<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 2, 1999
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 1-11593
THE SCOTTS COMPANY
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1414921
- --------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14111 Scottslawn Road
Marysville, OHIO 43041
---------------------------------------
(Address of principal executive offices)
(Zip Code)
(937) 644-0011
----------------------------------------------------
(Registrant's telephone number, including area code)
No Change
- ----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
18,307,025 Outstanding at February 10, 1999
- ---------------------------------------- -----------------------------------
Common Shares, voting, no par value
Exhibit Index at page 27
<PAGE> 2
THE SCOTTS COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
Part I. Financial Information:
<S> <C>
Item 1. Financial Statements
Condensed, Consolidated Statements of Operations - Three
month periods ended January 2, 1999 and January 3, 1998 3
Condensed, Consolidated Statements of Cash Flows - Three
month periods ended January 2, 1999 and January 3, 1998 4
Condensed, Consolidated Balance Sheets -
January 2, 1999, January 3, 1998, and September 30, 1998 5
Notes to Condensed Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Part II. Other Information
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Exhibit Index 27
</TABLE>
Page 2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SCOTTS COMPANY AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
January 2, January 3,
1999 1998
------- ----------
<S> <C> <C>
Net sales $ 184.4 $ 124.8
Cost of sales 119.7 83.5
------- -------
Gross profit 64.7 41.3
Commission earned from agency agreement 5.0 --
Operating expenses:
Advertising and promotion 16.7 10.3
Selling, general and administrative 53.9 31.9
Amortization of goodwill and other 4.9 2.7
intangibles
Restructuring and other charges 1.4 --
Other income, net (0.1) (0.3)
------- -------
Loss from operations (7.1) (3.3)
Interest expense 9.8 6.4
------- -------
Loss before income taxes (16.9) (9.7)
Income tax benefit (6.9) (4.2)
------- -------
Net loss before extraordinary item (10.0) (5.5)
Extraordinary loss on early extinguishment
of debt, net of tax 0.4 --
------- -------
Net loss (10.4) (5.5)
------- -------
Preferred stock dividends 2.4 2.4
------- -------
Loss applicable to common shareholders $ (12.8) $ (7.9)
======= =======
Basic earnings per common share:
Before extraordinary item $ (.68) $ (.42)
Extraordinary item, net of tax (.02) --
------- -------
(.70) (.42)
------- -------
Diluted earnings per common share:
Before extraordinary item $ (.68) $ (.42)
Extraordinary item, net of tax (.02) -
------- -------
(.70) (.42)
------- -------
Common shares used in basic earnings
per share calculation 18.3 18.7
======= =======
Common shares and potential common shares
used in diluted earnings per share calculation 18.3 18.7
======= =======
</TABLE>
See notes to condensed, consolidated financial statements
Page 3
<PAGE> 4
THE SCOTTS COMPANY AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
January 2, January 3,
1999 1998
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10.4) $ (5.5)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 11.8 8.1
Net change in certain components of
working capital (134.9) (89.2)
Net change in other assets and
liabilities and other adjustments (29.9) (1.9)
------ ------
Net cash used in operating activities (163.4) (88.5)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment, net (13.8) (7.6)
Investment in acquired businesses, net of cash acquired (160.7) (88.8)
Other, net (7.6) --
------ ------
Net cash used in investing activities (182.1) (96.4)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under term loans, revolving
and bank lines of credit 372.6 194.4
Payment on interest rate locks (15.2) --
Financing fees (10.2) --
Dividends on Class A Convertible Preferred Stock (4.9) (2.4)
Other, net 0.9 0.4
------ ------
Net cash provided by financing activities 343.2 192.4
------ ------
Effect of exchange rate changes on cash (0.1) (0.1)
------ ------
Net (decrease) increase in cash (2.4) 7.4
Cash at beginning of period 10.6 13.0
------ ------
Cash at end of period $ 8.2 $ 20.4
====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Businesses Acquired:
Fair value of assets acquired $260.3 $119.8
Liabilities assumed (57.6) (27.5)
Cash paid 4.8 0.4
Debt issued $197.9 $ 91.9
</TABLE>
See notes to condensed, consolidated financial statements
Page 4
<PAGE> 5
THE SCOTTS COMPANY AND SUBSIDIARIES
CONDENSED, CONSOLIDATED BALANCE SHEETS
(in millions)
ASSETS
<TABLE>
<CAPTION>
Unaudited
January 2, January 3, September 30,
1999 1998 1998
-------- -------- --------
Current assets:
<S> <C> <C> <C>
Cash $ 8.2 $ 20.4 $ 10.6
Accounts receivable, less allowances
of $8.6, $6.5 and $6.3, respectively 206.7 148.0 146.6
Inventories, net 298.2 210.4 177.7
Current deferred tax asset 31.4 19.1 20.8
Prepaid and other assets 21.5 3.6 11.5
-------- -------- --------
Total current assets 566.0 401.5 367.2
-------- -------- --------
Property, plant and equipment, net 208.9 168.7 197.0
Intangible assets, net 620.4 414.1 435.1
Other assets 50.2 4.0 35.9
-------- -------- --------
Total assets $1,445.5 $ 988.3 $1,035.2
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 24.4 $ 93.7 $ 13.3
Accounts payable 112.5 62.2 77.8
Accrued liabilities 96.7 65.7 124.9
Accrued taxes 14.8 21.9 15.9
-------- -------- --------
Total current liabilities 248.4 243.5 231.9
Long-term debt 754.8 324.5 359.2
Other liabilities 51.2 39.8 40.2
-------- -------- --------
Total liabilities 1,054.4 607.8 631.3
-------- -------- --------
Commitments and contingencies
Shareholders' equity:
Class A Convertible Preferred Stock, no par value 177.3 177.3 177.3
Common shares, no par value per share, $.01 stated
value per share, issued 21.1 shares in 1999 and 1998 0.2 0.2 0.2
Capital in excess of par value 208.7 207.9 208.7
Retained earnings 63.8 42.2 76.6
Treasury stock, 2.8, 2.4, and 2.8 shares,
respectively, at cost (55.5) (41.6) (55.9)
Accumulated other comprehensive income:
Foreign currency translation account (3.4) (5.5) (3.0)
-------- -------- --------
Total shareholders' equity 391.1 380.5 403.9
-------- -------- --------
Total liabilities and shareholders' equity $1,445.5 $ 988.3 $1,035.2
======== ======== ========
</TABLE>
See notes to condensed, consolidated financial statements
Page 5
<PAGE> 6
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
(all amounts are in millions except per share data or as otherwise noted)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Scotts Company is engaged in the manufacture and sale of lawn care and
garden products. The Company's major customers include mass merchandisers,
home improvement centers, large hardware chains, independent hardware
stores, nurseries, garden centers, food and drug stores, golf courses,
professional sports stadiums, lawn and landscape service companies,
commercial nurseries and greenhouses, and specialty crop growers. The
Company's products are sold in the United States, Canada, the European
Union, the Caribbean, South America, Southeast Asia, the Middle East,
Africa, Australia, New Zealand, Mexico, Japan, and several Latin American
countries.
ORGANIZATION AND BASIS OF PRESENTATION
The condensed, consolidated financial statements include the accounts of
The Scotts Company and its subsidiaries, (collectively, the "Company").
All material intercompany transactions have been eliminated.
The condensed, consolidated balance sheets as of January 2, 1999 and
January 3, 1998, and the related condensed, consolidated statements of
operations and cash flows for the three month periods ended January 2,
1999 and January 3, 1998 are unaudited; however, in the opinion of
management, such financial statements contain all adjustments necessary
for the fair presentation of the Company's financial position and results
of operations. Interim results reflect all normal recurring adjustments
and are not necessarily indicative of results for a full year. The interim
financial statements and notes are presented as specified by Regulation
S-X of the Securities and Exchange Commission, and should be read in
conjunction with the financial statements and accompanying notes in
Scotts' fiscal 1998 Annual Report on Form 10-K.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying disclosures. The most significant of these
estimates are related to the allowance for doubtful accounts, inventory
valuation reserves, expected useful lives assigned to property, plant and
equipment and goodwill and other intangible assets, legal and
environmental accruals, post-retirement benefits, promotional and consumer
rebate liabilities, income taxes and contingencies. Although these
estimates are based on management's best knowledge of current events and
actions the Company may undertake in the future, actual results ultimately
may differ from the estimates.
ADVERTISING AND PROMOTION
The Company advertises its branded products through national and regional
media, and through cooperative advertising programs with retailers.
Retailers are also offered pre-season stocking and in-store promotional
allowances. Certain products are also promoted with direct consumer rebate
programs. The Company expenses advertising and promotion costs as
incurred, although costs incurred during interim periods are generally
expensed ratably in relation to revenues or related performance measures.
RECLASSIFICATIONS
Certain reclassifications have been made in prior periods' financial
statements to conform to fiscal 1999 classifications.
2. ACQUISITIONS
Effective October 1998, the Company acquired Rhone-Poulenc Jardin ("RPJ"),
continental Europe's largest consumer lawn and garden products company,
for approximately $216.0 million, subject to adjustment based on working
capital as of the closing date and as defined in the purchase agreement.
Effective February 1998, the Company acquired all the shares of EarthGro,
Inc. ("EarthGro"), a regional growing media company located in
Glastonbury, Connecticut, for approximately $47.0 million.
Effective December 1997, the Company acquired all the shares of Levington
Group Limited ("Levington"), a leading producer of consumer and
professional lawn fertilizer and growing media in the U.K., for
approximately $94.0 million.
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<PAGE> 7
During fiscal 1999 and 1998, the Company also invested in or acquired
other entities consistent with its long-term strategic plan. These
investments include Asef Holding BV, Scotts Lawn Service, Sanford
Scientific, Inc. (genetics) and the U.S. Home and Garden Consumer Products
Business of AgrEvo Environmental Health, Inc. (pesticides), which is
expected to be divested in fiscal 1999.
Each of the above acquisitions was accounted for under the purchase method
of accounting. Accordingly, the purchase prices have been allocated to the
assets acquired and liabilities assumed based on their estimated fair
values at the date of acquisition. A final allocation of the purchase
price to acquired net assets associated with the RPJ and Asef Holding BV
acquisitions is pending. The excess of the purchase price over the net
book value of acquired assets is currently recorded on the balance sheet
as an intangible asset. Intangible assets associated with the purchase of
EarthGro and Levington were $21.6 million and $62.8 million, respectively.
Intangible assets associated with the other acquisitions mentioned above
are approximately $43.0 million on a combined basis.
