<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 JULY 1, 2000
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 1-13292
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)
41 SOUTH HIGH STREET, SUITE 3500
COLUMBUS, OHIO 43215
(Address of principal executive offices)
(Zip Code)
(614) 719-5500
(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 the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
28,040,151 Outstanding at August 7 , 2000
Common Shares, voting, no par value
<PAGE> 2
THE SCOTTS COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed, Consolidated Statements of Operations - Three and nine month
periods ended July 1, 2000 and July 3, 1999...................................... 3
Condensed, Consolidated Statements of Cash Flows - Nine month periods
ended July 1, 2000 and July 3, 1999.............................................. 4
Condensed, Consolidated Balance Sheets - July 1, 2000, July 3, 1999
and September 30, 1999........................................................... 5
Notes to Condensed, Consolidated Financial Statements............................ 6-25
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................ 26-39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 40
Item 6. Exhibits and Reports on Form 8-K................................................. 41
Signatures ................................................................................. 42
Exhibit Index ................................................................................. 43
</TABLE>
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 NINE MONTHS ENDED
------------------ -----------------
JULY 1, JULY 3, JULY 1, JULY 3,
2000 1999 2000 1999
------ ------- -------- --------
<S> <C> <C> <C> <C>
Net sales ......................................... $598.3 $ 586.2 $1,510.6 $1,402.2
Cost of sales ..................................... 356.1 349.8 881.4 832.1
------ ------- -------- --------
Gross profit .............................. 242.2 236.4 629.2 570.1
Gross commission earned from agency agreement ..... 16.9 9.9 26.1 27.5
Contribution expenses under agency agreement ...... 1.6 0.4 4.9 1.2
------ ------- -------- --------
Net commission earned from agency
agreement ................................ 15.3 9.5 21.2 26.3
Operating expenses:
Advertising and promotion ...................... 64.9 63.8 186.8 166.6
Selling, general and administrative ............ 76.8 80.8 229.8 209.6
Amortization of goodwill and other intangibles . 6.4 7.9 19.4 17.3
Restructuring and other charges ................ -- -- -- 1.4
Other expense (income), net .................... 1.0 (1.7) (0.8) (3.8)
------ ------- -------- --------
Income from operations ............................ 108.4 95.1 215.2 205.3
Interest expense .................................. 24.8 24.6 74.4 59.0
------ ------- -------- --------
Income before income taxes ........................ 83.6 70.5 140.8 146.3
Income taxes ...................................... 30.6 28.9 53.7 60.0
------ ------- -------- --------
Net income before extraordinary item .............. 53.0 41.6 87.1 86.3
Extraordinary loss on early extinguishment
of debt, net of tax ............................ -- -- -- 5.8
------ ------- -------- --------
Net income ........................................ 53.0 41.6 87.1 80.5
Payments to preferred shareholders ................ -- 2.4 6.4 7.3
------ ------- -------- --------
Income available to common shareholders ........... $ 53.0 $ 39.2 $ 80.7 $ 73.2
====== ======= ======== ========
Basic earnings per common share:
Before extraordinary item ...................... $ 1.90 $ 2.14 $ 2.89 $ 4.32
Extraordinary item, net of tax ................. -- -- -- 0.32
------ ------- -------- --------
1.90 2.14 2.89 4.00
Diluted earnings per common share:
Before extraordinary item ...................... $ 1.78 $ 1.35 $ 2.71 $ 2.83
Extraordinary item, net of tax ................. -- -- -- 0.19
------ ------- -------- --------
1.78 1.35 2.71 2.64
Common shares used in basic earnings per
share calculation .............................. 27.9 18.3 27.9 18.3
====== ======= ======== ========
Common shares and potential common shares
used in diluted earnings per share calculation . 29.7 30.9 29.7 30.5
====== ======= ======== ========
</TABLE>
See notes to condensed, consolidated financial statements
3
<PAGE> 4
THE SCOTTS COMPANY AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------
JULY 1, JULY 3,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................................... $ 87.1 $ 80.5
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................... 46.1 42.8
Loss on sale of property......................................................... 4.0 0.9
Net change in certain components of working capital.............................. 34.8 (14.9)
Net change in other assets and liabilities and other adjustments................. (7.5) (18.8)
------- -----------
Net cash provided by operating activities....................................... 164.5 90.5
------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment........................................... (37.2) (39.4)
Investment in acquired businesses, net of cash acquired .............................. (3.4) (533.4)
Other, net ........................................................................... 1.7 (5.0)
------- -----------
Net cash used in investing activities............................................ (38.9) (577.8)
------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under revolving and bank lines of credit ................. (24.1) 52.5
Gross borrowings under term loans..................................................... -- 525.0
Gross repayments under term loans..................................................... (18.4) (1.2)
Issuance of 8 5/8% Senior Subordinated Notes.......................................... -- 330.0
Extinguishment of $97.1 million 9 7/8% Senior Subordinated Notes...................... -- (104.1)
Repayment of outstanding balance on previous credit facility ......................... -- (241.0)
Settlement of interest rate locks..................................................... -- (12.9)
Financing and issuance fees........................................................... (1.0) (23.8)
Payments to preferred shareholders.................................................... (6.4) (9.8)
Repurchase of treasury shares......................................................... (23.9) (6.3)
Other, net ........................................................................... (0.8) 3.5
------- -----------
Net cash (used in) provided by financing activities............................. (74.6) 511.9
------- -----------
Effect of exchange rate changes on cash.................................................. (1.9) (1.0)
-------- -----------
Net increase in cash..................................................................... 49.1 23.6
Cash and cash equivalents at beginning of period ........................................ 30.3 10.6
------- -----------
Cash and cash equivalents at end of period............................................... $ 79.4 $ 34.2
======= ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Investment in acquired businesses:
Fair value of assets acquired, net of cash ........................................... $ 3.4 $ 635.2
Liabilities assumed................................................................... -- (101.8)
-------- -----------
Net assets acquired................................................................... 3.4 533.4
Notes issued to seller ............................................................... 2.2 37.0
Cash paid............................................................................. 1.2 4.8
Debt issued........................................................................... -- 491.6
</TABLE>
See notes to condensed, consolidated financial statements
4
<PAGE> 5
THE SCOTTS COMPANY AND SUBSIDIARIES
CONDENSED, CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
UNAUDITED
---------
JULY 1, JULY 3, SEPTEMBER 30,
ASSETS 2000 1999 1999
---- ---- ----
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ..................................... $ 79.4 $ 34.2 $ 30.3
Accounts receivable, less allowances of $13.1, $15.5 and $16.4,
respectively ............................................... 374.2 319.2 201.4
Inventories, net .............................................. 294.1 281.1 313.2
Current deferred tax asset .................................... 24.4 22.1 29.3
Prepaid and other assets ...................................... 21.6 36.2 67.5
---------- ---------- ----------
Total current assets ..................................... 793.7 692.8 641.7
Property, plant and equipment, net ............................... 266.6 241.3 259.4
Intangible assets, net ........................................... 758.9 777.9 794.1
Other assets ..................................................... 78.7 59.8 74.4
---------- ---------- ----------
Total assets ............................................. $ 1,897.9 $ 1,771.8 $ 1,769.6
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt ............................................... $ 50.2 $ 41.2 $ 56.4
Accounts payable .............................................. 195.5 127.2 133.5
Accrued liabilities ........................................... 259.1 222.6 177.0
---------- ---------- ----------
Total current liabilities ................................ 504.8 391.0 366.9
Long-term debt ................................................... 836.0 855.6 893.6
Other liabilities ................................................ 60.8 59.3 65.8
---------- ---------- ----------
Total liabilities ........................................ 1,401.6 1,305.9 1,326.3
========== ========== ==========
Commitments and contingencies
Shareholders' equity:
Class A Convertible Preferred Stock, no par value ............. -- 176.7 173.9
Common shares, no par value per share,
$.01 stated value per share, issued 31.3,
21.1 and 21.3, respectively ................................ 0.3 0.2 0.2
Capital in excess of par value ................................ 388.1 209.2 213.9
Retained earnings ............................................. 210.8 149.9 130.1
Treasury stock, 3.4, 2.8, and 2.9 shares, respectively,
at cost .................................................... (83.7) (58.9) (61.9)
Accumulated other comprehensive expense ....................... (19.2) (11.2) (12.9)
---------- ---------- ----------
Total shareholders' equity ............................... 496.3 465.9 443.3
---------- ---------- ----------
Total liabilities and shareholders' equity ....................... $ 1,897.9 $ 1,771.8 $ 1,769.6
========== ========== ==========
</TABLE>
See notes to condensed, consolidated financial statements
5
<PAGE> 6
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(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, 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 July 1, 2000 and July
3, 1999, and the related condensed, consolidated statements of
operations for the three and nine month periods ended July 1, 2000 and
July 3, 1999, as well as the condensed, consolidated statement of cash
flows for the nine month periods ended July 1, 2000 and July 3, 1999,
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 1999 Annual Report on Form 10-K.
Revenue Recognition
Revenue is recognized when products are shipped and when title and risk
of loss transfer to the customer. For certain large multi-location
customers, products may be shipped to third-party warehousing
locations. Revenue is not recognized until the customer places orders
against that inventory and acknowledges in writing ownership of the
goods. Provisions for estimated returns and allowances are recorded at
the time of shipment based on historical rates of return as a
percentage of sales.
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. Advertising and promotion costs (including
allowances and rebates) incurred during the year are expensed ratably
to interim periods in relation to revenues. All advertising and
promotion costs, except for production costs, are expensed within the
fiscal year in which such costs are incurred. Production costs for
advertising programs are deferred until the period in which the
advertising is first aired.
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
6
<PAGE> 7
current events and actions the Company may undertake in the future,
actual results ultimately may differ from the estimates.
Reclassifications
Certain reclassifications have been made in prior periods' financial
statements to conform to fiscal 2000 classifications.
2. AGENCY AGREEMENT
Effective September 30, 1998, the Company entered into an agreement
with Monsanto Company ("Monsanto") for exclusive domestic and
international marketing and agency rights to Monsanto's consumer
Roundup(R) herbicide products. Under the terms of the agreement, the
Company is entitled to receive an annual commission from Monsanto in
consideration for the performance of its duties as agent. The annual
commission is calculated as a percentage of the actual earnings before
interest and income taxes (EBIT), as defined in the agreement, of the
Roundup(R) business. Each year's percentage varies in accordance with
the terms of the agreement based on the achievement of two earnings
thresholds and commission rates that vary by threshold and program
year.
The agreement also requires the Company to make annual payments to
Monsanto as a contribution against the overall expenses of the
Roundup(R) business. The amount of the contribution payment varies by
year and can be increased based on the level of program EBIT achieved
during certain years. Annual contribution payments are payable in
twelve monthly installments within the year.
The agreement has a term of seven years for all countries within the
European Union (at the option of both parties, the agreement can be
renewed for up to 20 years for the European Union countries). For
countries outside of the European Union, the agreement continues
indefinitely unless terminated by either party. The agreement provides
Monsanto with the right to terminate the agreement for an event of
default (as defined in the agreement) by the Company or a change in
control of Monsanto or sale of the Roundup business. The agreement
provides the Company with the right to terminate the agreement in
certain circumstances including an event of default by Monsanto or the
sale of the Roundup business. Unless the agreement is terminated for an
event of default by the Company, Monsanto is required to pay a
termination fee to the Company that varies by program year. The
termination fee is $150 million for each of the first five program
years, gradually declines to $100 million by year ten of the program
and then declines to a minimum of $16 million if the program continues
for years 11 through 20.
In consideration for the rights granted to the Company under the
agreement for North America, the Company was required to pay a
marketing fee of $32 million to Monsanto. The Company has deferred this
amount on the basis that the payment will provide a future benefit
through commissions that will be earned under the agreement. Although
the agreement for North America has no stated term, the termination
provisions ensure that, for any termination caused by Monsanto through
year 20 of the agreement, an amount greater than or equal to the
unamortized balance of the deferred marketing fees will be due from
Monsanto. Accordingly, the Company is amortizing the deferred marketing
fee over a period of 20 years.
In fiscal 1999, the Company recognized commission income under the
agreement during interim periods based on the estimated percentage of
EBIT that would be payable to the Company as commission for the year
applied to the actual EBIT for the Roundup(R) business for the interim
period. Commission income recorded for that full year is calculated by
applying the threshold commission structure for that year to the actual
EBIT of the Roundup business for the year. For interim periods
beginning in fiscal 2000, in accordance with SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements", the
Company will not recognize commission income until actual Roundup EBIT
reaches the first commission threshold for that year. The annual
contribution payment, if any, is recognized ratably throughout the
year.
7
<PAGE> 8
3. RESTRUCTURING AND OTHER CHARGES
1999 Charges
During the nine months ended July 3, 1999, the Company recorded $1.4
million of restructuring charges associated with management's decision
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.
These charges represent the severance payments for approximately 60
in-house sales associates who were terminated in fiscal 1999.
Approximately $1.1 million of severance payments were made to these
former associates during fiscal 1999 and substantially all of the
remainder has been paid in fiscal 2000.
