<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 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)
<TABLE>
<S> <C>
OHIO 31-1414921
---------------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification
organization) No.)
41 SOUTH HIGH STREET, SUITE 3500, COLUMBUS, OHIO 43215
---------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: 614-719-5500
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
Common Shares, without par value (28,049,151 New York Stock Exchange
Common Shares outstanding at November 1,
2000)
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the common shares held by non-affiliates of the
registrant at November 1, 2000 was $643,979,659.
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE PROXY STATEMENT FOR REGISTRANT'S 2001 ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD JANUARY 18, 2001, ARE INCORPORATED BY REFERENCE INTO
PART III HEREOF.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
The Scotts Company (with our subsidiaries, "we" or "Scotts") is among the
most widely recognized marketers and manufacturers of products for lawns,
gardens and horticulture. Our Turf Builder(R) (for consumer lawn care),
Miracle-Gro(R) (for consumer garden care), Osmocote(R) (for professional
horticulture) and Ortho(R) (for consumer herbicides and disease-control
products) brands command market shares that we believe are more than double
those of the next ranked competitors, in the referenced consumer or professional
subgroup. In addition, under an agreement with Monsanto Company (now known as
Pharmacia Corporation), we have exclusive domestic and international agency and
marketing rights to Monsanto's consumer Roundup(R) herbicide products*. In the
United Kingdom, our brands include: Weedol(R) and Pathclear(R) consumer
herbicides; the Evergreen(R) lawn fertilizer line; the Levington(R) line of lawn
and garden products; and Miracle-Gro(R) plant fertilizer. Our brands in
continental Europe include KB(R) and Fertiligene(R) in France and NexaLotte(R)
and Celaflor(R) in Germany. We believe that our long history of technical
innovation, reputation for quality and service and marketing tailored to the
needs of do-it-yourself consumers, and professionals, have enabled us to
maintain market share leadership in our markets while delivering consistent
sales growth.
Our domestic operating subsidiaries include: Hyponex Corporation,
Scotts-Sierra Horticultural Products Company, Republic Tool & Manufacturing
Corp., and Scotts Manufacturing Company (formerly Scotts Miracle-Gro Products,
Inc.). International operating subsidiaries include: Scotts Canada Ltd.
(Canada), Scotts ASEF BVBA (Belgium), Scotts Horticulture Ltd. (Ireland), Scotts
France SAS (France), Scotts Celaflor GmbH & Co. KG (Germany), Celaflor HG
(Austria), ASEF BV and Scotts International BV (Netherlands), and The Scotts
Company (UK) Ltd. and Corwen Home and Garden Limited (United Kingdom).
Do-it-yourself consumers, and professionals, purchase through different
distribution channels and have different information and product needs. To
address all of our customers' needs and the international portion of our
business, we have seven business groups comprised of Consumer Lawns, Consumer
Gardens, Consumer Growing Media, Consumer Ortho and Consumer Canada (together,
the "North American Consumer Business Group"), the North American Professional
Business Group and the International Business Group.
FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS
During fiscal 2000, we operated in three principal business segments: (1)
the North American Consumer Business Group, which includes products of the
Consumer Lawns, Consumer Gardens, Consumer Growing Media and Consumer Ortho
groups, sold in the United States and Canada; (2) the North American
Professional Business Group, including primarily horticultural products, sold in
the United States and Canada; and (3) the International Business Group. The
following chart shows, for fiscal 2000, each segment's contribution to
consolidated sales and operating income before general corporate expenses:
<TABLE>
<CAPTION>
Percent of Fiscal Percent of Fiscal 2000
2000 Operating Income
Consolidated Sales Before General Corporate Expenses
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
North American
Consumer
Business Group 72% 87%
North American
Professional
Business Group 7% 1%
International Business
Group 21% 12%
</TABLE>
Financial information on our segments for the three years ended September
30, 2000, is presented in Note 20 of the Notes to Consolidated Financial
Statements, which are included under Item 8 of this Form 10-K.
----------------
* Roundup(R) is a registered trademark of Monsanto Company (now known as
Pharmacia Corporation).
----
2
<PAGE> 3
NORTH AMERICAN CONSUMER BUSINESS GROUP
PRODUCTS
Scotts' consumer products include: lawn fertilizers, lawn fertilizer
combination products and lawn control products, garden tools, walk-behind and
riding mowers, grass seed, lawn spreaders and lawn and garden carts; garden and
indoor plant care products; potting soils and other growing media products; and
pesticides (including herbicides, insecticides and fungicides).
CONSUMER LAWNS PRODUCTS. Among Scotts' most important consumer products are
lawn fertilizers, such as Scotts Turf Builder(R), and lawn fertilizer
combination products, such as Scotts Turf Builder(R) with Plus 2(R) Weed Control
and Scotts Turf Builder(R) with Halts(R) Crabgrass Preventer. Typically, these
are patented, homogeneous, controlled-release products which provide complete
controlled feeding for consumers' lawns for up to two months without the risk of
damage to the lawn presented by less expensive controlled- and
non-controlled-release products. Some of Scotts' products are specially
formulated for geographical differences and some, such as Bonus(R) S (to control
weeds in Southern grasses), are distributed to limited areas. Lawn control
products prevent or control lawn problems and contain no fertilizer component.
These control products include Scotts(R) Halts(R) Crabgrass Preventer and
GrubEx(R) Season Long Grub Control. Scotts' lawn fertilizers, combination
products and control products are sold in dry, granular form.
Scotts also sells numerous varieties and blends of high quality grass seed,
many of them proprietary, designed for different uses and geographies. Our grass
seed is sold under the Scotts Pure Premium(TM) and Scotts Quality lines.
Because Scotts' granular lawn care products perform best when applied
evenly and accurately, we sell a line of lawn spreaders specifically
manufactured and developed for use with our products. For fiscal 2000, this line
included three sizes each of SpeedyGreen(R) rotary spreaders and of AccuGreen(R)
drop spreaders, and the HandyGreen(R) II hand-held rotary spreaders, all
marketed under the Scotts(R) brand name. Management estimates that for the
period from January through August 2000, Scotts' share of the U.S.
do-it-yourself consumer lawn fertilizer and combination products, grass seed
(includes PatchMaster(R) products) and spreaders market was approximately 52%.
Spreaders and lawn and garden carts are manufactured by our Republic Tool
subsidiary.
Under a royalty-bearing licensing agreement, we have granted Union Tools,
Inc. the right to produce and market a line of garden tools bearing the
Scotts(R) trademark. We also have a royalty-bearing licensing agreement with
American Lawn Mower Company for the production and marketing of a line of
push-type walk-behind lawn mowers bearing the Scotts(R) trademark. Also, Scotts
is a party to a licensing agreement with Home Depot U.S.A., Inc. and a number of
manufacturers under which, in return for the payment of royalties, Home Depot
markets a line of motorized, walk-behind lawnmowers and tillers bearing the
Scotts(R) trademark. These products are sold exclusively through Home Depot
retail stores. We do not believe that Scotts had a material share of the markets
for these products in fiscal 2000.
Our OMS Investments, Inc. subsidiary is a party to another royalty-bearing
licensing agreement with Home Depot and Deere & Company, under which Home Depot
markets a line of high quality, riding/tractor lawnmowers bearing the Scotts(R)
trademark, with the mowers currently manufactured by Deere. These mowers are
sold exclusively through Home Depot retail stores in Canada and the United
States.
The Consumer Lawns Business Group has used Scotts(R) and Miracle-Gro(R)
consumer brand recognition to market "Scotts LawnService(R)". Scotts
LawnService(R) provides applications of lawn fertilizer and control products,
and tree/shrub care services. Through fiscal 2000, Scotts LawnService(R)
serviced 11 markets and had 22 franchised outlets. The fiscal 2001 strategy will
be to: expand the business aggressively within existing markets; enter into a
few new markets through both company-owned and franchised operations; and make
selective acquisitions of suitable lawn service companies.
CONSUMER GARDENS PRODUCTS. Scotts sells a complete line of water-soluble
fertilizers under the Miracle-Gro(R) brand name. These products are primarily
used for garden fertilizer application. We also produce and sell a line of boxed
Scotts(R) plant foods, garden and landscape fertilizers, Osmocote(R)
controlled-release garden fertilizers, hose-end feeders and houseplant
fertilizer products.
The Consumer Gardens Business Group markets and distributes what we believe
to be the country's leading line, by market share, of water-soluble plant foods.
These products are designed to be dissolved in
----
3
<PAGE> 4
water, creating a dilute nutrient solution which is poured over plants or
sprayed through an applicator and rapidly absorbed by their roots and leaves.
Miracle-Gro(R) All-Purpose Water-Soluble Plant Food is the leading product
in the Miracle-Gro(R) line, by market share. Other water-soluble plant foods in
the product line include Miracid(R) for acid loving plants, Miracle-Gro(R) for
Roses, Miracle-Gro(R) for Tomatoes, Miracle-Gro(R) for Lawns and Miracle-Gro(R)
Bloom Booster(R) for flowers. This group also sells a line of hose-end
applicators for water-soluble plant foods, through the Miracle-Gro(R) No-Clog-4
in 1(R) Garden and Lawn Feeder line, which allows consumers to apply
water-soluble fertilizers to large areas quickly and easily with no mixing or
measuring required. The Consumer Gardens Business Group also markets a line of
products for houseplant use including Liquid Miracle-Gro(R), African Violet
Food, Plant Food Spikes, Leaf Shine and Orchid Food.
We believe that for the period from January through August 2000, Scotts'
share of the garden fertilizer market was 62%, and its share of the indoor plant
foods market was approximately 33%.
CONSUMER GROWING MEDIA PRODUCTS. The Consumer Growing Media Business Group
sells a complete line of growing media products for indoor and outdoor uses
under the Miracle-Gro(R), Scotts(R), Hyponex(R) and Earthgro(R) brands, and
other labels. These products include retail potting soils, garden soils,
topsoil, manures, sphagnum peat and decorative barks and mulches.
We believe that for the period from January through August 2000, we had
approximately a 54% market share of the consumer potting soil market, and
approximately a 67% market share of the consumer garden soil market.
CONSUMER ORTHO PRODUCTS. The Consumer Ortho Business Group markets weed
control, insect control and plant disease control products under the Ortho(R)
brand name. The Ortho(R) product line includes over 150 different items that
solve outdoor pest problems faced by consumers. Ortho(R) products are available
in aerosol, liquid ready-to-use, concentrated, granular and dust forms in a wide
variety of sizes and delivery systems.
The Consumer Ortho Business Group's weed control products are led by the
Weed-B-Gon(R) herbicide -- which we believe is the leading selective consumer
herbicide brand in the United States, by market share. In addition, the Consumer
Ortho Business Group sells products in the brush control segment
(Brush-B-Gon(R)) and total vegetation control segment (Triox(R)) of the weed
control market.
The Consumer Ortho Business Group markets insect control products for
outdoor and indoor use. Outdoor insect control products include general insect
control under the Ortho(R), Bug-B-Gon(R), Diazinon Ultra(R), Diazinon Plus(R),
Malathion 50 Plus(R), Isotox(R) and Orthene(R) brand names. Because consumer
satisfaction depends on easy and accurate application of these products, this
group also markets a line of applicators under the Ortho(R), Lock 'N Spray(R),
Spray-ette(R), Dial 'n Spray(R), Whirlybird(R) and Pull 'N Spray(R) brands.
The Ortho(R) outdoor line also includes specialty insect control products
under the Ortho(R), RosePride(R), Ortho-Klor(R), Ant-Stop(R) and Orthene(R) Fire
Ant control brands. Specialty outdoor products include a line of snail and slug
controls under the Bug-Geta(R) and Bug-Geta(R) Plus brand names. There is also a
line of indoor insect control products under the Ortho(R) Home Defense(R),
Flea-B-Gon(R) and Ant-Stop(R) brand names.
Separately, the Ortho(R) product line includes items that control common
diseases on lawns, roses, ornamental and vegetable gardens, and sensitive trees
and shrubs. Several of these disease control products also control insects.
These products are sold under the Ortho(R), Orthenex(R), Funginex(R) (owned by
American Cyanamid Company) and Daconil 2787(R) (owned by GB Biosciences
Corporation) brand names. The group also markets a limited line of fertilizers
under the Greensweep(R) and Up-Start(R) brands.
The Ortho(R) product line is typically formulated with proprietary active
ingredients sourced from some of the world's largest agricultural and specialty
chemical manufacturers. A number of the packaging systems used in the line are
unique, including the Pull 'N Spray(R) system and Lock 'N Spray(R) hose-end
dispensing system.
We believe that for the period from January through August 2000, brands
marketed by this group had a combined share of the U.S. consumer lawn and garden
control products segment of approximately 47%.
----
4
<PAGE> 5
This group also acts as the exclusive agent to market and manage Monsanto's
(now Pharmacia's) consumer Roundup(R) brand of non-selective weed control
products in the United States. Roundup(R) is sold in aerosol, liquid
ready-to-use, concentrated and super-concentrated forms. We believe Roundup(R)
is the leading brand of consumer non-selective weed control products, by market
share, in the United States, Germany, France, Australia, Denmark, Sweden, Norway
and Belgium. See "Matters Relating to Scotts Generally -- Roundup Marketing
Agreement, -- Commission Structure, -- Term, -- Termination, -- Termination
Fee, -- Sale of Roundup and -- Marketing Fee."
CONSUMER CANADA. For fiscal 2000, Scotts established a separate business
office in Canada to manage and further develop the Green Cross(R) brand of
pesticide products there, and to integrate Scotts' lawns, gardens and growing
media businesses with the Green Cross(R) business acquired in the acquisition of
the consumer Ortho business in January 1999. This office operates as Scotts
Canada Ltd.
MARKET
We believe that our leading market share position in the U.S. consumer
do-it-yourself lawn care and garden markets has been the result of our strong
marketing and advertising programs, sophisticated technology, the superior
quality and value of our products and service provided to customers. Scotts
seeks to maintain and expand its market position by emphasizing these qualities
and taking advantage of the name and reputation of its many strong brands such
as Scotts(R), Miracle-Gro(R), Ortho(R) and Hyponex(R).
We have the leading market share in the lawn, garden and growing media
sections of the growing lawn and garden market. Census data indicates that the
consumer segment age of 40 and older, who represent the largest group of lawn
and garden product users, will grow by 18% from 2000 to 2010, a growth rate more
than twice that of the total population.
Drawing upon our strong research and development capabilities, we intend to
continue to develop and introduce new and innovative lawn and garden products.
We believe that our ability to introduce successful new consumer products has
been an important element in our growth. New consumer products in recent years
include:
FISCAL 1998
the No-Clog-4 in 1(R), which allows for sprinkler feeding of fertilizer
for gardens and lawns; a new line of potting mix and soil amendment
products under the Miracle-Gro(R) brand; and an expanded assortment of
professional nursery quality potting mixes for consumers under the
Scotts Pro Gro(R) brand
FISCAL 1999
Miracle-Gro(R) Flower Seeding Mix, a pre-mixed combination of flower
seed, fertilizer and mulch; Miracle-Gro(R) Bloom Booster(R), a
fertilizer for flowers; and three varieties of Miracle-Gro(R) Tree and
Shrub Fertilizer Spikes, a fertilizer for outdoor trees and shrubs
FISCAL 2000
Turf Builder(R) with Micromax(R) micronutrients; the Pure Premium(TM)
line of Scotts(R) grass seed for consumer use; Miracle-Gro(R) Garden
Weed Prevent and Miracle-Gro(R) Garden Weed Prevent and Plant Food,
which contain a pre-emergent herbicide for outdoor gardening; and a
premium line of outdoor garden soils under the Miracle-Gro(R) brand.
In fiscal 2001, we plan to introduce: a premium Turf Builder(R) grass seed,
marketed exclusively by North America's largest home center organization;
Miracle-Gro(R) water-soluble plant food for Azaleas, Camellia and Rhododendrons;
Miracle-Gro(R) Moisture Control(TM) Potting Mix, a premium potting mix that
retains water for a longer period of time; Miracle-Gro(R) Enriched Sphagnum Peat
Moss, a premium peat moss product; and a line of improved indoor aerosol pest
control products under the Ortho(R) brand.
Scotts also seeks to capitalize upon the competitive advantages stemming
from our market share positions and ability to act as a nationwide supplier of a
full line of consumer lawn and garden products. We believe that this gives us an
advantage in selling to retailers, who value the efficiency of dealing with a
limited number of suppliers with high-recognition consumer brands.
----
5
<PAGE> 6
During fiscal 2000, Scotts continued to strengthen its relationship with
key retailers by maintaining business development teams at Home Depot, Kmart,
Lowe's, Wal*Mart, the U.S. military and hardware co-operatives. The business
development teams work closely with these retailers, who represent 78% of the
sales volume for the North American Consumer Business Group. The teams assist in
all areas of business including category management, best practices development,
product mix, merchandising, shelving and pricing. Additionally, Scotts is a
source of consumer data that assists retailers in identifying retail trends,
which can lead to increased store sales.
Scotts formed a North American sales management integration team in fiscal
2000 to coordinate customer programs, customer service and retailer education
programs, offered by all business groups within the North American Consumer
Business Group. For fiscal 2001, this team will integrate sales, merchandising
and in-store counseling efforts across all of these business groups.
MARKETING, PROMOTION AND BUSINESS STRATEGY
For fiscal 2000, Consumer Lawns products were sold by an approximate
100-person direct sales force to the headquarters of national, regional and
local retail chains. This sales force, most of whom have college degrees and
prior sales experience, also recruited and supervised approximately 335 seasonal
part-time merchandisers and 65 part-time year-round merchandisers in connection
with Scotts' emphasis on in-store retail merchandising of lawn and garden
products, a strategy Scotts intends to continue for fiscal 2001. Most retail
sales of Scotts' lawn products occur on weekends during the spring and fall. The
Consumer Lawns Business Group also employs distributors on a selective basis.
For fiscal 2000, the Consumer Gardens Business Group utilized a 10-person
sales force for sales to a network of hardware and lawn and garden wholesale
distributors, with some sales made directly to retailers. Most retail sales of
Consumer Gardens products occur on or near weekends during Spring and early
Summer. For fiscal 2000, the sales force for Consumer Gardens and Ortho(R)
products were combined in some geographic areas, for sales to retail home center
stores.
For fiscal 2000, the Consumer Growing Media Business Group utilized a
20-person direct sales force to cover the headquarters of national and regional
chains, local accounts of significant size and distributors who sell to smaller
accounts. The Consumer Growing Media Business Group's sales force hired and
directed a network of outside merchandising service companies to provide
seasonal in-store retail merchandising and re-order support on a national basis.
Most retail sales of Consumer Growing Media commodity landscape products occur
on weekends during late spring, while value-added products sell year-round.
For fiscal 2000, Ortho(R) and Roundup(R) branded products were sold to the
headquarters of the largest 25 retail customers through an approximate
120-person direct sales force, who worked with the Consumer Ortho Business
Group's largest customers to secure retail placement for Ortho(R) and Roundup(R)
brands as well as ongoing promotional and cooperative advertising support. This
sales force recruited and supervised approximately 90 seasonal part-time
merchandisers and 100 part-time year-round merchandisers.
Prior to fiscal 2000, Ortho(R) and Roundup(R) products were distributed
under an exclusive distribution agreement with Central Garden & Pet Company.
Scotts assumed the agreement with Central Garden as part of the Ortho
acquisition in January 1999. After the Central Garden agreement expired in
September 1999, Scotts began distributing Ortho(R) and Roundup(R) products in a
manner similar to its other lawn and garden products. This system involved a
combination of distributors, of which the largest was Central Garden, as well as
direct sales by Scotts to some major retailers. For fiscal 2001, Scotts has
terminated its distribution arrangement with Central Garden, and structured a
new distribution network for all North American business groups, in which Scotts
will take orders from, and distribute and ship directly to or indirectly through
regional distribution centers to, major retail customers. See "Matters Relating
to Scotts Generally -- Distribution".
The Consumer Lawns Business Group continues to support independent
retailers with a special line of products, marketed under the Lawn Pro(R) name.
These products include the 4-Step program, introduced in 1984, which encourages
consumers to purchase four products at one time (fertilizer plus crabgrass
preventer, fertilizer plus weed control, fertilizer plus insect control and a
special fertilizer for fall application). Scotts promotes the 4-Step program as
providing consumers with all their annual lawn care needs for, on average, less
than one-third of what a lawn care service would cost. Scotts believes the
----
6
<PAGE> 7
Lawn Pro(R) program has helped Scotts to grow its business with independent
retailers while they face increasing competition from mass merchandisers and
home improvement centers. The Consumer Growing Media Business Group similarly
markets a special line of growing media products under the 1881 Select(R) label,
to independent retailers on a regional basis.
Scotts supports its sales efforts with extensive advertising and
promotional programs, in furtherance of a consumer "pull" marketing strategy.
Advertising primarily airs on national and regional television and radio
programming with supplemental efforts in key markets via spot TV, radio and
print. Because of the importance of the spring sales season in the marketing of
consumer lawn and garden products, Scotts focuses advertising and promotional
efforts on this period. In addition to creating product awareness, advertising
and other promotional efforts encourage consumers to make their lawn and garden
purchases in the early months of spring to moderate weather-related risk. The
Consumer Lawns Business Group also utilizes radio and television advertising to
build consumer product usage in the Fall, a recommended time to plant grass seed
and plants. That group also promotes a Turf Builder(R) annual program, which
encourages consumers to purchase their entire year's supply of Turf Builder(R)
products in early spring, for application in the early spring, late spring,
summer and fall. Advertising and retail customer promotional efforts, including
feature displays, coincide with periods of high seasonal demand.
The percentage of North American Consumer Business Group sales to mass
merchandisers, warehouse-type clubs, home improvement centers and large buying
groups continues to increase as a percentage of sales. The top ten accounts
(which include two buying groups of independent retailers) represented 79% of
the North American Consumer Business Group sales in fiscal 1999 and 80% in
fiscal 2000.
An important part of Scotts' sales effort is its national toll-free
Consumer Helpline, on which its Consumer Service consultants answer questions
about Scotts' products and give general lawn and garden advice to consumers.
With the fiscal 1999 Ortho acquisition, the Consumer Services divisions at
Scotts and Ortho were integrated. Scotts' consultants responded to approximately
810,000 telephone and written inquiries in fiscal 2000.
Backing up Scotts' marketing effort is its well-known Scotts No-Quibble
Guarantee(R), instituted in 1958, which promises consumers a full refund if for
any reason they are not satisfied with the results after using Scotts' lawn,
garden and growing media products. Refunds under this guarantee have
consistently amounted to less than 0.4% of net sales for the North American
Consumer Business Group on an annual basis.
Scotts has an Internet web site at www.scottscompany.com, which provides
lawn care and gardening information for consumers, and special sections for the
North American Professional Business Group's customers, along with corporate and
investment information. Do-it-yourself consumer topics include basic lawn care
and gardening tips, problem solving, frequently asked questions, houseplant
care, landscaping with trees and shrubs and product guides. An arrangement with
the National Gardening Association (NGA) provides access to a database of
gardening questions with answers by NGA's staff horticulturists. The site also
provides an e-mail link to Scotts' Consumer Helpline for answers to lawn care
questions. The Professional Horticulture section points nursery and greenhouse
growers to their nearest distributor, delivers the latest news from the
Professional Horticulture business of Scotts, and directs users to customer
service. For the period from January through September 2000, the site received
approximately 2 million user sessions and 39,000 e-mails to Scotts' Consumer
Helpline. This represents increases of 176% for the number of user sessions, and
120% for the number of e-mails, over the same period in 1999. A Lawn Care E-Mail
Reminder Service was added to the site in March, with 90,000 homeowners
registering for the service in the first seven months.
The fiscal 2001 marketing strategies for the Consumer Lawns Business Group
are to continue the efforts begun in prior years to improve Scotts' relationship
with consumers and retail customers, including: carefully directed consumer
research, to increase understanding of its markets, sales trends and consumer
needs; increased media advertising, with continuation of television advertising
featuring real-life stories of individuals' experiences with Scotts(R) products,
and of weekend radio advertising emphasizing that "this weekend" is the best
time to apply selected Scotts products; simplification of the product line;
addressing "just-in-time" customer purchasing through continued use of the
"never-out" program by which Scotts builds pre-season inventory of select
high-volume products, which enhances Scotts' ability to timely and
----
7
<PAGE> 8
completely fill customer orders; and use of retail merchandisers to enhance
communications with consumers at the point of sale.
The fiscal 2001 marketing strategies for the Consumer Gardens Business
Group are to continue: the conducting of consumer and market research to analyze
consumer attitudes and purchase decisions; implementation of packaging
improvements and graphic re-design; cost-reduction and quality enhancement
efforts throughout all product lines; and increased national network television
advertising. Growth is expected by increasing the frequency of use among current
users.
The fiscal 2001 strategy for the Consumer Growing Media Business Group is
to expand its market share of the potting soil and garden soil markets and
increase the size of these markets, while maintaining a network of low-cost
production facilities for the more commodity-oriented products such as topsoil,
manures and barks/mulches. Scotts expects to grow its share of the potting and
garden soil markets by: developing products and national marketing programs
which utilize its Miracle-Gro(R) and Scotts(R) brand names on high-quality,
higher margin growing media products such as potting mixes, with innovative and
consumer-preferred packaging; expanding distribution of these products; and
conducting consumer research to better understand market needs.
The fiscal 2001 strategy for the Consumer Ortho Business Group is to
increase the size of the markets in which it competes and to capture a share of
this growth greater than its market share, through: the effective use of media
advertising; improved product availability and consumer communication at retail
point-of-purchase; and product and packaging improvements to make the products
easier to apply with good results. Growth is expected by attracting new users to
the categories and by increasing the frequency of use among current users.