The following unaudited pro forma results of operations give effect to the
RPJ, Earthgro, and Levington acquisitions as if they had occurred on
October 1, 1997.
<TABLE>
<CAPTION>
Three Months Ended
------------------
January 2, January 3,
1999 1998
---- ----
(in millions)
<S> <C> <C>
Net sales $ 184.4 $ 175.9
Loss before extraordinary loss (10.0) (7.3)
Net loss (10.4) (7.3)
Basic earnings per share:
Before extraordinary loss $ (0.68) $ (0.52)
After extraordinary loss (0.70) (0.52)
Diluted earnings per share
Before extraordinary loss $ (0.68) $ (0.52)
After extraordinary loss (0.70) (0.52)
</TABLE>
The pro forma information provided does not purport to be indicative of
actual results of operations if the RPJ, Earthgro and Levington
acquisitions had occurred as of October 1, 1997, and is not intended to be
indicative of future results or trends.
3. AGENCY AGREEMENT
Effective September 30, 1998, the Company entered into an agreement with
Monsanto for exclusive international marketing and agency rights to
Monsanto's consumer Roundup(R) herbicide products. In connection with the
agreement, the Company paid a $32.0 million deferred marketing fee that is
being amortized over 20 years. The agreement covers most major consumer
lawn and garden markets in the world, including the U.S., Canada, Germany,
France, other parts of continental Europe, and Australia.
The agreement provides for the company to earn a commission based on the
EBIT (as defined by the agreement) generated annually by the global
Roundup(R) business. The Company has recorded $5.0 million in the first
quarter of fiscal 1999, representing a pro-rata share of the estimated
amount to be earned for the year.
4. INVENTORIES
Inventories, net of provisions of $15.0 million, $12.3 million and $12.0
million, respectively, consisted of:
<TABLE>
<CAPTION>
January 2, January 3, September 30,
(in millions) 1999 1998 1998
------ ------ ------
<S> <C> <C> <C>
Finished goods $227.3 $157.4 $121.0
Raw materials 70.4 51.4 55.8
------ ------ ------
FIFO cost 297.7 208.8 176.8
LIFO reserve 0.5 1.6 0.9
------ ------ ------
Total $298.2 $210.4 $177.7
====== ====== ======
</TABLE>
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<PAGE> 8
5. INTANGIBLE ASSETS, NET
<TABLE>
<CAPTION>
January 2, January 3, September 30,
(in millions) 1999 1998 1998
------ ------ ------
<S> <C> <C> <C>
Goodwill $386.6 $260.0 $268.1
Trademarks 141.9 133.3 144.0
Other 91.9 20.8 23.0
------ ------ ------
Total $620.4 $414.1 $435.1
====== ====== ======
</TABLE>
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
January 2, January 3, September 30,
(in millions) 1999 1998 1998
------ ------ ------
<S> <C> <C> <C>
Revolving loans under credit facility $ 98.3 $308.7 $253.5
Term loans under credit facility 525.0 -- --
9 7/8% Senior Subordinated Notes
$100.0 face amount (net of
unamortized discount) 99.5 99.5 99.5
Deferred acquisition price 42.8 -- 5.6
Foreign term loans 9.0 9.0 9.0
Capital lease obligations and other 4.6 1.0 4.9
------ ------ ------
779.2 418.2 372.5
Less current portions 24.4 93.7 13.3
------ ------ ------
$754.8 $324.5 $359.2
====== ====== ======
</TABLE>
On December 4, 1998, the Company and certain of its subsidiaries entered
into a new credit facility which provides for borrowings in the aggregate
principal amount of $1.025 billion and consists of term loan facilities in
the aggregate amount of $525 million and a revolving credit facility in
the amount of $500 million. Proceeds from borrowings under the new credit
facility of approximately $241.0 million were used to repay amounts
outstanding under the then existing credit facility. Gross borrowings and
gross repayments under the credit facility were $817.7 million and $445.1
million, respectively, for the three months ended January 2, 1999. An $0.4
million extraordinary loss, net of tax, was recorded in connection with
the retirement of the old facility.
The term loan facilities consist of three tranches. The Tranche A Term
Loan Facility consists of three sub-tranches of French Francs, German
Deutschemarks and British Pounds Sterling in an aggregate principal amount
of $265 million which are to be repaid quarterly over a 6 1/2 year period.
The Tranche B Term Loan Facility is a 7 1/2 year term loan facility in an
aggregate principal amount of $140 million, which is to be repaid in
nominal quarterly installments for the first 6 1/2 years and in
substantial quarterly installments in the final year. The Tranche C Term
Loan Facility is a 8 1/2 year term loan facility in an aggregate principal
amount of $120 million, which is to be repaid in nominal quarterly
installments for the first 7 1/2 years and in substantial quarterly
installments in the final year.
The revolving credit facility provides for borrowings up to $500 million,
which are available on a revolving basis over a term of 6 1/2 years. A
portion of the revolving credit facility not to exceed $40 million is
available for the issuance of letters of credit. A portion of the facility
not to exceed $225 million is available for borrowings in optional
currencies, including German Deutschemarks, British Pounds Sterling,
French Francs, Belgian Francs, Italian Lira and other specified
currencies, provided that the outstanding revolving loans in optional
currencies other than British Pounds Sterling does not exceed $120
million. The outstanding principal amount of all revolving credit loans
may not exceed $150 million for at least 30 consecutive days during any
calendar year.
Interest rates and commitment fees pursuant to the new credit facility
vary according to the Company's leverage ratios and also within tranches.
Financial covenants include minimum net worth, interest coverage and net
leverage ratios. Other covenants include limitations on: indebtedness,
liens, mergers, consolidations, liquidations and dissolutions, sale of
assets, leases, dividends, capital expenditures, and investments, among
others.
Approximately $10.2 million dollars of financing costs associated with the
new credit facility have been deferred as of January 2, 1999 and are being
amortized over a period of approximately 7 years.
In conjunction with the acquisition of RPJ and Sanford Scientific, notes
payable of $37.2 million and $5.6 million, respectively, were issued for
certain portions of the total purchase price that are to be paid in annual
installments over a four year period.
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7. EARNINGS PER COMMON SHARE
The following table presents information necessary to calculate basic and
diluted earnings per common share ("EPS"). For each period presented,
basic and diluted EPS are equal since common share equivalents (stock
options, Class A Convertible Preferred Stock and warrants) outstanding for
each period were anti-dilutive and thus not considered in the diluted
earnings per common share calculations.
<TABLE>
<CAPTION>
Three Months Ended
------------------
(in millions except for per share data) January 2, January 3,
1999 1998
------ ------
<S> <C> <C>
Net loss before extraordinary item $(10.0) $ (5.5)
Extraordinary item, net of tax 0.4 -
------ ------
Net loss (10.4) (5.5)
Preferred Stock dividends (2.4) (2.4)
------ ------
Loss applicable to common
shareholders $(12.8) $ (7.9)
====== ======
Common shares used in earnings
per common share computation 18.3 18.7
====== ======
Basic and diluted earnings per common share
before extraordinary item $ (.68) $ (.42)
====== ======
Extraordinary item, net of tax $ (.02) $ -
====== ======
Basic and diluted earnings per common share $ (.70) $ (.42)
====== ======
</TABLE>
8. STATEMENT OF COMPREHENSIVE INCOME
Effective October 1, 1999 the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income".
SFAS 130 requires that changes in the amounts of certain items, including
foreign currency translation adjustments, be presented in the Company's
financial statements. The components of other comprehensive income and
total comprehensive income for the three months ended January 2, 1999 and
January 3, 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended
------------------
January 2, January 3,
(in millions) 1999 1998
----------- ----------
<S> <C> <C>
Net loss $(10.4) $(5.5)
Other comprehensive income:
Translation adjustments, net of taxes of
$0.2 and $0.5, respectively (0.2) (0.7)
------ -----
Comprehensive income $(10.6) $(6.2)
====== =====
</TABLE>
9. CONTINGENCIES
Management continually evaluates the Company's contingencies, including
various lawsuits and claims which arise in the normal course of business,
product and general liabilities, property losses and other fiduciary
liabilities for which the Company is self-insured. In the opinion of
management, its assessment of contingencies is reasonable and related
reserves, in the aggregate, are adequate; however, there can be no
assurance that future quarterly or annual operating results will not be
materially affected by final resolution of these matters. The following
details are the more significant of the Company's identified
contingencies.
OHIO ENVIRONMENTAL PROTECTION AGENCY
The Company has assessed and addressed certain environmental issues
regarding the wastewater treatment plants which had operated at the
Marysville facility. The Company decommissioned the old wastewater
treatment plants and has connected the facility's wastewater system with
the City of Marysville's municipal treatment system. Additionally, the
Company has been assessing, under Ohio's new Voluntary Action Program
("VAP"), the possible remediation of several discontinued on-site waste
disposal areas dating back to the early
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<PAGE> 10
operations of its Marysville facility.
In February 1997, the Company learned that the Ohio Environmental
Protection Agency ("OEPA") was referring certain matters relating to
environmental conditions at the Company's Marysville site, including the
existing wastewater treatment plants and the discontinued on-site waste
disposal areas, to the Ohio Attorney General's Office ("OAG").
Representatives from the OEPA, the OAG and the Company continue to meet to
discuss these issues.
In June 1997, the Company received formal notice of an enforcement action
and draft Findings and Orders ("F&O") from the OEPA. The draft F&O
elaborated on the subject of the referral to the OAG alleging: potential
surface water violations relating to possible historical sediment
contamination possibly impacting water quality; inadequate treatment
capabilities of the Company's existing and currently permitted wastewater
treatment plants; and that the Marysville site is subject to corrective
action under the Resource Conservation Recovery Act ("RCRA"). In late July
1997, the Company received a draft judicial consent order from the OAG
which covers many of the same issues contained in the draft F&O including
RCRA corrective action.
In accordance with the Company's past efforts to enter into Ohio's VAP,
the Company submitted to the OEPA a "Demonstration of Sufficient Evidence
of VAP Eligibility Compliance" on July 8, 1997. Among other issues
contained in the VAP submission, was a description of the Company's
ongoing efforts to assess potential environmental impacts of the
discontinued on-site waste disposal areas as well as potential remediation
efforts. Pursuant to the statutes covering VAP, an eligible participant in
the program is not subject to State enforcement actions for those
environmental matters being addressed. On October 21, 1997, the Company
received a letter from the Director of the OEPA denying VAP eligibility
based upon the timeliness of and completeness of the submittal. The
Company has appealed the Director's action to the Environmental Review
Appeals Commission. No hearing date has been set and the appeal remains
pending.