1998 Charges
During fiscal 1998, the Company recorded charges of $9.3 million in
connection with its decision to close nine composting sites. As of
September 30, 1999, $0.9 million remained accrued in the Company's
consolidated balance sheet for losses to be incurred under contractual
commitments and remaining lease obligations (a detailed discussion and
rollforward is included in the Company's fiscal 1999 Annual Report on
Form 10-K). For the first nine months of fiscal 2000, $0.6 million of
the obligations had been paid, leaving the remaining accrual at $0.3
million. The Company expects to make all significant remaining payments
in fiscal 2000.
4. ACQUISITIONS AND DIVESTITURES
In January 1999, the Company acquired the assets of Monsanto's consumer
lawn and garden businesses, exclusive of the Roundup(R) business
("Ortho"), for approximately $300 million, subject to adjustment based
on working capital as of the closing date and as defined in the
purchase agreement. Based on the estimate of working capital received
from Monsanto, the Company made an additional payment of $39.9 million
at the closing date. A revised assessment of working capital provided
by Monsanto indicated that an additional payment of approximately $27.0
million (for a total purchase price of approximately $366.0 million)
would also have been required, however the Company disputed a
significant portion of those working capital amounts. In the third
quarter of fiscal 2000, the Company and Monsanto (now known as
Pharmacia Corporation) resolved the disputed working capital amounts
which resulted in a purchase price of approximately $355.5 million.
In October 1998, the Company acquired Rhone-Poulenc Jardin, continental
Europe's largest consumer lawn and garden products company.
Management's initial estimate of the purchase price for Rhone-Poulenc
Jardin was $192.8 million; however, subsequent adjustments for
reductions in acquired working capital have resulted in a final
purchase price of approximately $147.5 million.
In connection with the Rhone-Poulenc Jardin acquisition, the Company
entered into a Research and Development Access Rights Agreement with
Rhone-Poulenc Jardin. In exchange for the rights provided under the
agreement, the Company will make four annual payments of 39 million
French Francs each beginning on October 1, 1999. The present value of
the payments (approximately $23.2 million) is being amortized over the
life of the agreement.
Each of the above acquisitions was made in exchange for cash or notes
due to seller and 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. The allocation of the final purchase
price of the Ortho business to the net assets acquired should be
completed during the fourth quarter of fiscal 2000. The excess of the
estimated purchase price for the Ortho business over the value of
tangible assets acquired is currently recorded as an intangible asset
and is being amortized over a period of 35 years.
8
<PAGE> 9
The following unaudited pro forma results of operations give effect to the
Ortho acquisition as if it had occurred on October 1, 1998.
NINE MONTHS ENDED
JULY 3, 1999
------------
Net sales................................................ $1,435.2
Income before extraordinary loss......................... 77.9
Net income............................................... 72.1
Basic earnings per share:
Before extraordinary loss................................ $ 3.86
After extraordinary loss ................................ $ 3.54
Diluted earnings per share:
Before extraordinary loss................................ $ 2.56
After extraordinary loss ................................ $ 2.37
The pro forma information provided does not purport to be indicative of
actual results of operations if the Ortho acquisition had occurred as
of October 1, 1998 and is not intended to be indicative of future
results or trends.
In May 2000, the Company sold its North American Professional Turf
business to two buyers. The terms of the agreement included the sale of
certain inventory for approximately $16.3 million and an arrangement
for the use and eventual purchase of related tradenames by the buyers.
No gain or loss on the sale transaction is reflected in the Company's
third quarter results of operations.
5. INVENTORIES
Inventories, net of provisions for slow moving and obsolete inventory of $24.9
million, $22.0 million, and $30.5 million, respectively, consisted of:
JULY 1, JULY 3, SEPTEMBER 30,
2000 1999 1999
--------- --------- ---------
Finished goods...................... $ 219.1 $ 206.6 $ 206.4
Raw materials....................... 74.0 74.1 106.5
--------- --------- ---------
FIFO cost........................... 293.1 280.7 312.9
LIFO reserve........................ 1.0 0.4 0.3
--------- --------- ---------
Total............................... $ 294.1 $ 281.1 $ 313.2
========= ========= =========
6. INTANGIBLE ASSETS, NET
JULY 1, JULY 3, SEPTEMBER 30,
2000 1999 1999
--------- --------- ---------
Goodwill ........................... $ 494.1 $ 619.5 $ 508.6
Trademarks.......................... 189.2 115.0 207.9
Other............................... 75.6 43.4 77.6
--------- --------- ---------
Total............................... $ 758.9 $ 777.9 $ 794.1
========= ========= =========
9
<PAGE> 10
7. LONG-TERM DEBT
JULY 1, JULY 3, SEPTEMBER 30,
2000 1999 1999
==== ==== ====
Revolving loans under credit facility..... $ 38.4 $ 16.8 $ 64.2
Term loans under credit facility.......... 471.6 500.6 509.0
Senior Subordinated Notes ................ 318.9 320.5 318.0
Notes due to sellers ..................... 37.7 37.9 37.0
Foreign bank borrowings and term loans.... 9.7 9.0 17.6
Capital lease obligations and other ...... 9.9 12.0 4.2
------- ------- -------
886.2 896.8 950.0
Less current portions..................... 50.2 41.2 56.4
------- ------- -------
$ 836.0 $ 855.6 $ 893.6
======= ======= =======
On December 4, 1998, the Company and certain of its subsidiaries
entered into a 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. Financial covenants
included as part of the facility include, amongst others, minimum net
worth, interest coverage and net leverage ratios.
In January 1999, the Company completed an offering of $330 million of 8
5/8% Senior Subordinated Notes ("the Notes") due 2009. The net proceeds
from the offering, together with borrowings under the Company's credit
facility, were used to fund the Ortho acquisition and to repurchase
approximately 97% of Scotts $100.0 million outstanding 9 7/8% Senior
Subordinated Notes due August 2004. In August 1999, the Company
repurchased the remaining $2.9 million of the 9 7/8% Senior
Subordinated Notes.
The Company entered into two interest rate locks in fiscal 1998 to
hedge its anticipated interest rate exposure on the Notes offering. The
total amount paid under the interest rate locks of $12.9 million has
been recorded as a reduction of the Notes' carrying value and is being
amortized over the life of the Notes as interest expense.
In conjunction with the acquisitions of Rhone-Poulenc Jardin and
Sanford Scientific, Inc., notes were issued for certain portions of the
total purchase price or other consideration that are to be paid in
annual installments over a four-year period. The present value of the
remaining note payments at July 1, 2000 is $25.5 million and $4.1
million, respectively. The Company is imputing interest on the
non-interest bearing notes using an interest rate prevalent for similar
instruments at the time of acquisition (approximately 9% and 8%,
respectively).
In March 2000, the Company acquired certain residual international
intellectual property including peat marketing rights and goodwill from
Bord na Mona Horticulture Limited. The purchase of the intellectual
property was made through the issuance of a promissory note containing
five annual payments. The present value of these payments,
approximately $6.2 million at July 1, 2000, is included in Notes Due to
Sellers above. The Company is imputing interest on the notes using an
8% interest rate.
The foreign term loans of $3.2 million issued on December 12, 1997,
have an 8-year term and bear interest at 1% below LIBOR. The loans are
denominated in Pounds Sterling and can be redeemed, on demand, by the
note holder. The foreign bank borrowings of $6.5 million at July 1,
2000 represent lines of credit for foreign operations and are
denominated in French Francs and Canadian Dollars.
10
<PAGE> 11
8. EARNINGS PER COMMON SHARE
The following table presents information necessary to calculate basic
and diluted earnings per common share ("EPS").
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JULY 1, JULY 3, JULY 1, JULY 3,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income before extraordinary item ............ $ 53.0 $ 41.6 $ 87.1 $ 86.3
Extraordinary loss on early
extinguishment of debt, net of taxes.......... -- -- -- 5.8
--------- --------- -------- ---------
Net income ...................................... 53.0 41.6 87.1 80.5
Payments to preferred shareholders .............. -- 2.4 6.4 7.3
--------- --------- -------- ---------
Income available to common shareholders ......... $ 53.0 $ 39.2 $ 80.7 $ 73.2
========= ========= ======== =========
Weighted-average common shares
outstanding during the period ................ 27.9 18.3 27.9 18.3
Assuming conversion of Class A
Convertible Preferred Stock .................. -- 10.3 -- 10.3
Assuming exercise of warrants ................... 1.0 1.2 1.0 1.0
Assuming exercise of options .................... 0.8 1.1 0.8 0.9
--------- --------- -------- ---------
Weighted-average number of common
shares outstanding and potential
common shares ................................ 29.7 30.9 29.7 30.5
--------- --------- -------- ---------
Basic earnings per common share:
Before extraordinary loss .................... 1.90 2.14 2.89 4.32
Extraordinary loss, net of tax ............... -- -- -- 0.32
--------- --------- -------- ---------
$ 1.90 $ 2.14 $ 2.89 $ 4.00
========= ========= ======== =========
Diluted earnings per common share:
Before extraordinary loss and impact
of early conversion of preferred shares .. 1.78 1.35 2.93 2.83
Extraordinary loss, net of tax ............... -- -- -- 0.19
Impact of early conversion of preferred shares -- -- .22 --
--------- --------- -------- ---------
$ 1.78 $ 1.35 $ 2.71 $ 2.64
========= ========= ======== =========
</TABLE>
9. STATEMENT OF COMPREHENSIVE INCOME
Effective October 1, 1998, 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 and
nine months ended July 1, 2000 and July 3, 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JULY 1, JULY 3, JULY 1, JULY 3,
2000 1999 2000 1999
------- ------ ------ -------
<S> <C> <C> <C> <C>
Net income ...................................... $ 53.0 $ 41.6 $ 87.1 $ 80.5
Other comprehensive income (expense):
Foreign currency translation adjustments ........ (0.7) (2.8) (6.3) (8.0)
------- ------ ------ -------
Comprehensive income ............................ $ 52.3 $ 38.8 $ 80.8 $ 72.5
======= ====== ====== =======
</TABLE>
11
<PAGE> 12
10. 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 matters are the more significant of the Company's
identified contingencies.
OHIO ENVIRONMENTAL PROTECTION AGENCY
The Company has assessed and addressed 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 Voluntary Action Program ("VAP"), the
possible remediation of several discontinued on-site waste disposal
areas dating back to the early operations of its Marysville facility.
In February 1997, the Company learned that the Ohio Environmental
Protection Agency 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.
Representatives from the Ohio Environmental Protection Agency, the Ohio
Attorney General 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 from the Ohio Environmental
Protection Agency. The draft Findings and Orders elaborated on the
subject of the referral to the Ohio Attorney General 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 Ohio Attorney General which covered many of the
same issues contained in the draft Findings and Orders including RCRA
corrective action. As a result of on-going discussions, the Company
received a revised draft of a judicial consent order from the Ohio
Attorney General in late April 1999. Subsequently, the Company replied
to the Ohio Attorney General with another revised draft. Comments on
that draft were received from the Ohio Attorney General in February
2000, and Scotts replied with another revised draft in March 2000.
Since July 2000, the parties have been engaged in settlement
discussions resulting in various revisions to the March 2000 draft, as
they seek to resolve this matter.
12
<PAGE> 13
The Company is continuing to meet with the Ohio Attorney General and
the Ohio Environmental Protection Agency in an effort to negotiate an
amicable resolution of these issues but is unable at this stage to
predict the outcome of the negotiations. While negotiations have
narrowed the unresolved issues between the Company and the Ohio
Attorney General/Ohio Environmental Protection Agency, several critical
issues remain the subject of ongoing discussions. The parties have
tentatively agreed to a civil penalty cash payment subject to the
successful completion of negotiations on the remaining provisions of a
judicial consent order. The Company believes that it has viable
defenses to the State's enforcement action, including that it had been
proceeding under VAP to address specified environmental issues, and
will assert those defenses should an amicable resolution of this
State's enforcement action not be reached.
In accordance with the Company's past efforts to enter into Ohio's VAP,
the Company submitted to the Ohio Environmental Protection Agency 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. Under 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 Ohio Environmental Protection Agency 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. While negotiations continue, the Company has been voluntarily
addressing a number of the historical onsite waste disposal areas with
the knowledge of the Ohio Environmental Protection Agency. Interim
measures consisting of capping two onsite waste disposal areas have
been implemented.
Since receiving the notice of enforcement action in June 1997,
management has continually assessed the potential costs that may be
incurred to satisfactorily remediate the Marysville site and to pay any
penalties sought by the State. Because the Company and the Ohio
Environmental Protection Agency have not agreed as to the extent of any
possible contamination and an appropriate remediation plan, the Company
has developed and initiated an action plan to remediate the site based
on its own assessments and consideration of specific actions which the
Ohio Environmental Protection Agency will likely require. Because the
extent of the ultimate remediation plan is uncertain, management is
unable to predict with certainty the costs that will be incurred to
remediate the site and to pay any penalties. Management estimates that
the range of possible loss that could be incurred in connection with
this matter is $2 million to $10 million. The Company has accrued for
the amount it considers to be the most probable within that range and
believes the outcome will not differ materially from the amount
reserved. 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 comments from the government were received during 1998
and 1999. The Company believes agreement on the remediation plan has
essentially been reached. Before this suit can be fully resolved,
however, the Company and the government must reach agreement on the
government's civil penalty demand. The Company has reserved for its
estimate of the probable loss to be incurred under this proceeding.