COMPETITION
The consumer lawn and garden market is highly competitive. Consumers have a
choice of do-it-yourself lawn care or use of a lawn service. In the
do-it-yourself lawn care and consumer garden markets, Scotts' products compete
primarily against "control-label" products produced by various suppliers and
sold by such companies as Home Depot (Vigoro(R)), Lowe's (Sta-Green(R)),
Wal*Mart (Sam's American Choice(R)), and Kmart (KGro(R)). "Control-label"
products are those sold under a retailer-owned label or a supplier-owned label,
which are sold exclusively at a specific retail chain. These products compete
across the entire range of Scotts' consumer product line. Some of Scotts'
consumer products compete against nationally distributed branded fertilizers,
pesticides and combination products marketed by such companies as United
Industries Corporation (Peters(R) water-soluble fertilizers for the consumer
market), Pursell Industries (Vigoro(R), Sta-Green(R)), the Bayer/Pursell
Industries joint venture (Advanced Garden(TM), Advanced Lawn(TM)), Central
Garden & Pet (Pennington(R) Seed), Lesco (Lesco lawn fertilizers), Schultz Co.
(Schultz(R) garden fertilizers and potting soils) and Lebanon Chemical Corp.
(Greenview(R) and Preen(R)). Competitors in Canada include The Nu-Gro
Corporation, So Green and IMC Vigoro.
Based on current usage and attitude surveys, management estimates that
approximately 15% of all homeowners with lawns use a lawn service. The most
significant competitors for the consumer market which uses a lawn service are
lawn care service companies. Tru Green-ChemLawn(R), a division of Service
Master, is the major national lawn service provider. Service Master is
significantly larger than Scotts.
Most competitors to the Consumer Lawns and Consumer Gardens Business Groups
sell their products at prices lower than those of Scotts, with the exception of
lawn care service companies. Scotts competes primarily on the basis of its
strong brand names, consumer advertising campaigns, quality, value, service,
convenience and technological innovation. Scotts' competitive position is also
supported by its national sales force and its unconditional guarantee.
In addition to nationally distributed, branded competitive products,
Scotts' Consumer Growing Media Business Group faces competition from regional
competitors who are able to compete very effectively on the basis of price for
commodity products.
The Consumer Ortho Business Group operates in highly competitive markets
against a large number of national and regional brands as well as
retailer-supported private or "control" labels. Given the large number of
distinct market segments and product types coupled with limited shelf space,
retailer customers often are forced to limit listings in any one product to two
or three manufacturers. This typically means
----
8
<PAGE> 9
one to two national brands, a regional brand and/or a private label offering.
Ortho's principal national competitors include: United Industries Corporation
(Spectracide(R), Hot Shot(R)), the Bayer/Pursell Industries joint venture
(Advanced Garden(TM), Advanced Lawn(TM) pesticide line), Central Garden
(Amdro(R)) and Enforcer Products, Inc. (Enforcer(R)). Regional competitors
include: The Chas. H. Lilly Co. (Lilly-Miller(R)), Green Light Company (Green
Light(R)), Sunnyland, Bonide Products, Inc. (Bonide(R)) and Farnam Companies,
Inc. (Security(R) and Finale(R)). Customers with significant private label
programs include: Wal*Mart, Kmart, Home Depot, Lowe's, TruServ and Ace Hardware.
Roundup(R) competitors include United Industries Corporation
(Spectracide(R)), Enforcer Products, Inc. (Enforcer(R)), Farnam Companies, Inc.
(Security(R) and Finale(R)) and private label products.
No assurance is given that new or existing competitors will not erode
Scotts' share of the consumer lawn and garden market and its profit margins in
the future.
BACKLOG
For fiscal 2000, the majority of annual consumer product orders were
received from retailers during the months of October through April and were
shipped during the months of January through April. For fiscal 2001, direct
distribution to retailers by Scotts is expected to shift order placement by
retailers to the months of December through April for delivery during the months
of January through May. As of November 24, 2000, orders on hand for retailers
(includes orders for Consumer Growing Media products) totaled approximately
$14.2 million compared to approximately $67.1 million on the same date in fiscal
1999 (excludes Consumer Growing Media products, which, before fiscal 2000, and
the introduction of nationally-distributed, branded products, were normally
ordered in-season on an "as-needed" basis). All such orders are expected to be
filled in fiscal 2001.
NORTH AMERICAN PROFESSIONAL BUSINESS GROUP
MARKET
Scotts sells its professional products to commercial nurseries,
greenhouses, landscape services and specialty crop growers. Our Professional
Business Group's core business is Horticulture, in primarily the nursery and
greenhouse markets. Professional customers are major commercial
nursery/greenhouse operations such as Monrovia, Hines, Imperial, Flowerwood,
McCorkle's and Baucom's. This group's other core business, North American
ProTurf(R), the professionally managed turf market, was sold to The Andersons,
Inc. in the United States and to The Nu-Gro Corporation in Canada, in May 2000.
Under the sale agreements, the buyers acquired the rights to selected
professional turf trademarks and product inventories. The parties entered into a
supply agreement under which Scotts will use its proprietary manufacturing
processes to produce value-added turf products for the buyers. Of the 36
employees working primarily in the ProTurf(R) business, 33 remained with the
business and became employees of the new owners.
For fiscal 2001, the Professional Business Group will be renamed the North
American Horticulture Business Group, and become part of the Worldwide
Professional Group.
Scotts sells products to thousands of nursery, greenhouse and specialty
crop growers through a network of approximately 75 horticultural distributors.
We estimate that our leading market share of the North American horticultural
market was approximately 28% in fiscal 2000.
We believe that the increasing acceptance of controlled-release fertilizers
in horticultural/agricultural applications due to performance advantages, labor
savings and water quality concerns should contribute to sales growth in the
horticulture market. However, competitive product technologies may also make
inroads into the horticultural markets.
PRODUCTS
Our professional horticultural products, marketed under such brand names as
Aqua-Gro(R) (owned by Aquatrols Corporation of America, Inc.), Osmocote(R),
Miracle-Gro(R), Metro-Mix(R), Banrot(R), Rout(R) and Peters(R), include a broad
line of sophisticated controlled-release fertilizers, water-soluble fertilizers,
pesticide products (herbicides, insecticides and fungicides), wetting agents and
growing media products. The fertilizer lines utilize a range of proprietary
controlled-release fertilizer technologies, including Poly-S(R),
----
9
<PAGE> 10
Osmocote(R) and ScottKote(R), and patented, proprietary water-soluble fertilizer
technologies, including Miracle-Gro Excel(R). Scotts applies these technologies
to meet a wide range of professional customer needs, ranging from quick-release
greenhouse fertilizers to extended-release nursery fertilizers that last up to a
year or more.
To secure uninterrupted supply and consistent costs of raw materials, the
Horticulture group has entered into alliances with suppliers. Scotts works
closely with basic pesticide manufacturers to secure access to, and if possible,
exclusive positions on, advanced control chemistry which can be formulated on
granular carriers or formulated as a liquid application. In fiscal 1998, Scotts
signed an agreement with AgrEvo USA Company for the exclusive domestic
distribution rights to various AgrEvo active ingredients for the professional
horticulture market. These active ingredients were used to create Scotts(R)
branded fungicides and insecticides such as Contrast(TM), Closure(TM) and
Ovation(TM), three new products launched in fiscal 1999 and 2000. This agreement
is currently the subject of litigation. See "ITEM 3. LEGAL PROCEEDINGS." Scotts
expects the plant protection product group to represent up to 15% of
Horticulture sales by fiscal 2002.
The professional horticulture line also includes an established line of
soil-less mixes in which controlled-release and control products, and
water-soluble fertilizers and wetting agents, can be incorporated or applied,
respectively, to customize potting media for nurseries and greenhouses.
BUSINESS STRATEGY
Our North American Professional Business Group focuses sales efforts on the
middle and high ends of the professional market and generally does not compete
for sales of commodity products. Demand for Scotts' professional products is
primarily driven by product quality, performance and technical support. Scotts
seeks to meet these needs with a range of sophisticated, specialized products
and technically competent sales personnel and managers to service customers with
recommendations and advice.
A primary focus of the North American Professional Business Group's
strategy is to provide innovative high-value products to its professional
horticultural customers. For fiscal 2000, in the horticulture market, the group
continued its expansion into the market with Osmocote(R) Pro, a modification of
Osmocote(R) timed-release fertilizer with IBDU fertilizer for U.S. markets,
which was a result of a marketing agreement reached with Nu-Gro, Inc. Scotts'
fertilizer technology is expected to lead to further new combination product
introductions in fiscal 2001 and beyond.
MARKETING AND PROMOTION
For fiscal 2000, the North American Professional Business Group's
horticultural sales force consisted of approximately 30 territory managers. Most
territory managers have degrees in agronomy, horticulture or similar
disciplines, and are well regarded in the industry. Several hold advanced
degrees. Territory managers work with greenhouse and nursery managers and other
landscape professionals. In addition to marketing Scotts' products, Scotts'
territory managers provide consultation, testing services and advice regarding
maintenance practices, including individualized comprehensive programs
incorporating various products for use at specified times throughout the year.
The North American Professional Business Group is served through a network of
distributors.
To reach potential purchasers, Scotts uses trade advertising and direct
mail and sponsors seminars throughout the country. In addition, Scotts maintains
a special toll-free number for its professional customers. The professional
customer service department responded to over 50,000 telephone inquiries in
fiscal 2000 (excludes calls for the ProTurf(R) business, which was sold in May
2000).
COMPETITION
In the professional horticulture markets, Scotts faces a broad range of
competition from numerous companies ranging in size from multi-national chemical
and fertilizer companies such as DowAgroSciences Company, Uniroyal and
Chisso-Asahi, to smaller specialized companies such as Pursell Technologies,
Inc., SunGro (a Division of Hines Horticultural), and Fafard, which are local
fertilizer and soil manufacturers and blenders. In addition, the higher margins
available for sophisticated products to treat high-value crops continue to
attract large and small chemical producers and formulators, some of which have
significant financial resources and research departments. The influence of mass
merchandisers, with significant
----
10
<PAGE> 11
buying power, has increased the cost consciousness of horticulture growers who
sell much of their production volume through mass merchandisers, to the
consumer. While Scotts believes that its reputation, ornamental market focus,
expertise in product development and sales and distribution network should
enable it to continue to maintain and build its share of the professional
market, there can be no assurance that we will be able to maintain market share
or margins against new or existing competitors.
BACKLOG
A large portion of professional horticultural product orders is received
during the months of November through March and is filled during the months of
December through May. As of November 24, 2000, orders on hand from professional
horticultural customers totaled approximately $9.5 million compared with $10.0
million on the same date in 1999. All of these orders are expected to be filled
in fiscal 2001.
BRANDED PLANTS BUSINESS SUBGROUP
In May 2000, the Branded Plants Business subgroup was formed within the
North American Professional Business Group to develop the green goods market
segment, which includes turf, seeds, annual and perennial flowers, cut flowers,
shrubs and ground covers. The subgroup's focus is on development of superior
turf and ornamental plants through both conventional and biotech breeding
methods. See "Matters Relation to Scotts Generally -- Research and Development".
Potential sales of branded plants to consumers through retail channels, and
sales of turf seeds to professional horticultural customers, are also managed by
this subgroup. For fiscal 2001, this subgroup will become a business unit within
the North American Consumer Business Group. This subgroup is not expected to
generate significant product sales until fiscal 2004. However, action or
inaction by governmental regulatory agencies could significantly or permanently
delay or inhibit bringing these products to market.
INTERNATIONAL BUSINESS GROUP
MARKET
The International Business Group regularly sells its products to both
consumer and professional users in over 40 countries. We believe that growth
potential should exist in both markets. This group also manages and markets
consumer Roundup(R) internationally. We have established business entities in
the markets with significant potential, which include Australia, the United
Kingdom, the Benelux countries, Germany, France, Spain and Italy.
Consumer lawn and garden products are sold under Scotts' various
trademarks, including the Scotts(R) label, in Australia, the European Union, New
Zealand and South America. In addition, products bearing the Miracle-Gro(R)
trademark are marketed in the Caribbean, Australia, New Zealand, the Netherlands
and the United Kingdom. Scotts' Hyponex(R) line of products is present in Japan
as a result of a long-term agreement with Hyponex Japan Corporation, Ltd., an
unaffiliated entity.
Professional markets include both the horticulture and turf industries. The
International Business Group markets professional products in Africa, Australia,
the Caribbean, the European Union, Japan, Latin America, Mexico, the Middle
East, New Zealand, South America and Southeast Asia. Horticultural products
mainly carry the Scotts(R), Sierra(R), Peters(R) and Osmocote(R) labels. Turf
products primarily use the Scotts(R) trademark.
Consumer products are sold by an approximate 200-person sales force and
professional products are sold by an approximate 94-person sales force.
We believe that we have leading market share positions in the United
Kingdom in a number of lawn and garden market categories. Our major consumer
brands there include Miracle-Gro(R) plant fertilizers, Weedol(R) and
Pathclear(R) herbicides, EverGreen(R) lawn fertilizer, Levington(R) growing
media, and Bug Gun(R) insecticides.
We believe that Scotts is continental Europe's largest producer of consumer
lawn and garden products. We manufacture and sell a full line of consumer lawn
and garden pesticides, fertilizers and growing media in France, Germany, the
Benelux countries, Austria, Italy and Spain. Brands include KB(R) and
Fertiligene(R) in France; Celaflor(R) and NexaLotte(R) in Germany; and ASEF in
the Netherlands.
----
11
<PAGE> 12
In October 1998, we acquired from an agency of the Irish government, Bord
na Mona, plc, the Shamrock(TM) trademark, a brand used to market peat products
in the United Kingdom and Ireland. We also acquired the rights to a
horticultural peat supply agreement with Bord na Mona as supplier, which
included an option to supply the Shamrock(TM) brand of peat in continental
European markets. Under the agreement, Bord na Mona will mix and package peat
and other growing media products for Scotts. This acquisition secures our access
to high quality peat resources for both the consumer and professional markets in
the United Kingdom and Ireland. In March 2000, we exercised the above option and
completed the purchase of the exclusive worldwide distribution rights for
horticultural peat and peat products manufactured by Bord na Mona. Under the
terms of the new long term supply agreement (which replaced the original
agreement), we will market and distribute a range of peat-based products,
manufactured and packaged by Bord na Mona, throughout Europe and the rest of the
world. Currently, the products are marketed in the professional grower sector.
We also intend to use the peat to supply our consumer growing media business in
Europe.
In fiscal 1999, in connection with efforts to successfully integrate
several acquisitions, we divided management of our international operations into
four zones, as follows: Zone 1 (the consumer business in the United Kingdom and
Ireland); Zone 2 (the consumer business in France, Belgium and Holland); Zone 3
(the consumer business in Germany, Austria and Australia); and Zone 4 (the
professional business). For fiscal 2001 going forward, the international
consumer and professional businesses will be divided into two new groups,
Worldwide Professional and International Consumer. The Worldwide Professional
Group will include the North American Horticulture Business subgroup.
BUSINESS STRATEGY
A significant portion of Scotts' sales and earnings is derived from
customers in foreign countries. The headquarters office for the International
Business Group is located near Lyon, France, in Ecully. The Professional
subgroup of the International Business Group maintains a separate office in
Waardenburg, Netherlands. Scotts' managers travel abroad regularly to visit its
facilities, distributors and customers. Scotts' own employees manage its affairs
in Europe, Australia, Malaysia, Mexico, Brazil and the Caribbean. The
International Business Group plans to further develop its international business
in both the consumer and professional markets. We believe that the technology,
quality and value that are widely associated with our domestic and acquired
brands should be transferable to the global marketplace.
We believe the International Business Group is positioned to obtain an
increased share of the international market. We have a broad, diversified
product line made up of value-added fertilizers which can be targeted to the
market segments of consumer, turf, horticulture and high value agricultural
crops. Also, we have the capability to sell worldwide through our extensive
distributor network. However, there can be no assurance that we can maintain
market share or margins against new or existing competitors, or that we can
obtain an increased share of the international market.
Any significant changes in international economic conditions,
expropriations, changes in taxation and regulation by U.S. and/or foreign
governments could have a substantial effect upon the international business of
Scotts. We believe, however, that these risks are not unreasonable in view of
the opportunities for profit and growth available in foreign markets. Our
international earnings and cash flows are subject to variations in currency
exchange rates, which derive from sales and purchases of our products made in
foreign currencies. For a discussion of how Scotts manages its foreign currency
rate exposure, see "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
COMPETITION
The International Business Group's consumer business faces strong
competition in the lawn and garden market, particularly in Australia and the
European Union. The lead competitor in Australia is Yates. Competitors in the
European Union include Bayer, COMPO (Kali und Salz) and various local companies.
We have historically responded to competition with superior technology,
excellent trade relationships, competitive prices, broad distribution and strong
advertising and promotional programs.
The international professional market is very competitive, particularly in
the controlled-release and water-soluble fertilizer segments. Numerous U.S. and
European companies are pursuing these segments
----
12
<PAGE> 13
internationally, including Pursell Industries, Lesco, COMPO, Norsk Hydro, Haifa
Chemicals, Kemira and private label companies. Historically, our response to
competition in the professional markets has been to adapt our technology to
solve specific user needs which are identified by developing close working
relationships with key users.
MATTERS RELATING TO SCOTTS GENERALLY
ROUNDUP MARKETING AGREEMENT
On September 30, 1998, Scotts entered into an agency and marketing
agreement with Monsanto Company (now known as Pharmacia Corporation) and became
Monsanto's exclusive agent for the marketing and distribution of consumer
Roundup(R) products in the consumer lawn and garden market within the United
States and other specified countries, including Australia, Austria, Canada,
France, Germany and the United Kingdom. In addition, if Monsanto develops new
products containing glyphosate, the active ingredient in Roundup(R), or other
non-selective herbicides, Scotts has specified rights to market these products
in the consumer lawn and garden market. Glyphosate was subject to a U.S. patent
that expired in September 2000, is no longer subject to patent in Europe and is
not subject to patent in Canada.
Under the marketing agreement, Scotts and Monsanto jointly develop global
consumer and trade marketing programs for Roundup(R). Scotts has assumed
responsibility for sales support, merchandising, distribution and logistics.
Monsanto continues to own the consumer Roundup(R) business and provides
significant oversight of its brand. In addition, Monsanto continues to own and
operate the agricultural Roundup(R) business. A Steering Committee comprised of
two Scotts designees and two Monsanto designees has ultimate oversight over the
consumer Roundup(R) business. In the event of a deadlock, the president of
Monsanto's agricultural division is entitled to the tie-breaking vote.
COMMISSION STRUCTURE
Scotts is compensated under the marketing agreement based on the success of
the consumer Roundup(R) business in the markets covered by the agreement. In
addition to recovering out-of-pocket costs on a fully burdened basis, Scotts
receives a graduated commission to the extent that the earnings before interest
and taxes of the consumer Roundup(R) business in the included markets exceed
specified thresholds. To the extent that these earnings are less than the first
commission threshold set forth below, Scotts will not receive any commission.
Net commission is equal to the commission set forth in the following chart less
the contribution payment Scotts is required to make, as described below. The net
commission is the amount that Scotts actually recognizes on its income
statements.
----
13
<PAGE> 14
The commission structure is as follows:
<TABLE>
<CAPTION>
If Earnings Are
Between the First
and Second
Commission If Earnings Are
Thresholds, the Greater than the
Commission Equals Second Commission
the Following Threshold, the
Percentage of the Commission Equals the
Difference Between Following Amount Plus
First Second the Earnings and 50% of the Amount of
Commission Commission the First Commission the Earnings
Year Threshold Threshold Threshold Above $80 Million
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999-2000 $30,000,000 $80,000,000 44% $22,000,000
2001 $31,250,000 $80,000,000 40% $19,500,000
2002 $32,531,250 $80,000,000 40% $18,987,500
2003 $33,844,531 $80,000,000 40% $18,462,188
2004 $35,190,645 $80,000,000 40% $17,923,742
2005 $36,570,411 $80,000,000 40% $17,377,836
2006 $37,984,471 $80,000,000 40% $16,806,212
2007 $39,434,288 $80,000,000 40% $16,226,285
2008 $40,920,145 $80,000,000 40% $15,631,942
2009+ $30,000,000 $80,000,000 40% $20,000,000
</TABLE>
Earnings for purposes of the marketing agreement for the 1999 fiscal, or
program, year were increased by $15 million for purposes of calculating Scotts'
commission.
The agreement also requires Scotts to make fixed annual payments to
Monsanto as a contribution against the overall expenses of the Roundup(R)
business. The annual fixed payment is defined as $20 million. However, portions
of the annual payments for the first three years of the agreement are deferred.
No payment was required for the first year (fiscal 1999), a payment of $5
million was required for the second year and a payment of $15 million is
required for the third year so that a total of $40 million of the contribution
payments are deferred. Beginning in the fifth year of the agreement, the annual
payments to Monsanto increase to at least $25 million, which include per annum
charges at 8%. The annual payments may be increased above $25 million if certain
significant earnings targets are achieved. If all of the deferred contribution
amounts are paid prior to 2018, the annual contribution payments revert to $20
million. Regardless of whether the deferred contribution amounts are paid, all
contribution payments cease entirely in 2018.
Specifically, Scotts will apply toward the deferral 50% of the amount by
which Scotts' net commission exceeds the following levels:
<TABLE>
<CAPTION>
Year Net Commission Level
------------------------------------------------------------------------------
<S> <C>
2001 $32,500,000
2002 $28,100,000
2003 $26,700,000
2004 $30,500,000
2005 $34,600,000
2006 $38,900,000
2007 $43,500,000
2008 $49,000,000
</TABLE>
----
14
<PAGE> 15
TERM
The marketing agreement has no definite term, except as it relates to
European Union countries. However, as described below, for a period of 20 years
Scotts may be entitled to receive a termination fee if Monsanto terminates the
marketing agreement upon a change of control of Monsanto or the sale of the
consumer Roundup(R) business. With respect to the European Union countries, the
initial term of the marketing agreement extends through September 30, 2005.
After September 30, 2005, the parties may agree to renew the agreement with
respect to the European Union countries for three successive terms ending on
September 30, 2008, 2015 and 2018, respectively. However, if Monsanto does not
agree to any of the extension periods with respect to the European Union
countries, the first commission threshold set forth in the table outlining the
commission structure above, will become $0.
TERMINATION
Monsanto has the right to terminate the marketing agreement upon a
specified event of default by Scotts or upon a change of control of Monsanto or
the sale of the consumer Roundup(R) business, so long as the termination after a
change of control of Monsanto or the sale of the Roundup(R) business occurs
later than September 30, 2003. The events of default by Scotts that could give
rise to termination by Monsanto include:
- "Material Breach" which is not cured within 90 days after written notice
from Monsanto and which is not remediable by the payment of damages or by
specific performance;
- "Material Fraud" which was engaged in with the intent to deceive Monsanto
and which is not cured, if curable, within 90 days after written notice
from Monsanto;
- "Material Willful Misconduct" which is not cured, if curable, within 90
days after written notice from Monsanto;
- "Egregious Injury" to the Roundup(R) brand that is not cured, if curable,
within 90 days after written notice from Monsanto, unless the egregious
injury resulted from the exercise by Monsanto of its tie-breaking right
with respect to deadlocked actions by the Steering Committee or was
caused primarily by an act or omission of Monsanto;
- Scotts' becoming insolvent;
- the acquisition of Scotts, by merger or asset purchase, or the
acquisition of more than 25% of Scotts' voting securities, without
Monsanto's prior written approval, by a competitor of Monsanto or by an
entity that Monsanto reasonably believes will materially detract from or
diminish Scotts' ability to fulfill Scotts' duties and obligations under
the agreement; or
- the assignment by Scotts of all, or substantially all, of Scotts' rights
or obligations under the agreement.
In addition, Monsanto may terminate the marketing agreement within the
North America, U.K., France or "Rest of the World" regions for specified
declines of the consumer Roundup(R) business. For purposes of determining
Monsanto's rights under the agreement, Scotts' performance is based on sales of
Roundup(R) to the ultimate consumers of the product, rather than on sales to
retailers or distributors. Scotts will measure sales to consumers by looking at
point-of-sale unit movement at selected, top-20 Roundup(R) customers in the
affected region.
More specifically, Monsanto may terminate the marketing agreement within
one of the regions if:
- sales to consumers decline cumulatively over a three fiscal year period
in the region; or
- sales to consumers decline by more than five percent in two consecutive
fiscal years within the region.
However, Monsanto may not exercise this termination right if Scotts can
demonstrate that the 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 Scotts' failure to perform its duties under the agreement.
Monsanto would also not be able to terminate the agreement if the decline were
caused by Monsanto's exercise of its right to break ties with respect to
deadlocked decisions of the Steering Committee.
----
15
<PAGE> 16
Scotts has rights similar to Monsanto's to terminate the agreement upon a
material breach, material fraud or material willful misconduct by Monsanto. In
addition, Scotts may terminate the marketing agreement upon Monsanto's sale of
the consumer Roundup(R) business, although then Scotts would lose the
termination fee described below.
TERMINATION FEE
Except to the extent described below, if Monsanto terminates the marketing
agreement upon a change of control of Monsanto or the sale of the consumer
Roundup(R) business, Scotts will be entitled to receive a significant
termination fee. Scotts will also be entitled to receive a termination fee if it
terminates the marketing agreement upon a material breach, material fraud or
material willful misconduct by Monsanto.
The termination fee will be calculated in accordance with the following
schedule:
<TABLE>
<CAPTION>
The Termination Fee
If Termination Occurs Payable to
Prior to September 30, Scotts will be Equal to:
---------------------------------------------------------------------------------
<S> <C>
2003 *$150,000,000
2004 $140,000,000
2005 $130,000,000
2006 $120,000,000
2007 $110,000,000
2008 $100,000,000
</TABLE>
---------------
* Neither Monsanto nor a successor to the consumer Roundup(R) business may
terminate the marketing agreement prior to September 30, 2003 upon a change of
control or a sale of the consumer Roundup(R) business. If Monsanto or a
successor were to do so despite such prohibition, the termination fee payable
to Scotts would be $185 million.
Between October 1, 2009 and September 30, 2018, if Monsanto terminates the
marketing agreement upon a sale of the consumer Roundup(R) business or if a
successor terminates the agreement following a change of control of Monsanto,
the termination fee will be equal to the greater of (i) a percentage (as
specified in the agreement) of the portion of the purchase price of the consumer
Roundup(R) business in excess of a specified amount and (ii) $16 million.