The Company is continuing to meet with the OAG and the OEPA in an effort
to negotiate an amicable resolution of these issues but is unable at this
stage to predict the outcome of the negotiations. The Company believes
that it has viable defenses to the State's enforcement action, including
that it had been proceeding under VAP to address certain environmental
issues, and will assert those defenses in any such action.
While the Company is unable to predict the ultimate outcome of this issue,
management believes that the probable range of outcome will not be
material to the Company. Many of the issues raised by the State are
already being investigated and addressed by the Company during the normal
course of conducting business.
LAFAYETTE
In July 1990, the Philadelphia District of the U.S. Army Corps of
Engineers ("Corps") directed that peat harvesting operations be
discontinued at Hyponex's Lafayette, New Jersey facility, based on its
contention that peat harvesting and related activities result in the
"discharge of dredged or fill material into waters of the United States"
and therefore require a permit under Section 404 of the Clean Water Act.
In May 1992, the United States filed suit in the U.S. District Court for
the District of New Jersey seeking a permanent injunction against such
harvesting, and civil penalties in an unspecified amount. If the Corps'
position is upheld, it is possible that further harvesting of peat from
this facility would be prohibited. The Company is defending this suit and
is asserting a right to recover its economic losses resulting from the
government's actions. The suit was placed in administrative suspense
during fiscal 1996 in order to allow the Company and the government an
opportunity to negotiate a settlement, and it remains suspended while the
parties develop, exchange and evaluate technical data. In July 1997, the
Company's wetlands consultant submitted to the government a draft
remediation plan. Comments were received, and a revised plan was submitted
in early 1998. Further immaterial comments from the government were
received during 1998, and final agreement is expected sometime in 1999.
Management does not believe that the outcome of this case will have a
material adverse effect on the Company's operations or its financial
condition. Furthermore, management believes the Company has sufficient raw
material supplies available such that service to customers will not be
materially adversely affected by continued closure of this peat harvesting
operation.
HERSHBERGER
In September 1991, the Company was identified by the OEPA as a Potentially
Responsible Party ("PRP") with respect to a site in Union County, Ohio
(the "Hershberger site"), because the Company allegedly arranged for the
transportation, treatment or disposal of waste that allegedly contained
hazardous substances, at the Hershberger site. Effective February 1998,
the Company and four other named PRPs executed an Administrative Order on
Consent ("AOC") with the OEPA, by which the named PRPs will fund remedial
action at the Hershberger site. After construction of the leachate
collection system and reconstruction of the landfill cap, which was
substantially completed in August 1998, the Company expects its obligation
thereafter to consist primarily of its share of annual operating and
maintenance expenses. Management does not believe that its obligations
under the AOC will have a material adverse effect on the Company's results
of operations or financial condition.
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<PAGE> 11
10. NEW ACCOUNTING STANDARDS
In June of 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information". In February and August of 1998,
respectively, the FASB issued SFAS No. 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits." and SFAS No. 133, "Accounting
For Derivative Instruments and Hedging Activities." SFAS No. 131 and 132
are effective for financial statements for fiscal years beginning after
December 15, 1997. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999.
SFAS No. 131 establishes standards for the way that public enterprises
report information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders
commencing in the year after adoption. SFAS No. 131 defines business
segments as components of an enterprise about which separate financial
information is available and used internally for evaluating segment
performance and decision making on resource allocations. SFAS No. 131
requires reporting a measure of segment profit or loss, certain specific
revenue and expense items, and segment assets; and other reporting about
geographic and customer matters. The Company plans to adopt SFAS No. 131
in fiscal 1999.
SFAS No. 132 revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or
recognition of those plans. It standardizes the disclosure requirements
for pensions and other postretirement benefits to the extent practicable,
requires additional information on changes in the benefit obligations and
fair values of plan assets that will facilitate financial analysis, and
eliminates certain disclosures that are no longer useful. The Company
plans to adopt SFAS No. 132 in fiscal 1999.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. The
Company has not yet determined the impact this statement will have on its
operating results. The Company plans to adopt SFAS No. 133 in fiscal 2000.
See Note 8 for a discussion of SFAS No. 130.
11. RESTRUCTURING
Restructuring and other charges totaled $1.9 million in the first quarter
of fiscal 1999, of which $0.5 million is included in SG&A charges. These
charges consist of severance and relocation costs to reorganize the North
American Professional Business Group to strengthen distribution and
technical sale support, integrate brand management across market segments
and reduce annual operating expenses
During fiscal 1998, the Company recorded $20.4 million of restructuring
and other charges. Included in these charges are the following: (1)$6.0
million for consolidation of the Company's two U.K. operations into one
lower-cost business, consisting primarily of property and equipment and
packaging costs of $3.9 million and severance costs of $1.4 million; (2)
$9.3 million for the closure of nine composting operations in the U.S.
that collect yard and compost waste for certain municipalities, consisting
primarily of losses under contractual commitments of $4.5 million and
inventory and fixed asset write-offs of $4.8 million; and (3) $5.1 million
for the sale or closure of certain other U.S. plants and businesses. The
Company expects that these restructuring efforts will be completed during
fiscal 1999.
In connection with the charges taken for the consolidation of the two U.K.
operations, the Company made $1.7 million of the estimated $3.8 million
cash payments accrued for in fiscal 1998, primarily related to severance,
packaging and information system costs. The Company estimates that the
remaining payments will be made in fiscal 1999
In connection with the charges taken for the closure of nine composting
operations, the Company made $0.6 million of the estimated $5.0 million
cash payments accrued for in fiscal 1998, primarily related to losses
under contractual commitments. The Company estimates that of the remaining
payments, $2.6 million will be made in fiscal 1999, while $1.8 million
will be made in fiscal 2000.
In connection with the charges taken for the sale or closure of certain
other U.S. plants and businesses, no cash payments were made in the first
quarter of fiscal 1999.
12. SUBSEQUENT EVENTS
On January 21, 1999, the Company consummated the acquisition of the assets
of the Monsanto Company's consumer lawn and garden businesses, exclusive
of the Roundup(R) business, for approximately $300 million, subject to
adjustment based on working capital as of the closing date and as defined
in the purchase agreement. The acquired businesses include the Ortho(R)
line of pesticides which encompasses brands such as Weed-B-Gon(R), Rose
Pride(R) and Home Defense(R). The Company also acquired Green Cross(R), a
leading pesticides business in Canada.
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In conjunction with the Ortho acquisition, in January 1999 the Company
completed an offering of $330 million of 10-year 8 5/8% Senior
Subordinated Notes ("the Notes") due 2009. The net proceeds from the
offering, together with borrowings under Scotts' bank facility, were used
to fund the Ortho acquisition and repurchase approximately 97% of the
Company's $100.0 million outstanding 9 7/8% Senior Subordinated Notes due
August 2004. The Company recorded a loss on the extinguishment of the 9
7/8% notes of approximately $9.2 million, including a call premium of $7.1
million and the write-off of unamortized issuance costs and discounts
associated with the 9 7/8% notes of $2.1 million.
Coincidental with the notes offering, the Company settled its then
outstanding interest rate lock for approximately $3.6 million. The Company
entered into two interest rate locks in fiscal 1998 to hedge its
anticipated interest rate exposure on the Note offering. In October 1998,
the Company settled one of the interest rate locks for $9.3 and entered
into a new interest rate lock instrument. The total amount paid under the
interest rate locks of $12.9 million has been deferred and is being
amortized over the life of the notes.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all amounts are in millions except per share data or as otherwise noted)
OVERVIEW
The Company is a leading manufacturer and marketer of consumer branded products
for lawn and garden care, professional turf care and professional horticulture
businesses in the United States and Europe. The Company's operations are divided
into three business segments: North American Consumer, Professional and
International. The North American Consumer segment includes the Lawns, Gardens,
Growing Media, and as of October 1998, Pesticides business groups.
The Company's sales are seasonal in nature and are susceptible to global weather
conditions, primarily in North America and Europe. For instance, periods of wet
weather can slow fertilizer sales but can create increased demand for pesticide
sales. Periods of dry, hot weather can have the opposite effect on fertilizer
and pesticide sales. The Company believes that its recent acquisitions diversify
both its product line risk and geographic risk to weather conditions.
On September 30, 1998, the Company entered into a long-term Exclusive Agency and
Marketing Agreement (the "Roundup(R) Marketing Agreement") with Monsanto for its
consumer Roundup(R) herbicide products. Under the Marketing Agreement, the
Company and Monsanto will jointly develop global consumer and trade marketing
programs for Roundup(R), and the Company has assumed responsibility for sales
support, merchandising, distribution, logistics and certain administrative
functions. In addition, on January 21, 1999, the Company consummated the
acquisition of the assets of the Monsanto Company's consumer lawn and garden
businesses, exclusive of the Roundup(R) business. These transactions with
Monsanto will further the Company's strategic objective of entering the
pesticides segment of the consumer lawn and garden category. These businesses
make up the newly created Consumer Pesticides business group within the North
American Consumer segment.
Over the past two years, the Company has made several other acquisitions to
strengthen its global market position in the lawn and garden category. In
October 1998, the Company acquired Rhone-Poulenc Jardin ("RPJ"), for
approximately $216.0 million, subject to adjustment based on working capital as
of the closing date and as defined in the purchase agreement. RPJ is a leading
European consumer lawn and garden business. The RPJ acquisition provides a
significant addition to the Company's existing European platform and strengthens
its foothold in the continental European consumer lawn and garden market.
Through this acquisition, the Company will establish a strong presence in
France, Germany, Austria, and the Benelux countries. The RPJ acquisition may
also mitigate, to a certain extent, the Company's susceptibility to weather
conditions by expanding the regions in which the Company operates.
In February 1998, the Company acquired EarthGro, Inc. ("Earthgro") a
Northeastern U.S. growing media producer. In December 1997, the Company acquired
Levington Group Limited ("Levington"), a leading producer of consumer and
professional lawn fertilizer and growing media in the United Kingdom. In January
1997, the Company acquired the approximate two-thirds interest in Miracle
Holdings Limited ("Miracle Holdings") which the Company did not already own.
Miracle Holdings owns Miracle Garden Care Limited ("MGC"), a manufacturer and
distributor of lawn and garden products in the United Kingdom. These
acquisitions are consistent with the Company's stated objective of becoming the
world's foremost branded lawn and garden company.
In addition, on December 15, 1998, the Company acquired Asef Holding B.V., a
privately-held Netherlands-based lawn and garden products company, for
approximately $22.0 million.
Management believes that the acquisitions will provide the Company with several
strategic benefits including immediate market penetration, geographic expansion,
brand leveraging opportunities, and the achievement of substantial cost savings.