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.
13
<PAGE> 14
BRAMFORD
In the United Kingdom, major discharges of waste to air, water and land
are regulated by the Environment Agency. The Scotts (UK) Ltd.
fertilizer facility in Bramford (Suffolk), United Kingdom, is subject
to environmental regulation by this Agency. Two manufacturing processes
at this facility require process authorizations and previously required
a waste management license (discharge to a licensed waste disposal
lagoon having ceased in July 1999). The Company expects to surrender
the waste management license in consultation with the Environment
Agency. In connection with the renewal of an authorization, the
Environment Agency has identified the need for remediation of the
lagoon, and the potential for remediation of a former landfill at the
site. The Company intends to comply with the reasonable remediation
concerns of the Environment Agency. The Company previously installed an
environmental enhancement to the facility to the satisfaction of the
Environment Agency and believes that it has adequately addressed the
environmental concerns of the Environment Agency regarding emissions to
air and groundwater. Although The Scotts Company (UK) Ltd. has retained
an environmental consulting firm to research remediation designs, The
Scotts Company (UK) Ltd. and the Environment Agency have not agreed on
a final plan for remediating the lagoon and the landfill. The Company
has reserved for its estimate of the probable loss to be incurred in
connection with this matter.
AGREVO ENVIRONMENTAL HEALTH
On June 3, 1999, AgrEvo Environmental Health, Inc. ("AgrEvo") (which is
reported to have changed its name to Aventis Environmental Health
Science USA LP) filed a complaint in the federal District Court for the
Southern District of New York (the "New York Action"), against the
Company, a subsidiary of the Company and Monsanto seeking damages and
injunctive relief for alleged antitrust violations and breach of
contract by the Company and its subsidiary and antitrust violations and
tortious interference with contact by Monsanto. The Company purchased a
consumer herbicide business from AgrEvo in May 1998. AgrEvo claims in
the suit that the Company's subsequent agreement to become Monsanto's
exclusive sales and marketing agent for Monsanto's consumer Roundup(R)
business violated the federal antitrust laws. AgrEvo contends that
Monsanto attempted to or did monopolize the market for non-selective
herbicides and conspired with the Company to eliminate the herbicide
the Company previously purchased from AgrEvo, which competed with
Monsanto's Roundup(R), in order to achieve or maintain a monopoly
position in that market. AgrEvo also contends that the Company's
execution of various agreements with Monsanto, including the Roundup(R)
marketing agreement, as well as the Company's subsequent actions,
violated the purchase agreements between AgrEvo and the Company.
AgrEvo is requesting unspecified damages as well as affirmative
injunctive relief, and seeking to have the court invalidate the
Roundup(R) marketing agreement as violative of the federal antitrust
laws. On September 20, 1999, the Company filed an answer denying
liability and asserting counterclaims that it was fraudulently induced
to enter into the agreement for purchase of the consumer herbicide
business and the related agreements, and that AgrEvo breached the
representations and warranties contained in those agreements. On
October 1, 1999, the Company moved to dismiss the antitrust allegations
against it on the ground that the claims fail to state claims for which
relief may be granted. On October 12, 1999, AgrEvo moved to dismiss the
Company's counterclaims. On May 5, 2000, AgrEvo amended its complaint
to add a claim for fraud and to incorporate the Delaware Action
described below. Thereafter, the Company moved to dismiss the new
claims, and defendants renewed their pending motions to dismiss. On
June 2, 2000, the court (i) granted the Company's motion to dismiss the
fraud claim AgrEvo had added to its complaint; (ii) granted AgrEvo's
motion to dismiss the Company's fraudulent-inducement counterclaim;
(iii) denied AgrEvo's motion to dismiss the Company's counterclaims
related to breach of representations and warranties; and (iv) denied
defendants' motion to dismiss the antitrust claims. On July 14, 2000,
the Company served an answer to AgrEvo's amended complaint and
re-pleaded its fraud counterclaim. Under the indemnification provisions
of the Roundup(R) marketing agreement, Monsanto and the Company each
have requested that the other indemnify against any losses arising from
this lawsuit.
On June 29, 1999, AgrEvo also filed a complaint in the Superior Court
of the State of Delaware (the "Delaware Action") against two of the
Company's subsidiaries seeking damages for alleged breach of contract.
AgrEvo alleges that, under the contracts by which a subsidiary of the
Company purchased a herbicide business from AgrEvo in May 1998, two of
the Company's subsidiaries have failed to pay AgrEvo approximately $0.6
million. AgrEvo is requesting damages in this amount, as well as pre
and post-judgment interest and attorneys' fees and costs. The Company's
subsidiaries have moved to dismiss or stay this action. On January 31,
2000, the Delaware court stayed AgrEvo's action pending (a) the
resolution of a motion to amend the New York Action and (b) resolution
of the New York Action.
14
<PAGE> 15
CENTRAL GARDEN & PET
On June 30, 2000, Scotts filed suit against Central Garden & Pet
Company in the U.S. District Court for the Southern District of Ohio to
recover approximately $17 million in outstanding accounts receivable
from Central Garden & Pet with respect to Scotts' 2000 fiscal year.
Pharmacia Corp. (formerly Monsanto Company) also filed suit against
Central Garden & Pet in Missouri state court, seeking unspecified
damages allegedly due Pharmacia under a four-year alliance agreement
between Pharmacia and Central.
On July 7, 2000, Central Garden & Pet filed suit against Scotts and
Pharmacia in the U.S. District Court for the Northern District of
California (San Francisco Division) alleging various matters, including
breach of contract and violations of federal antitrust laws, and
seeking an unspecified amount of damages and injunctive relief. Scotts
believes that Central Garden & Pet's claims are entirely without merit
and intends to vigorously defend against them.
OTHER
The Company has determined that quantities of cement containing
asbestos material at certain manufacturing facilities in the United
Kingdom should be removed. The Company has reserved for the estimate of
costs to be incurred for this matter.
GENERAL
The Company has accrued $10.1 million at July 1, 2000 for the legal and
environmental matters described above. The significant components of
the accrual are: (i) costs for site remediation of $6.8 million; (ii)
costs for asbestos abatement of $2.8 million; and (iii) fines and
penalties of $0.5 million. The significant portion of the costs accrued
as of July 1, 2000 are expected to be paid in fiscal years 2000 through
2002; however, some payments are expected to be made through fiscal
2003 and possibly for a period thereafter.
The Company believes that the amounts accrued as of July 1, 2000 are
adequate to cover its known environmental expenses based on current
facts and estimates of likely outcome. However, the adequacy of these
accruals is based on several significant assumptions:
(i) that the Company has identified all of the significant sites that
must be remediated;
(ii) that there are no significant conditions of potential
contamination that are unknown to the Company;
(iii) that potentially contaminated soil can be remediated in place
rather than having to be removed; and
(iv) that only specific stream sediment sites with unacceptable
levels of potential contaminant will be remediated.
15
<PAGE> 16
If there is a significant change in the facts and circumstances
surrounding these assumptions, it could have a material impact on the
ultimate outcome of these matters and the Company's results of
operations, financial position and cash flows.
11. CONVERSION OF PREFERRED STOCK
In October 1999, all of the then outstanding shares of Class A
Convertible Preferred Stock were converted into approximately 10.1
million common shares. The Company paid the holders of the Preferred
Stock $6.4 million. The amount represents the dividends on the
Preferred Stock that otherwise would have been payable through May
2000, the month during which the Preferred Stock could first be
redeemed by the Company. In fiscal 1999, certain of the Preferred Stock
was converted into 0.2 million common shares at the holder's option.
12. NEW ACCOUNTING STANDARDS
In August 1998, the FASB issued SFAS No. 133, "Accounting For
Derivative Instruments and Hedging Activities." SFAS No. 133 (as
amended) is effective for fiscal years beginning after June 15, 2000.
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 2001.
In December 1999, the Securities and Exchange Commission issued SEC
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements." This staff accounting bulletin summarizes certain of the
staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company believes its
annual accounting policies are consistent with the staff's views. The
Company is required, however, to conform its interim period revenue
recognition policies for the commission under the Roundup(R) marketing
agreement to be consistent with the staff's views and has adopted the
guidance in the first quarter of fiscal 2000. Under the new guidance,
the Company must defer the recognition of commission earned in interim
periods until minimum earnings thresholds are achieved. There will be
no impact on the commission earned on an annual basis.
In May 2000, the Emerging Issues Task Force (EITF) reached consensus on
Issue 00-14 "Accounting for Certain Sales Incentives". This issue
requires certain sales incentives (e.g., discounts, rebates, coupons)
offered by the Company to distributors, retail customers and consumers
to be classified as a reduction of sales revenue. Like many other
consumer products companies, the Company has historically classified
most of these costs as advertising, promotion, or selling expenses. The
guidance is effective for the fourth quarter of fiscal years beginning
after December 15, 1999. The Company plans to adopt the guidance in
fiscal 2001 and does not anticipate that the new accounting policy will
impact fiscal 2001 results of operations.
13. SEGMENT INFORMATION
The Company is divided into three reportable segments--North American
Consumer, Professional and International. The North American Consumer
segment consists of the Lawns, Gardens, Growing Media, Ortho and
Canadian business units.
The North American Consumer segment specializes in dry, granular
slow-release lawn fertilizers, lawn fertilizer combination and lawn
control products, grass seed, spreaders, water-soluble and
controlled-release garden and indoor plant foods, plant care products,
and potting soils, barks, mulches and other growing media products, and
pesticide products. Products are marketed to mass merchandisers, home
improvement centers, large hardware chains, nurseries and gardens
centers.
The Professional segment is focused on a full line of horticulture
products including controlled-release and water-soluble fertilizers and
plant protection products, grass seed, spreaders, custom application
services and growing media. Products are sold to lawn and landscape
service
16
<PAGE> 17
companies, commercial nurseries and greenhouses and specialty crop
growers. Prior to June 2000, this segment also included the Company's
North American professional turf business, which was sold in May 2000.
The International segment provides a broad range of controlled-release
and water-soluble fertilizers and related products, including
ornamental horticulture, turf and landscape, and consumer lawn and
garden products which are sold to all customer groups mentioned above.
The following table presents segment financial information in
accordance with SFAS No. 131. "Disclosures about Segments of an
Enterprise and Related Information". Pursuant to that statement, the
presentation of the segment financial information is consistent with
the basis used by management (i.e., certain costs not allocated to
business segments for internal management reporting purposes are not
allocated for purposes of this presentation).
17
<PAGE> 18
<TABLE>
<CAPTION>
N.A. OTHER/
(IN MILLIONS) CONSUMER PROFESSIONAL INTERNATIONAL CORPORATE TOTAL
------------- -------- ------------ ------------- --------- -----
<S> <C> <C> <C> <C> <C>
SALES:
2000 YTD $ 1,101.4 $ 96.9 $ 312.3 $ 1,510.6
1999 YTD $ 958.7 $ 109.2 $ 334.3 $ 1,402.2
2000 Q3 $ 451.1 $ 31.7 $ 115.5 $ 598.3
1999 Q3 $ 426.9 $ 35.8 $ 123.5 $ 586.2
OPERATING INCOME (LOSS):
2000 YTD $ 226.3 $ 3.9 $ 40.3 $ (55.3) $ 215.2
1999 YTD $ 192.5 $ 12.2 $ 52.9 $ (52.3) $ 205.3
2000 Q3 $ 102.5 $ 0.4 $ 20.8 $ (15.3) $ 108.4
1999 Q3 $ 88.7 $ 5.9 $ 19.0 $ (18.5) $ 95.1
OPERATING MARGIN:
2000 YTD 20.5% 4.0% 12.9% nm 14.2%
1999 YTD 18.9% 11.2% 15.8% nm 14.6%
2000 Q3 23.5% 1.3% 18.0% nm 18.1%
1999 Q3 20.8% 16.5% 15.4% nm 16.2%
TOTAL ASSETS:
2000 YTD $ 1,139.8 $ 168.4 $ 500.0 $ 89.7 $ 1,897.9
1999 YTD $ 1,028.2 $ 179.2 $ 500.8 $ 63.6 $ 1,771.8
</TABLE>
nm Not meaningful.
Operating income reported for the Company's three operating segments
represents earnings before amortization of intangible assets, interest
and taxes, since this is the measure of profitability used by
management. Accordingly, corporate operating loss for the nine month
periods ended July 1, 2000 and July 3, 1999 includes amortization of
certain intangible assets, corporate general and administrative
expenses, and certain "other" income/expense not allocated to the
business segments. In the first quarter of fiscal 2000, management
changed the measure of profitability for the business segments as
compared to the method used at September 30, 1999, to include the
allocation of certain costs to the business segments which historically
were included in corporate costs. Such costs include research and
development, administrative and certain "other" income/expense items
which could be directly attributable to a business segment. The results
shown above for the nine months of fiscal 1999 have been adjusted to
conform to the fiscal 2000 basis of presentation.
Total assets reported for the Company's operating segments include the
intangible assets for the acquired business within those segments.
Corporate assets primarily include deferred financing and debt issuance
costs, corporate fixed assets as well as deferred tax assets.