In addition, if the marketing agreement is terminated for any reason other
than because of egregious injury, material fraud or material willful misconduct
by Scotts, Monsanto will forfeit recovery of any unpaid portion of the $40
million deferral of contribution payments described above.
SALE OF ROUNDUP
Monsanto has agreed to provide Scotts with notice of any proposed sale of
the consumer Roundup(R) business, allow Scotts to participate in the sale
process and negotiate in good faith with Scotts with respect to a sale. If the
sale is run as an auction, Scotts will further be entitled to a 15-day exclusive
negotiation period following the submission of all bids to Monsanto. During this
period, Scotts may revise its original bid, but Scotts will not have the right
to review the terms of any other bids.
In the event that Scotts acquires the consumer Roundup(R) business in such
a sale, it will receive credit against the purchase price in the amount of the
termination fee that would otherwise have been paid to Scotts upon termination
by Monsanto of the marketing agreement upon the sale.
If Monsanto decides to sell the consumer Roundup(R) business to another
party, Scotts must let Monsanto know within 30 days after receipt of notice of
the purchaser whether Scotts intends to terminate the marketing agreement and
forfeit any right to a termination fee or whether Scotts will agree to perform
its obligations under the agreement on behalf of the purchaser, unless and until
the purchaser terminates Scotts and pays the applicable termination fee.
----
16
<PAGE> 17
MARKETING FEE
Upon execution of the marketing agreement, Scotts paid Monsanto a fee of
$32 million in consideration for the rights obtained under the marketing
agreement with respect to North America.
PATENTS, TRADEMARKS AND LICENSES
The "Scotts(R)", "Miracle-Gro(R)", "Hyponex(R)" and "Ortho(R)" brand names
and logos, as well as a number of product trademarks, including "Turf
Builder(R)", "Osmocote(R)" and "Peters(R)", are federally and/ or
internationally registered and are considered material to Scotts' business.
Scotts regularly monitors its trademark registrations, which are generally
effective for ten years, so that it can renew those nearing expiration. In 1989,
Scotts assigned rights to selected Hyponex trademarks to Hyponex Japan
Corporation, Ltd., an unaffiliated entity. In July 1995, Scotts-Sierra granted
an exclusive license to use the Peters(R) trademark in the U.S. consumer market,
to Peters Acquisition Corporation, now owned by United Industries Corporation,
for the life of the mark. In connection with the sale of Scotts' ProTurf(R)
business, Scotts entered into several trademark licensing agreements with The
Andersons, Inc. and The Nu-Gro Corporation. Under these agreements, certain
Scotts' trademarks formerly used in the ProTurf(R) business (including the
ProTurf(R), Contec(R) and Accupro(TM) marks), are licensed to Andersons in the
United States and to Nu-Gro in Canada, for five years, after which time the
licensees may purchase those marks in accordance with the terms of the various
license agreements. The buyers were granted a long-term license to use the
Peters Professional(R) and Starter(R) trademarks in the U.S. professional turf
market.
As of September 30, 2000, Scotts held over 90 issued patents, covering
fertilizer and chemical compositions and processes, grasses and application
devices. Many of these patents have issued in numerous countries around the
world, bringing Scotts' total worldwide patents to 269. Worldwide patents are
subject to annual renewal, with patent protection generally extending to 20
years from the date of filing. Many of Scotts' patents extend well into the next
decade. In addition, Scotts continues to file new patent applications each year.
Currently, Scotts has over 160 pending patent applications worldwide. Scotts
also holds exclusive and non-exclusive patent licenses from various raw material
suppliers, permitting the use and sale of additional patented fertilizers and
pesticides.
During fiscal 2000, Scotts was granted a number of new U.S. patents. Two
separate patents were granted covering coated fertilizer technologies to support
the Osmocote(R) line of products. These represent the first patented advances in
Osmocote(R) since 1987. Two U.S. patents were also issued covering the unique
packaging/application device for the new Miracle-Gro(R) Garden Weed Prevent (now
known as Miracle-Gro(R) Garden Weed Preventer(TM)), a product successfully
introduced in fiscal 2000. Internationally, patents were granted covering
Poly-S(R) coated fertilizer technology in Europe, Israel and the Russian
Federation. In addition, a use patent was granted in the Russian Federation
covering the use of controlled-release fertilizers as improved nutrient sources
for aquaculture.
One of Scotts' methylene-urea patents, which is deemed material to Scotts'
business, will expire in July 2001. This product composition patent covers
Scotts Turf Builder(R), Scotts Turf Builder(R) with Plus 2(R) Weed Control and
Scotts Turf Builder(R) with Halts(R) Crabgrass Control, among other products.
These products are also the subject of a separate patent extending to 2010,
which covers the current and preferred manufacturing method for producing these
products. Although the product possibly could be manufactured by an alternative
method, we believe that the higher manufacturing costs to replicate this product
and the strength of the Scotts(R) brand, should lessen the likelihood of product
duplication by any competitor.
In May 2000, Scotts sold its North American ProTurf(R) business to The
Andersons, Inc. in the U.S. and The Nu-Gro Corporation in Canada. The sale
included an exclusive "field of use" license of two Scotts patents. These
patents cover certain professional rotary spreaders and technology supporting
fertilizer/ growth regulator combination products. Under the license agreements,
Scotts retains rights to use these patents outside the North American
professional turf business.
Glyphosate, the active ingredient in Roundup(R), was subject to a patent in
the United States that expired in September 2000. Scotts cannot predict the
success of Roundup(R) now that glyphosate is no longer patented. Substantial new
competition in the United States could adversely affect Scotts. Glyphosate is no
longer subject to patent in Europe and is not subject to patent in Canada. While
sales of Roundup(R) in such countries have continued to increase despite the
lack of patent protection, sales in the
----
17
<PAGE> 18
United States may decline as a result of increased competition. Any such decline
in sales would adversely affect Scotts' financial results through the reduction
of commissions as calculated under the Roundup(R) marketing agreement.
RESEARCH AND DEVELOPMENT
Scotts has a long history of innovation dating from the 1928 introduction
of Turf Builder(R), through the development, design and construction of its
newest state of the art methylene-urea fertilizer production facility in
Marysville, Ohio. Commissioned in 1999, this facility produced the new and
improved Turf Builder(R) with Micromax(R) micronutrients for fiscal 2000.
Scotts' continued commitment to innovation has produced a portfolio of 269
patents worldwide, covering most of its fertilizers and many of its grasses and
application devices.
Scotts operates what it believes to be a premier research and development
organization in the consumer lawn and garden industry. Headquartered in the
Dwight G. Scott Research Center for North America in Marysville, Ohio ("Scotts
R&D"), Scotts R&D's mission is to develop and enhance easy to use lawn and
garden products for consumers. This is accomplished through a comprehensive and
consolidated view of innovation including Scotts R&D divisions such as: product
development (agronomic performance/efficacy evaluation); process/formulation
development (design of manufacture); packaging and durables development (new
structures, forms, dispensing and application devices); and regulatory and
environmental affairs (product registration, industry and government relations).
Scotts R&D's consolidated effort harnesses the synergies among all Scotts
technologies which we believe results in optimization for the lawn and garden
consumer, from seed, soil and fertilizer to weed/pest control.
Scotts R&D operates six research field stations strategically located
throughout the United States in Ohio, Florida, Texas, California, New Jersey and
Oregon, covering 212 acres. These facilities allow for evaluation of regional
product requirements (different soil, climatic and pest conditions) and provide
flexibility for year-round testing. The facilities also provide regional
technical support and training for sales personnel.
Scotts R&D underwent significant change in fiscal 1999 and 2000 with the
relocation to Marysville, Ohio of the durable goods/application device
development group from Republic Tool's Carlsbad, California facility and the
relocation of the Ortho research and development group from San Ramon,
California. Product development efforts were reorganized in fiscal 1999 for
better alignment with the business group marketing departments. In fiscal 2000,
Scotts R&D "relationship managers" were assigned to each business group within
Scotts for greater efficiency in the management of complex project portfolio
activity.
Since 1992, Scotts' entire line of controlled-released fertilizers has been
reformulated or upgraded with new technology. These include: patented Poly-S(R),
ScottKote(R) and methylene-urea; and Osmocote(R) patterned release,
polymer-encapsulated technology. These technologies service the turfgrass,
garden, horticultural and specialty agricultural markets both domestically and
internationally. Process development efforts continue to focus on process
innovation, capacity increase, quality enhancement and cost reduction. The
fiscal 2000 impact of this work resulted in improvements ranging from
Miracle-Gro(R) Tree Spikes (cost reduction and quality improvement) to
controlled-release fertilizer for professional horticultural container-grown
plants (improved performance, cost reduction and quality improvement).
Application of Scotts' expertise in process/formulation development is expected
to provide significant future benefit to the Consumer Ortho and Consumer Gardens
Business Groups by way of cost reduction, quality enhancement and operating
efficiency improvement.
In fiscal 1998, Scotts' consumer lawn fertilizer packaging was converted to
high quality plastic that has since become the industry standard. Scotts R&D
applied learning gained in that conversion to subsequently convert the North
American Professional Business Group's fertilizer line in fiscal 1999 and 2000.
The Consumer Ortho Business Group converted packaging for granular control
products in fiscal 2000, achieving a cost reduction of $1 million per year while
improving appearance, durability and shipping characteristics. Also new in
fiscal 2000 was the sliding reclosure feature on Miracle-Gro(TM) Potting Soil, a
consumer convenience-oriented improvement.
Scotts R&D expects to benefit from the consolidation of resources as a
result of the relocation to Marysville of the Ortho research and development
functions in fiscal 2000. Continued efforts will include package/dispensing
innovation, consumer ease of use and reduction of consumer exposure. Examples in
----
18
<PAGE> 19
fiscal 1999 include the successful introduction of Pull 'N Spray(R) and Lock 'N
Spray(R) in the Roundup(R) and Ortho(R) product lines, both unique combined
packaging/application systems. Work on improved, second-generation versions of
these products is underway.
Scotts R&D maintains an aggressive active ingredient access and evaluation
program, critical to the introduction of new and improved products. Over 100 new
formulations are prepared and evaluated each year in over 1,000 tests. Combined
with Scotts' brands and market/sales position, this capability has allowed
Scotts to gain exclusive and semi-exclusive access to new active ingredients
from major chemical suppliers. Examples in consumer products are: bifenthrin
insecticide (FMC Corporation); halofenozide insecticide (RohMid LLC); and
pendimethalin herbicide (American Cyanamid Company). Examples in professional
products are: myclobutanil fungicide (Rohm & Haas Company); paclobutrazol turf
growth regulator (Zeneca Professional Products); etridiazole fungicide (C&K
Witco); and flutolanil fungicide, propamocarb fungicide, deltamethrin
insecticide, bendiocarb insecticide, clofentezine miticide and buprofezin
insecticide (AgrEvo Environmental Health). In addition to traditional pest
control chemistry, Scotts R&D continually evaluates emerging technologies,
searching for new, environmentally sound products that can provide consumers
with effective alternatives for solving their pest control needs.
Since 1997, Scotts has maintained a dedicated turfgrass genetic engineering
laboratory in its existing Scotts R&D facility in Marysville, to develop
turfgrass varieties with improved characteristics such as resistance to disease,
insects and herbicides. In January 1998, Scotts acquired an 80.8% interest in
Sanford Scientific, Inc., a research company in the rapidly growing field of
genetic engineering of plants. Sanford Scientific has developed and licensed a
broad portfolio of genes and genetic process technology. It holds the exclusive,
worldwide license to use biolistic ("gene gun") technology in the commercial
development of genetically transformed woody ornamental plants, ground covers,
trees and shrubs, and the non-exclusive worldwide license for use with
turfgrass, ornamental flowers, houseplants and vines. Biolistic technology
involves the delivery of desirable genetic characteristics by high-velocity
injection into cells. The technology is widely used in medical research and
agricultural fields for applications ranging from immunization and cancer
treatment to creation of new agricultural crop varieties, including corn and
soybeans. The biolistic approach to genetic engineering of plants has important
advantages over other transformation technologies. For some plant species,
transformation using the gene gun is largely considered the only commercially
viable method of inserting new gene traits into plants. In addition, Sanford
Scientific has developed and licensed a broad portfolio of genes and genetic
process technology with commercial potential.
Gene gun technology augments Scotts' genetic improvement program by
allowing researchers to create desirable varieties of plants with value-added
traits beyond the capabilities of conventional plant breeding techniques.
Targets of Scotts' research effort include disease and insect resistance,
herbicide tolerance and other consumer-relevant traits, such as turfgrasses that
require less mowing and flowers with longer-lasting blooms. Management believes
that some of these traits could produce plants requiring fewer horticultural
inputs such as water and insect control applications. Those plants could then be
marketed as having a favorable environmental impact. Scotts expects that it will
commercialize selected plants with these traits, within a few years.
Scotts acquired its interest from Sanford Scientific founder and president
Dr. John Sanford, who retained a 19.2% interest and remains involved with
Sanford Scientific, as a member of Sanford Scientific's Board of Directors. He
also provides consulting services to Sanford Scientific, under an agreement that
continues through January 31, 2002. Dr. Sanford led the team of Cornell
University scientists who invented the gene gun technology in the 1980's, and he
continues as a leading expert in the field. Sanford Scientific operates an
advanced genetic research facility in upstate New York, and actively
collaborates with other leading genetic scientists.
Exclusive access to this technology is a key element in Scotts' program to
create value by combining Scotts' brands and Sanford Scientific's biolistic
transformation process with proven genes licensed from technology partners.
Consistent with this strategy, in August 1998, Scotts completed an agreement
with Rutgers University, the State University of New Jersey. Under this
agreement, Scotts funds, through research support and future royalties, a
combined effort by Rutgers' plant biotechnology and turfgrass breeding programs
to develop improved transgenic bentgrass varieties. In return, Scotts has
exclusive rights to market all Rutgers' patented transgenic bentgrass varieties
developed through 2005, likely extending to 2015. Rutgers' development program
will utilize the biolistic process and other enabling
----
19
<PAGE> 20
technologies under license to Sanford Scientific to insert and activate genes
that are proprietary to Rutgers University. Any superior bentgrass varieties
that result from the program are expected to be commercialized in the golf
course market.
Scotts is party to an agreement with Monsanto (now known as Pharmacia) to
bring further benefits of biotechnology to the turfgrass and ornamental plants
business. Under the terms of the agreement, Scotts and Monsanto agree to share
technologies, including Monsanto's extensive genetic library of plant traits and
Scotts' proprietary gene gun technology to produce improved transgenic
turfgrasses and ornamental plants. Scotts and Monsanto will work with each other
on a global basis to develop these biotechnology products in the professional
and consumer markets. Each company will bring its leading brands, marketing
skills and technological expertise to create new products. In addition to sales
by Scotts, the companies plan to license the new products to other marketing
partners in the turf and ornamental industry. The collaborative alliance will
focus on providing professional and consumer benefits such as turfgrass that
requires less mowing and water, ornamental plants that last longer and produce
larger and more plentiful blooms, and plants that will allow for better weed
control. Scotts has been working since 1997 on Roundup Ready(R) turfgrass, which
is tolerant to Monsanto's Roundup(R), under a research agreement with Monsanto.
The current alliance expands that relationship to cover new applications for
Roundup Ready(R) technology as well as other improvements to ornamental plants.
In addition to Scotts R&D for North America, the International Business
Group conducts research and development in Levington, the United Kingdom; Lyon,
France; Ingelheim, Germany; Heerlen, Netherlands; and Sydney, Australia. The
Levington site supports consumer and professional formulation and testing of
lawn and garden fertilizers, pesticides and growing media. The Lyon and
Ingelheim sites support consumer household insecticide formulation and testing,
as well as lawn and garden fertilizers, pesticides and growing media. The
Heerlen facility supports professional formulation, testing and process
development of turf and horticultural fertilizers, and testing of pesticide
products. The Sydney site supports consumer and professional testing and
technical service of fertilizer and pesticide products. The Scotts Company (UK)
Ltd. leases a research facility and trial station in the United Kingdom for
formulating plant protection products for the consumer and professional markets.
Research and development expenses were approximately $24.1 million (1.4% of
net sales) for fiscal 2000 including environmental and regulatory expenses. This
compares to $21.7 million (1.3% of net sales) and $14.8 million (1.3% of net
sales) for fiscal 1999 and 1998.
SEASONALITY
Scotts' business is highly seasonal with approximately 75% of net sales
occurring in the second and third fiscal quarters combined for fiscal 2000, and
74% for fiscal 1999 (including Ortho(R) products, but excluding Roundup(R)
products.) Please also see the discussion in "North American Consumer Business
Group -- Backlog" and "North American Professional Business Group -- Backlog."
The products marketed by the Consumer Ortho Business Group are highly
seasonal. However, they are not necessarily driven by the same weather variables
as are the other products of Scotts. For example, insect populations (and
corresponding control product sales) tend to thrive when wet springs yield to
hot, humid summers. In contrast, fertilizer sells best in drier springs.
OPERATIONS
PRODUCTION FACILITIES
The manufacturing plant for consumer and professional fertilizer products
marketed under the Scotts(R) label is located in Marysville, Ohio. Manufacturing
for these products is also conducted by approximately 40 contract manufacturers.
Demand for Turf Builder(R), Poly-S(R) and other products results in Scotts
expanding operations (generally from October through May) of its fertilizer
processing and packaging lines from five days per week, three-shift operations
to seven days, three-shift operations when necessary to prepare for the peak
demand periods. Scotts currently operates its three Turf Builder(R) lines seven
days per week, year round, and began construction of a fourth Turf Builder(R)
production line, to meet capacity needs for those products. Scotts-Sierra
controlled-release fertilizers are produced in Charleston, South Carolina;
Milpitas, California; and Heerlen, Netherlands. Expansion at each facility has
been completed to permit the blending of products which utilize both Scotts and
Scotts-Sierra proprietary technology. Production
----
20
<PAGE> 21
schedules at Scotts-Sierra's facilities vary to meet demand. Seed blending and
packaging are outsourced to various packaging companies located on the West
Coast near seed growers. Consumer growing media products are processed and
packaged in 25 locations throughout the United States. Scotts operates two
composting facilities where yard waste (grass clippings, leaves and twigs) is
converted to raw materials for Scotts' growing media products. Scotts also
utilizes approximately 30 contract production locations for growing media
products. Professional horticultural growing media products are processed and
packaged at two U.S. locations. Scotts' lawn spreaders and specialty hose
sprayers are produced at the Republic facility in Carlsbad, California. Scotts
will be relocating the operations of that facility to Temecula, California in
2001. Republic Tool adjusts assembly capacity from time to time, to meet demand.
Both the Consumer Growing Media business and Republic Tool vary production
schedules to meet demand. The majority of Miracle-Gro(R) water-soluble
fertilizers is contract-manufactured in three facilities located in Ohio, Texas
and Florida.
Granular and water-soluble fertilizers, liquid herbicides and pesticides
and growing media for the U.K. market, are produced in East Yorkshire (Howden,
Hatfield and Swinefleet) and Bramford (Suffolk), in the United Kingdom.
Bramford is the headquarters for U.K. operations and for the U.K.
professional business. The site houses a modern fertilizer granulation plant
with automated packing lines, liquid fertilizer production and bottling
facilities. In addition, there are facilities for formulating and bottling a
wide range of liquid plant protection products including herbicides,
insecticides and fungicides. Bramford produces a wide range of products for both
the consumer and professional businesses in Europe. These include the
EverGreen(R) line of consumer lawn products and Greenmaster(R) products for the
professional turf market. The Hatfield and Swinefleet factories contain modern
facilities for the screening and blending of peat, together with various
additives to produce a wide range of growing media. Peat to supply the
facilities is harvested on both sites and brought in from satellite sites in
Northwest England and Scotland. These facilities produce the Levington(R) brand
of compost for both the consumer and professional businesses. Peat from Ireland
is imported to produce the Shamrock(TM) range of growing media. Granular and
water-soluble fertilizers and pesticides are produced at Howden and growing
media is produced at Swinefleet and Hatfield.
At Hautmont, France, growing media and fertilizers for the consumer market
are blended and bagged, and at Bourth, France, pesticide products for the
consumer market are formulated, blended and packaged. Production schedules at
Hautmont vary from one shift to two shifts to meet demand, while Bourth
maintains two shifts year-round.
Liquid and granular ingredients made primarily for Ortho(R) and Roundup(R)
products are manufactured at Scotts' Fort Madison, Iowa facility and at several
contract facilities. The plants adjust to seasonal demands expanding from two
shifts five days per week to three shifts five days per week during peak season.
Resin used for producing Osmocote(R) controlled-release fertilizer in the
United States is manufactured by Sunpol Resins and Polymers, Inc. (formerly
Sierra-Sunpol Resins, Inc.).
Management believes that each of its facilities is well-maintained and
suitable for its purpose. However, due to the seasonal nature of Scotts'
business, Scotts' plants operate at maximum capacity during the peak production
periods. Therefore, an unplanned serious production interruption could have a
substantial adverse affect on Scotts' sales of the affected product lines.
CAPITAL EXPENDITURES
Capital expenditures totaled $72.5 million and $66.7 million for fiscal
2000 and 1999. Of the major expenditures for fiscal 2000, approximately $14.3
million was spent on the implementation of the Enterprise Resource Planning
information services program, $15.0 million for engineering, equipment purchases
and initial construction of the fourth Turf Builder(R) production line and
associated packaging line additions, and over $8.2 million for the North
American Headquarters expansion required for consolidation of Ortho and
Miracle-Gro operations. The expansion of our research and development facilities
to accommodate Ortho and biotechnology activities increased research and
development spending by $2 million over prior years. Automation of packaging
lines at several growing media plants increased spending by nearly $5 million
over prior years. The additional production capacity for Osmocote(R) products in
Europe added $1.0 million to current spending. Scotts estimates that capital
spending will approximate
----
21
<PAGE> 22
$75-80 million for fiscal 2001. Completion of the fourth Turf Builder(R) line
and packaging line additions will involve $28.9 million of spending next year,
with an additional $5 million planned for ongoing automation of the growing
media plants. Planned research and development expenditures of $8 million in
fiscal 2001, will include the beginning of a major greenhouse expansion project
to support increased activities in the biotechnology and branded plants areas.
PURCHASING
The key ingredients in Scotts' fertilizer and control products are various
commodity and specialty chemicals including phosphates, urea, potash,
herbicides, insecticides and fungicides. Scotts obtains its raw materials from
various sources, which Scotts presently considers to be adequate. No one source
is considered to be essential to any of Scotts' business groups or to its
business as a whole. Scotts has never experienced a significant interruption of
supply.
Raw materials for the Consumer Gardens Business Group's water-soluble
fertilizer products, include phosphates, urea and potash. Scotts considers its
sources of supply for these materials to be adequate. All of the liquid
Miracle-Gro(R) fertilizer products sold by Scotts in North America are produced
under contract by independent fertilizer blending and packaging companies.
The North American Horticulture Business subgroup purchases granular,
homogeneous fertilizer substrates to be coated and the resins for coating. These
resins are primarily supplied domestically by Sunpol Resins and Polymers, Inc.
Sphagnum peat, bark, peat, humus and manure constitute the Consumer Growing
Media Business Group's most significant raw materials. At current production
levels, Scotts estimates its peat reserves to be sufficient for its near-term
needs in all locations. Bark products are obtained from sawmills and other wood
residue producers and manure is obtained from a variety of sources, such as feed
lots and farming operations.
Raw materials for Republic Tool's durables operation include various
engineered resins and metals, all of which are available from a variety of
vendors.
The Consumer Ortho Business Group's primary raw materials are pesticides
similar to those used by the agriculture industry. No single chemical is
essential in this market and all materials or suitable substitutes are expected
to remain readily available.
For fiscal 2000, the International Business Group was comprised of
Professional and Consumer subgroups, which offer products that are very similar
to those marketed by the North American Professional and Consumer Business
Groups. The raw materials are therefore similar to the materials used by those
groups. Scotts believes that its raw materials sources for the International
Business Group are sufficiently varied and anticipates no significant raw
material shortages. Both the North American Consumer Business Group and the
International Consumer Business subgroup contract with essentially the same
major chemical and packaging companies, through short- and long-term supply
agreements, for the supply of specialty chemicals, fertilizers and packaging
materials. The North American Professional Business Group and the International
Professional Business subgroup contract with local major producers, through
short- and long-term supply agreements, for the supply of sphagnum peat, peat
and humus, which constitute the most significant raw materials for these
businesses. Long-term supply arrangements for peat and owned peat reserves in
the United Kingdom are expected to be sufficient for the International Business
Group's near-term needs, at current production levels. Packaging materials are
supplied by major packaging companies, through short- and long-term supply
arrangements, which Scotts considers adequate for its supply needs.
DISTRIBUTION
The primary distribution centers for Consumer Lawns' products are located
near Scotts' North American headquarters in central Ohio. Scotts' expansion of
its Marysville distribution facility was completed in December 1997. Scotts also
uses nine primary regional distribution centers located in strategic markets
across the United States. These third-party operations service customers
directly during the in-season period. Scotts' products are shipped by rail and
truck. While the majority of truck shipments are made by contract carriers, a
portion is made by Scotts' own fleet of leased trucks.
----
22
<PAGE> 23
Consumer Gardens' products are warehoused and shipped from three primary
contract packagers located throughout the United States. In addition to the
contract packagers, Consumer Gardens' products ship directly to customers from
the same nine regional distribution centers as Consumer Lawns' products during
the in-season period. Consumer Gardens' products ship via common carrier
directly to customers and to lawn and garden distributors. Inventories of
Consumer Gardens' U.K. products for the European market, which are produced at
the East Yorkshire (Howden) and Bramford (Suffolk) facilities, are distributed
through a public warehouse in Daventry, the United Kingdom. Professional
products for the U.K. market are warehoused and shipped from the Daventry and
Chasetown, U.K. locations.
