinued Operations. Income from discontinued operations increased by $326,000 to $336,000 during the nine months
ended March 31, 2005 from $85,000 during the five months ended March 31, 2004 and a loss of $75,000
during the four months ended October 31, 2003 for a combined income of $10,000 from the comparable
period in 2004. The Company’s income from discontinued operations during the nine months ended
March 31, 2005 was due to a reduction in the estimated liabilities of Ampro. The Company’s income
during the five months ended March 31, 2004 was from Ampro’s operations. The Predecessor’s
loss during the four months ended October 31, 2003 was due to its discontinued Weed Wizard operations.
See Note 6 to the financial statements. | |
Net loss. Net loss decreased by $2,152,000 to $3,481,000 during the nine months ended March 31,
2005 from a net loss of $181,000 during the five months ended March 31, 2004 and $5,452,000 during
the four months ended October 31, 2003 for a combined net loss of $5,633,000 during the comparable
period in 2004. The decrease in net loss is due to matters described above. As a percentage of net
sales, the net loss decreased to 6.6% for the nine months ended March 31, 2005 from 11.7% during
the comparable period in 2004. | |
Seasonality | |
The Company’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 |
16 |
inventory of lawn and garden products. These patterns are affected 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, Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) 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. | |
Liquidity and Capital Resources | |
Since inception, the Company has financed its operations primarily through cash generated by operations,
and net 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 senior loan requirements to pay such interest have not been met.
The Company did not meet the financial covenants of the Maximum Senior Leverage Ratio at March 31,
2005. The senior lenders have waived this matter at March 31, 2005. It is possible that the Company
could miss this and other covenants at June 30, 2005. If it misses any covenants at June 30, 2005,
it would have to resolve the matter with its senior lenders. | |
The Company is also below the minimum EBITDA level required by the senior 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
(not cancel) the monthly interest payment commencing with the August 2004 payment. The Trustee uses
the interest on the Junior Subordinated Debentures to pay the interest on the 9.40% Cumulative Trust
Preferred Securities. At March 31 2005, the Company had cash and short-term investments totaling
$629,000 and a working capital deficit of $2,061,000. At June 30, 2004, the Company had cash and
short-term investments totaling $441,000 and working capital of $1,385,000. The change in working
capital deficit for the nine months ended March 31, 2005 of $3,446,000 was primarily attributable
to the net loss of $3,481,000 for the nine months ended March 31, 2005. | |
Net cash provided by operating activities for the nine months ended March 31, 2005 was $0.5 million
resulting from a net loss from continuing operations of $3.8 million, such loss was reduced by non-cash
interest expense, depreciation and amortization expense and deferred income tax benefit of $5.4 million,
offset by an increase in inventory, accounts receivable and prepaid expenses and other current assets
and a decrease in accounts payable and accrued expenses of $1.1 million. These changes are generally
consistent with the seasonal nature of the Company’s business. Net cash used in investing activities
for the nine months ended March 31, 2005 of $1.4 million is due to capital purchases of equipment
and package tooling costs. | |
Net cash provided by financing activities for the nine months ended March 31, 2005 of $1.2 million
is primarily due to borrowings on the revolving credit facility of $3.9 million used to make principal
payments and financing costs of $2.7 million and to fund investing activities. | |
The Company and its parent, EYAS International, Inc., and their subsidiaries have a revolving credit
facility with LaSalle Business Credit, L.L.C. who is the Agent for and one of the lenders on the
facility, and two term loans with CapitalSource Finance, L.L.C. The revolving credit facility has
a maximum borrowing level of $25 million. Interest is at variable annual rates based upon |
17 |
the prime rate plus 0.5% or LIBOR plus 3.25%. The interest rate on the revolving credit facility was
5.75% at March 31, 2005. The revolving credit facility has various financial covenants including
minimum EBITDA, minimum EBITDA to pay interest on the Junior Subordinated Debentures, Fixed Charge
Coverage Ratio, Maximum Senior Leverage Ratio and limits on Capital Expenditures. The Company did
not meet the financial covenant of the Maximum Senior Leverage Ratio at March 31, 2005. The senior
lenders have waived this matter at March 31, 2005. It is possible that the Company could miss this
and other covenants at June 30, 2005. If it misses any covenants at June 30, 2005, it would have
to resolve the matter with its senior lenders. Borrowings on the revolving credit facility were $17,400,000
at March 31, 2005 and are based on eligible borrowing base of $22,814,000. Term loan A had $9,950,000
outstanding at March 31, 2005 and term loan B had $9,500,000 outstanding at March 31, 2005 plus
accrued interest. 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 beginning November 1, 2003, $166,667
per month beginning November 1, 2004, and $291,667 per month beginning November 1, 2005. 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 on October 29, 2008. The variable interest rates
on term loans A and B were 11.33% and 14.33%, respectively, at March 31, 2005. Term loans A and B
also require mandatory prepayments from the excess cash flow as defined in the loan agreement. The
principal prepayments range from 50% to 75% of the excess cash flow. The Company made a mandatory
prepayment from excess cash flow of $1,800,000 prior to March 31, 2005 for the quarter ended March
31, 2005. This payment was due on May 10, 2005. The Company was required to pay an additional amount
of $500,000 for the quarter ended March 31, 2005 by May 10, 2005. The facility has financial covenants
identical to those of the revolving credit facility described above. As noted above, the Company
did not meet the Maximum Senior Leverage Ratio at March 31, 2005, and the matter was waived by the senior lenders. | |
| Commitments | |
The Company leases office and warehouse space, certain office equipment and automobiles under operating
leases expiring through 2010. The future minimum annual lease payments under these non-cancelable
operating leases are as follows: | |
| Year Ended June 30, | Amount | ||||
|---|---|---|---|---|---|
| 2005 | $ | 590,000 | |||
| 2006 | 234,000 | ||||
| 2007 | 53,000 | ||||
| 2008 | 43,000 | ||||
| 2009 and thereafter | 30,000 | ||||
| $ | 950,000 | ||||
| New Accounting Pronouncements |
In November 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 151 entitled Inventory Costs – an amendment of ARB No. 43, Chapter 4. This Statement, which is
effective for fiscal years beginning after June 15, 2005, clarifies the accounting for inventory
costs, in particular, abnormal amounts of idle facility expense, freight, handling costs and wasted
material (spoilage). The Company is reviewing the implications of this Statement on its financial
reporting and does not expect that it will have an effect on its financial statements. |
18 |
| Item 4. Controls and Procedures | |
(a) Evaluation of disclosure controls and procedures. As of the end of the period covered
by this report, the Company has 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 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 a reasonable assurance level. | |
(b) Changes in internal control over financial reporting. There have been no changes in
the Company’s internal control over financial reporting that occurred during the nine months
ended March 31, 2005 that have materially affected or are reasonably likely to materially affect
the internal controls over financial reporting. |
19 |
| PART II – OTHER INFORMATION | |
|
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. May 16, 2005 | ||
| Easy Gardener Products, Ltd. | ||
| (Registrant) | ||
| By: | /s/ Richard M. Grandy | |
| Richard M. Grandy | ||
| Manager / CEO | ||
| By: | /s/ Richard M. Kurz | |
| Richard M. Kurz | ||
| Manager/ CFO | ||
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