18
<PAGE> 19
14. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTORS
In January 1999, the Company issued $330 million of 8 5/8% Senior
Subordinated Notes due 2009 to qualified institutional buyers under the
provisions of Rule 144A of the Securities Act of 1933. The Company is
in the process of registering an exchange offer for these Notes under
the Securities Act.
The Notes are general obligations of the Company and are guaranteed by
all of the existing wholly-owned, domestic subsidiaries and all future
wholly-owned, significant (as defined in Regulation S-X) domestic
subsidiaries of the Company. These subsidiary guarantors jointly and
severally guarantee the Company's obligations under the Notes. The
guarantees represent full and unconditional general obligations of each
subsidiary that are subordinated in right of payment to all existing
and future senior debt of that subsidiary but are senior in right of
payment to any future junior subordinated debt of that subsidiary.
The following unaudited information presents consolidating statements
of operations, statements of cash flows and balance sheets for the
three and nine-month periods ended July 1, 2000 and July 3, 1999, and
statements of cash flows for the nine-month periods ending July 1, 2000
and July 3, 1999.
Separate audited financial statements of the individual guarantor
subsidiaries have not been provided because management does not believe
they would be meaningful to investors.
19
<PAGE> 20
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 1, 2000 (IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales.......................................... $ 292.3 $ 182.3 $ 123.7 $ 598.3
Cost of sales...................................... 186.0 105.9 64.2 356.1
-------- -------- -------- --------- ---------
Gross profit....................................... 106.3 76.4 59.5 -- 242.2
Gross commission earned from agency
agreement...................................... 15.4 0.4 1.1 16.9
Contribution expenses under agency agreement....... 1.5 -- 0.1 1.6
-------- -------- -------- --------- ---------
Net commission................................. 13.9 0.4 1.0 -- 15.3
Operating expenses:
Advertising and promotion...................... 28.5 21.5 14.9 64.9
Selling, general and administrative ........... 45.6 7.8 23.4 76.8
Amortization of goodwill and other intangibles. 1.9 1.7 2.8 6.4
Equity income ................................. (35.2) 35.2 --
Intracompany allocations....................... (3.1) 0.9 2.2 --
Other expense (income), net ................... 0.7 0.6 (0.3) 1.0
-------- -------- -------- --------- ---------
Income (loss) from operations...................... 81.8 44.3 17.5 (35.2) 108.4
Interest expense .................................. 22.1 (3.6) 6.3 24.8
-------- -------- -------- --------- ---------
Income (loss) before income taxes ................ 59.7 47.9 11.2 (35.2) 83.6
Income taxes ...................................... 6.7 19.4 4.5 30.6
-------- -------- -------- --------- ---------
Net income (loss).................................. $ 53.0 $ 28.5 $ 6.7 $ (35.2) $ 53.0
======== ======== ======== ========= =========
</TABLE>
FOR THE NINE MONTHS ENDED JULY 1, 2000 (IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales.......................................... $ 810.8 $ 374.0 $ 325.8 $ 1,510.6
Cost of sales...................................... 490.5 213.5 177.4 881.4
-------- -------- -------- --------- ---------
Gross profit....................................... 320.3 160.5 148.4 -- 629.2
Gross commission earned from agency agreement ..... 22.1 0.8 3.2 26.1
Contribution expenses under agency agreement ...... 4.3 0.1 0.5 4.9
-------- -------- -------- --------- ---------
Net commission................................. 17.8 0.7 2.7 -- 21.2
Operating expenses:
Advertising and promotion ..................... 99.9 45.0 41.9 186.8
Selling, general and administrative ........... 136.0 22.1 71.7 229.8
Amortization of goodwill and other
intangibles.................................. 7.0 5.1 7.3 19.4
Equity income.................................. (58.2) 58.2 --
Intracompany allocations....................... (15.2) 8.9 6.3 --
Other expense (income), net ................... 4.1 (4.4) (0.5) (0.8)
-------- -------- -------- --------- ---------
Income (loss) from operations...................... 164.5 84.5 24.4 (58.2) 215.2
Interest expense .................................. 63.3 (7.3) 18.4 74.4
-------- -------- -------- --------- ---------
Income (loss) before income taxes.................. 101.2 91.8 6.0 (58.2) 140.8
Income taxes ...................................... 14.1 37.2 2.4 53.7
-------- -------- -------- --------- ---------
Net income (loss).................................. $ 87.1 $ 54.6 $ 3.6 $ (58.2) $ 87.1
======== ======== ======== ========= =========
</TABLE>
20
<PAGE> 21
STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED JULY 1, 2000 (IN MILLIONS) (UNAUDITED)
<TABLE>
<CAPTION>
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................... $ 87.1 $ 54.6 $ 3.6 $ (58.2) $ 87.1
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization.................. 21.4 13.3 11.4 46.1
Loss on sale of property....................... 0.4 1.8 1.8 4.0
Equity income ................................. (58.2) 58.2 0.0
Net change in certain components of
working capital.............................. 89.6 (58.3) 3.5 34.8
Net changes in other assets and
liabilities and other adjustments............ (4.5) (3.1) 0.1 (7.5)
-------- -------- -------- --------- ---------
Net cash provided by operating activities.......... 135.8 8.3 20.4 0.0 164.5
-------- -------- -------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment.... (28.2) (2.9) (6.1) (37.2)
Investments in acquired businesses, net of
cash acquired............................... 0.1 (3.5) (3.4)
Other, net..................................... (0.1) 1.8 1.7
-------- --------- -------- --------- ---------
Net cash used in investing activities.............. (28.2) (2.9) (7.8) 0.0 (38.9)
-------- -------- -------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings and repayments under
revolving and bank lines of credit........... (34.8) 2.4 8.3 (24.1)
Gross repayments under term loans.............. (1.5) (16.9) (18.4)
Financing and issuance fees.................... (1.0) (1.0)
Payments to preferred shareholders............. (6.4) (6.4)
Repurchase of treasury shares.................. (23.9) (23.9)
Intracompany financing......................... 9.1 (10.2) 1.1 --
Other, net..................................... (0.8) (0.8)
-------- --------- --------- --------- ---------
Net cash used in financing activities.............. (59.3) (7.8) (7.5) 0.0 (74.6)
-------- -------- -------- --------- ---------
Effect of exchange rate changes on cash............ (1.1) 0.0 (0.8) 0.0 (1.9)
-------- -------- -------- --------- ---------
Net increase in cash............................... 47.2 (2.4) 4.3 0.0 49.1
Cash and cash equivalents, beginning of period..... 8.5 3.1 18.7 30.3
-------- -------- -------- --------- ---------
Cash and cash equivalents, end of period........... $ 55.7 $ 0.7 $ 23.0 $ 0.0 $ 79.4
======== ======== ======== ========= =========
</TABLE>
21
<PAGE> 22
BALANCE SHEET
AS OF JULY 1, 2000 (IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 55.7 $ 0.7 $ 23.0 $ 79.4
Accounts receivable, net....................... 164.1 97.1 113.0 374.2
Inventories, net............................... 158.8 72.4 62.9 294.1
Current deferred tax asset..................... 28.1 0.5 (4.2) 24.4
Prepaid and other assets....................... (1.1) 1.5 21.2 21.6
----------- ----------- ----------- ----------- -----------
Total current assets......................... 405.6 172.2 215.9 0.0 793.7
Property, plant and equipment, net................. 171.8 56.1 38.7 266.6
Intangible assets, net............................. 235.1 267.1 256.7 758.9
Other assets....................................... 57.1 8.4 13.2 78.7
Investment in affiliates........................... 842.4 (842.4) --
Intracompany assets................................ -- 380.1 (380.1) --
----------- ----------- ----------- ----------- -----------
Total assets................................. $ 1,712.0 883.9 524.5 (1,222.5) 1,897.9
=========== =========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt................................ 28.0 6.7 15.5 50.2
Accounts payable............................... 92.2 31.0 72.3 195.5
Accrued liabilities............................ 112.7 99.3 47.1 259.1
----------- ----------- ----------- ----------- -----------
Total current liabilities.................... 232.9 137.0 134.9 0.0 504.8
Long-term debt..................................... 556.5 5.0 274.5 836.0
Other liabilities.................................. 35.2 6.2 19.4 60.8
Intracompany liabilities........................... 376.1 4.0 (380.1) --
----------- ------------ ----------- ----------- -----------
Total liabilities............................ 1,200.7 148.2 432.8 (380.1) 1,401.6
----------- ----------- ----------- ----------- -----------
Commitments and contingencies
Shareholders' equity:
Investment from parent......................... 488.8 59.8 (548.6) --
Common shares, no par value per share,
$.01 stated value per share.................. 0.3 0.3
Capital in excess of par value................. 388.1 388.1
Retained earnings.............................. 210.8 246.9 46.9 (293.8) 210.8
Accumulated other comprehensive expense........ (4.2) (15.0) (19.2)
Treasury stock, 3.4 shares at cost............. (83.7) (83.7)
Total shareholders' equity................... 511.3 735.7 91.7 (842.4) 496.3
----------- ----------- ----------- ----------- -----------
Total liabilities and shareholders' equity......... $ 1,712.0 $ 883.9 $ 524.5 $ (1,222.5) $ 1,897.9
=========== =========== =========== =========== ===========
</TABLE>
22
<PAGE> 23
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 3, 1999 (IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales.......................................... $ 296.8 $ 160.6 $ 128.8 $ 586.2
Cost of sales...................................... 190.9 90.2 68.7 349.8
----------- ----------- ----------- ----------- -----------
Gross profit....................................... 105.9 70.4 60.1 -- 236.4
Gross commission earned from agency
agreement...................................... 9.9 -- -- 9.9
Contribution expenses under agency agreement....... 0.4 -- -- 0.4
----------- ----------- ----------- ----------- -----------
Net commission................................. 9.5 -- -- -- 9.5
Operating expenses:
Advertising and promotion...................... 31.5 14.5 17.8 63.8
Selling, general and administrative............ 47.1 10.6 23.1 80.8
Amortization of goodwill and
other intangibles............................ 1.6 2.6 3.7 7.9
Equity income.................................. (29.0) 29.0 --
Intracompany allocations....................... (7.2) 1.9 5.3 --
Other (income) expenses, net................... (0.4) (1.3) -- (1.7)
----------- ----------- ----------- ----------- -----------
Income (loss) from operations...................... 71.8 42.1 10.2 (29.0) 95.1
Interest expense................................... 21.0 (3.6) 7.2 24.6
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes.................. 50.8 45.7 3.0 (29.0) 70.5
Income taxes....................................... 9.2 18.5 1.2 28.9
----------- ----------- ----------- ----------- -----------
Net income (loss).................................. $ 41.6 $ 27.2 $ 1.8 $ (29.0) $ 41.6
=========== =========== =========== =========== ===========
</TABLE>
FOR THE NINE MONTHS ENDED JULY 3, 1999 (IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales.......................................... $ 680.6 $ 378.4 $ 343.2 $ 1,402.2
Cost of sales...................................... 416.7 229.5 185.9 832.1
----------- ----------- ----------- ----------- -----------
Gross profit....................................... 263.9 148.9 157.3 -- 570.1
Gross commission earned from agency
agreement...................................... 27.5 -- -- 27.5
Contribution expenses under agency agreement....... 1.2 -- -- 1.2
----------- ----------- ----------- ----------- -----------
Net commission................................. 26.3 -- -- -- 26.3
Operating expenses:
Advertising and promotion...................... 90.3 33.3 43.0 166.6
Selling, general and administrative............ 118.0 25.8 65.8 209.6
Amortization of goodwill and other
intangibles.................................. 2.9 7.1 7.3 17.3
Restructuring and other charges................ 1.4 -- -- 1.4
Equity income.................................. (57.4) -- -- 57.4 --
Intracompany allocations....................... (28.6) 20.9 7.7 --
Other (income) expenses, net................... 3.5 (6.8) (0.5) (3.8)
----------- ----------- ----------- ----------- -----------
Income (loss) from operations...................... 160.1 68.6 34.0 (57.4) 205.3
Interest expense................................... 52.9 (11.1) 17.2 59.0
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes.................. 107.2 79.7 16.8 (57.4) 146.3
Income taxes....................................... 20.9 32.3 6.8 60.0
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary item............ 86.3 47.4 10.0 (57.4) 86.3
Extraordinary loss on early
extinguishment of debt, net of income tax...... 5.8 5.8
----------- ------------ ----------- ----------- -----------
Net income (loss).................................. $ 80.5 $ 47.4 $ 10.0 $ (57.4) $ 80.5
=========== =========== =========== =========== ===========
</TABLE>
23
<PAGE> 24
STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED JULY 3, 1999 (IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................... $ 80.5 $ 47.4 $ 10.0 $ (57.4) $ 80.5
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization.................. 16.5 13.8 12.5 42.8
Loss on sale of property....................... (0.3) 1.2 0.9
Equity income.................................. (57.4) 57.4 --
Net change in certain components of
working capital.............................. (6.5) 56.3 (64.7) (14.9)
Net changes in other assets and
liabilities and other adjustments............ (20.2) (4.6) 6.0 (18.8)
----------- ----------- ----------- ----------- -----------
Net cash used in operating activities.............. 12.6 114.1 (36.2) -- 90.5
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment.... (31.7) (3.3) (4.4) (39.4)
Investments in acquired businesses,
net of cash acquired......................... (341.8) (3.5) (188.1) (533.4)
Other, net..................................... (5.7) 1.6 (0.9) -- (5.0)
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities.............. (379.2) (5.2) (193.4) -- (577.8)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving and bank
lines of credit.............................. (148.1) (0.7) 202.3 52.5
Gross borrowings under term loans.............. 525.0 (1.0) 525.0
Gross repayments under term loans.............. (1.2) (1.2)
Issuance of 8 5/8% Senior
Subordinated Notes........................... 330.0 330.0