Most growing media products have low sales value per unit of weight, making
freight costs significant to profitability. Therefore, the Consumer Growing
Media Business Group has located all of its 25 plant/ distribution locations
near large metropolitan areas in order to minimize shipping costs and to be near
raw material sources. This group uses its own fleet of approximately 70 trucks
as well as contract haulers to transport its products from plant/distribution
points to retail customers. Large-bag outdoor landscaping products and much of
the indoor potting soil products are shipped directly to retail stores. A
portion of Scotts' indoor potting soil and additive products is shipped to
retailers' distribution centers for redistribution to their stores. In the
United Kingdom, growing media is packaged at Hatfield and Swinefleet and shipped
directly to customers in the United Kingdom. Growing media is also produced in
Hautmont, France and Didam, Netherlands, and shipped directly to customers.
Scotts' Ortho(R) and Roundup(R) products are produced and shipped from two
primary manufacturing facilities, one owned by Scotts and located in Fort
Madison, Iowa and another at a contract packager located in Sullivan, Missouri.
Ortho(R) and Roundup(R) products are shipped via common carrier through the same
nine distribution centers used by the Consumer Lawns and Consumer Gardens
Business Groups. Products ship directly from these centers to customers and to
various lawn and garden distributors across the United States.
Professional horticultural products are produced at two fertilizer and two
growing media manufacturing facilities located in the United States and one
fertilizer manufacturing facility located in Heerlen, Netherlands. The majority
of shipments are via common carriers through distributors in the United States
and a network of public warehouses in Europe.
Republic Tool-produced, Scotts(R) branded spreaders are shipped via common
carrier to regional warehouses serving Scotts' retail network. A portion of
Republic Tool's spreader line and its private label lines is sold free-on-board
(FOB) Carlsbad with transportation arranged by the customer. During fiscal 2001,
plans are to consolidate all finished goods inventory into one new location with
the manufacturing activities. Construction of this new facility is underway.
Fertilizers and pesticide products manufactured in Bourth, France are
shipped to customers via a central distribution center located in Oleno, France.
SIGNIFICANT CUSTOMERS
Home Depot and Wal*Mart represented approximately 22.9% and 8.9% of Scotts'
net sales in fiscal 2000. Kmart's net sales represented 8.2% of Scotts' fiscal
2000 net sales. After allocating buying groups' sales to Wal*Mart, Wal*Mart
sales represented approximately 12.5% of Scotts' fiscal 2000 net sales. All
three customers hold significant positions in the retail lawn and garden market.
There continues to be intense competition between and consolidation within the
retail outlets selling Scotts' products. The loss of any of these customers or a
substantial decrease in the amount of their purchases could have a material
adverse effect on Scotts' business.
EMPLOYEES
Scotts' corporate culture is a blend of the history, heritage and culture
of Scotts and companies acquired over the past ten years. Scotts provides a
comprehensive benefits program to all full-time associates. As of September 30,
2000, we employed approximately 2,975 full-time workers in the United States
(includes Scotts and all subsidiaries) and an additional 1,093 full-time
employees located outside the United States. As of September 30, 2000, full-time
workers averaged approximately eight years employment with Scotts or its
predecessors. During peak production periods, Scotts engages as many as 1,600
temporary workers in the United States. In the United Kingdom, during peak
periods, as many as 84
----
23
<PAGE> 24
temporary workers are engaged and European operations engage an average of 71
temporary workers annually.
Scotts' U.S. employees are not members of a union, with the exception of 25
of Scotts-Sierra's employees at its Milpitas facility, who are represented by
the International Chemical Workers Union Council/United Food and Commercial
Workers Union. Approximately 120 of Scotts' full-time U.K. employees at the
Bramford (Suffolk) and East Yorkshire (Hatfield and Swinefleet) manufacturing
sites are members of the Transport and General Workers Union, having full
collective bargaining rights. A number of Scotts' full-time employees at the
headquarters office in Lyon, France are members of the Confederation Generale
des Cadres (CGC), Confederation Francaise Democratique du Travail (CFDT) and
Confederation Generale du Travail (CGT), which number is confidential under
French law. The average rate of union membership among employees in France is
approximately 15%. A number of union and non-union full-time employees are
members of work councils at three sites in Bourth, Hautmont and Lyon, France,
and a number of non-union employees are members of work councils in Ingelheim,
Germany. Work councils represent employees on labor and employment matters and
manage social benefits.
In connection with the Ortho acquisition, Scotts made offers of employment
to all but a very limited number of employees who worked primarily in the Ortho
business of Monsanto. While a majority of sales personnel accepted, most of the
corporate staff declined relocation. Through September 30, 2000, Scotts paid
aggregate severance, benefits and outplacement costs of $5.4 million for U.S.
employees based on Monsanto's severance policy. Scotts was reimbursed in the
aggregate by Monsanto for $2.7 million of the costs of such termination
payments.
In connection with the move of the North American Consumer Gardens Business
Group from Port Washington, New York, to Ohio, Scotts made offers of employment
to all of the employees who worked in Port Washington. Approximately 33%
accepted offers to relocate. Scotts paid severance, benefits and outplacement
costs totaling $1.4 million to employees that did not relocate.
ENVIRONMENTAL AND REGULATORY CONSIDERATIONS
Local, state, federal and foreign laws and regulations relating to
environmental matters affect Scotts in several ways. In the United States, all
products containing pesticides must be registered with the United States
Environmental Protection Agency ("USEPA") (and in many cases, similar state
and/or foreign agencies) before they can be sold. The inability to obtain or the
cancellation of any such registration could have an adverse effect on Scotts'
business. The severity of the effect would depend on which products were
involved, whether another product could be substituted and whether Scotts'
competitors were similarly affected. Scotts attempts to anticipate regulatory
developments and maintain registrations of, and access to, substitute chemicals,
but there can be no assurance that it will continue to be able to avoid or
minimize these risks. Fertilizer and growing media products (including manures)
are also subject to state and foreign labeling regulations. Grass seed is also
subject to state, federal and foreign labeling regulations.
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 USEPA is evaluating the cumulative risks from
dietary and non-dietary exposures to pesticides. The pesticides in Scotts'
products, which are also used on foods, will be evaluated by the USEPA as part
of this non-dietary exposure risk assessment. It is possible that the USEPA or
the active ingredient registrant may decide that a pesticide Scotts uses in its
products, would be limited or made unavailable to Scotts. For example, in June
2000, DowAgroSciences, an active ingredient registrant, voluntarily agreed to a
gradual phase-out of residential uses of Dursban, an active ingredient used by
Scotts in its lawn and garden products. In December 2000, the USEPA reached
agreement with various parties, including manufacturers of the active ingredient
diazinon, regarding a phased withdrawal of residential uses of products
containing diazinon, used also by Scotts in its lawn and garden products. Scotts
cannot predict the outcome or the severity of the effect of the USEPA's
continuing evaluations. Management believes that Scotts should be able to obtain
substitute ingredients if selected pesticides are limited or made unavailable,
but there can be no assurance that it will be able to do so for all products.
With regard to Dursban, Scotts has introduced, and with regard to diazinon,
Scotts expects to introduce, new pesticide products to meet consumer needs for
pest control.
----
24
<PAGE> 25
In addition, the use of certain pesticide and fertilizer products is
regulated by various local, state, federal and foreign environmental and public
health agencies. These regulations may include requirements that only certified
or professional users apply the product or that certain products be used only on
certain types of locations (such as "not for use on sod farms or golf courses"),
may require users to post notices on properties to which products have been or
will be applied, may require notification of individuals in the vicinity that
products will be applied in the future or may ban the use of certain
ingredients. Scotts believes it is operating in substantial compliance with, or
taking action aimed at ensuring compliance with, these laws and regulations.
Compliance with these regulations and the obtaining of registrations does not
assure, however, that Scotts' products will not cause injury to the environment
or to people under all circumstances. 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 these environmental matters, taking into
account established reserves, should not have a material adverse effect on
Scotts' financial position; however, there can be no assurance that the
resolution of these matters will not materially affect future quarterly or
annual operating results.
State and federal authorities generally require Hyponex to obtain permits
(sometimes on an annual basis) in order to harvest peat and to discharge storm
water run-off or water pumped from peat deposits. The state permits typically
specify the condition in which the property must be left after the peat is fully
harvested, with the residual use typically being natural wetland habitats
combined with open water areas. Hyponex is generally required by these permits
to limit its harvesting and to restore the property consistent with the intended
residual use. In some locations, Hyponex has been required to create water
retention ponds to control the sediment content of discharged water.
Regulations and environmental concerns exist surrounding peat extraction in
the United Kingdom. The Scotts Company (UK) Ltd. played a leading role in the
development and implementation of legislation concerning peat extraction, and
believes it complies with this legislation, regarding it as the minimum
standard.
Local, state, federal and foreign agencies regulate the disposal, handling
and storage of waste, air and water discharges from Scotts' facilities. During
fiscal 2000, Scotts had approximately $1.2 million in environmental capital
expenditures and $1.8 million in other environmental expenses, compared with
approximately $1.1 million in environmental capital expenditures and $5.9
million in other environmental expenses in fiscal 1999. Management anticipates
that environmental capital expenditures and other environmental expenses for
fiscal 2001 will not differ significantly from those incurred in fiscal 2000.
OHIO ENVIRONMENTAL PROTECTION AGENCY
Scotts has assessed and addressed environmental issues regarding the
wastewater treatment plants which had operated at the Marysville facility.
Scotts decommissioned the old wastewater treatment plants and has connected the
facility's wastewater system with the City of Marysville's municipal treatment
system. Additionally, Scotts 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, Scotts learned that the Ohio Environmental Protection
Agency was referring matters relating to environmental conditions at Scotts'
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 Scotts continue to meet to discuss these issues.
In June 1997, Scotts 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 Scotts' 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, Scotts 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
----
25
<PAGE> 26
discussions, Scotts received a revised draft of a judicial consent order from
the Ohio Attorney General in late April 1999. Subsequently, Scotts 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.
Scotts is continuing to meet with the Ohio Attorney General and the Ohio
Environmental Protection Agency in an effort to complete negotiations of an
amicable resolution of these issues. While negotiations have narrowed the
unresolved issues between Scotts 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. Scotts 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 the State's enforcement action
not be reached.
In accordance with Scotts' past efforts to enter into Ohio's VAP, Scotts
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 Scotts' 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, Scotts 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. Scotts 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,
Scotts has been voluntarily addressing a number of the historical on-site waste
disposal areas with the knowledge of the Ohio Environmental Protection Agency.
Interim measures consisting of capping two on-site 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 Scotts and the Ohio Environmental Protection Agency have not
agreed as to the extent of any possible contamination and an appropriate
remediation plan, Scotts 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. As of September 30, 2000, management estimates that the
range of possible loss that could be incurred in connection with this matter is
$2 million to $10 million. Scotts 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 of
Ohio are already being investigated and addressed by Scotts 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. Scotts 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 suspension during fiscal 1996 in
order to allow Scotts 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, Scotts' 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. Scotts believes
----
26
<PAGE> 27
agreement on the remediation plan has essentially been reached. Before this suit
can be fully resolved, however, Scotts and the government must reach agreement
on the government's civil penalty demand. Scotts has reserved for its estimate
of the probable loss to be incurred under this proceeding as of September 30,
2000. Furthermore, management believes Scotts 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.
BRAMFORD
In the United Kingdom, major discharges of waste to air, water and land are
regulated by the Environment Agency. The Scotts Company (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).
Scotts 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. Scotts intends
to comply with the reasonable remediation concerns of the Environment Agency.
Scotts previously installed an environmental enhancement to the facility to
reduce emissions to both air and groundwater. Additional work is being
undertaken to further reduce emissions to groundwater and surface water. Scotts
believes that it has adequately addressed the environmental concerns of the
Environment Agency regarding emissions to air and groundwater. The Scotts
Company (UK) Ltd. has retained an environmental consulting firm to research
remediation designs. Scotts and the Environment Agency are in discussions over
the final plan for remediating the lagoon and landfill. Scotts has reserved for
its estimate of the probable loss to be incurred in connection with this matter
as of September 30, 2000.
OTHER
In July 2000, Scotts entered into a Consent Agreement with the USEPA, to
settle alleged violations of the Federal Insecticide, Fungicide and Rodenticide
Act ("FIFRA"), relating to the registered pesticide Ortho(R) Home Defense(R)
Indoor & Outdoor Insect Killer, sold with the Pull 'N Spray(R) pump dispenser.
The agency alleged that the product was misbranded due to the dispenser
mechanism leaking or spraying product onto the user. Based upon Scotts'
voluntary self-disclosure, product recall efforts and adherence to a corrective
action plan, the agreed penalty pursuant to the Consent Agreement was $44,000.
Total expenses in fiscal 2000 relating to the recall and action plan,
approximate $2.6 million.
Scotts has determined that quantities of cement containing asbestos
material at certain manufacturing facilities in the United Kingdom should be
removed. Scotts has reserved for the estimate of costs to be incurred for this
matter as of September 30, 2000.
GENERAL
Scotts has accrued $8.9 million at September 30, 2000 for the environmental
matters described above. The significant components of the accrual are: (i)
costs for site remediation of $6.3 million; (ii) costs for asbestos abatement of
$2.1 million; and (iii) fines and penalties of $0.5 million. The significant
portion of the costs accrued as of September 30, 2000 are expected to be paid in
fiscal 2001 and 2002; however, payments are expected to be made through fiscal
2003 and possibly for a period thereafter.
Scotts believes that the amounts accrued as of September 30, 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 Scotts 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 Scotts;
(iii) that potentially contaminated soil can be remediated in place rather
than having to be removed; and
----
27
<PAGE> 28
(iv) that only specific stream sediment sites with unacceptable levels of
potential contaminant will be remediated.
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 Scotts' results of operations, financial position and cash
flows.
ITEM 2. PROPERTIES
Scotts has fee or leasehold interests in approximately 60 facilities.
Scotts leases from the Union County Community Improvement Corporation, its
Marysville, Ohio headquarters for the North American Consumer Lawns, Consumer
Gardens, Consumer Growing Media, and Consumer Ortho Business Groups, the North
American Professional Business Group, and the Operations and Research and
Development functions. These facilities encompass approximately 875 acres of
land. Scotts leases space in downtown Columbus for its World Headquarters
office. Four research facilities in Apopka, Florida; Cleveland, Texas; Gervais,
Oregon; and Moorestown, New Jersey, comprise 129 acres. The Ortho production
facility encompasses 27 acres in Fort Madison, Iowa. Scotts leases warehouse
space throughout the United States and continental Europe as needed. Republic
Tool leases its 20-acre spreader facility in Carlsbad, California.
Scotts operates 25 growing media facilities located nationwide in 20
states. Twenty-three are owned by Scotts and two are leased. Most facilities
include production lines, warehouses, offices and field processing areas.
As of October 1, 2000, Scotts had two remaining compost facilities in
Connecticut. One site is located at a bagging facility in Lebanon, Connecticut
and the other is a stand-alone leased facility in Fairfield, Connecticut.
Scotts owns three manufacturing facilities in Hope, Arkansas; Fairfield,
California; and Heerlen, Netherlands. It leases three manufacturing facilities
for professional horticultural products in Milpitas, California; North
Charleston, South Carolina; and Travelers Rest, South Carolina.
Internationally, Scotts leases its: U.K. headquarters, located in Godalming
(Surrey); French headquarters, located in Lyon; German headquarters, located in
Ingleheim; and Worldwide Professional Group headquarters, located in
Waardenburg, Netherlands.
Scotts owns manufacturing facilities in East Yorkshire (Howden, Hatfield
and Swinefleet) and Bramford (Suffolk) in the United Kingdom. Scotts also owns
the Hautmont plant in France, a blending and bagging facility for growing media
and fertilizers sold to the consumer market; and the Bourth plant, also in
France, a facility for formulating, blending and packaging pesticide products
for the consumer market. A sales and research and development facility is
maintained at the Ingleheim, Germany site. Scotts leases sales offices and
operates an organics bagging facility in Didam, Netherlands. Sales offices are
also leased in Saint Niklaas, Belgium.
Scotts leases property for fifteen lawn care service centers in Georgia,
Illinois, Indiana, Kentucky, Maryland, Missouri, Pennsylvania and Ohio. Scotts
also leases the land upon which Sanford Scientific is located in Waterloo, New
York.
As a result of the Ortho acquisition, Scotts acquired research stations in
Moorestown, New Jersey; and Valley Center, California. Foreign operations
acquired as a result of the Ortho acquisition include a plant in Corwen, United
Kingdom. Scotts also operates sales offices in Beaverton, Oregon; Rolling
Meadows, Illinois; and Bentonville, Arkansas.
Scotts' management believes that its facilities are adequate to serve their
intended purposes at this time and that its property leasing arrangements are
stable. Please also see the discussion of Scotts' production facilities in "ITEM
1. BUSINESS -- Matters Relating to Scotts Generally -- Operations -- Production
Facilities" above.
----
28
<PAGE> 29
ITEM 3. LEGAL PROCEEDINGS
As noted in the discussion of "Environmental and Regulatory Considerations"
in "ITEM 1. BUSINESS", Scotts is involved in several pending environmental
matters. 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 the final resolution of these matters will not
materially affect Scotts' future quarterly or annual operating results.
Pending material legal proceedings are as follows:
AGREVO ENVIRONMENTAL HEALTH, INC.
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 U.S. District Court for the Southern District of
New York (the "New York Action"), against Scotts, a subsidiary of Scotts and
Monsanto (now Pharmacia) seeking damages and injunctive relief for alleged
antitrust violations and breach of contract by Scotts and its subsidiary and
antitrust violations and tortious interference with contract by Monsanto. Scotts
purchased a consumer herbicide business from AgrEvo in May 1998. AgrEvo claims
in the suit that Scotts' 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 Scotts to
eliminate the herbicide Scotts 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 Scotts' execution of various
agreements with Monsanto, including the Roundup(R) marketing agreement, as well
as Scotts' subsequent actions, violated the purchase agreements between AgrEvo
and Scotts.
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,
Scotts filed an answer denying liability and asserting counterclaims that it was
fraudulently induced to enter into the agreement for the 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, Scotts 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 Scotts' counterclaims. On May 5, 2000, AgrEvo
amended its complaint to add a claim for fraud and to incorporate the Delaware
Action described below. Thereafter, Scotts moved to dismiss the new claims, and
the defendants renewed their pending motions to dismiss. On June 2, 2000, the
court (i) granted Scotts' motion to dismiss the fraud claim AgrEvo had added to
its complaint; (ii) granted AgrEvo's motion to dismiss Scotts'
fraudulent-inducement counterclaim; (iii) denied AgrEvo's motion to dismiss
Scotts' counterclaims related to breach of representations and warranties; and
(iv) denied defendants' motion to dismiss the antitrust claims. On July 14,
2000, Scotts 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 Scotts 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 Scotts'
subsidiaries seeking damages for alleged breach of contract. AgrEvo alleges
that, under the contracts by which a subsidiary of Scotts purchased a herbicide
business from AgrEvo in May 1998, two of Scotts' 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.
Scotts' subsidiaries have moved to dismiss or stay this action. On January 31,
2000, the Delaware court stayed AgrEvo's action pending the resolution of a
motion to amend the New York Action, and the resolution of the New York Action.
If the above actions are determined adversely to Scotts, the result could
have a material adverse effect on our results of operations, financial position
and cash flows.
----
29
<PAGE> 30
CENTRAL GARDEN & PET COMPANY
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 its outstanding accounts receivable from Central
Garden with respect to Scotts' 2000 fiscal year. Scotts' complaint was later
amended to seek approximately $24 million in accounts receivable and additional
damages for other breaches of duty. Pharmacia Corporation (formerly Monsanto)
also filed suit against Central Garden 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 filed suit against Scotts and Pharmacia in
the U.S. District Court for the Northern District of California (San Francisco
Division) alleging various claims, including breach of contract and violations
of federal antitrust laws, and seeking an unspecified amount of damages and
injunctive relief. On October 26, 2000, after a noticed hearing, the District
Court dismissed all of Central Garden's breach of contract claims for lack of
subject matter jurisdiction. On November 17, 2000, Central Garden filed an
amended complaint in the District Court, re-alleging various claims for
violations of federal antitrust laws and also alleging state antitrust claims
under the Cartwright Act, Section 16726 of the California Business and
Professions Code. On October 31, 2000, Central Garden filed an additional
complaint against Scotts and Pharmacia in the California Superior Court of
Contra Costa County. That complaint seeks to assert the breach of contract
claims previously dismissed by the District Court and additional claims under
sec. 17200 of the California Business and Professional Code. On December 4,
2000, defendants Scotts and Pharmacia jointly filed a motion to stay this action
based on the pendency of prior lawsuits (including the two described above) that
involve the same subject matter. Defendants' motion to stay is set for hearing
on January 19, 2001. Scotts believes that Central Garden's federal and state
claims are entirely without merit and intends to vigorously defend against them.
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 ("ICC") against Rhone-Poulenc S.A. and
Rhone-Poulenc Agro S.A. (collectively, "Rhone-Poulenc") under arbitration
provisions contained in contracts (including a Master Contract and Research and
Development Agreement dated September 30, 1998) 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 ("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.
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 U.S. 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.
On January 7, 2000, the arbitration 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 specified products.
On October 9, 2000, the ICC issued a First Partial Award by the tribunal
which: (i) found that Rhone-Poulenc breached its duty of good faith under French
law by not disclosing to Scotts the contemplated combination of Rhone-Poulenc
Agro and AgrEvo GmbH; (ii) directed that the parties re-negotiate a non-compete
clause of the Master Contract; and (iii) ruled that the Research and Development
Agreement is binding upon both Rhone-Poulenc Agro and its post-merger successor,
Aventis CropScience S.A.
The tribunal invited Scotts to proceed to a hearing to establish the amount
of damages suffered as a result of the determined breach of the duty of good
faith. Further, the tribunal ordered that Rhone-Poulenc shall be responsible for
Scotts' reasonable legal fees and other expenses up to and including the date of
notification of the First Partial Award, less Rhone-Poulenc's costs referable to
an interim relief application by Scotts. No date has been set for a damages
hearing.
----
30
<PAGE> 31
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". AgrEvo thereafter removed the action to the U.S.
District Court for the Southern District of Ohio. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders during
the fourth quarter of the fiscal year covered by this Report.
EXECUTIVE OFFICERS OF REGISTRANT
The executive officers of The Scotts Company, their positions and, as of
November 1, 2000, their ages and years with The Scotts Company (and its
predecessors) are set forth below.
<TABLE>
<CAPTION>
Years with
Scotts
(And Its
Name Age Position(s) Held Predecessors)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Charles M. Berger 64 Chairman of the Board 4
and Chief Executive Officer
James Hagedorn 45 President, Chief Operating Officer 13
and a Director
Michael P. Kelty, Ph.D. 50 Group Executive Vice President, 21
Technology and Operations
James L. Rogula 66 Group Executive Vice President, 5
North American Business Groups
G. Robert Lucas 57 Executive Vice President, 3
General Counsel and Secretary
Patrick J. Norton 49 Executive Vice President, 10 months
Chief Financial Officer and a Director
Laurens J.M. de Kort 49 Senior Vice President, 18
Professional Business Group, Worldwide
William A. Dittman 44 Senior Vice President, 8
Consumer Gardens Business Group
Michel J. Farkouh 43 Senior Vice President, 2
International Consumer Business Group
(acting)
Thomas A. Feusse 41 Senior Vice President, Consumer 15
Growing Media Business Group
Nick G. Kirkbride 41 Senior Vice President, 2
International Consumer Business Group,
United Kingdom and Ireland
Hadia Lefavre 55 Senior Vice President, 1
Human Resources Worldwide
</TABLE>
----
31
<PAGE> 32
<TABLE>
<CAPTION>
Years with
Scotts
(And Its
Name Age Position(s) Held Predecessors)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Daniel C. McCafferty 42 Senior Vice President, 1
Consumer Ortho Business Group
Joseph M. Petite 50 Senior Vice President, 12
Business Process Development
William R. Radon 41 Senior Vice President, 3
Information Technology
Christian Ringuet 49 Senior Vice President, 14
International Consumer Business Group,
France
Mark R. Schwartz 42 Senior Vice President, 13
Branded Plants Business subgroup
L. Robert Stohler 59 Senior Vice President, 5
Consumer Lawns Business Group
</TABLE>
Executive officers serve at the discretion of the Board of Directors and in
the case of: Mr. Berger, Mr. Hagedorn, Mr. Lucas, Mr. Norton, Mr. de Kort, Mr.
Kirkbride, Ms. Lefavre and Mr. Ringuet, pursuant to employment agreements.
The business experience of each of the persons listed above during the past
five years is as follows:
Mr. Berger was elected Chairman of the Board and Chief Executive Officer of
Scotts in August 1996. From August 1996 until April 2000, he was also President
of Scotts. Mr. Berger came to Scotts from H. J. Heinz Company, where, from
October 1994 to August 1996, he served as Chairman and Chief Executive Officer
of Heinz India Pvt. Ltd. (Bombay). During his 32-year career at Heinz, he also
held the positions of Chairman, President and Chief Executive Officer of Weight
Watchers International, a Heinz affiliate; Managing Director and Chief Executive
Officer of Heinz-Italy (Milan), the largest Heinz profit center in Europe;
General Manager, Marketing, for all Heinz U.S. grocery products; Marketing
Director for Heinz UK (London) and Director of Corporate Planning at Heinz World
Headquarters.
Mr. Hagedorn was named President and Chief Operating Officer of Scotts in
April 2000. From December 1998 to April 2000, he served as President, Scotts
North America. He was previously Executive Vice President, U.S. Business Groups,
of Scotts, from October 1996 to December 1998. From May 1995 to October 1996, he
served as Senior Vice President, Consumer Gardens Group, of Scotts. He served as
Executive Vice President of Scotts' Miracle-Gro Products, Inc. (now Scotts'
Consumer Gardens Business Group) from May 1995 to August 2000, and Executive
Vice President of Stern's Miracle-Gro Products, Inc. from 1989 until May 1995.
Mr. Hagedorn also serves as a director of Scotts. Mr. Hagedorn is the son of
Horace Hagedorn, Director Emeritus of Scotts, and is the brother of Katherine
Hagedorn Littlefield, a director of Scotts.