The Company is currently a leader in four segments of the consumer lawn and
garden category: lawn fertilizer, garden fertilizer, growing media and grass
seeds. The acquisition of Ortho and the Marketing Agreement for Roundup(R) will
provide the Company with an immediate entry into the fifth segment of the
consumer lawn and garden category: the U.S. pesticides segment. The addition of
the U.S. pesticides product line completes the Company's product portfolio and
positions the Company as the only national company with a complete offering of
consumer products.
The addition of strong pesticide brands completes the Company's product
portfolio of powerful branded consumer lawn and garden products that should
provide the Company with brand leveraging opportunities for revenue growth. For
example, the Company's strengthened market position should create category
management opportunities to enhance shelf positioning, consumer communication,
trade incentives and trade programs. In addition, significant synergies should
be realized from the combined businesses, including reductions in general and
administrative, sales, distribution, purchasing, research and development, and
corporate overhead costs. Management expects to redirect a portion of these cost
savings into increased consumer marketing spending in support of the Ortho
brand.
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RESULTS OF OPERATIONS
The following discussion and analysis of the consolidated results of operations,
cash flows and financial position of the Company should be read in conjunction
with the Condensed, Consolidated Financial Statements of the Company included
elsewhere in this report. Scotts' Annual Report on Form 10-K for the fiscal year
ended September 30, 1998 includes additional information about the Company, its
operations, and its financial position, and should be read in conjunction with
this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
The following table sets forth sales by business segment for the three months
ended January 2, 1999 and January 3, 1998:
<TABLE>
<CAPTION>
For the Three Months Ended
-------------------------- Period to
January 2, January 3, Period
1999 1998 % Change
------ ------ --------
<S> <C> <C> <C>
North American Consumer:
Lawns $ 39.2 $ 30.2 29.8%
Gardens 13.5 12.3 9.8
Growing Media 20.1 16.2 24.1
------ ------
Total 72.8 58.7 24.0
Professional 32.5 32.4
0.3
International 79.1 33.7 134.7
------ ------
Consolidated $184.4 $124.8 47.8%
====== ======
</TABLE>
The following table sets forth the components of income and expense as a
percentage of sales for the three months ended January 2, 1999 and January 3,
1998:
<TABLE>
<CAPTION>
For the Three Months Ended
---------------------------
January 2, January 3,
1999 1998
---------- ----------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 64.9 66.9
----- -----
Gross profit 35.1 33.1
Commission earned from agency agreement 2.7 --
Operating expenses:
Advertising and promotion 9.1 8.3
Selling, general and administrative 29.2 25.6
Amortization of goodwill and other intangibles 2.7 2.2
Restructuring and other charges 0.8 0.0
Other income, net (0.1) (0.2)
----- -----
Loss from operations (3.9) (2.6)
Interest expense 5.3 5.1
----- -----
Loss before income taxes (9.2) (7.8)
Income tax benefit (3.7) (3.4)
----- -----
Net loss before extraordinary item (5.4) (4.4)
Extraordinary item, net of tax 0.2 0.0
Net loss (5.6) (4.4)
----- -----
Preferred stock dividends 1.3 1.9
----- -----
Loss applicable to common shareholders (6.9)% (6.3)%
===== =====
</TABLE>
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THREE MONTHS ENDED JANUARY 2, 1999 VERSUS THE THREE MONTHS ENDED JANUARY 3, 1998
Sales for the three months ended January 2, 1999 totaled $184.4 million, an
increase of 47.8% over the three months ended January 3, 1998 of $124.8 million.
On a pro forma basis, assuming that the RPJ, Levington and Earthgro acquisitions
had occurred on October 1, 1997, sales for the first quarter of fiscal 1999
increased 4.8% over pro forma sales for the first quarter of fiscal 1998 of
$175.9 million. The increase in these pro forma sales was driven primarily by
significant increases in sales in the Consumer Lawns business group as discussed
below.
NORTH AMERICAN CONSUMER segment sales were $72.8 million in the first quarter of
fiscal 1999, an increase of $14.1 million, or 24.0%, over sales for the first
quarter of fiscal 1998 of $58.7 million. Sales in the Consumer Lawns business
group within this segment increased $9.0 million, or 29.8%, from fiscal 1998 to
fiscal 1999, reflecting significant volume growth period-to-period in the
Company's Turf Builder(R) line of products. Sales in the Consumer Gardens
business group increased $1.2 million, or 9.8%, from the first quarter of fiscal
1998 to fiscal 1999, primarily due to strong volume in the Miracle-Gro(R)
product line. Sales in the Consumer Growing Media business group increased $3.9
million, or 24.1%, primarily the result of the Earthgro acquisition made in
February of fiscal 1998. On a pro forma basis, including the Earthgro
acquisition, sales in the Consumer Growing Media business group increased 4.1%
from the first quarter of fiscal 1998 to fiscal 1999, driven primarily by the
sales of higher margin, value added potting soil products. Selling price changes
did not have a material impact in the North American Consumer segment in the
first quarter of fiscal 1999.
PROFESSIONAL segment sales of $32.5 million in the first quarter of fiscal 1999
were flat in comparison to first quarter of fiscal 1998 sales of $32.4 million.
Results reflect the offsetting performance of the Company's horticultural
products, sales of which increased 20% period-to-period, and ProTurf(R) products
which decreased by a similar amount. The decrease in ProTurf(R) sales was driven
by short-term interruptions associated with the reorganization of the
Professional business group made to strengthen distribution and technical sales
support and to integrate brand management. The Company expects the first quarter
results for the ProTurf(R) line to recover in the second and third quarters. The
increase in horticultural products stems from strong sales volume for
controlled-release fertilizers used in the nursery and greenhouse segments.
INTERNATIONAL segment sales were $79.1 million in the first quarter of fiscal
1999, an increase of $45.4 million, or 134.7%, over the first quarter of fiscal
1998. After considering the RPJ and Levington acquisitions, on a pro forma
basis, sales in the International segment decreased 3.2% from the first quarter
of fiscal 1998 to fiscal 1999, primarily the result of decreases experienced in
the group's U.K. business and the impact of foreign currency translation. The
decreases in the U.K stem from slower than anticipated orders through the end of
the first quarter which are expected to be recovered through the remainder of
the selling season. Excluding the effects of currency translation, pro forma
sales would have been 0.9% lower than the first quarter of the prior year.
Gross profit increased to $64.7 million in the first quarter of fiscal 1999, an
increase of 56.7% over fiscal 1998 gross profit of $41.3 million. As a
percentage of sales, gross profit was 35.1% of sales for fiscal 1999 compared to
33.1% of sales for the first quarter of fiscal 1998, primarily due to start-up
costs associated with the upgrade of certain domestic manufacturing facilities
and demolition costs associated with the removal of certain old manufacturing
facilities that had an adverse impact on margins in the first quarter of fiscal
1998.
The "commission earned from agency agreement" of $5.0 million in the first
quarter of fiscal 1999 was generated from the Company's agreement with Monsanto
for exclusive international marketing and agency rights to Monsanto's consumer
Roundup(R) herbicide products. The agreement provides for the Company to earn a
commission based on EBIT (as defined by the agreement) generated annually by the
global Roundup(R) business. The $5.0 million recorded in the first quarter of
fiscal 1999 represents a pro-rata share of the estimated amount to be earned for
the year.
Advertising and promotion expenses in the first quarter of fiscal 1999 were
$16.7 million, an increase of $6.4 million, or 62.1% over fiscal 1998
advertising and promotion expenses of $10.3 million. On a pro forma basis,
including the RPJ, Levington and EarthGro acquisitions, advertising and
promotion expenses increased 15.2% from the first quarter of fiscal 1998 to
fiscal 1999. This increase reflects continued emphasis on building consumer
demand through consumer-oriented marketing efforts, and is highlighted by 53.6%
and 62.2% increases in advertising and promotion expenses in the Consumer Lawns
business unit and International segment (on a pro forma basis), respectively. As
a percentage of sales, advertising and promotion increased slightly to 9.1%
compared to 8.3% for the prior year.
Selling, general and administrative (SG&A) expenses in the first quarter of
fiscal 1999 were $53.9 million, an increase of $22.0 million, or 69.0% over
similar expenses in the first quarter of fiscal 1998 of $31.9 million. As a
percentage of sales, SG&A was 29.2% for the first quarter of fiscal 1999
compared to 25.6% for fiscal 1998. On a pro forma basis, including the RPJ,
Levington and EarthGro acquisitions, SG&A expenses increased 15.7% from the
first quarter of fiscal 1998 to fiscal 1999. The increase in SG&A expenses was
due to several factors: the
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assumption of selling, marketing, research and development and administrative
functions related to acquired businesses; information systems expenses of $1.3
million for year 2000 compliance and $1.6 million for enterprise system
implementation efforts; and increased charges for management incentive
compensation as compared to the prior year.
Amortization of goodwill and other intangibles increased to $4.9 million in the
first quarter of fiscal 1999, compared to $2.7 million in the prior year, due to
additional intangibles resulting from the RPJ, Levington and Earthgro
acquisitions.
Restructuring and other charges totaled $1.9 million in the first quarter of
fiscal 1999, of which $0.5 million is included in SG&A charges. These charges
consist of severance and relocation costs to reorganize the North American
Professional Business Group to strengthen distribution and technical sales
support, integrate brand management across market segments and reduce annual
operating expenses.
Other income for the first quarter of fiscal 1999 was $0.1 million compared to
$0.3 million in the prior year. The decrease was primarily due to higher legal
and environmental costs being partially offset by lower foreign currency losses.
Loss from operations for the first quarter of fiscal 1999 was $7.1 million
compared to $3.3 million for the first quarter of fiscal 1998, primarily due to
charges associated with information systems expense for year 2000 compliance and
for enterprise system implementation efforts. On a pro forma basis, including
the RPJ, Levington and EarthGro acquisitions, loss from operations for the first
quarter of fiscal 1998 was $1.7 million.
Interest expense for the first quarter of fiscal 1999 was $9.8 million, an
increase of 53.1% over fiscal 1998 interest expense of $6.4 million. The
increase in interest expense was due to increased borrowings to fund the RPJ,
Levington, and EarthGro acquisitions. The increase was also due to higher
average borrowing rates determined by the terms and conditions of the Company's
new credit facility as discussed below.
Income tax benefit was $6.9 million for fiscal 1999 compared to a benefit of
$4.2 million in the prior year. The Company's effective tax rate was 41.0% in
the first quarter of fiscal 1999 compared to 43.2% in fiscal 1998 as a result of
favorable tax planning strategies.