Extinguishment of 9 7/8% Senior
Subordinated Notes........................... (104.1) (104.1)
Repayment of outstanding balance on
previous credit facility..................... (241.0) (241.0)
Settlement of interest rate locks.............. (12.9) (12.9)
Financing and issuance fees.................... (23.8) (23.8)
Payments to preferred shareholders............. (9.8) (9.8)
Repurchase of treasury shares.................. (6.3) (6.3)
Intracompany financing......................... 74.7 (109.5) 34.8 0.0
Other, net..................................... 3.5 3.5
----------- ------------ ----------- ----------- -----------
Net cash provided by financing activities.......... 386.0 (110.2) 236.1 -- 511.9
----------- ----------- ----------- ----------- -----------
Effect of exchange rate changes on cash............ (0.5) 0.0 (0.5) 0.0 (1.0)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash.................... 18.9 (1.3) 6.0 -- 23.6
Cash and cash equivalents, beginning of period..... 4.9 (2.1) 7.8 -- 10.6
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents, end of period........... $ 23.8 $ (3.4) $ 13.8 $ -- $ 34.2
=========== =========== =========== =========== ===========
</TABLE>
24
<PAGE> 25
BALANCE SHEET
AS OF JULY 3, 1999 (IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 23.8 $ (3.4) $ 13.8 $ 34.2
Accounts receivable, net....................... 199.4 8.2 111.6 319.2
Inventories, net............................... 159.8 55.0 66.3 281.1
Current deferred tax asset..................... 20.4 1.7 -- 22.1
Prepaid and other assets....................... 19.2 1.9 15.1 36.2
----------- ----------- ----------- ----------- -----------
Total current assets................. 422.6 63.4 206.8 0.0 692.8
Property, plant and equipment, net................. 146.1 59.4 35.8 241.3
Intangible assets, net............................. 227.3 270.9 279.7 777.9
Other assets ..................................... 55.8 2.4 1.6 59.8
Investment in affiliates........................... 709.1 (709.1) 0.0
Intracompany assets................................ 305.1 (305.1) 0.0
----------- ----------- ----------- ----------- -----------
Total assets......................... 1,560.9 701.2 523.9 (1,014.2) 1,771.8
=========== =========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt................................ 16.0 5.8 19.4 41.2
Accounts payable............................... 75.8 13.8 37.6 127.2
Accrued liabilities............................ 99.3 76.2 47.1 222.6
----------- ----------- ----------- ----------- -----------
Total current liabilities............ 191.1 95.8 104.1 0.0 391.0
Long-term debt..................................... 564.0 (2.9) 294.5 855.6
Other liabilities.................................. 31.7 6.7 20.9 59.3
Intracompany liabilities........................... 297.2 7.9 (305.1) 0.0
----------- ----------- ----------- ----------- -----------
Total liabilities.............................. 1,084.0 99.6 427.4 (305.1) 1,305.9
----------- ----------- ----------- ----------- -----------
Commitments and contingencies
Shareholders' equity:
Investment from parent......................... 413.6 57.4 (471.0) --
Common shares, no par value per
share, $.01 stated value per share........ 0.2 0.2
Capital in excess of par value................. 209.2 -- 209.2
Class A Convertible Preferred Stock, no
par value................................. 176.7 188.0 176.7
Retained earnings......................... 149.9 50.1 (238.1) 149.9
Accumulated other comprehensive expense........ (0.2) (11.0) (11.2)
Treasury stock, 2.8 shares at cost............. (58.9) (58.9)
----------- ----------- ----------- ----------- -----------
Total shareholders' equity........... 476.9 601.6 96.5 (709.1) 465.9
----------- ----------- ----------- ----------- -----------
Total liabilities and shareholders' equity......... $ 1,560.9 $ 701.2 $ 523.9 $ (1,014.2) $ 1,771.8
=========== =========== =========== =========== ===========
</TABLE>
25
<PAGE> 26
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
Scotts is a leading manufacturer and marketer of consumer branded products for
lawn and garden care and professional horticulture businesses in the United
States and Europe. Our operations are divided into three business segments:
North American Consumer, Professional and International. The North American
Consumer segment includes the Lawns, Gardens, Growing Media, Ortho and Canadian
business groups.
As a leading consumer branded lawn and garden company, we focus on our consumer
marketing efforts, including advertising and consumer research, to create demand
to pull product through the retail distribution channels. During the first nine
months of fiscal 2000, we spent $186.8 million on advertising and promotional
activities, which is a significant increase over fiscal 1999 spending levels. We
have applied this consumer marketing focus over the past several years, and we
believe that Scotts continues to receive a significant return on these increased
marketing expenditures. For example, sales in our domestic consumer businesses
increased 14.9% for the first nine months of fiscal 2000 compared to the same
period in fiscal 1999. We believe that this dramatic sales growth resulted
primarily from our increased consumer-oriented marketing efforts. We expect that
we will continue to focus our marketing efforts toward the consumer and to
increase consumer marketing expenditures in the future to drive market share and
sales growth.
Scotts' 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. We believe that our recent acquisitions diversify both our
product line risk and geographic risk to weather conditions.
On September 30, 1998, Scotts entered into a long-term marketing agreement with
Monsanto for its consumer Roundup(R) herbicide products. Under the marketing
agreement, Scotts and Monsanto will jointly develop global consumer and trade
marketing programs for Roundup(R), and Scotts has assumed responsibility for
sales support, merchandising, distribution, logistics and certain administrative
functions. In addition, in January 1999 Scotts purchased from Monsanto the
assets of its worldwide consumer lawn and garden businesses, exclusive of the
Roundup(R) business, for $355.5 million. These transactions with Monsanto will
further our strategic objective of significantly enhancing our position in the
pesticides segment of the consumer lawn and garden category. These businesses
make up the Ortho business group within the North American Consumer segment.
We believe that these transactions provide us with several strategic benefits
including immediate market penetration into new categories, geographic
expansion, brand leveraging opportunities, and the achievement of substantial
cost savings. With the Ortho acquisition, we are currently a leader by market
share in all five segments of the U.S. consumer lawn and garden category: lawn
fertilizer, garden fertilizer, growing media, grass seeds and pesticides. We
believe that we are now positioned as the only national company with a complete
offering of consumer lawn and garden products.
The addition of strong pesticide brands completes our product portfolio of
branded consumer lawn and garden products that should provide Scotts with brand
leveraging opportunities for revenue growth. For example, our strengthened
market position should create category management opportunities to enhance shelf
positioning, consumer communication, trade incentives and trade programs. In
addition, significant synergies have been and should continue to be realized
from the combined businesses, including reductions in general and
administrative, selling, distribution, purchasing, research and development and
corporate overhead costs. We have redirected, and expect to continue to
redirect, a portion of these cost savings into increased consumer marketing
spending in support of the Ortho(R) brand.
Over the past few years, we have made several other acquisitions to strengthen
our global market position in the lawn and garden category. In October 1998, we
purchased Rhone-Poulenc Jardin, a leading European lawn and garden business, for
approximately $147.5 million. This acquisition provides a significant addition
to our existing European platform and strengthens our foothold in the
continental European consumer lawn and garden market. Through this acquisition,
we have established a strong presence in France, Germany, Austria, and the
Benelux countries. This acquisition may also mitigate, to a certain extent, our
susceptibility to weather conditions by expanding the regions in which we
operate.
26
<PAGE> 27
In December 1998, we acquired Asef Holding B.V., a privately-held
Netherlands-based lawn and garden products company. In February 1998, we
acquired EarthGro, Inc., a Northeastern U.S. growing media producer. In December
1997, we acquired Levington Group Limited, a leading producer of consumer and
professional lawn fertilizer and growing media in the United Kingdom. In January
1997, we acquired the approximate two-thirds interest in Miracle Holdings
Limited which we did not already own. Miracle Holdings owns Miracle Garden Care
Limited, a manufacturer and distributor of lawn and garden products in the
United Kingdom. These acquisitions are consistent with our stated objective of
becoming the world's foremost branded lawn and garden company.
The following discussion and analysis of the consolidated results of operations
and financial position should be read in conjunction with our Condensed,
Consolidated Financial Statements included elsewhere in this report. Scotts'
Annual Report on Form 10-K for the fiscal year ended September 30, 1999 includes
additional information about the Company, our operations, and our 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 and nine
months ended July 1, 2000 and July 3, 1999:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
JULY 1, JULY 3, JULY 1, JULY 3,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
North American Consumer:
Lawns........................................... $ 110.0 $ 107.6 $ 440.5 $ 390.8
Gardens......................................... 63.8 57.3 147.5 131.8
Growing Media................................... 143.4 135.8 261.6 235.2
Ortho........................................... 121.9 116.4 224.5 180.3
Canada.......................................... 12.0 9.8 27.3 20.6
--------- --------- ----------- -----------
Total...................................... 451.1 426.9 1,101.4 958.7
Professional.................................... 31.7 35.8 96.9 109.2
International................................... 115.5 123.5 312.3 334.3
--------- --------- ----------- -----------
Consolidated.................................... $ 598.3 $ 586.2 $ 1,510.6 $ 1,402.2
========= ========= =========== ===========
</TABLE>
27
<PAGE> 28
The following table sets forth the components of income and expense as a
percentage of sales for the three and nine months ended July 1, 2000 and July 3,
1999:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
JULY 1, JULY 3, JULY 1, JULY 3,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales....................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................................... 59.5 59.7 58.3 59.3
----------- ----------- ----------- ------------
Gross profit.................................... 40.5 40.3 41.7 40.7
Gross commission earned from
agency agreement.............................. 2.8 1.7 1.7 2.0
Contribution expenses under agency
agreement..................................... 0.3 0.1 0.3 0.1
----------- ----------- ----------- ------------
Net commission................................ 2.5 1.6 1.4 1.9
Operating expenses:
Advertising and promotion.................... 10.8 10.9 12.4 11.9
Selling, general and administrative.......... 12.8 13.8 15.2 14.9
Amortization of goodwill and
other intangibles......................... 1.1 1.3 1.3 1.2
Restructuring and other charges.............. -- -- -- 0.1
Other expense (income), net.................. 0.2 (0.3) (0.1) (0.3)
----------- ----------- ----------- ------------
Income from operations.......................... 18.1 16.2 14.2 14.6
Interest expense................................ 4.1 4.2 4.9 4.2
----------- ----------- ----------- ------------
Income before income taxes...................... 14.0 12.0 9.3 10.4
Income taxes.................................... 5.1 4.9 3.6 4.3
----------- ----------- ----------- ------------
Net income before extraordinary item............ 8.9 7.1 5.7 6.1
Extraordinary item, net of tax.................. -- -- -- 0.4
---------- ----------- ----------- ------------
Net income...................................... 8.9 7.1 5.7 5.7
Payments to preferred shareholders.............. -- 0.4 0.4 0.5
---------- ----------- ----------- ------------
Income available to common
shareholders.................................. 8.9% 6.7% 5.3% 5.2%
=========== =========== =========== ============
</TABLE>
THREE MONTHS ENDED JULY 1, 2000 VERSUS THREE MONTHS ENDED JULY 3, 1999
Sales for the third quarter ended July 1, 2000 were $598.3 million, an increase
of 2.1% over sales for the third quarter ended July 3, 1999 of $586.2 million.
The increase in sales was driven by increases in sales across all of the North
American Consumer businesses, partially offset by decreased sales in the
Professional and International segments. The decrease in sales for the
Professional segment was due primarily to the sale of the North American
Professional Turf business in May 2000. The decrease in sales for the
International segment was primarily due to continued weakening of European
currencies versus the U.S. dollar. Excluding the impact of unfavorable exchange
rates, sales for the International segment increased slightly compared to the
prior year.
North American Consumer segment sales were $451.1 million in the third quarter
of fiscal 2000, an increase of $24.2 million, or 5.7%, over sales for the third
quarter of fiscal 1999 of $426.9 million. Sales in the Consumer Gardens business
group increased $6.5 million, or 11.3%, from fiscal 1999 to fiscal 2000,
primarily driven by strong sales and market share performance in the water
soluble and tree spike product lines and the successful introduction of new
products such as Weed Prevent(R) in fiscal 2000.
Sales in the Consumer Growing Media business increased $7.6 million, or 5.6%,
due to strong category and market share growth, particularly for value-added
products such as Miracle-Gro Potting Soils(R). Sales in the Ortho business group
increased $5.5 million, or 4.7%, reflecting significantly improved volume with
home center retailers and improved category and market share performance in the
selective weed control product lines. Sales in the Consumer Lawns and Canadian
businesses also improved for the third quarter of fiscal 2000 compared to the
same period of the prior year, increasing 2.2% and 22.5% respectively. Selling
price changes did not have a material impact on sales for the North American
Consumer segment in the third quarter of fiscal 2000.