Dr. Kelty was named Group Executive Vice President, Technology and
Operations, of Scotts, in February 2000. He was previously Executive Vice
President, Technology and Operations, of Scotts, since February 1999. From July
1995 to February 1999, he was Senior Vice President, Professional Business
Group, of Scotts.
Mr. Rogula was named Group Executive Vice President, North American
Business Groups, of Scotts, in April 2000. From October 1998 to April 2000, he
served as Senior Vice President, Consumer Ortho Business Group. Prior thereto,
he had been Senior Vice President, Consumer Lawns Group, of Scotts since October
1996. He served as Senior Vice President, Consumer Business Group, of Scotts
from January 1995 to October 1996.
Mr. Lucas was named Executive Vice President, General Counsel and Secretary
of Scotts in February 1999. He was previously Senior Vice President, General
Counsel and Secretary of Scotts, since May 1997. From 1990 until the time he
joined Scotts, Mr. Lucas was a partner with the law firm Vorys, Sater, Seymour
and Pease LLP ("VSSP"). From 1993 to the time he joined Scotts, he was the lead
outside counsel at VSSP representing Scotts. Mr. Lucas is a director of Bob
Evans Farms, Inc.
----
32
<PAGE> 33
Mr. Norton was named Executive Vice President and Chief Financial Officer
of Scotts in May 2000, having served as interim Chief Financial Officer of
Scotts since February 2000. From 1983 until February 1997, Mr. Norton was the
President, Chief Executive Officer and a director of Barefoot Inc., the second
largest lawn care company in the United States prior to its acquisition in
February 1997 by Service Master. Mr. Norton also serves as a director of Scotts.
Mr. de Kort was named Senior Vice President, Professional Business Group,
Worldwide, of Scotts, in June 2000. From May 1999 to October 2000, he served as
Senior Vice President, Zone 4, International. From July 1994 to May 1999, he was
Vice President, Scotts Europe, Middle East, Africa. Mr. de Kort is employed by
Scotts International B.V. (formerly Scotts Europe B.V.), a wholly-owned
subsidiary of Scotts.
Mr. Dittman was named Senior Vice President, Consumer Gardens Business
Group, of Scotts, in January 2000. He was previously Senior Vice President,
Growing Media Business Group since April 1998. From December 1996 to April 1998,
he was Senior Vice President of Sales, Marketing and Advertising of the Consumer
Gardens Group of Scotts. From 1992 to December 1996, he was Vice President of
Sales, Stern's Miracle-Gro Products, Inc.
Mr. Farkouh was named acting Senior Vice President, International Consumer
Business Group, of Scotts, in October 2000. From May 1999 to October 2000, he
served as Senior Vice President, Zone 3, International, having joined Scotts
France SAS in January 1999. From January 1997 to the time he joined Scotts, he
was Vice President, Worldwide Lawn and Garden Category Manager, of Monsanto
Company. From 1991 to January 1997, he was General Manager, Lawn and Garden
Europe, of Monsanto Company.
Mr. Feusse was named Senior Vice President, Consumer Growing Media Business
Group, of Scotts, in October 2000. From January 2000 to October 2000, he served
as interim Senior Vice President, Consumer Growing Media Business Group. From
August 1998 to January 2000, he served as Vice President, Business Operations of
the Consumer Growing Media Business Group of Scotts, and from April 1996 to
August 1998 he was Vice President, Finance & Administration, Consumer Lawns
Business Group of Scotts. Mr. Feusse was Scotts Corporate Controller from 1992
to April 1996.
Mr. Kirkbride was named Senior Vice President, International Consumer
Business Group, United Kingdom and Ireland, of Scotts, in October 2000. From May
1999 to October 2000, he served as Senior Vice President, Zone 1, International,
having joined The Scotts Company (UK) Ltd. in December 1998. From January 1995
to the time he joined Scotts, he was Managing Director of The Virgin Cola
Company, a privately-held soft drink company.
Ms. Lefavre joined Scotts as Senior Vice President, Human Resources
Worldwide, in March 1999. From October 1995 to October 1998, she served as
Senior Vice President, Human Resources Worldwide, at Rhone-Poulenc Rorer Inc., a
pharmaceutical company, based in Pennsylvania. From April 1994 to October 1995,
she was Vice President, Executive Management, of Bull, a computer company based
in Paris, France.
Mr. McCafferty was named Senior Vice President, Ortho Business Group, of
Scotts, in April 2000. He had previously been Vice President Sales, Ortho
Business Group, of Scotts, since January 1999. Prior to the Ortho acquisition by
Scotts, Mr. McCafferty had been Vice President, North America Sales with The
Solaris Group (a division of Monsanto), since March 1997. Prior to joining The
Solaris Group, Mr. McCafferty was Vice President and General Manager of
NutraSweet Kelco's Beverage Group (a division of Monsanto), from January 1996 to
March 1997.
Mr. Petite was named Senior Vice President, Business Process Development,
of Scotts, in February 1998. He served as Senior Vice President, Consumer
Growing Media Business Group, of Scotts from December 1996 to February 1998.
From July 1996 to December 1996, he served as Vice President, Consumer Growing
Media Business Group, of Scotts. From November 1995 to July 1996, Mr. Petite
served as Vice President, Strategic Planning of Scotts. From 1989 to November
1995, he was Vice President of Marketing, Consumer Business Group, of Scotts.
Mr. Radon was named Senior Vice President, Information Technology in
February 1998. From September 1995 to the time he joined Scotts in February
1998, Mr. Radon was Vice President, Chief Information Officer at Lamson &
Sessions, a manufacturer and distributor of plastic pipe, conduit and consumer
electrical devices. From 1984 to September 1995, he was a management consultant
at Ernst & Young.
----
33
<PAGE> 34
Mr. Ringuet was named Senior Vice President, International Consumer
Business Group, France in October 2000. He joined Scotts France SAS in October
1998 and served as Senior Vice President, Zone 2, International until October
2000. He was Managing Director of Rhone-Poulenc Jardin, from March 1995 through
September 1998. From 1986 to March 1995, he was Marketing and Sales Manager of
Rhone-Poulenc Jardin. Mr. Ringuet resigned as an executive officer of Scotts on
November 17, 2000, but remains an associate of Scotts through December 17, 2000.
Mr. Schwartz was named Senior Vice President, Branded Plants Business
Group, of Scotts, in May 2000. Previously, he was Vice President, Strategic
Initiatives, U.S. Business Groups, of Scotts, since November 1998. From December
1996 to November 1998, he was Senior Vice President, Operations and Finance, of
the Consumer Gardens Group, of Scotts. From 1991 to December 1996, he was Vice
President, Product Development, of Stern's Miracle-Gro Products, Inc.
Mr. Stohler was named Senior Vice President, Consumer Lawns Business Group,
in October 1998. Prior thereto, he had been Senior Vice President, International
Business Group, of Scotts since December 1996. From November 1995 to December
1996, he served as Vice President, International Business Group, of Scotts.
----
34
<PAGE> 35
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common shares of The Scotts Company trade on the New York Stock
Exchange under the symbol "SMG".
<TABLE>
<CAPTION>
Sale Prices
-------------
High Low
---------------------------------------------------------------------------
<S> <C> <C>
FISCAL 1999
1st quarter $36 3/16 $26 5/8
2nd quarter 39 3/4 32 3/8
3rd quarter 47 5/8 38 1/2
4th quarter 46 3/8 34 5/8
FISCAL 2000
1st quarter $41 1/4 $35 1/4
2nd quarter 42 29 7/16
3rd quarter 41 1/2 32 11/16
4th quarter 37 1/2 31
</TABLE>
Scotts has not paid dividends on the common shares in the past and does not
presently plan to pay dividends on the common shares. It is presently
anticipated that earnings will be retained and reinvested to support the growth
of Scotts' business. The payment of any future dividends on common shares will
be determined by the Board of Directors of Scotts in light of conditions then
existing, including Scotts' earnings, financial condition and capital
requirements, restrictions in financing agreements, business conditions and
other factors.
As of December 1, 2000, Scotts estimates there were approximately 8,200
shareholders including holders of record and Scotts' estimate of beneficial
holders.
----
35
<PAGE> 36
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
2000 1999(1) 1998(2) 1997(3) 1996
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Sales $1,764.3 $1,648.3 $1,113.0 $899.3 $750.4
Gross profit 712.0 659.2 398.0 325.7 238.0
Income from operations(4) 210.2 196.1 94.1 94.8 26.3
Income (loss) before extraordinary
items 73.1 69.1 37.0 39.5 (2.5)
Income (loss) applicable to common
shareholders 66.7 53.5 26.5 29.7 (12.3)
Depreciation and amortization 66.3 60.2 37.8 30.4 29.3
FINANCIAL POSITION:
Working capital(5) 234.1 274.8 135.3 146.5 181.1
Investments in property, plant and
equipment 72.5 66.7 41.3 28.6 18.2
Property, plant and equipment, net 290.5 259.4 197.0 146.1 139.5
Total assets 1,761.4 1,769.6 1,035.2 787.6 731.7
Total debt 862.8 950.0 372.5 221.3 225.3
Total shareholders' equity 477.9 443.3 403.9 389.2 364.3
CASH FLOWS:
Cash flows from operating
activities 171.5 78.2 71.0 121.1 82.3
Cash flows from investing
activities (88.5) (571.6) (192.1) (72.5) (17.4)
Cash flows from financing
activities (79.2) 513.9 118.4 (46.2) (61.1)
RATIOS:
Operating margin 11.9% 11.9% 8.5% 10.5% 3.5%
Current ratio 1.6 1.7 1.6 2.1 2.6
Total debt to total book
capitalization 64.3% 68.2% 48.0% 36.2% 38.2%
Return on average shareholders'
equity 15.9% 14.9% 9.2% 10.5% (0.7)%
PER SHARE DATA:
Basic earnings (loss) per common
share before extraordinary items 2.39 3.25 1.46 1.60 (0.65)
Basic earnings (loss) per common
share 2.39 2.93 1.42 1.60 (0.65)
Diluted earnings (loss) per common
share before extraordinary items
and impact of early conversion
of Class A Convertible Preferred
Stock 2.39 2.27 1.22 1.35 (0.65)
Diluted earnings (loss) per common
share 2.25 2.08 1.20 1.35 (0.65)
Price to diluted earnings per
share, end of period 14.9 16.6 25.5 19.4 nm
Stock price at year-end 33.50 34.63 30.63 26.25 19.25
Stock price range -- High 42.00 47.63 41.38 30.56 21.88
Low 29.44 26.63 26.25 17.75 16.13
OTHER:
EBITDA(6) 276.5 256.3 131.9 125.2 55.6
EBITDA margin 15.7% 15.5% 11.9% 13.9% 7.4%
Interest coverage (EBITDA/interest
expense) 2.9 3.2 4.1 5.0 2.2
Average common shares outstanding 27.9 18.3 18.7 18.6 18.8
Common shares used in diluted
earnings (loss) per common share
calculation 29.6 30.5 30.3 29.3 18.8
Dividends on Class A Convertible
Preferred Stock $ 6.4 $ 9.7 $ 9.8 $ 9.8 $ 9.8
</TABLE>
---------------
NOTE: Prior year presentations have been changed to conform to fiscal 2000
presentation; these changes did not impact net income.
----
36
<PAGE> 37
(1) Includes Rhone-Poulenc Jardin (nka Scotts France SAS) from October 1998,
ASEF Holdings BV from December 1998 and the non-Roundup ("Ortho") business
from January 1999.
(2) Includes Levington Group Limited (nka The Scotts Company (UK) Ltd.) from
December 1997 and EarthGro, Inc. from February 1998.
(3) Includes Miracle Holdings Limited (nka The Scotts Company (UK) Ltd.) from
January 1997.
(4) Operating income for fiscal 1998 and 1996 includes $20.4 million and $17.7
million of restructuring and other charges, respectively.
(5) Working capital is defined as total current assets less total current
liabilities.
(6) EBITDA is defined as income from operations, plus depreciation and
amortization. We believe that EBITDA provides additional information for
determining our ability to meet debt service requirements. EBITDA does not
represent and should not be considered as an alternative to net income or
cash flow from operations as determined by generally accepted accounting
principles, and EBITDA does not necessarily indicate whether cash flow will
be sufficient to meet cash requirements.
nm Not meaningful
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Scotts is a leading manufacturer and marketer of consumer branded products
for lawn and garden care and professional horticulture in the United States and
Europe. During fiscal 2000, our operations were divided into three business
segments: North American Consumer, North American Professional and
International. The North American Consumer segment includes the Consumer Lawns,
Consumer Gardens, Consumer Growing Media, Consumer Ortho and Consumer Canada
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
fiscal 2000, we spent $209.1 million on advertising and promotional activities,
which is a significant increase over fiscal 1999 spending levels of $189.0
million. 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 Consumer Lawns
Business Group increased 13.2% from fiscal 1999 to fiscal 2000, after having
experienced double-digit percentage increases in sales during the prior two
years. 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 increase consumer
marketing expenditures across all of our consumer businesses, driving increased
sales through market share and category 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
pesticides. 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). Scotts has assumed responsibility
for sales support, merchandising, distribution and logistics. 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
$366 million. These transactions with Monsanto 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 Consumer Ortho
Business Group within the North American Consumer segment.
We believe that these transactions provide us with several strategic
benefits including immediate market penetration, geographic expansion, brand
leveraging opportunities and the achievement of substantial cost savings. With
the Ortho acquisition, we believe we are currently a leader by market share
----
37
<PAGE> 38
in all five segments of the consumer lawn and garden category in North America:
lawn fertilizer, garden fertilizer, growing media, grass seeds and pesticides.
We believe that we are now positioned as the only company with a complete
offering of consumer lawn and garden products in the United States.
Over the past several 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, from Rhone-Poulenc for approximately $147.5 million (excluding
access rights to certain research and development acquired for $23.2 million).
This acquisition provided a significant addition to our existing European
platform and strengthened 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.
In December 1998, we acquired ASEF Holdings 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 Scotts 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 our consolidated results of
operations and financial position should be read in conjunction with our
Consolidated Financial Statements included elsewhere in this report. Dollars are
in millions except per share data.
RESULTS OF OPERATIONS
The following table sets forth the components of income and expense as a
percentage of net sales for the three years ended September 30, 2000:
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 59.6 60.0 64.2
-------- -------- --------
Gross profit 40.4 40.0 35.8
Commission earned from agency
agreement, net 1.7 1.8 0.0
Advertising and promotion 11.9 11.5 9.4
Selling, general and administrative 17.2 17.1 15.2
Amortization of goodwill and other
intangibles 1.4 1.5 1.2
Restructuring and other charges 0.0 0.0 1.4
Other (income) expense, net (0.3) (0.2) 0.1
-------- -------- --------
Income from operations 11.9 11.9 8.5
Interest expense 5.3 4.8 2.9
-------- -------- --------
Income before income taxes 6.6 7.1 5.6
Income taxes 2.4 2.9 2.2
-------- -------- --------
Income before extraordinary items 4.2 4.2 3.4
Extraordinary loss on extinguishment
of debt 0.0 0.4 0.1
-------- -------- --------
Net income 4.2 3.8 3.3
Dividends on Class A Convertible
Preferred Stock 0.4 0.6 0.9
-------- -------- --------
Income applicable to common
shareholders 3.8% 3.2% 2.4%
======== ======== ========
</TABLE>
----
38
<PAGE> 39
The following table sets forth net sales by business segment for the three
years ended September 30, 2000:
<TABLE>
<CAPTION>
2000 1999 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
North American Consumer:
Consumer Lawns $ 517.6 $ 457.2 $ 366.3
Consumer Gardens 157.8 141.2 128.0
Consumer Growing Media 300.5 263.7 231.3
Consumer Ortho 255.5 212.5 0.0
Consumer Canada 29.8 22.4 8.1
-------- -------- --------
Total 1,261.2 1,097.0 733.7
North American Professional 127.6 159.4 179.4
International 375.5 391.9 199.9
-------- -------- --------
Consolidated $1,764.3 $1,648.3 $1,113.0
======== ======== ========
</TABLE>
FISCAL 2000 COMPARED TO FISCAL 1999
Net sales for fiscal 2000 were $1.8 billion, an increase of 7.0% over
fiscal 1999 net sales of $1.7 billion. On a pro forma basis, assuming that the
Ortho acquisition had occurred on October 1, 1998, net sales for fiscal 2000
were 4.9% higher than pro forma net sales for fiscal 1999. The increase in net
sales from year to year was driven by significant increases in net sales across
all businesses in the North American Consumer segment, partially offset by
decreases in net sales in the North American Professional and International
segments as discussed below.
North American Consumer segment net sales were $1.3 billion in fiscal 2000,
an increase of $164.2 million, or 15.0%, over net sales for fiscal 1999 of $1.1
billion. Net sales in the Consumer Lawns Business Group increased $60.4 million,
or 13.2%, from fiscal 1999 to fiscal 2000, primarily due to a significant
increase in sales to and consumer takeaway from national home centers. Net sales
in the Consumer Gardens Business Group increased $16.6 million, or 11.8%,
primarily driven by strong net sales and market share performance in the water
soluble and tree spikes product lines and the successful introduction of new
products such as Miracle-Gro(R) Garden Weed Prevent (now known as Miracle-Gro(R)
Garden Weed Preventer(TM)) line in fiscal 2000. Net sales in the Consumer
Growing Media Business Group increased $36.8 million, or 14.0%, due to strong
category and market share growth, particularly for value-added products such as
Miracle-Gro(TM) Potting Soils. Sales in the Consumer Ortho Business Group
increased $43.0 million, or 20.2%, on an actual basis and $10.0 million, or
4.1%, on a pro forma basis, reflecting significantly improved volume with home
center retailers and improved category and market share performance on the
selective weed control product lines. Net sales for the Consumer Ortho Business
Group were negatively impacted by the voluntary product return of the registered
pesticide Ortho(R) Home Defense(R) Indoor & Outdoor Insect Killer, sold with the
Pull 'N Spray(R) pump dispenser, the phasing out of products containing the
active ingredient Dursban and reduced selling efforts by a primary distributor
prior to its termination on September 30, 2000. Selling price changes did not
have a significant impact on net sales in the North American Consumer segment
for fiscal 2000.
North American Professional segment net sales of $127.6 million in fiscal
2000 were $31.8 million lower than fiscal 1999 net sales of $159.4 million. In
fiscal 1999, the North American Professional segment consisted of two
businesses: the ProTurf(R) business which provides turf care products to golf
courses, athletic fields and related facilities and the Horticulture business
which provides plant care products to professional nurseries and growers. The
decrease in net sales for the North American Professional segment was primarily
due to lower net sales of ProTurf(R) products and the sale of the ProTurf(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 for the period prior to the sale of the business. Net sales of
horticulture products within this segment were slightly improved compared to the
prior year.
----
39
<PAGE> 40
International segment net sales of $375.5 million in fiscal 2000 were $16.4
million lower than net sales for fiscal 1999 of $391.9 million. Excluding the
adverse impact of changes in exchange rates, net sales for the International
segment increased 5.1% compared to the prior year period. The 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 caused by significant product
rationalization and unusually poor weather.
Gross profit increased to $712.0 million for fiscal 2000, an increase of
8.0% over fiscal 1999 gross profit of $659.2 million, driven by the 7.0%
increase in year-to-date net sales discussed above and a slight increase in
gross profit as a percentage of net sales. As a percentage of net sales, gross
profit was 40.4% for fiscal 2000 compared to 40.0% of net sales for fiscal 1999.
This increase in profitability on net sales was driven by a shift to direct
distribution to certain retail accounts, improved product mix toward higher
margin, value-added products and improved efficiencies in Scott's production
plants, offset by increased urea, fuel and other raw material costs and a
significant erosion in the profitability of the ProTurf(R) business prior to its
sale.
The "gross commission from agency agreement" in fiscal 2000 was $39.2
million, compared to $30.3 million in fiscal 1999. The increase in the gross
commission from year to year was driven by significantly higher sales of
Roundup(R) worldwide year over year. The gross commission earned under the
agreement is based on the EBIT (as defined by the agreement) generated each
program year by the global Roundup(R) business. "Contribution expenses under
agency agreement" were $9.9 million for fiscal 2000, compared to $1.6 million
for fiscal 1999. The increase in contribution expenses was due to an increase in
the contribution payment to Monsanto (now Pharmacia) and an increase of $3.2
million in the amortization of the $32 million marketing fee paid to Monsanto as
a result of correcting the amortization period from 20 to 10 years. The $3.2
million of additional amortization represents the additional amortization of
$1.6 million that was not recognized in fiscal 1999 and additional amortization
of $1.6 million for fiscal 2000.
Advertising and promotion expenses for fiscal 2000 were $209.1 million, an
increase of 10.6% over fiscal 1999 advertising and promotion expenses of $189.0
million. As a percentage of net sales, advertising and promotion expenses
increased to 11.9% in fiscal 2000 from 11.5% in fiscal 1999. This increase was
primarily due to continued emphasis on increasing advertising and promotion
expenses to drive revenue growth 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 fiscal 2000 were $302.7
million, an increase of 7.6% over fiscal 1999 expenses of $281.2 million. As a
percentage of net sales, selling, general and administrative expenses were 17.2%
for both fiscal 2000 and fiscal 1999. The increase in the dollar amount of
selling, general and administrative expenses was primarily related to additional
costs needed to support the increased net sales levels in the North American
Consumer Business Groups, infrastructure expenses within the International
segment, selling, general and administrative expenses for the Consumer 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 Note 15 of the Notes to
Consolidated Financial Statements.
Amortization of goodwill and other intangibles in fiscal 2000 was $25.3
million, an increase of $1.5 million over fiscal 1999 amortization of $23.8
million. This increase was primarily due to fiscal 1999 not reflecting a full
year of amortization related to the Ortho acquisition since the acquisition
occurred in January 1999.
Restructuring and other charges were $1.4 million in fiscal 1999. These
charges represent severance costs associated with the reorganization of the
North American Professional Business Group to strengthen distribution and
technical sales support, integrate brand management across market segments and
reduce annual operating expenses. Substantially all payments have been made.
There were no restructuring charges incurred in fiscal 2000.
Other income in fiscal 2000 was $6.0 million compared to other income of
$3.6 million in the prior year. The increase in other income, on a net basis,
was primarily due to the $4.6 million gain resulting from the sale of the
ProTurf(R) business, partially offset by costs incurred in connection with
Scotts' voluntary return program for the registered pesticide Ortho(R) Home
Defense(R) Indoor & Outdoor Insect Killer,
----
40
<PAGE> 41
sold with the Pull 'N Spray(R) pump dispenser and additional losses on disposals
of miscellaneous fixed assets.
Income from operations for fiscal 2000 was $210.2 million compared to
$196.1 million for fiscal 1999. The increase in income from operations was due
primarily to the increase in net sales across the North American Consumer
Business Groups as noted above, partially offset by the decrease in net sales in
the North American Professional segment.
Interest expense for fiscal 2000 was $93.9 million, an increase of $14.8
million over fiscal 1999 interest expense of $79.1 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 $43.2 million for fiscal 2000 compared to $47.9
million in the prior year. Scotts' effective tax rate decreased to 37.1% for
fiscal 2000 compared to 41.0% for the previous year. The decrease in the tax
rate for fiscal 2000 is due primarily 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 base tax rate for the year, before
reversal of reserves, to 40.0%. The base tax rate reduction is primarily a
result of the favorable treatment of a permanent tax difference associated with
percentage depletion accounting.
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 approximately
97% of the then outstanding $100 million 9 7/8% Senior Subordinated Notes due
August 2004. We 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 $73.1 million for fiscal 2000, or $2.25 per
common share on a diluted basis, compared to net income of $63.2 million for
fiscal 1999, or $2.08 per common share on a diluted basis. The diluted earnings
per share for fiscal 2000 is net of a one-time reduction of $0.22 per share
resulting from the early conversion of Class A Convertible Preferred Stock in
October 1999. The diluted earnings per share for fiscal 1999 is net of a $0.19
per share charge associated with the extraordinary loss on early extinguishment
of debt discussed above.
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales for fiscal 1999 were $1.65 billion, an increase of 48.1% over
fiscal 1998 sales of $1.1 billion. On a pro forma basis, assuming that the
Ortho, Rhone-Poulenc Jardin, Levington and EarthGro acquisitions had occurred on
October 1, 1997, pro forma net sales for fiscal 1999 were $1.68 billion, an 11%
increase over fiscal 1998 pro forma net sales of $1.5 billion. As discussed
below, the increase in net sales on a pro forma basis was primarily driven by
exceptional growth in the Consumer Lawns Business Group and strong revenue
growth within the Consumer Gardens and Consumer Growing Media Business Groups.
North American Consumer segment net sales were $1.1 billion in fiscal 1999,
an increase of nearly 50% over fiscal 1998 net sales of $734 million and an
increase of 16% over fiscal 1998 on a pro forma basis. Net sales in the Consumer
Lawns Business Group within this segment were $461.0 million in fiscal 1999, a
25% increase over fiscal 1998 net sales of $369.1 million. The continued
dramatic revenue growth in the Consumer Lawns Business Group was driven by
increases in consumer-oriented marketing efforts such as advertising, consumer
research and packaging improvements, which increased category growth and Scotts'
market share. Net sales in the Consumer Gardens Business Group increased 11% to
$147.4 million in fiscal 1999 due to several successful new product
introductions and the extension of the advertising season for All-Purpose
Miracle-Gro(R). Net sales in the Consumer Growing Media Business Group increased
14% to $264.3 million, or 11% on a pro forma basis. Significantly higher levels
of advertising and promotional spending drove this revenue growth which resulted
in increased net sales for value-added potting soils in particular. Net sales in
the Consumer Ortho Business Group were $224.3 million in fiscal 1999 which is an
increase of 10% on a pro forma basis.