As discussed further in "Liquidity and Capital Resources, on December 4, 1998,
the Company and certain of its subsidiaries entered into a new credit facility
and used borrowings under the facility to repay amounts outstanding under its
then existing credit facility. The write-off of deferred financing costs
associated with the then existing credit facility resulted in an extraordinary
loss, net of income taxes, of $0.4 million.
The Company reported a net loss of $10.4 million for the first quarter of fiscal
1999, or $0.70 loss per common share on a basic and diluted basis, compared to a
net loss of $5.5 million for fiscal 1998, or $0.42 loss per common share on a
basic and diluted basis. Excluding the impact of the extraordinary loss
discussed above, the Company reported a loss of $0.68 per share on a basic and
diluted basis.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities totaled $163.6 million for the three months
ended January 2, 1999 compared to a use of $88.5 million for the three months
ended January 3, 1998. The seasonal nature of the Company's operations generally
requires cash to fund significant increases in certain components of working
capital (primarily inventory and accounts receivable) during the first and
second quarters. The third fiscal quarter is a significant period for collecting
accounts receivable and liquidating inventory levels. The additional cash used
in operating activities for the first quarter of fiscal 1998 is attributable to
the increased build of inventory levels needed to cover expected revenue growth,
cash required for operations of recently acquired businesses, and for the
payment of marketing fees associated with the Roundup(R) agency agreement.
Cash used in investing activities totaled $182.1 million for the three months
ended January 2, 1999 as compared to $96.4 million in the prior year. This
increase in cash used was primarily due to the cost of the RPJ and ASEF
businesses acquired during the period. Additionally, capital investments were
$13.8 in the first quarter of fiscal 1999, a $6.2 increase in comparison to the
prior year. The increase in capital investments was primarily due to the upgrade
of certain manufacturing facilities to more technologically advanced production
capabilities, including the installation of a fourth state-of-the-art production
line in the Company's Marysville facility. The Company's new credit facilities
(as described below) restrict annual capital investments to $70.0 million.
Financing activities generated cash of $343.2 million for the three months ended
January 2, 1999 compared to $192.4 million in the prior year. Cash generated in
the first quarter of fiscal 1999 was generally provided by the Company's new
$1.025 billion credit facility in order to provide funds for the following:
acquisitions of RPJ and Asef; marketing fees associated with the Roundup(R)
agency agreement; financing fees associated with the new
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credit facility (as discussed below); payments associated with the then
outstanding interest rate locks (also described below); and dividends on Class A
Preferred Stock.
Total debt was $779.2 million as of January 2, 1999, an increase of $406.7
million compared with debt at September 30, 1998 and an increase of $361.0
compared with debt levels at January 3, 1998. The increase in debt period to
period was primarily due to borrowings made to fund the financing activities
previously mentioned.
The primary sources of liquidity for the Company are funds generated by
operations and borrowings under the Company's Credit Agreement. On December 4,
1998, the Company and certain of its subsidiaries entered into a new credit
facility which provides for borrowings in the aggregate principal amount of
$1.025 billion and consists of term loan facilities in the aggregate amount of
$525 million and a revolving credit facility in the amount of $500 million.
Proceeds from borrowings under the new credit facility of approximately $241.0
million were used to repay amounts outstanding under the then existing credit
facility.
The term loan facilities consist of three tranches. The Tranche A Term Loan
Facility consists of three sub-tranches of French Francs, German Deutschemarks
and British Pounds Sterling in an aggregate principal amount of $265 million
which are to be repaid quarterly over a 6 1/2 year period. The Tranche B Term
Loan Facility is a 7 1/2 year term loan facility in an aggregate principal
amount of $140 million, which is to be repaid in nominal quarterly installments
for the first 6 1/2 years and in substantial quarterly installments in the final
year. The Tranche C Term Loan Facility is a 8 1/2 year term loan facility in an
aggregate principal amount of $120 million, which is to be repaid in nominal
quarterly installments for the first 7 1/2 years and in substantial quarterly
installments in the final year.
The revolving credit facility provides for borrowings up to $500 million, which
are available on a revolving basis over a term of 6 1/2 years. A portion of the
revolving credit facility not to exceed $40 million is available for the
issuance of letters of credit. A portion of the facility not to exceed $225
million is available for borrowings in optional currencies, including German
Deutschemarks, British Pounds Sterling, French Francs, Belgian Francs, Italian
Lira and other specified currencies, provided that the outstanding revolving
loans in optional currencies other than British Pounds Sterling does not exceed
$120 million. The outstanding principal amount of all revolving credit loans may
not exceed $150 million for at least 30 consecutive days during any calendar
year.
The Company funded the acquisition of RPJ and Asef with borrowings under the
newly created credit facility. Certain other borrowings under the credit
facility, along with proceeds from the January 21, 1999 offering of $330 million
of 10-year 8 5/8% Senior Subordinated Notes due 2009, were used to fund the
Ortho acquisition and to repurchase approximately 97% of the Company's $100.0
million outstanding 9 7/8% Senior Subordinated Notes due August 2004.
Coincidental with the notes offering, the Company settled its then outstanding
interest rate lock for approximately $3.6 million. The Company entered into two
interest rate locks in fiscal 1998 to hedge its anticipated interest rate
exposure on the Note offering. In October 1998, the Company terminated one of
the interest rate locks for $9.3 and entered into a new interest rate lock
instrument. The total amount paid under the interest rate locks of $12.9 million
has been deferred and is being amortized over the life of the notes
The Board of Directors of the Company has authorized the repurchase of up to
$100 million of the Company's common shares on the open market or in privately
negotiated transactions on or prior to September 30, 2001. As of January 2,
1999, approximately 250,000 common shares have been repurchased under the
Company's previously announced stock repurchase program, all of which will be
applied to the new repurchase program limit. The timing and amount of any
purchases under the new repurchase program will be at the Company's discretion
and will depend upon market conditions and the Company's operating performance
and liquidity. Any repurchase will also be subject to the covenants contained in
the Company's new credit facilities as well as its other debt instruments. The
repurchased shares will be held in treasury and will thereafter be used for the
exercise of employee stock options and for other valid corporate purposes. The
Company anticipates that any repurchases would be made pro rata from the former
shareholders of Stern's Miracle-Gro Products, Inc. (the "Miracle-Gro
Shareholders") upon terms no less favorable to the Company than those obtainable
in the public market. The agreement governing the merger transactions with the
Miracle-Gro Shareholders requires that the they reduce their percentage
ownership in the Company to no more than 44% on a fully diluted basis to the
extent that repurchases by the Company would cause such ownership to exceed 44%.
In the opinion of the Company's management, cash flows from operations and
capital resources will be sufficient to meet debt service and working capital
needs during fiscal 1999, however, the Company cannot ensure that its business
groups will generate sufficient cash flow from operations, that currently
anticipated cost savings and operating improvements will be realized on schedule
or at all, or that future borrowings will be available under the newly created
credit facility in amounts sufficient to pay indebtedness or fund other
liquidity needs. The Company cannot ensure that it will be able to refinance any
indebtedness,including the newly created credit facility, on commercially
reasonable terms, or at all.
ENVIRONMENTAL MATTERS
The Company is subject to local, state, federal and foreign environmental
protection laws and regulations with respect to its business operations and
believes it is operating in substantial compliance with, or taking action aimed
at ensuring compliance with, such laws and regulations. The Company is involved
in several environmental related legal actions with various governmental
agencies. While it is difficult to quantify the potential financial impact of
actions involving environmental matters, particularly remediation costs at waste
disposal sites and future capital expenditures for
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environmental control equipment, in the opinion of management, the ultimate
liability arising from such environmental matters, taking into account
established reserves, should not have a material adverse effect on the Company's
financial position; however, there can be no assurance that future quarterly or
annual operating results will not be materially affected by the resolution of
these matters. Additional information on environmental matters affecting the
Company is provided in Note 8 to the Company's unaudited Consolidated Financial
Statements as of and for the three months ended January 2, 1999 and in the 1998
Annual Report on Form 10-K under the "BUSINESS" and "LEGAL PROCEEDINGS"
sections.
YEAR 2000 READINESS
General
The Company may be impacted by the inability of its computer software
applications and other business systems (e.g., embedded microchips) to properly
identify the Year 2000 due to a commonly used programming convention of using
only two digits to identify a year. Unless modified or replaced, these systems
could fail or create erroneous results when referencing the Year 2000.
Management is assessing the extent and impact of this issue and is implementing
a readiness program to mitigate the possibility of business interruption or
other risks. The objective of the program is to have all significant business
systems Year 2000 compliant by mid-1999.
The Company has established a Year 2000 Program Office to oversee the readiness
program. The Program Office functions include regular communication with Year
2000 project managers and site visits to the Company's various businesses to
monitor remediation efforts and verify progress toward stated compliance goals.
The Program Office reports to senior management, who in turn reports regularly
to the Board of Directors regarding the Company's progress toward Year 2000
readiness.
Information Technology (IT) Systems
Currently, the mainframe computer operations at the Company's Marysville, Ohio
headquarters support all U. S. business groups with the exception of the Scotts'
Miracle-Gro administrative headquarters in New York and the Republic Tool
(spreaders) manufacturing operation in California. The Company's foreign
operations generally do not electronically interface with the U.S. headquarters.
The headquarters mainframe operations consist primarily of internally developed
systems which are being remediated, while other domestic and international
operations utilize commercial packaged software which, if not Year 2000
compliant, is being upgraded or replaced. Remediation of headquarters
applications, which is the Company's most complex and costly effort, is being
managed and executed by a project team including 15 external consultants working
full-time in conjunction with 7 Company associates. The Company maintains
overall project management control while a project manager for the consultants
is responsible for daily administration of the project.
Personal computers are being made Year 2000 compliant by systematic upgrade
through lease renewals. Many other hardware/software upgrades are being executed
under ongoing maintenance and support agreements with vendors. Testing of
upgrades will be performed internally.
In support of the Company's long-range strategic plans, an enterprise-wide
application systems (ERP) project is under way to link all business groups. This
enterprise-wide system will be implemented in stages starting in 1999 and is
expected to be completed in 2000. The primary software provider for the
enterprise-wide system has represented that its software is Year 2000 compliant,
which will be verified as part of testing prior to implementation.
The Company's Year 2000 compliance efforts are being concentrated on the
currently existing systems to ensure there is adequate information systems
support until implementation of the enterprise-wide system is completed.
Non-IT Systems
Non-IT systems, comprised mainly of equipment and machinery operating and
control systems, telecommunication systems, building air management systems,
security and fire control systems, electrical and natural gas systems are being
assessed by each business group with advice from suppliers of these
systems/services. Upgrades or replacements are being made as necessary.