28
<PAGE> 29
Professional segment sales of $31.7 million in the third quarter of fiscal 2000
were $4.1 million, or 11.5%, lower than sales for the third quarter of fiscal
1999 of $35.8 million. The decrease in sales for the Professional segment was
primarily due to the sale of the North American Professional Turf business in
May 2000, as mentioned above.
International segment sales of $115.5 million in the third quarter of fiscal
2000 were $8.0 million, or 6.5%, lower than sales for the third quarter of
fiscal 1999 of $123.5 million. Excluding the adverse impact of changes in
exchange rates, sales for the International segment increased 1.9% compared to
the prior year. The increase is primarily due to improved results in France and
Germany driven by increased consumer marketing spending, as well as increased
sales in the international professional business.
Gross profit increased to $242.2 million in the third quarter of fiscal 2000, an
increase of 2.4% over third quarter fiscal 1999 gross profit of $236.4 million.
The increase in gross profit from the prior year was primarily due to the
increase in sales mentioned above. As a percentage of sales, gross profit was
40.5% of sales for the third quarter of fiscal 2000, which was essentially
unchanged from the prior year.
The "gross commission from agency agreement" in the third quarter of fiscal 2000
was $16.9 million compared to $9.9 million in the third quarter of fiscal 1999.
In fiscal 2000, in accordance with revenue recognition guidance put forth by the
SEC, we did not record commission under the Roundup(R) agency agreement until
the minimum EBIT thresholds within the agreement were achieved. In the prior
year, commission was recorded each period based on the estimated overall
commission rate for the year applied to that period's EBIT. The increase in the
gross commission in the third quarter of fiscal 2000 compared to the prior year
was due to an increase in the quarterly EBIT for the Roundup(R) business as well
as the change in the methodology for calculating the commission. The
"contribution expenses under agency agreement" increased to $1.6 million in the
third quarter of fiscal 2000 from $0.4 million in the prior year due to the
additional contribution payment due under the agreement in fiscal 2000 compared
to fiscal 1999.
Advertising and promotion expenses for the third quarter of fiscal 2000 were
$64.9 million, an increase of $1.1 million over the prior year. As a percentage
of sales, advertising and promotion expenses did not change significantly from
the third quarter of fiscal 1999 to the third quarter of fiscal 2000.
Selling, general and administrative expenses in the third quarter of fiscal 2000
were $76.8 million, a decrease of $4.0 million, or 5.0% over similar expenses in
the third quarter of fiscal 1999 of $80.8 million. As a percentage of sales,
selling, general and administrative expenses were 12.8% for the third quarter of
fiscal 2000 compared to 13.8% for fiscal 1999. The decrease in selling, general
and administrative expenses was primarily related to reduced provisions for bad
debts due to charges related to the Hechinger bankruptcy in the prior year, and
decreased acquisition integration costs.
Amortization of goodwill and other intangibles decreased to $6.4 million in the
third quarter of fiscal 2000, compared to $7.9 million in the prior year, due to
reduced goodwill and other intangibles resulting from finalizing the purchase
price for the Ortho acquisition.
Other expense for the third quarter of fiscal 2000 was $1.0 million compared to
other income of $1.7 million in the prior year. The increase in expense was
primarily due to costs incurred in connection with the Company's voluntary
return program for Ortho Pull `n Spray products and a gain of $0.6 million in
the third quarter of fiscal 1999 resulting from the sale of the Company's
interest in a small resins business.
Income from operations for the third quarter of fiscal 2000 was $108.4 million
compared to $95.1 million for the third quarter of fiscal 1999. The increase was
primarily due to the increased sales and gross margin dollars and an increase in
gross commissions recognized under the Roundup(R) agreement as described above.
Interest expense for the third quarter of fiscal 2000 was $24.8 million, an
increase of $0.2 million over fiscal 1999 interest expense of $24.6 million. For
the quarter, significantly higher interest rates on our credit facility were
substantially offset by reduced borrowing levels reflecting reductions in
working capital requirements.
Income tax expense was $30.6 million for the third quarter of fiscal 2000
compared to a $28.9 million in the prior year. The Company's effective tax rate
decreased to 36.6% in the current quarter from 41.0% in the prior year. The
decrease in the tax rate in fiscal 2000 was due to a reversal of $3.2 million of
29
<PAGE> 30
tax reserves upon resolution of certain outstanding tax matters during the
quarter and a reduction in the estimated rate for the year, before adjustment,
to 40.5%.
Scotts reported net income of $53.0 million for the third quarter of fiscal
2000, or $1.78 per common share on a diluted basis, compared to net income of
$41.6 million for the third quarter of fiscal 1999, or $1.35 per common share on
a diluted basis.
NINE MONTHS ENDED JULY 1, 2000 VERSUS NINE MONTHS ENDED JULY 3, 1999
Net sales for the nine months ended July 1, 2000 were $1,510.6 million, an
increase of 7.7% over the nine months ended July 3, 1999 of $1,402.2 million. On
a pro forma basis, assuming that the Ortho acquisition had occurred on October
1, 1998, sales for the nine months of fiscal 2000 were 5.3% higher than pro
forma sales for the nine months of fiscal 1999 of $1,435.2 million. The increase
in pro forma sales was driven primarily by significant increases in sales across
all businesses in the North American Consumer segment, partially offset by
decreases in sales in the Professional and International segments as discussed
below.
North American Consumer segment sales were $1,101.4 million for the nine months
of fiscal 2000, an increase of $142.7 million, or 14.9%, over sales for the nine
months of fiscal 1999 of $958.7 million. Sales in the Consumer Lawns business
group within this segment increased $49.7 million, or 12.7%, from fiscal 1999 to
fiscal 2000, primarily due to a significant increase in sales to and consumer
takeaway from national home centers. Sales in the Consumer Gardens business
group increased $15.7 million, or 11.9%, primarily driven by strong sales and
market share performance in the water soluble and tree spikes product lines and
the successful introduction of new products such as Weed Prevent(R) in fiscal
2000. Sales in the Consumer Growing Media business increased $26.4 million, or
11.2%, due to strong category and market share growth, particularly for
value-added products such as Miracle-Gro Potting Soils(R). Sales in the Ortho
business group increased $44.2 million, or 24.5%, on an actual basis and $11.2
million, or 5.3%, on a pro forma basis, reflecting significantly improved volume
with home center retailers and improved category and market share performance in
the selective weed control product lines. Selling price changes did not have a
material impact on sales in the North American Consumer segment in the nine
months of fiscal 2000.
Professional segment sales of $96.9 million in the nine months of fiscal 2000
were $12.3 million lower than the nine months of fiscal 1999 sales of $109.2
million. The decrease in sales for the Professional segment was primarily due to
lower sales of ProTurf(R) products and the sale of the Pro Turf(R) business
during the third quarter of fiscal 2000. In the second quarter of fiscal 1999,
we changed from selling direct to customers to selling through distributors. The
timing of this change and performance issues with one of our largest ProTurf(R)
distributors caused sales to decrease when compared to the prior year. Sales of
horticulture products within this segment were slightly improved in comparison
to the prior year period.
International segment sales of $312.3 million in the nine months of fiscal 2000
were $22.0 million lower than sales for the nine months of fiscal 1999 of $334.3
million. Excluding the adverse impact of changes in exchange rates, sales for
the International segment increased 1.6% compared to the prior year period. The
slight increase is primarily due to improved results in the segment's
continental European consumer businesses and the international professional
business, partially offset by decreases in the segment's U.K. consumer business.
Gross profit increased to $629.2 million for the nine months of fiscal 2000, an
increase of 10.4% over fiscal 1999 gross profit of $570.1 million, driven by the
7.7% increase in year-to-date sales discussed above. As a percentage of sales,
gross profit was 41.7% of sales for fiscal 2000 compared to 40.7% of sales for
the nine months of fiscal 1999. This increase in profitability on sales was
driven by a successful shift to direct distribution to certain retail accounts
and improved efficiencies in the Company's production plants, offsetting higher
costs for certain raw materials such as urea, and a shift in sales mix toward
higher margin products, particularly within the Consumer Lawns and Consumer
Growing Media business groups.
The "gross commission from agency agreement" in the nine months of fiscal 2000
was $26.1 million, compared to $27.5 million in the nine months of fiscal 1999.
The decrease in the gross commission from year to year was due to lower EBIT for
the Roundup(R) business in fiscal 2000 for purposes of calculating our
commission. "Contribution expenses under agency agreement" were $4.9 million for
the nine months of fiscal 2000, compared to $1.2 million for fiscal 1999, due to
the increased contribution payment due in fiscal 2000 under the agreement.
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Advertising and promotion expenses for the nine months of fiscal 2000 were
$186.8 million, an increase of $20.2 million, or 12.1%, over fiscal 1999
advertising and promotion expenses of $166.6 million. This increase was
primarily due to advertising and promotion expenses for the Ortho business,
costs to support the increase in sales within the North American Consumer
segment and investments in advertising and promotion to drive future sales
growth in the International segment.
Selling, general and administrative expenses in the nine months of fiscal 2000
were $229.8 million, an increase of $20.2 million, or 9.6%, over similar
expenses in the nine months of fiscal 1999 of $209.6 million. As a percentage of
sales, selling, general and administrative expenses were 15.2% for the nine
months of fiscal 2000 compared to 14.9% for fiscal 1999. The increase in
selling, general and administrative expenses was primarily related to additional
selling and administrative costs needed to support the increased sales levels in
the Consumer Lawns business group, infrastructure expenses within the
International segment, selling, general and administrative expenses for the
Ortho business group which were not incurred in the first quarter of fiscal 1999
due to the timing of the acquisition in January 1999, and increased legal costs
as a result of the various legal matters discussed in Item 1.
Amortization of goodwill and other intangibles increased to $19.4 million in the
nine months of fiscal 2000, compared to $17.3 million in the prior year, due to
additional intangibles resulting from the Ortho acquisition.
Restructuring and other charges were $1.4 million in the nine months of fiscal
1999. These charges represent severance costs associated with the reorganization
of North American Professional Business Group to strengthen distribution and
technical sales support, integrate brand management across market segments and
reduce annual operating expenses. To date, substantially all payments have been
made.
Other income for the nine months of fiscal 2000 was $0.8 million compared to
other income of $3.8 million in the prior year. The decrease in other income, on
a net basis, was primarily due to costs incurred in connection with the
Company's voluntary return program for Ortho Pull `n Spray products and
additional losses on disposals of miscellaneous fixed assets, partially offset
by increase in royalty income compared to the prior year arising from additional
royalty arrangements in fiscal 2000.
Income from operations for the nine months of fiscal 2000 was $215.2 million
compared to $205.3 million for the nine months of fiscal 1999. The increase in
income from operations was due primarily to the increase in sales across the
North American consumer businesses as noted above, partially offset by the
decrease in sales in the Professional segment and a decline in the net
commission earned under the Roundup(R) agreement.
Interest expense for the nine months of fiscal 2000 was $74.4 million, an
increase of $15.4 million over fiscal 1999 interest expense of $59.0 million.
The increase in interest expense was due to increased borrowings to fund the
Ortho acquisition and an increase in average borrowing rates under our credit
facility, partially offset by reduced working capital requirements.
Income tax expense was $53.7 million for fiscal 2000 compared to $60.0 million
in the prior year. The Company's effective tax rate decreased to 38.1% for the
first nine months of fiscal 2000 compared to 41.0% for the previous year. The
decrease in the tax rate for fiscal 2000 is due to a reversal of $3.2 million of
tax reserves upon resolution of certain outstanding tax matters during the third
quarter of fiscal 2000 and a reduction in the estimated rate for the year,
before adjustment, to 40.5%.
In conjunction with the Ortho acquisition, in January 1999 Scotts completed an
offering of $330 million of 8 5/8% Senior Subordinated Notes due 2009. The net
proceeds from this offering, together with borrowings under our credit facility,
were used to fund the Ortho acquisition and repurchase the then outstanding $100
million 9 7/8% Senior Subordinated Notes due August 2004. Scotts recorded an
extraordinary loss on the extinguishment of the 9 7/8% notes of $9.3 million,
including a call premium of $7.2 million and the write-off of unamortized
issuance costs and discounts of $2.1 million.
Scotts reported net income of $80.7 million for the nine months of fiscal 2000,
or $2.71 per common share on a diluted basis, compared to net income of $73.2
million for fiscal 1999, or $2.83 per common share on a diluted basis before the
impact of extraordinary items. The diluted earnings per share for the nine
months of fiscal 2000 is net of a one-time reduction of $0.22 per share
resulting from the early conversion of preferred stock in October 1999.
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LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities totaled $162.1 million for the nine months
ended July 1, 2000 compared to providing $90.5 million for the nine months ended
July 3, 1999. The seasonal nature of our operations generally requires cash to
fund significant increases in working capital (primarily inventory and accounts
receivable) during the first and second quarters. The third fiscal quarter is a
period for collecting accounts receivable and liquidating inventory levels. The
increase in cash provided by operating activities for the nine months of fiscal
2000 compared to the prior year is attributable to a significant decrease in the
amount of working capital used during the period as well as the payment of the
Roundup(R) marketing fee made in the first quarter of fiscal 1999.