----
41
<PAGE> 42
North American Professional segment net sales were $159.4 million in fiscal
1999, a decrease of 11% from fiscal 1998. The decrease in fiscal 1999 net sales
in this segment was reflected in the ProTurf(R) business, which changed its
distribution model earlier in the year, electing to market and deliver products
through distributors rather than directly to customers. Short-term interruptions
associated with this change and the discontinuance of certain commodity products
resulted in lower net sales volumes in fiscal 1999.
International segment net sales increased to $391.9 million in fiscal 1999
compared to $199.9 million in fiscal 1998, primarily the result of the
Rhone-Poulenc Jardin and ASEF acquisitions in fiscal 1999. The increase in net
sales on a pro forma basis was 9%, which was primarily due to revenue growth in
the European Professional and Rhone-Poulenc Jardin businesses, partially offset
by a net sales decline in the U.K. consumer business caused by supply chain
interruptions resulting from the integration of the recently acquired
businesses. Excluding the effects of foreign currency translation, pro forma net
sales in fiscal 1999 would have been 10% higher than fiscal 1998. Selling price
changes did not have a significant impact on Scotts' results of operations for
fiscal 1999.
Gross profit increased to $659.2 million in fiscal 1999 compared to $398.0
million in fiscal 1998. On a pro forma basis, gross profit in fiscal 1999 was
$671.1 million, or 40% of net sales, compared to $569.2 million in fiscal 1998,
or 38% of net sales. The increase in gross profit as a percentage of net sales
was driven by improved raw material costs and improved manufacturing
efficiencies from higher volumes in fiscal 1999. Fiscal 1998 gross profit also
reflected the following charges: restructuring and other charges of $2.9 million
as discussed below; start-up costs of $1.4 million associated with the upgrade
of certain domestic manufacturing facilities; demolition costs of $1.4 million
associated with the removal of certain old manufacturing facilities; unplanned
production outsourcing costs of $2.8 million; the loss of a composting contract
of $1.0 million; and unfavorable inventory adjustments of $0.8 million.
The "gross commission earned from agency agreement" in fiscal 1999 of $30.3
million was generated from our marketing agreement with Monsanto for exclusive
domestic and international marketing and agency rights to Monsanto's consumer
Roundup(R) herbicide products.
Advertising and promotion expenses for fiscal 1999 were $189.0 million, an
increase of $84.6 million over fiscal 1998 advertising and promotion expenses of
$104.4 million. The Ortho and Rhone-Poulenc Jardin businesses contributed $30.7
million and $20.5 million, respectively, to this increase. The remaining
increase reflects continued emphasis on building consumer demand through
consumer-oriented marketing efforts, and is highlighted by 28%, 26% and 64%
increases in advertising and promotional spending in the Consumer Lawns,
Consumer Gardens and Consumer Growing Media Business Groups, respectively. As a
percentage of net sales, advertising and promotion expenses increased to 11% in
fiscal 1999 from 9% in fiscal 1998.
Selling, general and administrative expenses were $281.2 million in fiscal
1999, an increase of $111.3 million over fiscal 1998 selling, general and
administrative expenses of $169.9 million. The Ortho and Rhone-Poulenc Jardin
businesses contributed $30.2 million and $37.3 million, respectively, to this
increase. The significant components of the remaining $43.8 million increase in
selling, general and administrative expenses are: additional information systems
expenses of $0.5 million for year 2000 remediation and $5.6 million for
Enterprise Resource Planning implementation efforts; increased bad debt expenses
of $4.6 million, primarily resulting from the bankruptcy of Hechinger; increased
marketing, selling and administrative costs within the Consumer Lawns, Consumer
Gardens and Consumer Growing Media Business Groups of $8.7 million to support
higher sales volumes; costs of $2.5 million associated with changes in
distribution arrangements in France; costs to integrate the Ortho business of
$8.4 million; increased research and development spending of $6.9 million,
largely in support of the acquired Ortho business; and increased legal and
environmental charges of $2.7 million, primarily for costs associated with the
environmental matter at our Marysville site.
Amortization of goodwill and other intangibles increased to $23.8 million
in fiscal 1999 compared to $12.9 million in fiscal 1998 due to additional
intangibles resulting from the Ortho, Rhone-Poulenc Jardin and ASEF
acquisitions.
Restructuring and other charges in fiscal 1999 were $1.4 million, which
represents severance costs associated with the change in distribution methods
within the ProTurf(R) business of the North American Professional segment. In
connection with this restructuring, approximately 60 in-house sales associates
were terminated in fiscal 1999. Approximately $1.1 million of severance payments
were made to these
----
42
<PAGE> 43
former associates during fiscal 1999; $0.2 million of the remaining $0.3 million
was paid in fiscal 2000, and the remaining $0.1 million is expected to be paid
in fiscal 2001. Restructuring and other charges in fiscal 1998 were $20.4
million, $15.4 million of which is identified separately within operating
expenses, $2.9 million of which is included in cost of sales and $2.1 million of
which is included in selling, general and administrative expenses.
Other income/expense for fiscal 1999 was income of $3.6 million compared to
$1.3 million of expense for fiscal 1998. Other income in fiscal 1999 represented
royalties received under license agreements for the use of some of our
trademarks. Other expenses in fiscal 1998 represented losses on the sale of
fixed assets and foreign currency, partially offset by royalty income described
above. Legal and environmental provisions of $5.4 million and $2.7 million for
fiscal 1999 and 1998, respectively, were reclassified from other income/expense
to selling, general and administrative expenses.
Income from operations for fiscal 1999 was $196.1 million compared to $94.1
million for fiscal 1998, primarily due to operating income realized from the
Ortho and Rhone-Poulenc Jardin businesses and significant improvements in the
Consumer Lawns and Consumer Growing Media Business Groups, partially offset by
increased selling, general and administrative and amortization expenses
described above.
Interest expense for fiscal 1999 was $79.1 million, an increase of $46.9
million over fiscal 1998 interest expense of $32.2 million. The increase in
interest expense was due to increased borrowings to fund the Ortho,
Rhone-Poulenc Jardin and ASEF acquisitions and higher working capital levels to
support the growth of the businesses.
Income tax expense for fiscal 1999, was $47.9 million compared to $24.9
million in fiscal 1998. Our effective tax rate was 41.0% in fiscal 1999 compared
to 40.3% in fiscal 1998. The increase in the effective tax rate was primarily
due to a reduction in foreign dividends remitted which provided excess foreign
tax credits in fiscal 1998.
As discussed below in "Liquidity and Capital Resources", in conjunction
with the Ortho acquisition, in January 1999 we 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 outstanding $100
million 9 7/8% Senior Subordinated Notes due August 2004. We 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.
We reported net income of $63.2 million for fiscal 1999, or $2.08 per share
on a diluted basis, compared to $36.3 million for fiscal 1998, or $1.20 per
share on a diluted basis. Excluding the impact of the extraordinary loss
discussed above, earnings per share for fiscal 1999 were $2.27 on a diluted
basis. Excluding the impact of restructuring and other charges taken in fiscal
1998 as well as an extraordinary loss on early extinguishment of debt, earnings
per share for fiscal 1998 was $1.62 on a diluted basis.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $171.5 million for fiscal 2000
compared to $78.2 million for fiscal 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 reducing inventory levels. The increase in cash provided by
operating activities for fiscal 2000 compared to the prior year is attributable
to a significant decrease in the amount of working capital required during the
year 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 $88.5 million for fiscal 2000
compared to $571.6 million in the prior year. In the first quarter of fiscal
1999, we purchased the Rhone-Poulenc Jardin and ASEF businesses for
approximately $147.5 million (excluding $23.2 million for access rights acquired
under a research and development 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. Scotts made an initial payment of $339.9 million at the acquisition
date, and made an additional payment of $15.6 million when the final purchase
price of $355.5 was determined in the
----
43
<PAGE> 44
third quarter of fiscal 2000. Capital expenditures increased to $72.5 million in
fiscal 2000 compared to $66.7 million in fiscal 1999.
Financing activities required cash of $79.2 million for fiscal 2000
compared to providing $513.9 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) marketing 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 August 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 cash provided by operating
activities during fiscal 2000, Scotts was able to make net repayments to its
credit facility of $47.6 million. Scotts also repurchased $23.9 million of
treasury shares during fiscal 2000, compared to $10.0 million in fiscal 1999.
Total debt was $862.8 million as of September 30, 2000, a decrease of $87.2
million compared with total debt at September 30, 1999. The decrease in total
debt as of September 30, 2000 was primarily due to scheduled quarterly debt
repayments on Scotts' term loans during fiscal 2000, repayments on the revolving
portion of Scotts' credit facility during fiscal 2000, and the impact of
weakening exchange rates on debt denominated in foreign currencies.
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. On December 5, 2000, we amended
our current credit facility to refinance a portion of the term loan facilities
and to increase the revolving credit facility to $575 million. See further
description of the amendment to the credit facility in Note 18 of the Notes to
Consolidated Financial Statements.
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 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 due August 2004.
Coincidental with the 8 5/8% Notes offering, Scotts settled its then
outstanding interest rate locks 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.
Capital expenditures were $72.5 million in fiscal 2000. We estimate that
capital expenditures will approximate $75-80 million in each of fiscal 2001 and
2002.
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 September 30, 2000,
1,106,295 common shares (or $40.6 million) have been repurchased under this
repurchase program limit.
In October 2000, the Board of Directors approved cancellation of the third
year commitment of $50 million under the share repurchase program. The Board did
authorize repurchasing the amount still outstanding under the second year
repurchase commitment (approximately $9.0 million) through September 30, 2001.
Any repurchase will also be subject to the covenants contained in our
credit facility as well as our other debt instruments. The repurchased shares
have been and will be held in treasury and will thereafter be used for the
exercise of employee stock options and for other general corporate purposes.
----
44
<PAGE> 45
In our opinion, cash flows from operations and capital resources will be
sufficient to meet debt service and working capital needs during fiscal 2001,
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 legal actions with various governmental agencies related to
environmental matters. 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 15 to our
Consolidated Financial Statements included herein and under "ITEM 1.
BUSINESS-Environmental and Regulatory Considerations" and "ITEM 3. LEGAL
PROCEEDINGS" of our Annual Report on Form 10-K for the fiscal year ended
September 30, 2000.
YEAR 2000 READINESS
In fiscal 2000, we did not experience any significant issues related to the
ability of our information technology and business systems to recognize the year
2000. In addition, we did not experience 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.
ENTERPRISE RESOURCE PLANNING
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 many key business processes in connection with the
installation of new software. SAP was selected as the primary software provider
for this project. As of October 1, 2000, all of the North American businesses
with the exception of Canada are operating under the new system. Through
September 30, 2000, we spent approximately $52.3 million on the project,
approximately 75% of which will be capitalized over a period of four to eight
years. We are currently evaluating when, and to what extent, the new information
systems and applications will be implemented at our international locations.
EURO
A new currency called the "euro" has been introduced in certain Economic
and Monetary Union (EMU) countries. During 2002, all EMU countries are expected
to be operating with the euro as their single currency. Uncertainty exists as to
the effects the euro currency will have on the marketplace. We are still
assessing the impact the EMU formation and euro implementation will have on our
internal systems and the sale of our products. We are in the process of
developing our plans and contracts for work to be performed to implement
utilization of the euro as required at our operations in continental Europe. We
expect that a significant portion of the costs associated with this work will be
incurred during fiscal 2001; however, some costs will likely be incurred in the
first quarter of fiscal 2002 as well. We have not yet determined the cost
related to addressing this issue and there can be no assurance that this issue
and its related costs will not have a material adverse effect on our business,
operating results and financial condition.
----
45
<PAGE> 46
MANAGEMENT'S OUTLOOK
Fiscal 2000 was another year of significant financial achievements for
Scotts, as we reported record net sales of $1.76 billion, grew diluted earnings
per share by at least 20% for the fourth consecutive year (on a pro forma basis,
excluding extraordinary items and the impact of the early conversion of the
Class A Convertible Preferred Stock) and established or maintained what we
believe to be the leading market share position in most of the significant lawn
and garden categories across the world. The strategic acquisitions during fiscal
1999, most notably the Ortho and Rhone-Poulenc Jardin businesses, were critical
in providing us with significant market positions in the pesticides category as
well as continental European lawn and garden markets.
During fiscal 2000, we were able to achieve our financial results despite
encountering unfavorable market trends such as rising raw material and fuel
costs, increased interest rates and declining exchange rates against the U.S.
dollar in nearly all of the significant foreign countries in which we operate.
We anticipate that raw material and fuel costs will likely remain at their high
levels or even increase further in fiscal 2001. To achieve our earnings targets
for fiscal 2001, we plan to continue our emphasis on consumer marketing to grow
the categories and our market shares, pursue opportunities to recover raw
material and fuel cost increases through increased manufacturing and
distribution efficiencies enabled by our newly implemented North American
Enterprise Resource Planning system, consolidate and reorganize our North
American sales force to better leverage sales and merchandising opportunities
with our customers, and reduce the rate of increases in our selling, general and
administrative costs.
Strategically, fiscal 2000's performance reflected the successful
continuation of our emphasis on consumer-oriented marketing efforts to pull
demand through our distribution channels. 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 our 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.
Scotts anticipates that we will continue to deliver significant revenue and
earnings growth through emphasis on executing our strategic plan. We believe
that we can continue to generate annual sales growth of 6% to 8% in our core
businesses and annual earnings growth of at least 15%. In addition, we have
targeted improving our return on invested capital. We believe that we can
achieve our goal of realizing a return of 13.5% on our invested capital (our
estimate of the average return on invested capital for our consumer products
peer group) in the next four years. We expect to achieve this goal by reducing
our overhead spending, tightening capital spending controls, implementing return
on capital measures into our incentive compensation plans and accelerating
operating performance and gross margin improvements utilizing our new Enterprise
Resource Planning capabilities in North America.
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, in this Form 10-K and in other
contexts relating to future growth and profitability targets and strategies
designed to increase total shareholder value. Forward-looking statements also
include, but are not limited to, information regarding our future economic and
financial condition, the plans and objectives of our management and our
assumptions regarding our performance and these plans and objectives.
----
46
<PAGE> 47
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 the Act.
The forward-looking statements that we make in our Annual Report, in this
Form 10-K 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 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 pesticide 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 net sales have occurred in the second and third fiscal
quarters combined. Our working capital needs and our borrowings peak near
the end of 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 facilities, 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;
- 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 flows from
operations to payments on our indebtedness, which would reduce the cash
flows 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.
----
47
<PAGE> 48
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 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 56.5% of our fiscal 2000 net sales and 41% of our
outstanding accounts receivable as of September 30, 2000. Our top three
customers, Home Depot, Wal*Mart and Kmart represented approximately
22.9%, 8.9% and 8.2% of our fiscal 2000 net 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 condition or related matters. Our inability
to collect accounts receivable from any of these customers could also
have a material adverse affect.
- IF MONSANTO 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, 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 three fiscal year period; or
- By more than 5% for each of two consecutive fiscal years.
----
48
<PAGE> 49
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), was subject to a patent
in the United States that expired in September 2000. Scotts cannot
predict the success of Roundup(R) now that glyphosate is no longer
patented. Substantial new competition in the United States could
adversely affect Scotts. Glyphosate is no longer subject to patent in
Europe and is not subject to patent in Canada. While sales of Roundup(R)
in such countries have continued to increase despite the lack of patent
protection, sales in the United States may decline as a result of
increased competition. Any such decline in sales would adversely affect
Scotts' financial results through the reduction of commissions as
calculated under the Roundup(R) marketing agreement.
Our methylene-urea product composition patent, which covers Scotts Turf
Builder(R), Scotts Turf Builder(R) with Plus 2(R) with Weed Control and
Scotts Turf Builder(R) with Halts(R) Crabgrass Preventer, is due to
expire in July 2001 and 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.
- 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. In the United States,
all products containing pesticides must be registered with the United
States Environmental Protection Agency and, in many cases, similar state
and/or foreign agencies before they can be sold. The inability to obtain
or the cancellation of any registration could have an adverse effect on
our business. The severity of the effect would depend on which products
were involved, whether another product could be substituted and whether
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 ("USEPA") is evaluating the cumulative risks from dietary and
non-dietary exposures to pesticides. The pesticides in Scotts' products,
which are also used on foods, will be evaluated by the USEPA as part of
this non-dietary exposure risk assessment. It is possible that the USEPA
or the active ingredient registrant may decide that a pesticide Scotts
uses in its products, would be limited or made unavailable to Scotts. For
example, in June 2000, DowAgroSciences, an active ingredient registrant,
voluntarily agreed to a gradual phase-out of residential uses of Dursban,
an active ingredient used by Scotts in its lawn and garden products. In
December 2000, the USEPA reached agreement with various parties,
including manufacturers of the active ingredient diazinon, regarding a
phased withdrawal of residential uses of products containing diazinon,
used also by Scotts in its lawn and garden products. Scotts cannot
predict the outcome or the severity of the effect of the USEPA's
continuing evaluations. Management believes that Scotts should be able to
----
49
<PAGE> 50
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. With regard to Dursban, Scotts has introduced, and with
regard to diazinon, Scotts expects to introduce, new pesticide products to
meet consumer needs for pest control.
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. 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.
In addition to the regulations already described, local, state, federal and
foreign agencies regulate the disposal, handling and storage of waste, and
air and water discharges from our facilities. In June 1997, the Ohio
Environmental Protection Agency (EPA) 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 potential 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.
During fiscal 2000, we made approximately $1.2 million in environmental
capital expenditures and $1.8 million in other environmental expenses,
compared with approximately $1.1 million in environmental capital
expenditures and $5.9 million in other environmental expenses in fiscal
1999. Management anticipates that environmental capital expenditures and
other environmental expenses for fiscal 2001 will not differ significantly
from those incurred in fiscal 2000. If we are required to significantly
increase our actual environmental capital expenditures and other
environmental expenses, it could adversely affect our financial results.
- THE IMPLEMENTATION OF THE EURO CURRENCY IN SOME EUROPEAN COUNTRIES
BETWEEN 1999 AND 2002 COULD ADVERSELY AFFECT US.
In January 1999, the "euro" was introduced in some Economic and Monetary
Union (EMU) countries and by 2002, all EMU countries are expected to be
operating with the euro as their single currency. Uncertainty exists as
to the effects the euro currency will have on the marketplace.
Additionally, the European Commission has not yet defined and finalized
all of the rules and regulations with regard to the euro currency. We are
still assessing the impact the EMU formation and euro implementation will
have on our internal systems and the sale of our products. We expect to
take appropriate actions based on the results of our assessment. However,
we have not yet determined the cost related to addressing this issue and
there can be no assurance that this issue and its related costs will not
have a material adverse effect on us or our operating results and
financial condition.
----
50
<PAGE> 51
- 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 Care Limited, Ortho and Rhone-Poulenc Jardin
and with the marketing agreement for consumer Roundup(R) products. In
fiscal 2000, international sales accounted for approximately 21% 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of our ongoing business, we are exposed to certain market risks,
including fluctuations in interest rates, foreign currency exchange rates and
commodity prices. We use derivative financial and other instruments, where
appropriate, to manage these risks. We do not enter into transactions designed
to mitigate our market risks for trading or speculative purposes.
INTEREST RATE RISK
We have various debt instruments outstanding at September 30, 2000 that are
impacted by changes in interest rates. As a means of managing our interest rate
risk on these debt instruments, we have entered into the following interest rate
swap agreements to effectively convert certain variable rate debt obligations to
fixed rates:
- A 20 million British Pounds Sterling notional amount swap to convert
variable-rate debt obligations denominated in British Pounds Sterling to
a fixed rate. The exchange rate used to convert British Pounds Sterling
to U.S. dollars at September 30, 2000 was $1.48: 1 GBP.
- Four interest rate swaps with a total notional amount of $105.0 million
which are used to hedge certain variable-rate obligations under our
credit facility. The credit facility requires that we enter into hedge
agreements to the extent necessary to provide that at least 50% of the
aggregate principal amount of the 8 5/8% Senior Subordinated Notes due
2009 and term loan facilities is subject to a fixed rate.
The following table summarizes information about our derivative financial
instruments and debt instruments that are sensitive to changes in interest rates
as of September 30, 2000. For debt instruments, the table presents principal
cash flows and related weighted-average interest rates by expected maturity
dates. For interest rate swaps, the table presents expected cash flows based on
notional amounts and weighted-average interest rates by contractual maturity
dates. Weighted-average variable rates are based
----
51
<PAGE> 52
on implied forward rates in the yield curve at September 30, 2000. The
information is presented in U.S. dollars (in millions):
<TABLE>
<CAPTION>
Expected Maturity Date
-------------------------------- Fair
2001 2002 2003 2004 Thereafter Total Value
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt:
Fixed rate debt $330.0 $330.0 $318.5
Average rate 8.625% 8.625%
Variable rate debt $29.4 $38.5 $42.0 $42.0 $337.6 $489.5 $489.5
Average rate 8.04% 7.97% 7.96% 7.96% 9.67% 9.02%
Interest rate derivatives:
Interest rate swap on GBP LIBOR $(0.4) $(0.2) $(0.6) $(0.6)
Average rate 7.62% 7.62% 7.62%
Interest rate swaps on USD LIBOR $1.7 $1.1 $0.5 $0.2 $3.5 $3.2
Average rate 5.10% 5.11% 5.16% 5.18% 5.11%
</TABLE>
OTHER MARKET RISKS
Our market risk associated with foreign currency rates is not considered to
be material. Through fiscal 2000, we had only minor amounts of transactions that
were denominated in foreign currencies. We are subject to market risk from
fluctuating market prices of certain raw materials, including urea and other
chemicals and paper and plastic products. Our objectives surrounding the
procurement of these materials are to ensure continuous supply and to minimize
costs. We seek to achieve these objectives through negotiation of contracts with
favorable terms directly with vendors. We do not enter into forward contracts or
other market instruments as a means of achieving our objectives or minimizing
our risk exposures on these materials.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and other information required by this Item are
contained in the financial statements, footnotes thereto and schedules listed in
the "Index to Consolidated Financial Statements and Financial Statement
Schedules" on page 57 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In accordance with General Instruction G(3), the information contained
under the captions "BENEFICIAL OWNERSHIP OF SECURITIES OF THE COMPANY -- Section
16(a) Beneficial Ownership Reporting Compliance" and "PROPOSAL NO. 1 -- ELECTION
OF DIRECTORS" in Scotts' definitive Proxy Statement for the 2001 Annual Meeting
of Shareholders to be held on January 18, 2001 filed with the Securities and
Exchange Commission pursuant to Regulation 14A promulgated under the Securities
Exchange Act of 1934 (the "Proxy Statement"), is incorporated herein by
reference. The information regarding executive officers required by Item 401 of
Regulation S-K is included in Part I hereof under the caption "Executive
Officers of Registrant."
ITEM 11. EXECUTIVE COMPENSATION
In accordance with General Instruction G(3), the information contained
under the captions "EXECUTIVE COMPENSATION" and "ELECTION OF
DIRECTORS -- Compensation of Directors" in Scotts' Proxy Statement, is
incorporated herein by reference. None of the report of the Compensation and
Organization Committee of Scotts' Board of Directors on executive compensation,
the performance graph or the Report of the Audit Committee of Scotts' Board of
Directors, each included in Scotts' Proxy Statement, shall be deemed to be
incorporated herein by reference.
----
52
<PAGE> 53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In accordance with General Instruction G(3), the information contained
under the caption "BENEFICIAL OWNERSHIP OF SECURITIES OF THE COMPANY" in Scotts'
Proxy Statement, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with General Instruction G(3), the information contained
under the captions "BENEFICIAL OWNERSHIP OF SECURITIES OF THE COMPANY" and
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in Scotts' Proxy Statement, is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
1 and 2. Financial Statements and Financial Statement Schedules:
The response to this portion of Item 14 is submitted as a separate
section of this Annual Report on Form 10-K. Reference is made to the "Index
to Consolidated Financial Statements and Financial Statement Schedules" on
page 57 herein.
3. Exhibits:
Exhibits filed with this Annual Report on Form 10-K are attached
hereto. For a list of such exhibits, see "Index to Exhibits" beginning at
page 110. The following table provides certain information concerning
executive compensation plans and arrangements required to be filed as
exhibits to this Annual Report on Form 10-K.
EXECUTIVE COMPENSATORY PLANS AND ARRANGEMENTS
<TABLE>
<CAPTION>
Exhibit
No. Description Location
-------------------------------------------------------------------------------------------------
<S> <C> <C>
10(a) The O.M. Scott & Sons Company Excess Benefit Plan, Incorporated herein by
effective October 1, 1993 reference to the Annual
Report on Form 10-K for the
fiscal year ended September
30, 1993, of The Scotts
Company, a Delaware
corporation (File No.