Third Party Suppliers
The Company relies on third party suppliers for finished goods, raw materials,
water, other utilities, transportation and a variety of other key services.
Interruption of supplier operation due to Year 2000 issues could affect Company
operations. The Company is evaluating the status of suppliers' efforts through
confirmation and follow-up procedures to determine contingency planning where
necessary.
Recent Acquisitions
The Company has recently completed the Ortho and RPJ acquisitions, as well as
the Roundup(R) Marketing Agreement. Due diligence reviews of the Year 2000
readiness status for each of these businesses have been completed. The Ortho and
RPJ acquisitions have both IT and non-IT Year 2000 considerations. The
Roundup(R) Marketing Agreement does not involve the acquisition of assets;
however, additional efforts are necessary to confirm Year 2000 readiness by the
Company's
Page 18
<PAGE> 19
business partners. Representations have been provided in the definitive
agreement signed in conjunction with the Ortho transaction that the Ortho
business is Year 2000 compliant in all material respects. The Company is in the
process of compiling Year 2000 reporting from these operations and performing
site visits as part of the verification efforts.
State of Readiness
Each business group has substantially completed an internal inventory which is
designed to identify IT and non-IT systems that are susceptible to system
failure or processing errors as a result of Year 2000 issues.
The headquarters mainframe remediation project is more than 75% complete and is
scheduled for completion (including testing) in mid-1999. Plans are in place for
the upgrade or replacement, and testing of IT systems at other U. S. operations
by mid-1999. Non-IT efforts are being performed concurrently and replacement and
testing is expected to be completed by mid-1999. Site visits are being planned
by the Program Office to verify progress against plans.
Year 2000 readiness plans are being executed within the International segment.
Upgrades of packaged software for the primary systems will be completed by
mid-1999. Completion of all IT and non-IT upgrades and testing is scheduled for
mid-1999. Site visits are being planned by the Program Office to verify progress
against plans.
A confirmation process with respect to third party suppliers is in progress.
Plans are being formulated for site visits and other testing with critical
suppliers to determine if alternative sources are needed.
Due diligence efforts to date for pending acquisitions have revealed that plans
exist by the seller to timely address material Year 2000 issues.
Costs
The Company has been tracking incremental Year 2000 costs which excludes the
costs of internally dedicated resources. The current estimate of incremental
costs for the Year 2000 efforts (excluding those related to the ERP project) is
approximately $5.7 million. Of this amount, $3.0 million has been incurred to
date. These costs, with the exception of relatively small capital expenditures,
are being expensed as incurred and are being funded through operating cash
flows. A summary of the cost components follows ($ in millions):
<TABLE>
<CAPTION>
As of Remainder of
Location January 2, 1999 Fiscal 1999 Total
- -------- --------------- ------------ -----
(actual) (estimate)
<S> <C> <C> <C>
Headquarters mainframe $2.3 $0.8 $3.1
Other U. S. operations and
Program Office 0.2 1.1 1.3
International operations 0.5 0.8 1.3
---- ---- ----
Total $3.0 $2.7 $5.7
==== ==== ====
</TABLE>
The above costs do not include costs of Year 2000 efforts for acquisitions not
deemed material. The costs of the headquarters mainframe work represents 27% of
1999 IT expenditures excluding ERP. The Company believes that Year 2000 costs
have not had and will not have a material impact on the Company's results of
operations, financial condition or cash flows.
Risks
The principal business risks to the Company relating to completion of Year 2000
efforts are:
- - Reliance on key business partners to not have disruption in ability to
provide goods and services as a result of Year 2000 issues.
- - The ability to recruit and/or retain key staff for the Year 2000 effort.
- - Unforeseen issues arising in connection with recent and future
acquisitions/business partnerships.
- - The ability to continue to focus on Year 2000 issues by internal and
external resources.
Because the Company's Year 2000 readiness is dependent upon key business
partners also being Year 2000 ready, there can be no guarantee that the
Company's efforts will prevent a material adverse impact on its results of
operations, financial condition and cash flows. The possible consequences to the
Company of its key business partners' inability to provide goods and services as
a result of Year 2000 issues include temporary plant closings; delays in
delivery of finished products; delays in receipt of key ingredients, containers
and packaging supplies; invoice and collection errors; and inventory and supply
obsolescence. The Company believes that its readiness efforts, which include
confirmation, site visits and other testing with critical suppliers to determine
if contingency planning is needed, should reduce the likelihood of such
disruptions.
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<PAGE> 20
Contingency Plans
A formal contingency plan has not yet been developed. The Company will continue
to assess where alternative courses of action are needed as the IT and non-IT
readiness plans are executed. The drive for formal contingency planning will be
in the second quarter of 1999, once a significant amount of the business groups'
readiness plans have been completed.
Ongoing Process
The Company's readiness program is an ongoing process and the estimates of costs
and completion dates for various components of the program described above are
subject to change.
ENTERPRISE RESOURCE PLANNING ("ERP")
In July 1998, the Company announced a project designed to bring its information
system resources in line with the Company's current strategic objectives. The
project will include the redesign of certain key business processes in
connection with the installation of new software on a world-wide basis over the
course of the next two fiscal years. The Company estimates that the project will
cost $50.0 million, approximately 75% of which will be capitalized over a period
of four to eight years. SAP has been selected as the primary software provider
for this project.
The Company has expensed approximately $3.6 million related the project since
its inception.
EURO
Beginning in January 1999, a new currency called the "euro" is scheduled to be
introduced in certain Economic and Monetary Union ("EMU") countries. During
2002, all EMU countries are expected to be operating with the euro as their
single currency. Uncertainty exists as to the effects the euro currency will
have on the marketplace. Additionally, the European Commission has not yet
defined and formalized all of the final rules and regulations. The Company is
still assessing the impact the EMU formation and euro implementation will have
on its internal systems and the sale of its products. The Company expects to
take appropriate actions based on the results of such assessment. The Company
has not yet determined the cost related to addressing this issue and there can
be no assurance that this issue and its related costs will not have a materially
adverse effect on the Company's business, operating results and financial
condition.
MANAGEMENT'S OUTLOOK
Results for the first quarter of fiscal 1999 are in line with the Company's
long-term strategy for profitable growth. The Company is coming off a very
strong fiscal 1998 as it reported record sales of $1,113.0 million and achieved
market share growth in every one of its major U. S. categories. The performance
in 1998 reflected the successful continuation of its primary growth drivers: to
emphasize consumer-oriented marketing efforts to pull demand through its
distribution channels, and to make strategic acquisitions to increase market
share in global markets and within segments of the lawn and garden category.
Restructuring charges taken in fiscal 1998 reflect the costs to integrate recent
acquisitions and to exit businesses that are not strategically aligned with the
Company's core businesses. Going forward, these actions should allow the Company
to fully realize the operational synergies created by the acquisitions and to
focus resources in businesses that provide opportunities for growth.
Looking forward, the Company maintains the following broad tenets to
its strategic plan:
(1) Promote and capitalize on the strengths of the Scotts(R),
Miracle-Gro(R) and Hyponex(R) industry-leading brands, as well
as those brands acquired in conjunction with the RPJ and Ortho
transactions. This involves a commitment to investors and
retail partners that the Company will support these brands
through advertising and promotion unequaled in the lawn and
garden consumables market. In the Professional categories, it
signifies a commitment to customers to provide value as an
integral element in their long-term success;
(2) Commit to continuously study and improve knowledge of the
market, the consumer and the competition;
(3) Simplify product lines and business processes, to focus on
those that deliver value, evaluate marginal ones and eliminate
those that lack future prospects; and
(4) Achieve world leadership in operations, leveraging technology
and know-how to deliver outstanding customer service and
quality.
Within the Company's four-year strategic plan, management has
established challenging, but realistic, financial goals, including:
(1) Sales growth of 6% to 8% in core businesses;
(2) An aggregate operating margin improvement of at least 2% over
the next four years; and
(3) Minimum compounded annual EPS growth of 15%.
Page 20
<PAGE> 21
FORWARD-LOOKING STATEMENTS
The Company has made and will make certain forward-looking statements in its
Annual Report, Form 10-K and in other contexts relating to future growth and
profitability targets, and strategies designed to increase total shareholder
value. The Private Securities Litigation Reform Act of 1995 (the "Act") provides
a "safe harbor" for forward-looking statements to encourage companies to provide
prospective information, so long as those statements are identified as
forward-looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those discussed in the forward-looking statements. The Company
desires to take advantage of the "safe harbor" provisions of the Act.
These forward-looking statements represent challenging goals for the Company,
and the achievement thereof is subject to a variety of risks and assumptions,
and numerous factors beyond the Company's control. These forward-looking
statements include, but are not limited to, information regarding the future
economic performance and financial condition of the Company, the plans and
objectives of the Company's management, and the Company's assumptions regarding
such performance and plans. Therefore, it is possible that the Company's future
actual financial results may differ materially from those expressed in these
forward-looking statements due to a variety of factors, including:
- - EFFECT OF WEATHER CONDITIONS --Adverse weather conditions could
adversely impact financial results: Weather conditions in North
America and Europe have a significant impact on the timing of
sales in the spring selling season and overall annual sales. In
particular, an abnormally cold spring throughout the United States
could adversely affect the Company's financial results;
- - EFFECT OF SEASONALITY --Historical seasonality could impair the
Company's ability to make interest payments on indebtedness.
Because the Company's products are used primarily in the spring
and summer, the business is highly seasonal. Approximately 72% of
sales occur in the second and third fiscal quarters. Working
capital needs, and correspondingly borrowings, peak at the end of
the first fiscal quarter during which the Company generates less
revenues while incurring expenditures in preparation for the
spring selling season. If the Company is unable to draw on the new
credit facility when an interest payment is due on the other
indebtedness, this seasonality could adversely affect the
Company's ability to make interest payments as required by other
indebtedness. Adverse weather conditions could heighten this risk;
- - CONTINUED MARKETPLACE ACCEPTANCE OF THE COMPANY'S NORTH AMERICAN
CONSUMER GROUPS' "PULL" ADVERTISING MARKETING STRATEGIES -
Acceptance is particularly important in the Consumer Lawns group
which refocused its general marketing strategy beginning in fiscal
1996;
- - THE ABILITY TO MAINTAIN PROFIT MARGINS ON ITS PRODUCTS, TO
PRODUCE ITS PRODUCTS ON A TIMELY BASIS, AND TO MAINTAIN AND
DEVELOP ADDITIONAL PRODUCTION CAPACITY AS NECESSARY TO MEET
DEMAND;
- - COMPETITION AMONG LAWN AND GARDEN CARE PRODUCT PRODUCERS
SUPPLYING THE CONSUMER AND PROFESSIONAL MARKETS, BOTH IN NORTH
AMERICA AND EUROPE;
- - COMPETITION BETWEEN AND THE RECENT CONSOLIDATION WITHIN THE
RETAIL OUTLETS SELLING LAWN AND GARDEN CARE PRODUCTS PRODUCED BY
THE COMPANY;
- - PUBLIC PERCEPTIONS REGARDING THE SAFETY OF THE PRODUCTS PRODUCED
AND MARKETED BY THE COMPANY;
- - RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS -- The Company's
significant international operations make it more susceptible to
fluctuations in currency exchange rates and to the costs of
international regulation. The Company currently operates
manufacturing, sales and service facilities outside of North
America and particularly in the U.K., Germany and France.