Cash used in investing activities was $36.7 million for the nine months of
fiscal 2000 compared to $540.8 million in the prior year. In the first quarter
of fiscal 1999, we purchased the Rhone-Poulenc Jardin and Asef businesses for
approximately $170 million (excluding consideration for rights acquired under an
access rights agreement with Rhone-Poulenc Jardin). In the second quarter of
fiscal 1999, we purchased from Monsanto the assets of its worldwide consumer
lawn and garden businesses, exclusive of the Roundup(R) business, for $300
million plus an amount for normalized working capital (requiring a total initial
payment of $339.9 million). Additionally, capital investments decreased slightly
to $37.2 million in the nine months of fiscal 2000 compared to $39.4 million in
the nine months of fiscal 1999.
Financing activities required cash of $76.8 million for the nine months ended
July 1, 2000 compared to providing $474.9 million in the prior year. In the
first quarter of fiscal 1999, Scotts borrowed funds under its credit facility in
order to purchase the Rhone-Poulenc Jardin and Asef businesses, to pay marketing
fees associated with the Roundup(R) agency agreement, to pay financing fees
associated with the new credit facility and to settle the then outstanding
interest rate locks (as described below). In the second quarter of fiscal 1999,
Scotts completed an offering of $330 million of 8 5/8% Senior Subordinated Notes
due 2009. The net proceeds from this offering, together with borrowings under
our credit facility, were used to fund the Ortho acquisition and repurchase
approximately 97% of the then outstanding $100 million 9 7/8% Senior
Subordinated Notes due August 2004. Due to the increase in cash provided by
operating activities for the first nine months of fiscal 2000 compared to the
prior year as noted above, the Company was able to make additional repayments to
its credit facility.
Total debt was $886.2 million as of July 1, 2000, a decrease of $63.8 million
compared with debt at September 30, 1999 and a decrease of $10.6 compared with
debt levels at July 3, 1999. The decrease in debt as of July 1, 2000 was
primarily due to scheduled quarterly debt repayments on the Company's term loans
during fiscal 2000.
Our primary sources of liquidity are funds generated by operations and
borrowings under our credit facility. The credit facility 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.
We funded the acquisition of the Rhone-Poulenc Jardin and Asef businesses with
borrowings under our credit facility. Additional borrowings under the credit
facility, along with proceeds from the January 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 Scotts' then outstanding
$100.0 million 9 7/8% Senior Subordinated Notes.
Coincidental with the notes offering, Scotts settled its then outstanding
interest rate lock for approximately $3.6 million. We entered into two interest
rate locks in fiscal 1998 to hedge the anticipated interest rate exposure on the
$330 million note offering. In October 1998, we terminated one of the interest
rate locks for $9.3 million 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.
In July 1998, our Board of Directors authorized the repurchase of up to $100
million of our common shares on the open market or in privately negotiated
transactions on or prior to September 30, 2001. As of July 1, 2000, 1,106,295
common shares (or $40.6 million) have been repurchased under this repurchase
program limit. The timing and amount of any purchases under the repurchase
program will be at our discretion and will depend upon market conditions and our
operating performance and liquidity.
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Any repurchase will also be subject to the covenants contained in our credit
facility as well as our 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. We anticipate that any
repurchases will be made in the open market or in privately negotiated
transactions, and that Hagedorn Partnership, L.P. will sell its pro rata share
(approximately 42%) of such repurchased shares in the open market.
In our opinion, cash flows from operations and capital resources will be
sufficient to meet debt service and working capital needs during fiscal 2000,
and thereafter for the foreseeable future. However, we cannot ensure that our
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 our
credit facilities in amounts sufficient to pay indebtedness or fund other
liquidity needs. Actual results of operations will depend on numerous factors,
many of which are beyond our control. We cannot ensure that we will be able to
refinance any indebtedness, including our credit facility, on commercially
reasonable terms, or at all.
ENVIRONMENTAL MATTERS
We are subject to local, state, federal and foreign environmental protection
laws and regulations with respect to our business operations and believe we are
operating in substantial compliance with, or taking action aimed at ensuring
compliance with, such laws and regulations. We are 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 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 our financial position; however, there can be no assurance
that the resolution of these matters will not materially affect future quarterly
or annual operating results. Additional information on environmental matters
affecting us is provided in Note 10 to the Company's unaudited Condensed,
Consolidated Financial Statements as of and for the three and nine months ended
July 1, 2000 and in the 1999 Annual Report on Form 10-K under "ITEM 1. BUSINESS
-- ENVIRONMENTAL AND REGULATORY CONSIDERATIONS" and "ITEM 3. LEGAL PROCEEDINGS"
sections.
YEAR 2000 READINESS
Through July 2000, we have not experienced any significant issues related to the
ability of our information technology and business systems to recognize the year
2000. In addition, we have not experienced any significant supply difficulties
related to our vendors' year 2000 readiness. While we believe that we have taken
adequate precautions against year 2000 systems issues, there can be no assurance
that we will not encounter business interruption or other issues related to the
year 2000 in the future.
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ENTERPRISE RESOURCE PLANNING ("ERP")
In July 1998, we announced a project designed to bring our information system
resources in line with our current strategic objectives. The project includes
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
several fiscal years. We estimate that the project will cost in the range of $70
to $75 million, of which we expect 75% will be capitalized and depreciated over
a period of four to eight years. SAP has been selected as the primary software
provider for this project.
MANAGEMENT'S OUTLOOK
Results for the first nine months of fiscal 2000 are in line with management's
expectations and position us to continue our trend of significant sales and
earnings growth. We are coming off a very strong fiscal 1999 as we reported
record sales of $1.65 billion, achieved market share growth in every one of our
major U. S. categories and established a number one market share position in
most of the significant lawn and garden categories across the world. The
performance in 1999 reflected the successful continuation of our primary growth
drivers: to emphasize consumer-oriented marketing efforts to pull demand through
distribution channels, and to make strategic acquisitions to increase market
share in global markets and within segments of the lawn and garden category.
Looking forward, we maintain the following broad tenets to our strategic plan:
(1) Promote and capitalize on the strengths of the Scotts(R),
Miracle-Gro(R), Hyponex(R) and Ortho(R) industry-leading
brands, as well as our portfolio of powerful brands in our
international markets. This involves a commitment to investors
and retail partners that we 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.
As part of our ongoing strategic plans, management has established challenging,
but realistic, financial goals, including:
(1) Sales growth of 8% to 10% per year;
(2) A minimum aggregate operating margin improvement of 50 basis
points per year;
(3) Minimum compounded annual earnings per share growth of 15% to
20%; and
(4) Increase return on equity from 15% to 18%.
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FORWARD-LOOKING STATEMENTS
We have made and will make "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 in our Annual Report, Forms 10-K and 10-Q and in other
contexts relating to future growth and profitability targets, and strategies
designed to increase total shareholder value. Forward-looking statements
include, but are not limited to, information regarding our future economic
performance and financial condition, the plans and objectives of our management
and our assumptions regarding our performance and these plans and objectives.
The Private Securities Litigation Reform Act of 1995 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. We desire to take advantage of the
"safe harbor" provisions of that Act.
The forward-looking statements that we make in our Annual Report, Forms 10-K and
10-Q and in other contexts represent challenging goals for our company, and the
achievement of these goals is subject to a variety of risks and assumptions and
numerous factors beyond our control. Important factors that could cause actual
results to differ materially from the forward-looking statements we make are
described below. All forward-looking statements attributable to us or persons
working on our behalf are expressly qualified in their entirety by the following
cautionary statements:
- ADVERSE WEATHER CONDITIONS COULD ADVERSELY IMPACT OUR 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. Periods of wet weather can
slow fertilizer sales, while periods of dry, hot weather can
decrease pesticide sales. In addition, an abnormally cold
spring throughout North America and/or Europe could adversely
affect both fertilizer and pesticides sales and therefore our
financial results.
- OUR HISTORICAL SEASONALITY COULD IMPAIR OUR ABILITY TO MAKE
INTEREST PAYMENTS ON INDEBTEDNESS.
Because our products are used primarily in the spring and
summer, our business is highly seasonal. For the past two
fiscal years, approximately 70% to 75% of our sales have
occurred in the second and third fiscal quarters combined. Our
working capital needs and our borrowings peak during our first
fiscal quarter because we are generating fewer revenues while
incurring expenditures in preparation for the spring selling
season. If cash on hand is insufficient to cover interest
payments due on our indebtedness at a time when we are unable
to draw on our credit facility, this seasonality could
adversely affect our ability to make interest payments as
required by our indebtedness. Adverse weather conditions could
heighten this risk.
- PUBLIC PERCEPTIONS THAT THE PRODUCTS WE PRODUCE AND MARKET ARE
NOT SAFE COULD ADVERSELY AFFECT US.
We manufacture and market a number of complex chemical
products, such as fertilizers, herbicides and pesticides,
bearing one of our brands. On occasion, customers allege that
some of these products fail to perform up to expectations or
cause damage or injury to individuals or property. Public
perception that our products are not safe, whether justified or
not, could impair our reputation, damage our brand names and
materially adversely affect our business.
- OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR
FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR
OBLIGATIONS.
Our substantial indebtedness could:
- make it more difficult for us to satisfy our
obligations;
- increase our vulnerability to general adverse
economic and industry conditions;
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- limit our ability to fund future working
capital, capital expenditures, research and
development costs and other general corporate
requirements;
- require us to dedicate a substantial portion
of cash flow from operations to payments on
our indebtedness, which would reduce the cash
flow available to fund working capital,
capital expenditures, research and
development efforts and other general
corporate requirements;
- limit our flexibility in planning for, or
reacting to, changes in our business and the
industry in which we operate;
- place us at a competitive disadvantage
compared to our competitors that have less
debt; and
- limit our ability to borrow additional funds.
If we fail to comply with any of the financial or
other restrictive covenants of our indebtedness, our
indebtedness could become due and payable in full
prior to its stated due date. We cannot be sure that
our lenders would waive a default or that we could pay
the indebtedness in full if it were accelerated.
- TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT
AMOUNT OF CASH, WHICH WE MAY NOT BE ABLE TO GENERATE.
Our ability to make payments on and to refinance our
indebtedness and to fund planned capital expenditures and
research and development efforts will depend on our ability to
generate cash in the future. This, to some extent, is subject
to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. We
cannot assure that our business will generate sufficient cash
flow from operations or that currently anticipated cost savings
and operating improvements will be realized on schedule or at
all. We also cannot assure that future borrowings will be
available to us under our credit facility in amounts sufficient
to enable us to pay our indebtedness or to fund other liquidity
needs. We may need to refinance all or a portion of our
indebtedness, on or before maturity. We cannot assure that we
will be able to refinance any of our indebtedness on
commercially reasonable terms or at all.
- WE MIGHT NOT BE ABLE TO INTEGRATE OUR RECENT ACQUISITIONS INTO
OUR BUSINESS OPERATIONS SUCCESSFULLY.
We have made several substantial acquisitions in the past four
years. The acquisition of the Ortho business represents the
largest acquisition we have ever made. The success of any
completed acquisition depends, and the success of the Ortho
acquisition will depend, on our ability to effectively
integrate the acquired business. We believe that our recent
acquisitions provide us with significant cost saving
opportunities. However, if we are not able to successfully
integrate Ortho, Rhone-Poulenc Jardin or our other acquired
businesses, we will not be able to maximize such cost saving
opportunities. Rather, the failure to integrate these 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
our financial results.
- BECAUSE OF THE CONCENTRATION OF OUR SALES TO A SMALL NUMBER OF
RETAIL CUSTOMERS, THE LOSS OF ONE OR MORE OF OUR TOP CUSTOMERS
COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS.
Our top 10 North American retail customers together accounted
for approximately 52% of our fiscal 1999 sales and 41% of our
outstanding accounts receivable as of September 30, 1999. Our
top three customers, Home Depot, Wal*Mart and Kmart represented
approximately 17%, 12% and 9% of our fiscal 1999 sales. These
customers hold significant positions in the retail lawn and
garden market. The loss of, or reduction in orders from, Home
Depot, Wal*Mart, Kmart or any other significant customer could
have a material adverse effect on our business and our
financial results, as could customer disputes regarding
shipments, fees, merchandise
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condition or related matters. Our inability to collect accounts
receivable from any of these customers could also have a
material adverse affect.
- IF MONSANTO OR WE WERE TO TERMINATE THE MARKETING AGREEMENT FOR
CONSUMER ROUNDUP(R) PRODUCTS, WE WOULD LOSE A SUBSTANTIAL
SOURCE OF FUTURE EARNINGS.
If we were to commit a serious default under the marketing
agreement with Monsanto for consumer Roundup(R) products,
Monsanto may have the right to terminate the agreement. If
Monsanto were to terminate the marketing agreement rightfully,
or if we were to terminate the agreement without appropriate
cause, we would not be entitled to any termination fee, and we
would lose all, or a significant portion, of the significant
source of earnings we believe the marketing agreement provides.
Monsanto may also terminate the marketing agreement within a
given region, including North America, without paying us a
termination fee if sales to consumers in that region decline:
- Over a cumulative period of three fiscal years; or
- By more than 5% for each of two consecutive fiscal
years.