0-19768) [Exhibit 10(h)]
10(b) The Scotts Company 1992 Long Term Incentive Plan (as Incorporated herein by
amended through May 15, 2000) reference to the
Registrant's Quarterly
Report on Form 10-Q for the
fiscal quarter ended April
1, 2000 (File No. 1-13292)
[Exhibit 10(b)]
10(c) The Scotts Company 2000 Executive Annual Incentive Plan *
10(d) The Scotts Company 1996 Stock Option Plan (as amended Incorporated herein by
through May 15, 2000) reference to the
Registrant's Quarterly
Report on Form 10-Q for the
fiscal quarter ended April
1, 2000 (File No. 1-13292)
[Exhibit 10(d)]
</TABLE>
----
53
<PAGE> 54
<TABLE>
<CAPTION>
Exhibit
No. Description Location
-------------------------------------------------------------------------------------------------
<S> <C> <C>
10(e) Specimen form of Stock Option Agreement (as amended Incorporated herein by
through August 1, 2000) for Non-Qualified Stock Options reference to the
granted to employees under The Scotts Company 1996 Stock Registrant's Quarterly
Option Plan Report on Form 10-Q for the
fiscal quarter ended July 1,
2000 (File No. 1-13292)
[Exhibit 10(l)]
10(f) The Scotts Company Executive Retirement Plan Incorporated herein by
reference to the
Registrant's Annual Report
on Form 10-K for the fiscal
year ended September 30,
1998
(File No. 1-11593) [Exhibit
10(j)]
10(g) The Scotts Company Millennium Growth Plan (effective Incorporated herein by
October 1, 1999) reference to the
Registrant's Quarterly
Report on Form 10-Q for the
fiscal quarter ended April
1, 2000 (File No. 1-13292)
[Exhibit 10(w)]
10(h) Employment Agreement, dated as of August 7, 1998, Incorporated herein by
between the Registrant and Charles M. Berger, and three reference to the
attached Stock Option Agreements with the following Registrant's Annual Report
effective dates: September 23, 1998, October 21, 1998 on Form 10-K for the fiscal
and September 24, 1999 year ended September 30,
1998
(File No. 1-11593) [Exhibit
10(n)]
10(i) Stock Option Agreement, dated as of August 7, 1996, Incorporated herein by
between the Registrant and Charles M. Berger reference to the
Registrant's Annual Report
on Form 10-K for the fiscal
year ended September 30,
1996
(File No. 1-11593) [Exhibit
10(m)]
10(j) Employment Agreement, dated as of May 19, 1995, between Incorporated herein by
the Registrant and James Hagedorn reference to the
Registrant's Annual Report
on Form 10-K for the fiscal
year ended September 30,
1995
(File No. 1-11593) [Exhibit
10(p)]
10(k) Letter Agreement, dated December 23, 1996, between the Incorporated herein by
Registrant and Jean H. Mordo reference to the
Registrant's Annual Report
on Form 10-K for the fiscal
year ended September 30,
1997
(File No. 1-11593)[Exhibit
10(p)]
10(l) Termination Letter Agreement, dated November 6, 2000, *
between the Registrant and Jean H. Mordo
10(m) Letter Agreement, dated April 10, 1997, between the Incorporated herein by
Registrant and G. Robert Lucas reference to the
Registrant's Annual Report
on Form 10-K for the fiscal
year ended September 30,
1997
(File No. 1-11593) [Exhibit
10(r)]
</TABLE>
----
54
<PAGE> 55
<TABLE>
<CAPTION>
Exhibit
No. Description Location
-------------------------------------------------------------------------------------------------
<S> <C> <C>
10(n) Letter Agreement, dated December 17, 1997, between the Incorporated herein by
Registrant and William R. Radon reference to the
Registrant's Annual Report
on Form 10-K for the fiscal
year ended September 30,
1998
(File No. 1-11593) [Exhibit
10(s)]
10(o) Letter Agreement, dated March 30, 1998, between the Incorporated herein by
Registrant and William A. Dittman reference to the
Registrant's Annual Report
on Form 10-K for the fiscal
year ended September 30,
1998
(File No. 1-11593) [Exhibit
10(t)]
10(p) Letter Agreement, dated March 16, 1999, between the Incorporated herein by
Registrant and Hadia Lefavre reference to the
Registrant's Annual Report
on Form 10-K for the fiscal
year ended September 30,
1999
(File No. 1-11593) [Exhibit
10(p)]
10(q) Letter Agreement, dated June 8, 2000, between the *
Registrant and Patrick J. Norton
10(r) Contract of Employment, dated February 28, 1986, between Incorporated herein by
Rhodic (assumed by Scotts France SAS) and Christian reference to the
Ringuet Registrant's Annual Report
on Form 10-K for the fiscal
year ended September 30,
1999
(File No. 1-11593) [Exhibit
10(r)]
10(s) Employment Agreement, dated August 1, 1995, between Incorporated herein by
Scotts Europe B.V. (now Scotts International B.V.) and reference to the
Laurens J.M. de Kort Registrant's Annual Report
on Form 10-K for the fiscal
year ended September 30,
1999
(File No. 1-11593) [Exhibit
10(s)]
10(t) Service Agreement, dated September 9, 1998, between Incorporated herein by
Levington Horticulture Limited (nka The Scotts Company reference to the
(UK) Ltd.) and Nicholas Kirkbride Registrant's Annual Report
on Form 10-K for the fiscal
year ended September 30,
1999
(File No. 1-11593) [Exhibit
10(t)]
</TABLE>
---------------
* Filed herewith.
(b) REPORTS ON FORM 8-K
The Registrant filed no Current Reports on Form 8-K during the last
quarter of the period covered by this Report.
(c) EXHIBITS
See Item 14(a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES
The response to this portion of Item 14 is submitted as a separate
section of this Annual Report on Form 10-K. See Item 14(a)(2) above.
----
55
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE SCOTTS COMPANY
By: /s/ CHARLES M. BERGER
--------------------------------------
Charles M. Berger, Chairman of the
Board and Chief Executive Officer
Dated: December 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ CHARLES M. BERGER Chairman of the Board/Chief December 28, 2000
--------------------------------------------------- Executive Officer
Charles M. Berger
/s/ ARNOLD W. DONALD Director December 28, 2000
---------------------------------------------------
Arnold W. Donald
/s/ JOSEPH P. FLANNERY Director December 28, 2000
---------------------------------------------------
Joseph P. Flannery
/s/ JAMES HAGEDORN President/Chief Operating December 28, 2000
--------------------------------------------------- Officer/ Director
James Hagedorn
/s/ ALBERT E. HARRIS Director December 28, 2000
---------------------------------------------------
Albert E. Harris
/s/ JOHN KENLON Director December 28, 2000
---------------------------------------------------
John Kenlon
/s/ KATHERINE HAGEDORN LITTLEFIELD Director December 28, 2000
---------------------------------------------------
Katherine Hagedorn Littlefield
/s/ KAREN G. MILLS Director December 28, 2000
---------------------------------------------------
Karen G. Mills
/s/ CHRISTOPHER L. NAGEL Controller/Principal Accounting December 28, 2000
--------------------------------------------------- Officer
Christopher L. Nagel
/s/ PATRICK J. NORTON Executive Vice President/Chief December 28, 2000
--------------------------------------------------- Financial Officer/Director
Patrick J. Norton
/s/ JOHN M. SULLIVAN Director December 28, 2000
---------------------------------------------------
John M. Sullivan
/s/ L. JACK VAN FOSSEN Director December 28, 2000
---------------------------------------------------
L. Jack Van Fossen
/s/ JOHN WALKER, PH.D. Director December 28, 2000
---------------------------------------------------
John Walker, Ph.D.
</TABLE>
----
56
<PAGE> 57
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Form 10-K
Annual Report
<S> <C>
Consolidated Financial Statements of The Scotts Company and
Subsidiaries:
Report of Management...................................... 58
Report of Independent Accountants......................... 59
Consolidated Statements of Operations for the fiscal years
ended September 30, 2000, 1999 and 1998................ 60
Consolidated Statements of Cash Flows for the fiscal years
ended September 30, 2000, 1999 and 1998................ 61
Consolidated Balance Sheets at September 30, 2000 and
1999................................................... 62
Consolidated Statements of Changes in Shareholders' Equity
for the fiscal years ended September 30, 2000, 1999 and
1998................................................... 63
Notes to Consolidated Financial Statements.................. 65
Schedules Supporting the Consolidated Financial Statements:
Report of Independent Accountants on Financial Statement
Schedules.............................................. 108
Valuation and Qualifying Accounts for the fiscal years
ended September 30, 2000, 1999 and 1998................ 109
</TABLE>
Schedules other than those listed above are omitted since they are not
required or are not applicable, or the required information is shown in the
Consolidated Financial Statements or Notes thereto.
----
57
<PAGE> 58
REPORT OF MANAGEMENT
Management of The Scotts Company is responsible for the preparation,
integrity and objectivity of the financial information presented in this Form
10-K. The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles appropriate in the circumstances
and, accordingly, include some amounts that are based on management's best
judgments and estimates.
Management is responsible for maintaining a system of accounting and
internal controls which it believes is adequate to provide reasonable assurance
that assets are safeguarded against loss from unauthorized use or disposition
and that the financial records are reliable for preparing financial statements.
The selection and training of qualified personnel, the establishment and
communication of accounting and administrative policies and procedures and a
program of internal audits are important objectives of these control systems.
The financial statements have been audited by PricewaterhouseCoopers LLP,
independent accountants selected by the Board of Directors. The independent
accountants conduct a review of internal accounting controls to the extent
required by generally accepted auditing standards and perform such tests and
related procedures as they deem necessary to arrive at an opinion on the
fairness of the financial statements in accordance with generally accepted
accounting principles.
The Board of Directors, through its Audit Committee consisting solely of
non-management directors, meets periodically with management, internal audit
personnel and the independent accountants to discuss internal accounting
controls and auditing and financial reporting matters. The Audit Committee
reviews with the independent accountants the scope and results of the audit
effort. Both internal audit personnel and the independent accountants have
access to the Audit Committee with or without the presence of management.
----
58
<PAGE> 59
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
The Scotts Company
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, cash flows and changes in
shareholders' equity present fairly, in all material respects, the financial
position of The Scotts Company at September 30, 2000 and 1999, and the results
of its operations and its cash flows for each of the three years in the period
ended September 30, 2000, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Columbus, Ohio
October 31, 2000
----
59
<PAGE> 60
THE SCOTTS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
2000 1999 1998
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $1,764.3 $1,648.3 $1,113.0
Cost of sales 1,052.3 989.1 715.0
-------- -------- --------
Gross profit 712.0 659.2 398.0
Gross commission earned from marketing
agreement 39.2 30.3
Contribution expenses under marketing
agreement 9.9 1.6
-------- -------- --------
Net commission earned from marketing
agreement 29.3 28.7
Operating expenses:
Advertising and promotion 209.1 189.0 104.4
Selling, general and administrative 302.7 281.2 169.9
Amortization of goodwill and other
intangibles 25.3 23.8 12.9
Restructuring and other charges 1.4 15.4
Other (income) expense, net (6.0) (3.6) 1.3
-------- -------- --------
Income from operations 210.2 196.1 94.1
Interest expense 93.9 79.1 32.2
-------- -------- --------
Income before income taxes 116.3 117.0 61.9
Income taxes 43.2 47.9 24.9
-------- -------- --------
Income before extraordinary item 73.1 69.1 37.0
Extraordinary loss on early
extinguishment of debt, net of income
tax benefit 5.9 0.7
-------- -------- --------
Net income 73.1 63.2 36.3
Dividends on Class A Convertible
Preferred Stock 6.4 9.7 9.8
-------- -------- --------
Income applicable to common
shareholders $ 66.7 $ 53.5 $ 26.5
Basic earnings per share:
Before extraordinary loss $ 2.39 $ 3.25 $ 1.46
Extraordinary loss, net of tax (0.32) (0.04)
-------- -------- --------
$ 2.39 $ 2.93 $ 1.42
Diluted earnings per share:
Before extraordinary loss $ 2.25 $ 2.27 $ 1.22
Extraordinary loss, net of tax (0.19) (0.02)
-------- -------- --------
$ 2.25 $ 2.08 $ 1.20
Common shares used in basic earnings
per share calculation 27.9 18.3 18.7
Common shares and potential common
shares used in diluted earnings per
share calculation 29.6 30.5 30.3
</TABLE>
See Notes to Consolidated Financial Statements.
----
60
<PAGE> 61
THE SCOTTS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
2000 1999 1998
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 73.1 $ 63.2 $ 36.3
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 29.0 29.0 21.6
Amortization 37.3 31.2 16.2
Extraordinary loss 5.9 0.7
Restructuring and other charges 19.3
Loss on sale of property 4.4 1.8 2.3
Gain on sale of business (4.6)
Changes in assets and liabilities, net of
acquired businesses:
Accounts receivable 6.4 23.7 (8.6)
Inventories 5.8 (21.6) (5.7)
Prepaid and other current assets (9.2) (25.2) (2.1)
Accounts payable 19.4 10.7 8.8
Accrued taxes and liabilities 30.0 (10.2) (14.4)
Other assets (4.7) (35.9) 0.3
Other liabilities (6.4) 2.2 (0.1)
Other, net (9.0) 3.4 (3.6)
------ ------- -------
Net cash provided by operating
activities 171.5 78.2 71.0
------ ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment (72.5) (66.7) (41.3)
Proceeds from sale of equipment 1.8 1.5 0.6
Investments in acquired businesses, net of
cash acquired (18.3) (506.2) (151.4)
Other, net 0.5 (0.2)
------ ------- -------
Net cash used in investing activities (88.5) (571.6) (192.1)
------ ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings under revolving
and bank lines of credit (26.0) 65.3 140.0
Gross borrowings under term loans 525.0
Gross repayments under term loans (23.7) (3.0)
Repayment of outstanding balance on previous
credit facility (241.0)
Issuance of 8 5/8% Senior Subordinated Notes 330.0
Extinguishment of 9 7/8% Senior Subordinated Notes (107.1)
Settlement of interest rate locks (12.9)
Financing and issuance fees (1.0) (24.1)
Dividends on Class A Convertible Preferred
Stock (6.4) (12.1) (7.3)
Repurchase of treasury shares (23.9) (10.0) (15.3)
Cash received from exercise of stock options 2.8 3.8 1.7
Other, net (1.0) (0.7)
------ ------- -------
Net cash (used in) provided by
financing activities (79.2) 513.9 118.4
Effect of exchange rate changes on cash (1.1) (0.8) 0.3
------ ------- -------
Net increase (decrease) in cash 2.7 19.7 (2.4)
Cash and cash equivalents, beginning of period 30.3 10.6 13.0
------ ------- -------
Cash and cash equivalents, end of period $ 33.0 $ 30.3 $ 10.6
====== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
----
61
<PAGE> 62
THE SCOTTS COMPANY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 33.0 $ 30.3
Accounts receivable, less allowance for uncollectible
accounts of $11.7 in 2000 and $16.4 in 1999 216.0 201.4
Inventories, net 307.5 313.2
Current deferred tax asset 25.1 29.3
Prepaid and other assets 62.3 67.5
-------- --------
Total current assets 643.9 641.7
Property, plant and equipment, net 290.5 259.4
Intangible assets, net 743.1 794.1
Other assets 83.9 74.4
-------- --------
Total assets $1,761.4 $1,769.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 49.4 $ 56.4
Accounts payable 153.0 133.5
Accrued liabilities 174.3 157.7
Accrued taxes 33.1 19.3
-------- --------
Total current liabilities 409.8 366.9
Long-term debt 813.4 893.6
Other liabilities 60.3 65.8
-------- --------
Total liabilities 1,283.5 1,326.3
-------- --------
Commitments and contingencies
Shareholders' equity:
Class A Convertible Preferred Stock, no par value 173.9
Common shares, no par value per share, $.01 stated value
per share, 31.3 shares issued in 2000, 21.3 shares
issued in 1999 0.3 0.2
Capital in excess of stated value 389.3 213.9
Retained earnings 196.8 130.1
Treasury stock, 3.4 shares in 2000, 2.9 shares in 1999 (83.5) (61.9)
Accumulated other comprehensive income (25.0) (12.9)
-------- --------
Total shareholders' equity 477.9 443.3
-------- --------
Total liabilities and shareholders' equity $1,761.4 $1,769.6
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
----
62
<PAGE> 63
THE SCOTTS COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
Class A
Convertible
Preferred Stock Common Shares Capital in Treasury Stock
---------------- --------------- Excess of Retained ---------------
Shares Amount Shares Amount Stated Value Earnings Shares Amount
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1997 0.2 $ 177.3 21.1 $0.2 $207.8 $ 50.1 (2.4) $(41.9)
Net income 36.3
Foreign currency
translation
Minimum pension liability
Comprehensive income
Issuance of common shares
held in treasury 1.1 0.1 1.7
Purchase of common shares (0.5) (15.7)
Dividends on Class A
Convertible Preferred
Stock (9.8)
---- ------- ---- ---- ------ ------ ---- ------
Balance, September 30, 1998 0.2 177.3 21.1 0.2 208.9 76.6 (2.8) (55.9)
Net income 63.2
Foreign currency
translation
Minimum pension liability
Comprehensive income
Issuance of common shares
held in treasury 1.6 0.2 4.0
Purchase of common shares (0.3) (10.0)
Dividends on Class A
Convertible Preferred
Stock (9.7)
---- ------- ---- ---- ------ ------ ---- ------
Conversion of Class A
Convertible Preferred
Stock (0.2) (3.4) 0.2 3.4
Balance, September 30, 1999 0.0 173.9 21.3 0.2 213.9 130.1 (2.9) (61.9)
Net income 73.1
Foreign currency
translation
Minimum pension liability
Comprehensive income
Issuance of common shares
held in treasury 0.1 1.5 0.1 2.3
Purchase of common shares (0.6) (23.9)
Dividends on Class A
Convertible Preferred
Stock (6.4)
Conversion of preferred
stock (173.9) 10.0 173.9
---- ------- ---- ---- ------ ------ ---- ------
Balance, September 30, 2000 0.0 $ 0.0 31.3 $0.3 $389.3 $196.8 (3.4) $(83.5)
==== ======= ==== ==== ====== ====== ==== ======
</TABLE>
----
63
<PAGE> 64
THE SCOTTS COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income
-----------------------------
Minimum Pension Foreign
Liability Currency
Adjustment Translation Total
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, September 30, 1997 $ 0.0 $ (4.3) $389.2
Net income 36.3
Foreign currency translation 1.3 1.3
Minimum pension liability (0.2)(a) (0.2)
Comprehensive income 37.4
Issuance of common shares held in treasury 2.8
Purchase of common shares (15.7)
Dividends on Class A Convertible Preferred Stock (9.8)
----- ------ ------
Balance, September 30, 1998 $(0.2) $ (3.0) $403.9
----- ------ ------
Net income 63.2
Foreign currency translation (5.7) (5.7)
Minimum pension liability (4.0)(a) (4.0)
----- ------ ------
Comprehensive income 53.5
Issuance of common shares held in treasury 5.6
Purchase of common shares (10.0)
Dividends on Class A Convertible Preferred Stock (9.7)
Conversion of Preferred Stock
Balance, September 30, 1999 $(4.2) $ (8.7) $443.3
----- ------ ------
Net income 73.1
Foreign currency translation (11.2) (11.2)
Minimum pension liability (0.9)(a) (0.9)
----- ------ ------
Comprehensive income 61.0
Issuance of common shares held in treasury 3.9
Purchase of common shares (23.9)
Dividends on Class A Convertible Preferred Stock (6.4)
Balance September 30, 2000 $(5.1) $(19.9) $477.9
===== ====== ======
</TABLE>
---------------
(a) Net of tax benefits of $0.5 million, $2.7 million, and $0.1 million for
fiscal 2000, 1999 and 1998, respectively.
See Notes to Consolidated Financial Statements.
----
64
<PAGE> 65
THE SCOTTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 consolidated financial statements include the accounts of The Scotts
Company and its subsidiaries (collectively, the "Company"). All material
intercompany transactions have been eliminated.
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 ownership of the goods in writing. Provisions for estimated returns
and allowances are recorded at the time of shipment based on historical rates of
return as a percentage of sales.
RESEARCH AND DEVELOPMENT
All costs associated with research and development are charged to expense
as incurred. Expense for fiscal 2000, 1999, and 1998 was $24.1 million, $21.7
million, and $14.8 million, respectively.
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 promotions 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.
EARNINGS PER COMMON SHARE
Basic earnings per common share is based on the weighted-average number of
common shares outstanding each period. Diluted earnings per common share is
based on the weighted-average number of common shares and dilutive potential
common shares (stock options, convertible preferred stock and warrants)
outstanding each period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying disclosures. The most significant of these estimates
are related to the allowance for doubtful accounts, inventory valuation
reserves, expected useful lives assigned to property, plant and equipment and
goodwill and other intangible assets, legal and environmental accruals,
post-retirement benefits, promotional and consumer rebate liabilities, income
taxes and contingencies. Although these estimates are based on management's best
knowledge of current
----
65
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
events and actions the Company may undertake in the future, actual results
ultimately may differ from the estimates.
INVENTORIES
Inventories are stated at the lower of cost or market, principally
determined by the FIFO method; however, certain growing media inventories are
accounted for by the LIFO method. At September 30, 2000 and 1999, approximately
13% and 8% of inventories, respectively, are valued at the lower of LIFO cost or
market. Inventories include the cost of raw materials, labor and manufacturing
overhead. The Company makes provisions for obsolete or slow-moving inventories
as necessary to properly reflect inventory value.
LONG-LIVED ASSETS
Property, plant and equipment, including significant improvements, are
stated at cost. Expenditures for maintenance and repairs are charged to
operating expenses as incurred. When properties are retired or otherwise
disposed of, the cost of the asset and the related accumulated depreciation are
removed from the accounts with the resulting gain or loss being reflected in
results of operations.
Depletion of applicable land is computed on the units-of-production method.
Depreciation of other property, plant and equipment is provided on the
straight-line method and is based on the estimated useful economic lives of the
assets as follows:
<TABLE>
<S> <C>
Land improvements 10 - 25 years
Buildings 10 - 40 years
Machinery and equipment 3 - 15 years
Furniture and fixtures 6 - 10 years
Software 3 - 8 years
</TABLE>
Interest is capitalized on all significant capital projects. The Company
capitalized $2.4 million and $1.8 million of interest costs during fiscal 2000
and 1999, respectively.
Goodwill arising from business acquisitions is amortized over its useful
life, which is generally 40 years, on a straight-line basis. Intangible assets
include patents and trademarks which are valued at acquisition through
independent appraisals. Debt issuance costs are being amortized over the terms
of the various debt instruments. Patents and trademarks are being amortized on a
straight-line basis over periods varying from 7 to 40 years. Accumulated
amortization at September 30, 2000 and 1999 was $121.9 million and $96.2
million, respectively.
Management assesses the recoverability of property and equipment, goodwill,
trademarks and other intangible assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable from its future undiscounted cash flows. If it is determined that an
impairment has occurred, an impairment loss is recognized for the amount by
which the carrying amount of the asset exceeds its estimated fair value.
INTERNAL USE SOFTWARE
In July of fiscal 1998, the Company announced an Enterprise Resource
Planning initiative designed to enhance its information system resources. The
project includes re-design of certain key business processes and the
installation of new software on a world-wide basis over the next several years.
SAP has been chosen as the primary software provider for this project. The
Company is accounting for the costs of the project in accordance with Statement
of Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". Accordingly, costs other than reengineering are
expensed or capitalized depending on whether they are incurred in the
preliminary project stage, application development stage, or the
post-implementation/operation stage. All reengineering costs are expensed as
incurred. As of September 30, 2000 and 1999, the Company had $37.3 million and
$23.9 million, respectively, in unamortized capitalized internal use computer
software costs. Amortization of these costs was $0.9 million during fiscal 2000.
----
66
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid financial instruments with original
maturities of three months or less to be cash equivalents.
FOREIGN EXCHANGE INSTRUMENTS
Gains and losses on foreign currency transaction hedges are recognized in
income and offset the foreign exchange gains and losses on the underlying
transactions. Gains and losses on foreign currency firm commitment hedges are
deferred and included in the basis of the transactions underlying the
commitments.
All assets and liabilities in the balance sheets of foreign subsidiaries
whose functional currency is other than the U.S. dollar are translated into U.S.
dollar equivalents at year-end exchange rates. Translation gains and losses are
accumulated as a separate component of other comprehensive income and included
in shareholders' equity. Income and expense items are translated at average
monthly exchange rates. Foreign currency transaction gains and losses are
included in the determination of net income.
ENVIRONMENTAL COSTS
The Company recognizes environmental liabilities when conditions requiring
remediation are identified. The Company determines its liability on a site by
site basis and records a liability at the time when it is probable and can be
reasonably estimated. Expenditures which extend the life of the related property
or mitigate or prevent future environmental contamination are capitalized.
Environmental liabilities are not discounted or reduced for possible recoveries
from insurance carriers.
BARTER CREDITS
The Company occasionally exchanges excess or obsolete inventory for barter
credits from an inventory broker. The barter credits are recorded as an asset at
the net book value of the inventory exchanged which is typically less than the
face value of the credits. The broker credits can be used in exchange for a
variety of services, including advertising, telephone and freight. When a barter
credit is utilized for face value, the charge for the service received is
recorded at the amount of cash paid plus the book value of the barter credits
exchanged.
As of September 30, 2000, the Company had available barter credits with a
face value of $2.8 million and with a carrying value of $1.4 million which are
included in the Company's balance sheet. To the extent that the Company is able
to utilize these barter credits in the future, the cost of the service received
will be reduced by the face value of the barter credits exchanged, offset by the
carrying value of the barter credits utilized.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to fiscal 2000 classifications.
NOTE 2. DETAIL OF CERTAIN FINANCIAL STATEMENT ACCOUNTS
<TABLE>
<CAPTION>
2000 1999
--------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
INVENTORIES, NET:
Finished Goods $232.9 $206.4
Raw Materials 73.7 106.5
------ ------
FIFO Cost 306.6 312.9
LIFO Reserve 0.9 0.3
------ ------
Total $307.5 $313.2
====== ======
</TABLE>
----
67
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventory balances are shown net of provisions for slow moving and obsolete
inventory of $20.1 million and $30.5 million as of September 30, 2000 and 1999,
respectively.
<TABLE>
<CAPTION>
2000 1999
--------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT, NET:
Land and improvements $ 38.5 $ 41.4
Buildings 109.0 88.2
Machinery and equipment 201.4 213.7
Furniture and fixtures 30.0 19.8
Software 39.5 32.6
Construction in progress 54.4 26.3
Less: accumulated depreciation (182.3) (162.6)
------ ------
Total $290.5 $259.4
====== ======
</TABLE>
<TABLE>
<CAPTION>
2000 1999
--------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
INTANGIBLE ASSETS, NET:
Goodwill $280.4 $508.6
Trademarks 331.1 207.9
Other 131.6 77.6
------ ------
Total $743.1 $794.1
====== ======
</TABLE>
<TABLE>
<CAPTION>
2000 1999
--------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
ACCRUED LIABILITIES:
Payroll and other compensation accruals $ 40.5 $ 42.5
Advertising and promotional accruals 73.0 56.4
Other 60.8 58.8
------ ------
Total $174.3 $157.7
====== ======
</TABLE>
<TABLE>
<CAPTION>
2000 1999
--------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
OTHER NON-CURRENT LIABILITIES:
Accrued pension and postretirement liabilities $ 49.8 $ 50.4
Legal and environmental reserves 10.5 11.5
Other 0.0 3.9
------ ------
Total $ 60.3 $ 65.8
====== ======
</TABLE>
NOTE 3. MARKETING AGREEMENT
Effective September 30, 1998, the Company entered into an agreement with
Monsanto Company ("Monsanto", now known as Pharmacia Corporation) 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 on commission rates that vary by threshold and
program year.