International operations have increased with the acquisitions of
Levington, Miracle Garden Care and RPJ and will increase further
through the Roundup(R) Marketing Agreement and the Ortho
Acquisition. In fiscal 1998, international sales accounted for
approximately 18% of total sales. Therefore, the Company is
subject to risks associated with operations in foreign countries,
including fluctuations in currency exchange rates, the imposition
of limitations on conversion of foreign currencies into dollars or
remittance of dividends and other payments by foreign
subsidiaries. Many foreign countries have tended to suffer from
inflation more than the United States. In addition, by operating
in a large number of countries, the Company incurs additional
costs of compliance with local regulations. The Company has
attempted to hedge some currency exchange rate risks, including by
borrowing in local currencies, but such hedges do not eliminate
the risk completely. The costs related to international operations
could adversely affect operations and financial results in the
future;
- - EFFECT OF NEW EUROPEAN CURRENCY -- The implementation of the euro
currency in certain European countries in 2002 could adversely
impact the Company. Beginning in January 1999, a new currency
called the "euro"is scheduled to be introduced in certain Economic
and Monetary Union ("EMU") countries. During 2002, all EMU
countries are expected to be operating with the euro as their
single currency. Uncertainty exists as to the effects the euro
currency will have on the marketplace. Additionally, all of the
final rules and regulations have not yet been defined and
finalized by the European Commission with regard to the euro
currency. The Company is still assessing the impact the EMU
formation will have on internal systems and the sale of products.
The Company expects to take appropriate actions based on the
results of such assessment. However, the Company has not yet
determined the cost related to addressing this issue and there can
be no assurance that this issue and its related costs will not
have a materially adverse effect on operating results and
financial condition;
Page 21
<PAGE> 22
- - CHANGES IN ECONOMIC CONDITIONS IN THE UNITED STATES AND THE
IMPACT OF CHANGES IN INTEREST RATES;
- - ADDRESSING YEAR 2000 ISSUES -- The failure of the Company, or the
failure of third party suppliers or retailer customers, to address
information technology issues related to the Year 2000 could
adversely affect operations. Like other business entities, the
Company must address the ability of its computer software
applications and other business systems (e.g., embedded
microchips) to properly identify the year 2000 due to a commonly
used programming convention of using only two digits to identify a
year. Unless modified or replaced, these systems could fail or
create erroneous results when referencing the year 2000. While the
Company is assessing the relevant issues related to the Year 2000
problem and have implemented a readiness program to mitigate the
possibility of business interruption or other risks, the Company
cannot be sure that it will have adequately addressed the issue,
particularly with respect to recent and pending acquisitions.
Moreover, the Company relies on third party suppliers for finished
goods, raw materials, water, other utilities, transportation and a
variety of other key services. If one or more of these suppliers
fail to address the Year 2000 problem adequately, such suppliers'
operations could be interrupted. Such interruption, in turn, could
adversely affect the Company's operations. In addition, the
failure of retailer customers adequately to address the Year 2000
problem could adversely affect financial results;
- - THE ABILITY TO IMPROVE PROCESSES AND BUSINESS PRACTICES TO KEEP
PACE WITH THE ECONOMIC, COMPETITIVE AND TECHNOLOGICAL ENVIRONMENT,
INCLUDING SUCCESSFUL COMPLETION OF PROJECT CATALYST;
- - ENVIRONMENTAL REGULATION -- Compliance with environmental and
other public health regulations could result in the expenditure of
significant capital resources. Local, state, federal and foreign
laws and regulations relating to environmental matters affect the
Company in several ways. All products containing pesticides must
be registered with the United States Environmental Protection
Agency ("United States EPA") (and in many cases, similar state
and/or foreign agencies) before they can be sold. The inability to
obtain or the cancellation of any such registration could have an
adverse effect on the Company. The severity of the effect would
depend on which products were involved, whether another product
could be substituted and whether competitors were similarly
affected. The Company attempts to anticipate regulatory
developments and maintain registrations of, and access to,
substitute chemicals, but may not always be able to avoid or
minimize these risks. Regulations regarding the use of certain
pesticide and fertilizer products may include requirements that
only certified or professional users apply the product or that
certain products be used only on certain types of locations (such
as "not for use on sod farms or golf courses"), may require users
to post notices on properties to which products have been or will
be applied, may require notification of individuals in the
vicinity that products will be applied in the future or may ban
the use of certain ingredients. In addition, with the acquisition
of RPJ and assuming the Ortho Acquisition is consummated, the
Company has acquired or will acquire many new pesticide product
lines that are subject to additional regulations. Even if the
Company is able to comply with all such regulations and obtain all
necessary registrations, the Company cannot assure that its
products, particularly pesticide products, will not cause injury
to the environment or to people under all circumstances. The costs
of compliance, remediation or products liability have adversely
affected operating results in the past and could materially affect
future quarterly or annual operating results;
- - CONTROL BY SIGNIFICANT SHAREHOLDERS -- The interests of the
Miracle-Gro Shareholders could conflict with those of the other
shareholders or noteholders. The Miracle-Gro Shareholders (through
the Hagedorn Partnership, L.P.) beneficially own approximately 42%
of the outstanding Common Shares of the Company on a fully diluted
basis. While the merger agreement pursuant to which Scotts and
Miracle-Gro merged places certain voting restrictions on the
Miracle-Gro Shareholders through May 19, 2000, the Miracle-Gro
Shareholders have the right to designate three members of the
Company's Board of Directors and have the ability to veto
significant corporate actions by the Company. In addition, after
May 19, 2000, the Miracle-Gro Shareholders will be able to vote
their shares without restriction and will be able to significantly
control the election of directors and the approval of other
actions requiring the approval of the Company's shareholders. The
interests of the Miracle-Gro Shareholders could conflict with
those of the Company's other shareholders or the holders of the
Company issued bonds;
- - SUBSTANTIAL LEVERAGE -- The Company's substantial indebtedness
could adversely affect the financial health of the Company and
prevent the Company from fulfilling its obligations under certain
indebtedness. After the anticipated private debt offering, the
Company will have a significant amount of indebtedness.
Substantial indebtedness could have important consequences. For
example, it could:
- make it more difficult to satisfy obligations with
respect to indebtedness;
- increase vulnerability to general adverse economic and
industry conditions;
- limit the ability to fund future working capital,
capital expenditures, research and development costs and
other general corporate requirements;
- require the Company to dedicate a substantial portion of
cash flow from operations to payments on indebtedness,
thereby reducing the availability of cash flow to fund
working capital, capital expenditures, research and
development efforts and other general corporate
purposes;
- limit flexibility in planning for, or reacting to,
changes in the Company's business and the industry in
which it operates;
Page 22
<PAGE> 23
- place the Company at a competitive disadvantage compared
to competitors that have less debt; and
- limit, along with the financial and other restrictive
covenants in the Company's indebtedness, among other
things, the ability to borrow additional funds. And,
failing to comply with those covenants could result in
an event of default which, if not cured or waived, could
have a material adverse effect on the Company;
- - ADDITIONAL BORROWINGS AVAILABLE -- Despite current indebtedness
levels, the Company and its subsidiaries may still be able to
incur substantially more debt. This could further exacerbate the
risks described above. The Company and its subsidiaries may be
able to incur substantial additional indebtedness in the future.
The terms of the indenture do not fully prohibit the Company or
its subsidiaries from doing so. If new debt is added to the
Company and its subsidiaries' current debt levels, the related
risks that the Company now face could intensify;
- - ABILITY TO SERVICE DEBT -- To service indebtedness, the Company
will require a significant amount of cash. The Company's ability
to generate cash depends on many factors beyond its control. The
ability to make payments on and to refinance indebtedness, and to
fund planned capital expenditures and research and development
efforts will depend on the ability to generate cash in the future.
This, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors
that are beyond the Company's control. Based on current level of
operations and anticipated cost savings and operating
improvements, the Company believes its cash flow from operations,
available cash and available borrowings under the new credit
facility will be adequate to meet its future liquidity needs for
at least the next few years. The Company cannot assure, however,
that its business will generate sufficient cash flow from
operations, that currently anticipated cost savings and operating
improvements will be realized on schedule or at all or that future
borrowings will be available under the new credit facility in
amounts sufficient to enable us to pay our indebtedness, or to
fund other liquidity needs. The Company may need to refinance all
or a portion of its indebtedness, on or before maturity. The
Company cannot ensure that it will be able to refinance any of its
indebtedness, on commercially reasonable terms or at all;
- - INTEGRATION ISSUES -- Inability to integrate the acquisitions
made could prevent the Company from maximizing synergies and could
adversely affect financial results. The Company has made several
substantial acquisitions in the past four years. The Ortho
Acquisition represents the largest. The success of any completed
acquisition depends, and the success of the Ortho Acquisition will
depend, on the ability to integrate effectively the acquired
business. The Company believes that the RPJ Acquisition and the
Ortho Acquisition provides significant cost saving opportunities.