Monsanto may not terminate the marketing agreement,
however, if we can demonstrate that the sales decline
was caused by a severe decline of general economic
conditions or a severe decline in the lawn and garden
market in the region rather than by our failure to
perform our duties under the agreement.
- THE EXPIRATION OF PATENTS RELATING TO ROUNDUP(R) AND THE SCOTTS
TURF BUILDER(R) LINE OF PRODUCTS COULD SUBSTANTIALLY INCREASE
OUR COMPETITION IN THE UNITED STATES.
Glyphosate, the active ingredient in Roundup(R), is covered by
a patent in the United States that expires in September 2000.
Sales in the United States may decline as a result of increased
competition after the U.S. patent expires. Any decline in sales
would adversely affect our net commission under the marketing
agreement for consumer Roundup(R) products and, therefore, our
financial results. A sales decline could also trigger
Monsanto's regional termination right under the marketing
agreement. For fiscal 1999, our commission under the Roundup
Marketing Agreement constituted approximately 26% of our income
before taxes.
Our methylene-urea product composition patent, which covers
Scotts Turf Builder(R), Scotts Turf Builder(R) with Plus 2(TM)
Weed Control and Scotts Turf Builder(R) with Halts(R)
Crabgrass Preventer, is due to expire in July 2001, which could
also result in increased competition. Any decline in sales of
Turf Builder(R) products after the expiration of the
methylene-urea product composition patent could adversely
affect our financial results. For fiscal 1999, sales of
products utilizing our methylene-urea product composition
patent accounted for approximately 18% of our total sales.
- THE INTERESTS OF THE FORMER MIRACLE-GRO SHAREHOLDERS COULD
CONFLICT WITH THOSE OF OUR OTHER SHAREHOLDERS.
The former shareholders of Stern's Miracle-Gro Products, Inc.,
through Hagedorn Partnership, L.P., beneficially own
approximately 42% of the outstanding common shares of Scotts on
a fully diluted basis. The former Miracle-Gro shareholders have
sufficient voting power to significantly control the election
of directors and the approval of other actions requiring the
approval of our shareholders. The interests of the former
Miracle-Gro shareholders could conflict with those of our other
shareholders.
- COMPLIANCE WITH ENVIRONMENTAL AND OTHER PUBLIC HEALTH
REGULATIONS COULD INCREASE OUR COST OF DOING BUSINESS.
Local, state, federal and foreign laws and regulations relating
to environmental matters affect us in several ways. All
products containing pesticides must be registered with the U.S.
Environmental Protection Agency and, in many cases, with
similar state and/or foreign agencies before they can be sold.
The inability to obtain or the
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cancellation of any registration could have an adverse effect
on us. The severity of the effect would depend on which
products were involved, whether another product could be
substituted and whether our competitors were similarly
affected. We attempt to anticipate regulatory developments and
maintain registrations of, and access to, substitute chemicals.
We may not always be able to avoid or minimize these risks.
The Food Quality Protection Act, enacted by the U.S. Congress
in August 1996, establishes a standard for food-use pesticides,
which is that a reasonable certainty of no harm will result
from the cumulative effect of pesticide exposures. Under this
act, the U.S. Environmental Protection Agency is evaluating the
cumulative risks from dietary and non-dietary exposures to
pesticides. The pesticides in our products, which are also used
on foods, will be evaluated by the U.S. Environmental
Protection Agency as part of this non-dietary exposure risk
assessment. It is possible that the U.S. Environmental
Protection Agency may decide that a pesticide we use in our
products would be limited or made unavailable. We cannot
predict the outcome or the severity of the effect of the U.S.
Environmental Protection Agency's evaluation. We believe that
we should be able to obtain substitute ingredients if selected
pesticides are limited or made unavailable, but there can be no
assurance that we will be able to do so for all products.
Regulations regarding the use of some pesticide and fertilizer
products may include requirements that only certified or
professional users apply the product or that the products be
used only in specified locations. Users may be required to post
notices on properties to which products have been or will be
applied and may be required to notify individuals in the
vicinity that products will be applied in the future. The use
of some ingredients has been banned. Even if we are able to
comply with all such regulations and obtain all necessary
registrations, we cannot assure that our 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.
The harvesting of peat for our growing media business has come
under increasing regulatory and environmental scrutiny. In the
United States, state regulations frequently require us to limit
our harvesting and to restore the property to its intended use.
In some locations we have been required to create water
retention ponds to control the sediment content of discharged
water. In the United Kingdom, our peat extraction efforts are
also the subject of legislation. Since 1990, we have been
involved in litigation with the Philadelphia District of the
U.S. Army Corps of Engineers involving our peat harvesting
operations at Hyponex's Lafayette, New Jersey facility. The
Corps of Engineers is seeking a permanent injunction against
harvesting and civil penalties in an unspecified amount. While
we are unable to predict the outcome of the negotiations on
this matter, we have accrued for our estimate of the probable
loss. If the ultimate settlement of this proceeding differs
significantly from the amount we have accrued, it could
materially impact our results of operations, financial position
or cash flows.
In addition to the regulations already described, local, state,
federal, and foreign agencies regulate the disposal, handling
and storage of waste, air and water discharges from our
facilities. In June 1997, the Ohio Environmental Protection
Agency gave us formal notice of an enforcement action
concerning our old, decommissioned wastewater treatment plants
that had once operated at our Marysville facility. The Ohio EPA
action alleges surface water violations relating to possible
historical sediment contamination, inadequate treatment
capabilities at our existing and currently permitted wastewater
treatment plants and the need for corrective action under the
Resource Conservation Recovery Act. We are continuing to meet
with the Ohio EPA and the Ohio Attorney General's office to
negotiate an amicable resolution of these issues. We are
currently unable to predict the ultimate outcome of this
matter. See Item 1. "Legal Proceedings" for a more complete
summary of current legal and environmental matters.
During fiscal 1999, we made approximately $1.1 million in
environmental capital expenditures and $5.9 million in other
environmental expenses, compared with approximately $0.7
million in environmental capital expenditures and $3.1 million
in other environmental expenses in fiscal 1998. Management
anticipates that environmental capital expenditures and other
environmental expenses for fiscal 2000 will not differ
significantly from those incurred in fiscal 1999. If we are
required to significantly increase our actual environmental
capital expenditures and other environmental expenses, it could
adversely affect our financial results.
38
<PAGE> 39
- OUR SIGNIFICANT INTERNATIONAL OPERATIONS MAKE US MORE
SUSCEPTIBLE TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES AND TO
THE COSTS OF INTERNATIONAL REGULATION.
We currently operate manufacturing, sales and service
facilities outside of North America, particularly in the United
Kingdom, Germany and France. Our international operations have
increased with the acquisitions of Levington, Miracle Garden,
Ortho and Rhone-Poulenc Jardin and with the marketing agreement
for consumer Roundup(R) products. In fiscal 1999, international
saleS accounted for approximately 24% of our total sales.
Accordingly, we are subject to risks associated with operations
in foreign countries, including:
- fluctuations in currency exchange rates;
- limitations on the conversion of foreign currencies
into U.S. dollars;
- limitations on the remittance of dividends and other
payments by foreign subsidiaries;
- additional costs of compliance with local regulations;
and
- historically, higher rates of inflation than in the
United States.
The costs related to our international operations could
adversely affect our operations and financial results in the
future.
- WE COULD EXPERIENCE DIFFICULTIES WITH OUR IMPLEMENTATION OF SAP
THAT COULD ADVERSELY AFFECT OUR OPERATIONS.
Our implementation of SAP is in progress and is currently being
utilized to provide information to three of our North American
business groups. While the implementation has not created
business interruption to this point, there can be no assurance
that we will not experience difficulties in the remainder of
the implementation process over the next several years.
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<PAGE> 40
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As noted in Note 10 to the Company's unaudited Condensed,
Consolidated Financial Statements as of and for the period
ended July 1, 2000, the Company is involved in several pending
legal and environmental matters. Pending other material legal
proceedings are as follows:
Rhone-Poulenc, S.A., Rhone-Poulenc Agro S.A. and Hoechst, A.G.
On October 15, 1999, Scotts began arbitration proceedings
before the International Chamber of Commerce against
Rhone-Poulenc S.A. and Rhone-Poulenc Agro S.A. (collectively,
"Rhone-Poulenc") under arbitration provisions contained in
contracts relating to the purchase by Scotts of
Rhone-Poulenc's European lawn and garden business,
Rhone-Poulenc Jardin, in 1998. Scotts alleges that the
combination of Rhone-Poulenc and Hoechst Schering AgrEvo GmbH
into a new entity, Aventis S.A., will result in the violation
of non-compete and other provisions in the contracts mentioned
above. In the arbitration proceedings, Scotts is seeking
injunctive relief as well as an award of damages.
On January 7, 2000, the tribunal issued a segregated Record
Agreement and Order requiring Aventis S.A., Rhone-Poulenc and
any affiliate or entity controlled by Aventis S.A. or
Rhone-Poulenc to maintain a segregated record of select sales
of certain products.
Also on October 15, 1999, Scotts filed a complaint styled The
Scotts Company, et al. v. Rhone-Poulenc, S.A., Rhone-Poulenc
Agro S.A. and Hoechst, A.G. in the Court of Common Pleas for
Union County, Ohio, seeking injunctive relief maintaining the
status quo in aid of the arbitration proceedings as well as an
award of damages against Hoechst for Hoechst's tortious
interference with Scotts' contractual rights. On October 19,
1999, the defendants removed the Union County action to the
United States District Court for the Southern District of
Ohio. On December 8, 1999, Scotts requested that this action
be stayed pending the outcome of the arbitration proceedings.
Scotts v. AgrEvo USA Company
The Scotts Company filed suit against AgrEvo USA Company on
August 8, 2000 in the Court of Common Pleas for Union County,
Ohio, alleging breach of contract relating to an Agreement
dated June 22, 1998 entitled "Exclusive Distributor Agreement
- Horticulture". The action seeks an unspecified amount of
damages resulting from AgrEvo's breaches of the Agreement, an
order of specific performance directing AgrEvo to comply with
its obligations under the Agreement, a declaratory judgment
that Scotts' future performance under the Agreement is waived
as a result of AgrEvo's failure to perform, and such other
relief to which Scotts might be entitled.
Scotts is involved in other lawsuits and claims which arise in
the normal course of its business. In the opinion of
management, these claims individually and in the aggregate are
not expected to result in a material adverse effect on Scotts'
financial position or operations.
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<PAGE> 41
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index at page 43 for a list of the exhibits
included herewith.
(b) The Registrant filed no Current Reports on Form 8-K for the
quarter covered by this Report.
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<PAGE> 42
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
Dated August 15, 2000 /s/ CHRISTOPHER L. NAGEL
------------------------
Principal Accounting Officer,
Vice President and Corporate
Controller
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<PAGE> 43
THE SCOTTS COMPANY
QUARTERLY REPORT ON FORM 10-Q FOR
FISCAL QUARTER ENDED JULY 1, 2000
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
<S> <C> <C>
2(e)(i) U.S. Asset Purchase Agreement dated as of March 29, 2000 by and *
among The Andersons, Inc. and The Andersons Agriservices, Inc.,
as buyers, and The Scotts Company and OMS Investments, Inc., as
sellers
2(e)(ii) Canadian Asset Purchase Agreement dated as of March 29, 2000 by *
and among The Nu-Gro Corporation, as buyer, and The Scotts
Company and OMS Investments, Inc., as sellers
4(i) Amendment No. 2, dated as of June 9, 2000, to the Credit *
Agreement, dated as of December 4, 1998, as amended by the
Waiver, dated as of January 19, 1999, the Amendment No. 1 and
Consent, dated as of October 13, 1999, and the Waiver No. 2,
dated as of February 14, 2000, among the Registrant; OM Scott
International Investments Ltd., Miracle Garden Care Limited,
Scotts Holdings Limited, Hyponex Corporation, Scotts
Miracle-Gro Products, Inc., Scotts-Sierra Horticultural
Products Company, Republic Tool & Manufacturing Corp.,
Scotts-Sierra Investments, Inc., Scotts France Holdings SARL,
Scotts Holding GmbH, Scotts Celaflor GmbH & Co. KG, Scotts
France SARL, Scotts Asef BVBA (fka Scotts Belgium 2 BVBA), The
Scotts Company (UK) Ltd., Scotts Canada Ltd., Scotts Europe
B.V., ASEF B.V., Scotts Australia PTY Ltd., and other
subsidiaries of the Registrant who are also borrowers from time
to time; the lenders party thereto; The Chase Manhattan Bank as
Administrative Agent; Salomon Smith Barney, Inc. as Syndication
Agent; Credit Lyonnais Chicago Branch and Bank One, Michigan,
as successor to NBD Bank, as Co-Documentation Agents; and Chase
Securities Inc., as Lead Arranger and Book Manager
</TABLE>
43
<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
<S> <C>
10(l) Specimen form of Stock Option Agreement for Non-Qualified Stock *
Options granted to employees under The Scotts Company 1996
Stock Option Plan (as amended through August 1, 2000)
27 Financial Data Schedule *
</TABLE>
* Filed herewith
44