However, if the Company is not able to successfully integrate
Ortho, RPJ or other acquisitions, the Company will not be able to
maximize such cost saving opportunities. Rather, the failure to
integrate such acquired businesses, because of difficulties in the
assimilation of operations and products, the diversion of
management's attention from other business concerns, the loss of
key employees or other factors, could materially adversely affect
financial results;
- - CUSTOMER CONCENTRATION -- Because of the concentration of sales
to a small number of retail customers, the loss of one of the top
10 customers could adversely affect financial results. The
Company's top 10 customers together accounted for approximately
50% of 1998 fiscal year sales and 27% of outstanding accounts
receivable as of September 30, 1998. The top two customers, The
Home Depot and Wal*Mart, represented approximately 17% and 10%,
respectively, of our 1998 fiscal year sales and approximately 12%
and 2%, respectively, of outstanding accounts receivable at
September 30, 1998. The loss of, or reduction in orders from, The
Home Depot, Wal*Mart or any other significant customer could have
a material adverse effect on the Company and its financial
results, as could customer disputes regarding shipments, fees,
merchandise condition or related matters with, or the inability to
collect accounts receivable from, any of such customers;
- - TERMINATION OF ROUNDUP(R) MARKETING AGREEMENT -- If Monsanto
terminates the Roundup(R) Marketing Agreement without having to
pay a termination fee, the Company would lose a substantial source
of future earnings. Monsanto has the right to terminate the
Roundup(R) Marketing Agreement either as a whole or within a
particular region for certain events of default. If Monsanto
rightfully terminates the Company pursuant to an event of default,
the Company would not be entitled to any termination fee under the
Roundup(R) Marketing Agreement and would lose the significant
source of earnings that the Company believes the Roundup(R)
Marketing Agreement provides. In addition, Monsanto may terminate
the Company within a given region, including North America,
without paying a termination fee, if sales decline on a consumer
sell-through basis over a cumulative three program year period or
if such sales decline by more than 5% for each of two consecutive
program years, unless the Company can show, in effect, that such
declines were not its fault;
- - POST-PATENT RESULTS OF ROUNDUP(R) IN THE UNITED STATES -- The
Company cannot predict the success of Roundup(R) after glyphosate
ceases to be patented. Substantial new competition in the United
States could adversely affect the Company. Glyphosate, the active
ingredient in Roundup(R), is subject to a patent in the United
States that expires in September 2000. Glyphosate is no longer
subject to patent in the European Union and is not subject to
patent in Canada. While sales of Roundup(R) in such countries have
continued to increase despite the lack of a patent, sales in the
United States may decline as a result of increased competition
after the U.S. patent expires. Any such decline in sales would
adversely affect the Company's net commission under the Roundup(R)
Marketing Agreement and therefore financial results. Such a
decline could also trigger Monsanto's regional termination right
under the Roundup(R) Marketing Agreement.
- - ANTITRUST REVIEW -- FEDERAL GOVERNMENT REVIEW OF THE NON-SELECTIVE
HERBICIDE MARKET UNDER THE ANTITRUST LAWS COULD ADVERSELY AFFECT
FINANCIAL RESULTS.
The applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (the "HSR Act") with respect to
the Ortho Acquisition has expired, and the Company believes that
no further governmental approvals are required with respect to the
Ortho Acquisition. However, the Company understands that the
Federal Trade Commission (the "FTC") is reviewing the
non-selective herbicide market under the various antitrust laws of
the United States. Pursuant to this review, the FTC has requested
additional information regarding Roundup(R) and Finale(R), a brand
of non-selective herbicide that was bought from AgrEvo
Environmental Health, Inc. in May 1998, and from Monsanto
regarding Roundup(R). While the Company believes that this review
may result in an order requiring the divesture of the Finale
business, the Company is already in discussions with several
parties regarding the sale of the Finale business since it no
longer fits within business plans. However, there can be no
assurance that the Company will be able to divest the Finale
business or that the terms of such divestiture will be
satisfactory to the FTC. Any sale of the Finale business for a net
loss or any modification of the Roundup Marketing Agreement, as a
result of the FTC's review, could adversely affect financial
results.
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<PAGE> 24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of its ongoing business, the Company is exposed to certain market risks,
including fluctuations in interest rates, foreign currency exchange rates,
commodity prices, and its common share price. The Company uses derivative
financial and other instruments, where appropriate, to manage these risks. The
Company does not enter into transactions designed to mitigate its market risks
for trading or speculative purposes.
INTEREST RATE RISK
The Company has various debt instruments outstanding at January 2, 1999 and has
issued new debt instruments subsequent to that date as well. Accordingly, the
Company is impacted by changes in interest rates. As a means of managing its
interest rate risk on existing debt instruments, the Company has entered into an
interest rate swap agreement to effectively convert certain variable rate debt
obligations denominated in British Pounds Sterling to a fixed rate. The exchange
rate used to convert British Pounds Sterling to U.S. dollars at September 30,
1998 was $1.66:1 GBP. In order to manage its interest rate risk on the
fixed-rate debt issuance consummated on January 21, 1999, the Company entered
into two interest rate locks.
The following table summarizes information about the Company's derivative
financial instruments and its debt instruments that are sensitive to changes in
interest rates as of January 2, 1999. For debt instruments, the table presents
principal cash flows and related weighted-average interest rates by expected
maturity dates. For interest rate swaps and locks, the table presents expected
cash flows based on notional amounts and weighted-average interest rates by
contractual maturity dates. Weighted-average variable rates are based on implied
forward rates in the yield curve at January 2, 1999. The information is
presented in U.S. dollars (in millions):
<TABLE>
<CAPTION>
Expected maturity date
------------------------------------------------------------------------------------------------
FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt:
- ---------------
Fixed rate debt $ 100.0 $ 100.0 $ 105.0
Average rate
9.88% 9.88%
Variable rate debt $ 3.1 $ 27.4 $ 34.9 $ 46.5 $ 50.8 $ 446.9 $ 609.6 $ 609.6
Average rate 7.94% 7.70% 7.68% 7.67% 7.66% 8.25% 8.10%
Interest-rate
Derivatives:
- ------------
Interest rate swap $ 0.5 $ 0.7 $ 0.7 $ 0.4 $(2.2)
Average rate 7.62% 7.62% 7.62% 7.62%
Interest rate lock $4.7 $(4.7)
Average rate 4.95%
</TABLE>
On January 21, 1999, the Company issued $330 million of Senior Subordinated
Notes due in 2009 bearing interest at 8.625%, retired approximately 97% of its
$100.0 million Senior Subordinated Notes then outstanding and unwound its
interest rate locks. See additional discussion of the Company's indebtedness in
"Liquidity and Capital Resources" in "ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
EQUITY PRICE RISK
In May 1998, the Company sold 0.3 million put options which give the holder the
option to sell one of the Company's common shares at a specified price for each
option held. The put options have a strike price of $35.32 per share and expire
in May 1999. The put options can only be exercised on their date of expiration.
At January 2, 1999 the buy-out value of these put options was $0.3 million as
estimated using an option pricing model.
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Part II - OTHER INFORMATION
Item 1. Legal Proceedings
See Footnote 7 to the Consolidated Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index at page 28 for a list of the exhibits included
herewith.
(b) The Registrant filed a Current Report on Form 8-K dated October 1,
1998, reporting under "Item 5. Other Events", its completion of an
agreement with Monsanto Company ("Monsanto") for exclusive international
agency and marketing rights to Monsanto's consumer Roundup(R) herbicide
products (the "Roundup(R) Marketing Agreement"). The Registrant also
reported that it would consolidate its two U.K. operations into a single
low-cost business, discontinue most of its U. S. composting operations,
and divest its AgrEvo pesticides business. The Registrant further reported
its previous announcement that it had signed a letter of intent to acquire
the assets of Monsanto's other consumer lawn and garden businesses,
including its Ortho(R) product line (the "Ortho Acquisition").
The Registrant filed a Current Report on Form 8-K dated October 22, 1998,
reporting under "Item 2. Acquisition or Disposition of Assets", through
certain subsidiaries, its acquiring from various affiliates of
Rhone-Poulenc Agro: the shares of Rhone-Poulenc Jardin SAS; the shares of
Celaflor GmbH; the shares of Celaflor Handelsgesellschaft m.b.H.; and the
home and garden business of Rhone-Poulenc Agro S.A. in Belgium, each in a
privately-negotiated transaction (collectively, the "RPJ Acquisition").
The Registrant filed financial information relating to the RPJ
Acquisition, in a Form 8-K/A dated December 21, 1998.
The Registrant filed a Current Report on Form 8-K dated December 11, 1998,
reporting under "Item 5. Other Events", that it had closed its Senior
Secured Credit Facilities totaling $1.025 billion (the "New Credit
Facility").
The Registrant filed a Current Report on Form 8-K dated January 7, 1999,
reporting under "Item 5. Other Events", more information concerning the
RPJ Acquisition, the Ortho Acquisition, the Roundup(R) Marketing
Agreement, the New Credit Facility, and the funding of the Ortho
Acquisition through a private placement of $300 million aggregate
principal amount of senior subordinated notes pursuant to Rule 144A under
the Securities Act of 1933, as amended.
Page 25
<PAGE> 26
SIGNATURES
Pursuant to the requirements 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.
THE SCOTTS COMPANY
Date __________ -------------------------------
Jean H. Mordo
Executive Vice President
Chief Financial Officer
Principal Accounting Officer
Page 26
<PAGE> 27
SIGNATURES
Pursuant to the requirements 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.
THE SCOTTS COMPANY
Date __________ /s/ Jean H. Mordo
----------------------------
Executive Vice President
Chief Financial Officer
Principal Accounting Officer
Page 26
<PAGE> 28
THE SCOTTS COMPANY
QUARTERLY REPORT ON FORM 10-Q FOR
FISCAL QUARTER ENDED JANUARY 2, 1999
EXHIBIT INDEX
Exhibit Page
Number Description Number
------ ----------- ------
27 Financial Data Schedule*
*Filed herewith
Page 27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF THE
SCOTTS COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FORM 10Q FOR
THE QUARTER ENDED JANUARY 2, 1999.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JAN-02-1999
<EXCHANGE-RATE> 1
<CASH> 8,200,000
<SECURITIES> 0
<RECEIVABLES> 215,300,000
<ALLOWANCES> (8,600,000)
<INVENTORY> 298,200,000
<CURRENT-ASSETS> 52,900,000
<PP&E> 356,600,000
<DEPRECIATION> (147,700,000)
<TOTAL-ASSETS> 1,445,500,000
<CURRENT-LIABILITIES> 248,400,000
<BONDS> 0
0
177,300,000
<COMMON> 200,000
<OTHER-SE> 213,600,000
<TOTAL-LIABILITY-AND-EQUITY> 1,445,500,000
<SALES> 184,400,000
<TOTAL-REVENUES> 189,400,000
<CGS> 119,700,000
<TOTAL-COSTS> 76,900,000
<OTHER-EXPENSES> (100,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,800,000
<INCOME-PRETAX> (16,900,000)
<INCOME-TAX> 6,900,000
<INCOME-CONTINUING> (10,000,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 400,000
<CHANGES> 0
<NET-INCOME> (10,400,000)
<EPS-PRIMARY> (0.70)
<EPS-DILUTED> (0.70)
</TABLE>