----
68
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The agreement also requires the Company to make fixed annual payments to
Monsanto as a contribution against the overall expenses of the Roundup(R)
business. The annual fixed payment is defined as $20 million. However, portions
of the annual payments for the first three years of the agreement are deferred.
No payment was required for the first year (fiscal 1999), a payment of $5
million was required for the second year and a payment of $15 million is
required for the third year so that a total of $40 million of the contribution
payments are deferred. Beginning in the fifth year of the agreement, the annual
payments to Monsanto increase to at least $25 million, which include per annum
charges at 8%. The annual payments may be increased above $25 million if certain
significant earnings targets are achieved. If all of the deferred contribution
amounts are paid prior to 2018, the annual contribution payments revert to $20
million. Regardless of whether the deferred contribution amounts are paid, all
contribution payments cease entirely in 2018.
The Company is recognizing a charge each year associated with the annual
contribution payments equal to the required payment for that year. The Company
is not recognizing a charge for the portions of the contribution payments that
are deferred until the time those deferred amounts are paid. The Company
considers this method of accounting for the contribution payments to be
appropriate after consideration of the likely term of the agreement, the
Company's ability to terminate the agreement without paying the deferred
amounts, and the fact that approximately $18.6 million of the deferred amount is
never paid, even if the agreement is not terminated prior to 2018, unless
significant earnings targets are exceeded.
The express terms of the agreement permit the Company to terminate the
agreement only upon Material Breach, Material Fraud or Material Willful
Misconduct by Monsanto, as such terms are defined in the agreement, or upon the
sale of the Roundup business by Monsanto. In such instances, the agreement
permits the Company to avoid payment of any deferred contribution and related
per annum charge. Our basis for not recording a financial liability to Monsanto
for the deferred portions of the annual contribution and per annum charge is
based on our assessment and consultations with our legal counsel and the
Company's independent accountants. In addition, the Company has obtained a legal
opinion from The Bayard Firm, P.A., which concluded, subject to certain
qualifications, that if the matter were litigated, a Delaware court would likely
conclude that the Company is entitled to terminate the agreement at will, with
appropriate prior notice, without incurring significant penalty, and avoid
paying the unpaid deferred amounts. We have concluded that, should the Company
elect to terminate the agreement at any balance sheet date, it will not incur
significant economic consequences as a result of such action.
The Bayard Firm was special Delaware counsel retained during fiscal 2000
solely for the limited purpose of providing a legal opinion in support of the
contingent liability treatment of the agreement previously adopted by the
Company and has neither generally represented or advised the Company nor
participated in the preparation or review of the Company's financial statements
or any SEC filings. The terms of such opinion specifically limit the parties who
are entitled to rely on it.
The Company's conclusion is not free from challenge and, in fact, would
likely be challenged if the Company were to terminate the agreement. If it were
determined that, upon termination, the Company must pay any remaining deferred
contribution amounts and related per annum charges, the resulting charge to
earnings could have a material impact on the Company's results of operations and
financial position. At September 30, 2000, contribution payments and related per
annum charges of approximately $38.0 million had been deferred under the
agreement. This amount is considered a contingent obligation and has not been
reflected in the financial statements as of and for the year then ended.
Monsanto has disclosed that it is accruing the $20 million fixed
contribution fee per year beginning in the fourth quarter of Monsanto's fiscal
year 1998, plus interest on the deferred portion.
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 the sale of the Roundup(R) 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(R) business.
----
69
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unless Monsanto terminates the agreement 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 and is amortizing the balance over ten years, which is the
estimated likely term of the agreement.
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(R) business for the
year. Beginning with the first quarter of fiscal 2000, the Company has adopted
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements". Accordingly, the Company will not recognize commission income until
the actual EBIT for the Roundup(R) business reaches the first commission
threshold for the year. The annual contribution payment, if any, is recognized
ratably throughout the year.
NOTE 4. RESTRUCTURING AND OTHER CHARGES
1999 CHARGES
During fiscal 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 costs to sever 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. Of the remaining $0.3 million, $0.2 million was paid in fiscal 2000, and
the remainder is expected to be paid in fiscal 2001.
1998 CHARGES
During fiscal 1998, the Company recorded $20.4 million of restructuring and
other charges, $15.4 million of which is identified separately within operating
expenses, $2.9 million of which is included in cost of sales and $2.1 million of
which is included in selling, general and administrative expenses. These charges
were primarily associated with three restructuring activities: (1) the
consolidation of the Company's two U.K. operations into one lower-cost business;
(2) the closure of nine composting operations in the United States that collect
yard and compost waste for certain municipalities; and (3) the sale or closure
of certain other U.S. plants and businesses. Most of these restructuring efforts
were completed during fiscal 1999, except as noted otherwise below.
CONSOLIDATION OF U.K. OPERATIONS
In connection with management's decision in the second quarter of fiscal
1998 to consolidate the Company's two U.K. operations (Miracle Garden Care and
Levington, into The Scotts Company (UK) Ltd.), the Company recorded charges of
$6.0 million which consisted of:
1. $0.9 million to write off the remaining carrying value of certain
property and equipment. In connection with the integration of the U.K.
businesses, management elected to move certain production lines from a
Miracle Garden Care facility in Howden to the newly-acquired Levington
facility in Bramford (see Note 5). As a result, certain production
equipment at the Howden facility will no longer be utilized. In
addition, certain computer hardware and software equipment previously
used by the Miracle Garden Care business will no longer be utilized as a
result of electing to use acquired information systems of the Levington
business. The Company ceased
----
70
<PAGE> 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
utilization of the production and computer equipment in the fourth
quarter of fiscal 1998. The assets written off had nominal value and
were scrapped or abandoned.
2. $1.3 million to relaunch products under a single, integrating branding
strategy and $0.8 million to write off packaging materials rendered
obsolete as a result of new packaging design. The charges associated
with the relaunch were expensed as incurred in fiscal 1998. Cash outflow
associated with the relaunch was complete in early fiscal 1999.
3. $1.4 million of severance costs associated with the termination of 25
employees of the Company's Miracle Garden Care operation that were made
redundant by the integration of the two U.K. businesses. As of September
30, 1998, six employees had been terminated. The remaining employees
were terminated in fiscal 1999. All severance costs accrued at September
30, 1998 have been paid (except for an adjustment of $0.3 million for
overaccrual).
4. $0.6 million to write off inventory rendered obsolete by integration
activities. The Company determined that certain SKUs of the combined
product lines would not be sold under the Company's branding, marketing
and selling strategies. The carrying value of the obsolete inventory was
subsequently written off and the inventory was disposed of in late
fiscal 1998 and early fiscal 1999.
5. $0.8 million for costs which were expensed as incurred in fiscal 1998
for other integration-related activities. The components of the other
integration costs include studies performed on combined logistics and
manufacturing processes, costs to integrate the combined information
technology of the businesses and legal costs associated with the
integration of the two previously separate entities.
CLOSURE OF COMPOST SITES
In connection with management's decision in the fourth quarter of fiscal
1998 to close nine composting sites, the Company recorded charges of $9.3
million which consisted of:
1. $4.5 million for costs to be incurred under contractual commitments for
which no future revenues will be realized. These costs are associated
with the final processing of remaining compost materials, as required,
through the end of the operating contract with the applicable
municipality but after the time when revenue-producing activities cease.
Six of the composting sites have operating contracts that ended in
fiscal 1999 for which $2.9 million was accrued; the operating contracts
for the three remaining sites expired in fiscal 2000 for which $1.6
million was accrued.
2. $3.2 million to write down to estimated fair value certain machinery and
equipment at the compost facilities scheduled for closure. In accordance
with SFAS No. 121, the Company concluded that the carrying amount of
these assets would not be recovered through future anticipated cash
flows. Given the impairment, a charge was recorded equal to the
difference between the estimated carrying value of the asset at the end
of the revenue producing period and the estimate of the fair value of
the asset. In most cases, the fair value of the asset was determined to
be zero as these assets were scheduled to be abandoned or scrapped.
Depreciation will continue to be recognized during revenue-producing
periods.
3. $1.1 million to write off inventory which must be disposed of as a
result of closing the various composting sites. Such inventory must be
removed from the applicable sites and has only nominal value.
4. $0.5 million for remaining lease obligations after revenue-producing
activities cease on certain machinery and equipment at the sites.
The composting facilities being closed as part of these restructuring
initiatives recorded losses included in the Company's consolidated results of
operations of approximately $1.0 and $3.0 for the fiscal years ended September
30, 1999 and 1998, respectively.
----
71
<PAGE> 72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SALE AND CLOSURE OF CERTAIN U.S. PLANTS AND BUSINESSES:
The charge for sale or closure of certain other U.S. plants or businesses
was $5.1 million and consisted of:
1. $4.5 million to write down to net realizable value the assets associated
with the Company's AgrEvo pesticides business. The Company elected to
divest these assets in order to avoid potential trade conflicts
associated with the Company's purchase of the Ortho business and the
signing of the Roundup(R) marketing agreement. The charge was calculated
as the difference between the Company's estimate of the proceeds to be
received upon sale of the business, less the carrying value of the
assets as of September 30, 1998. The business was subsequently sold in
February 1999 and no material differences were experienced between
actual selling proceeds and those used to determine the fiscal 1998
charge. The AgrEvo business incurred an operating loss of $0.8 million
in fiscal 1998 and $0.5 million in fiscal 1999. The Company does not
expect any future benefits to be gained from the sale of the AgrEvo
business other than foregoing the operating losses incurred by this
business during the Company's time of ownership.
2. $0.6 million to write off and close a single growing media production
facility in New York that was deemed to be redundant after the purchase
of the EarthGro, Inc. ("EarthGro") business in February 1998 (see Note
5). The closure of this facility was completed in September 1998. The
charge taken was equivalent to the carrying value of the assets which
were abandoned or scrapped.
The following is a rollforward of the Company's 1998 restructuring charges:
<TABLE>
<CAPTION>
Fiscal 1998 Activity Fiscal 1999 Activity
Type --------------------------- --------------------------------
Balance Classification Charge Payments Balance Payments Adjustments Balance
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidation of U.K.
operations:
Property and equipment
demolition Cash Restructuring $0.2 $ -- $0.2 $(0.2) $ -- --
Product relaunch costs Cash SG&A 1.3 (0.4) 0.9 (0.9) -- --
Severance costs Cash Restructuring 1.4 (0.3) 1.1 (0.8) (0.3) --
Other integration
costs Cash SG&A 0.8 (0.4) 0.4 (0.4) -- --
----
3.7
Property and equipment
write-offs Non-cash Restructuring 0.9
Obsolete packaging
write-offs Non-cash Cost of sales 0.8
Other inventory write-
offs Non-cash Cost of sales 0.6
----
2.3
Closure of compost
sites:
Costs under
contractual
commitments Cash Restructuring 4.5 -- 4.5 (4.1) -- 0.4
Lease obligations Cash Restructuring 0.5 -- 0.5 -- -- 0.5
----
5.0
Property and equipment
write-offs Non-cash Restructuring 3.2
Inventory write-offs Non-cash Cost of sales 1.1
----
4.3
Other businesses/plants:
Sale of AgrEvo
business Non-cash Restructuring 4.5
Property and equipment
write-offs Non-cash Restructuring 0.2
Inventory write-offs Non-cash Cost of sales 0.4
----
$5.1
</TABLE>
During fiscal 1999, the restructuring reserve established to integrate the
U.K. businesses was reduced by $0.3 for overestimates of severance costs. During
fiscal 2000, the amounts reserved at September 30, 1999 associated with the
closure of compost sites were paid.
----
72
<PAGE> 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. 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 $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 resolved the disputed working capital amounts which resulted in a
purchase price of approximately $355.5 million (requiring an additional payment
of $15.6 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. The agreement provides the Company with the royalty-free right to
market products with current and future active ingredients developed by
Rhone-Poulenc and the right to obtain research and development services from
Rhone-Poulenc at a cost stipulated in the agreement. 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 15-year
life of the agreement.
In February 1998, the Company acquired all the shares of EarthGro, a
regional growing media company located in Glastonbury, Connecticut, for
approximately $47.0 million, including deal costs and refinancing of certain
assumed debt.
In December 1997, the Company acquired all the shares of Levington Group
Limited ("Levington"), a leading producer of consumer and professional lawn
fertilizer and growing media in the United Kingdom, for approximately $94.0
million, including deal costs and refinancing of certain assumed debt.
During fiscal 2000, 1999 and 1998, the Company also invested in or acquired
other entities consistent with its long-term strategic plan. These investments
include ASEF Holdings BV, Scotts Lawn Service, Sanford Scientific, Inc. and
certain intangible assets acquired in Ireland.
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. Intangible assets associated with the purchase of Rhone-Poulenc
Jardin, EarthGro and Levington were $137.3 million, $23.3 million and $62.8
million, respectively. The allocation of the final purchase price of the Ortho
business to the net assets was completed during the fourth quarter of fiscal
2000. Intangible assets associated with the purchase were $232.1 million.
Intangible assets associated with the other acquisitions described above are
approximately $37.0 million on a combined basis.
The following unaudited pro forma results of operations give effect to the
Ortho, Rhone-Poulenc Jardin, EarthGro and Levington acquisitions and the
Roundup(R) marketing agreement as if they had occurred on October 1, 1997.
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Net sales $1,681.3 $1,513.8
Income before extraordinary loss 60.7 46.4
Net income 54.8 45.7
Basic earnings per share:
Before extraordinary loss $ 2.79 $ 1.96
After extraordinary loss 2.47 1.92
Diluted earnings per share:
Before extraordinary loss $ 1.99 $ 1.53
After extraordinary loss 1.80 1.51
</TABLE>
----
73
<PAGE> 74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The pro forma information provided does not purport to be indicative of
actual results of operations if the Ortho, Rhone-Poulenc Jardin, EarthGro and
Levington acquisitions and the Roundup(R) marketing agreement had occurred as of
October 1, 1997 and is not intended to be indicative of future results or
trends.
In May 2000, the Company sold its ProTurf(R) 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. A gain of approximately $4.6 million for the sale of
this business is reflected in the Company's fiscal 2000 results of operations.
NOTE 6. RETIREMENT PLANS
In September 1997, in conjunction with the decision to offer a new defined
contribution retirement savings plan to domestic Company associates, management
decided to suspend benefits under its Scotts and Sierra defined benefit pension
plans. These pension plans covered substantially all full-time U.S. associates
who had completed one year of eligible service and reached the age of 21. The
benefits under these plans are based on years of service and the associates'
average final compensation for the Scotts plan employees and for Sierra salaried
employees and on stated amounts for Sierra hourly employees. The Company's
funding policy, consistent with statutory requirements and tax considerations,
is based on actuarial computations using the Projected Unit Credit method.
The following table sets forth the changes in the projected benefit
obligations for the curtailed pension plans for fiscal 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Beginning balance $59.0 $56.9
Interest cost 4.1 4.2
Actuarial losses 0.0 1.2
Benefits paid (3.6) (3.3)
----- -----
Ending balance $59.5 $59.0
===== =====
</TABLE>
The following table sets forth the changes in the fair value of the net
assets of the curtailed pension plans for fiscal 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Beginning balance $56.8 $58.0
Actual return on plan assets 3.0 2.1
Benefits paid (3.6) (3.3)
----- -----
Ending Balance $56.2 $56.8
===== =====
</TABLE>
----
74
<PAGE> 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the plans' funded status and the related
amounts recognized in the Consolidated Balance Sheets:
<TABLE>
<CAPTION>
September 30,
----------------
2000 1999
------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Actuarial present value of projected benefit obligations:
Vested benefits $(58.5) $(58.6)
Nonvested benefits (1.0) (0.4)
------ ------
(59.5) (59.0)
Plan assets at fair value, primarily corporate bonds, U.S.
Government bonds and cash equivalents 56.2 56.8
------ ------
Plan assets less than projected benefit obligations (3.3) (2.2)
Unrecognized losses 8.3 6.9
------ ------
Prepaid pension costs 5.0 4.7
------ ------
Accrued benefit liability $ (3.3) $ (2.2)
Accumulated other comprehensive income 8.3 6.9
------ ------
Prepaid pension costs $ 5.0 $ 4.7
====== ======
</TABLE>
Pension cost includes the following components:
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
-----------------------
2000 1999 1998
-------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Interest cost $ 4.1 $ 4.2 $ 3.6
Expected return on plan assets (4.4) (4.5) (3.7)
Net amortization and deferral 0.0 0.4 0.0
----- ----- -----
Net pension cost $(0.3) $ 0.1 $(0.1)
===== ===== =====
</TABLE>
The weighted-average settlement rate used in determining the actuarial
present value of the projected benefit obligation was 7.75% as of September 30,
2000 and 1999. The expected long-term rate of return on plan assets was 8.0% for
fiscal 2000 and 1999.
The Company also sponsors the following pension plans associated with the
international businesses it has acquired: Scotts Europe BV, ASEF Europe BV
(Netherlands), The Scotts Company (UK) Ltd., Miracle Garden Care, Scotts France
SAS, Scotts Celaflor GmbH (Germany) and Scotts Celaflor HG (Austria). These
plans generally cover all associates of the respective businesses and retirement
benefits are generally based on years of service and compensation levels. The
pension plans for Scotts Europe BV, ASEF Europe BV (Netherlands), The Scotts
Company (UK) Ltd. and Miracle Garden Care are funded plans. The remaining
international pension plans are not funded by separately held plan assets.
The following table sets forth the changes in the projected benefit
obligations for the international plans on a combined basis for fiscal 2000 and
1999:
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Beginning balance $73.2 $52.0
Service cost 2.9 2.8
Interest cost 3.7 3.6
Participant contributions 0.8 0.5
Actuarial (gains) losses (0.4) 7.6
Benefits paid (1.6) (3.0)
Foreign currency translation (6.5) (1.9)
Impact of acquisition 11.6
----- -----
Ending balance $72.1 $73.2
===== =====
</TABLE>
----
75
<PAGE> 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the changes in the fair value of the net
assets of the international plans on a combined basis for fiscal 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Beginning balance $59.9 $50.9
Return on plan assets 7.6 10.3
Employer contributions 1.2 2.7
Participant contributions 0.9 0.6
Benefits paid (0.6) (2.8)
Foreign currency translation (4.7) (1.8)
----- -----
Ending balance $64.3 $59.9
===== =====
</TABLE>
The following table sets forth the funded status and net amount recognized
in the Consolidated Balance Sheets for the Company's international plans on a
combined basis at September 30, 2000 and 1999:
<TABLE>
<CAPTION>
September 30,
----------------
2000 1999
------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Projected benefit obligations $(72.1) $(73.2)
Plan assets at fair value 64.3 59.9
------ ------
Projected benefit obligations in excess of plan assets (7.8) (13.3)
Unrecognized items 0.7 (0.5)
------ ------
Accrued benefit costs $ (7.1) $(13.8)
====== ======
</TABLE>
<TABLE>
<CAPTION>
September 30,
--------------
2000 1999
----------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Plans with benefit obligations in excess of plan assets:
Aggregate projected benefit obligations $17.2 $33.7
Aggregate fair value of plan assets 4.7 20.0
Plans with plan assets in excess of benefit obligations:
Aggregate projected benefit obligations $54.9 $39.5
Aggregate fair value of plan assets 59.6 39.9
</TABLE>
Pension costs for the international plans on a combined basis consisted of
the following components for fiscal 2000 and 1999:
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
-----------------
2000 1999
-------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Service cost $3.5 $ 3.2
Interest cost 4.0 3.6
Expected return on plan assets (5.5) (3.7)
Net amortization 0.6 0.3
----- -----
Net pension cost $2.6 $ 3.4
===== =====
</TABLE>
----
76
<PAGE> 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The range of actuarial assumptions used for the various international plans
for the years presented were:
<TABLE>
<S> <C>
Settlement rates 5.4% - 6.5%
Compensation increases 1.5% - 4.0%
Rates of return on plan assets 4.0% - 8.0%
</TABLE>
At September 30, 1997, the Company also curtailed its non-qualified
supplemental pension plan which provides for incremental pension payments from
the Company so that total pension payments equal amounts that would have been
payable from the Company's pension plans if it were not for limitations imposed
by income tax regulations.
The following table sets forth the changes in the projected benefit
obligations for the non-qualified plan for fiscal 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Beginning balance $ 1.9 $ 1.8
Interest cost 0.1 0.1
Actuarial losses (0.1) 0.1
Benefits paid 0.0 (0.1)
----- -----
Ending balance $ 1.9 $ 1.9
===== =====
</TABLE>
The following table sets forth the funded status of the non-qualified plan
at September 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $(1.8) $(1.8)
Nonvested benefits (0.1) (0.1)
----- -----
Projected benefit obligations (1.9) (1.9)
Plan assets at fair value 0.0 0.0
----- -----
Plan assets less than projected benefit obligations (1.9) (1.9)
Unrecognized losses 0.3 0.4
----- -----
Net pension liability $(1.6) $(1.5)
===== =====
Accrued benefit liability (1.9) (1.9)
Accumulated other comprehensive income 0.3 0.4
----- -----
Net pension liability $(1.6) $(1.5)
===== =====
</TABLE>
Pension expense for the plan was $0.1 million, $0.2 million and $0.1
million in fiscal 2000, 1999 and 1998, respectively, consisting primarily of
interest costs on the projected benefit obligations.
The actuarial assumptions used for the non-qualified supplemental pension
plan were the same as those used for the curtailed qualified plans as described
above.
NOTE 7. ASSOCIATE BENEFITS
The Company provides comprehensive major medical benefits to certain of its
retired associates and their dependents. Substantially all of the Company's
domestic associates become eligible for these benefits if they retire at age 55
or older with more than ten years of service. The plan requires certain minimum
contributions from retired associates and includes provisions to limit the
overall cost increases the Company is required to cover. The Company funds its
portion of retiree medical benefits on a pay-as-you-go basis.
----
77
<PAGE> 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to October 1, 1993, the Company effected several changes in plan
provisions, primarily related to current and ultimate levels of retiree and
dependent contributions. Retirees as of October 1, 1993 are entitled to benefits
existing prior to these plan changes. These plan changes resulted in a reduction
in unrecognized prior service cost, which is being amortized over future years.
The following table sets forth the changes in the accumulated
postretirement benefit obligation for the retiree medical plan for fiscal 2000
and 1999:
<TABLE>
<CAPTION>
2000 1999
---------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Beginning balance $15.8 $15.2
Service cost 0.4 0.4
Interest cost 1.3 1.1
Contribution by participants 0.3 0.2
Actuarial loss 1.4 0.1
Sale of ProTurf(R) Business (0.2) 0.0
Benefits paid (1.0) (1.2)
----- -----
Ending balance $18.0 $15.8
===== =====
</TABLE>
The following table sets forth the changes in the fair value of the assets
of the retiree medical plan for fiscal 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Beginning balance $ 0.0 $ 0.0
Company contributions 0.7 0.9
Contributions by participants 0.3 0.3
Benefits paid (1.0) (1.2)
----- -----
$ 0.0 $ 0.0
===== =====
</TABLE>
The following table sets forth the retiree medical plan status reconciled
to the amounts included in the Consolidated Balance Sheets, as of September 30,
2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
---------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 7.3 $ 8.9
Fully eligible active plan participants 0.4 0.5
Other active plan participants 10.3 6.4
----- -----
Total accumulated postretirement benefit obligation 18.0 15.8
Unrecognized prior service costs 3.0 5.0
Unrecognized net gains 4.0 5.6
----- -----
Accrued postretirement liability $25.0 $26.4
===== =====
</TABLE>
Net periodic postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Service cost $ 0.4 $ 0.4 $ 0.4
Interest cost 1.3 1.1 1.0
Net amortization (1.1) (1.0) (1.3)
----- ----- -----
Net periodic postretirement benefit cost $ 0.6 $ 0.5 $ 0.1
===== ===== =====
</TABLE>
----
78
<PAGE> 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The discount rates used in determining the accumulated postretirement
benefit obligation were 7.75% and 7.5% in fiscal 2000 and 1999, respectively.
For measurement purposes, annual rates of increase in per capita cost of covered
retiree medical benefits assumed for fiscal 2000 and 1999 were 8.50% and 7.75%,
respectively. The rate was assumed to decrease gradually to 5.5% through the
year 2006 and remain at that level thereafter. A 1% increase in the health care
cost trend rate assumptions would increase the accumulated postretirement
benefit obligation (APBO) as of September 30, 2000 and 1999 by $0.7 million and
$0.5 million, respectively. A 1% increase or decrease in the same rate would not
have a material effect on service or interest costs.
Effective January 1, 1998, the Scotts, Hyponex and Sierra defined
contribution profit sharing and 401(k) plans were merged and the surviving plan
was expanded and amended to serve as the sole, active retirement savings plan
for substantially all U.S. employees. Full-time employees may participate in the
plan on the first day of the month after being hired. Temporary employees may
participate after working at least 1,000 hours in their first twelve months of
employment and after reaching the age of 21. The plan allows participants to
contribute up to 15% of their compensation in the form of pre-tax or post-tax
contributions. The Company provides a matching contribution equivalent to 100%
of participants' initial 3% contribution and 50% of the participants' remaining
contribution up to 5%. Participants are immediately vested in employee
contributions, the Company's matching contributions and the investment return on
those monies. The Company also provides a 2% automatic base contribution to
employees' accounts regardless of whether employees are active in the plan.
Participants become vested in the Company's 2% base contribution after three
years of service. The Company recorded charges of $7.4 million and $8.4 million
under the new plan in fiscal 2000 and 1999, respectively. Under the terminated
profit sharing and 401(k) plans, the Company recorded charges of $2.3 million in
fiscal 1997.
The Company is self-insured for certain health benefits up to $0.2 million
per occurrence per individual. The cost of such benefits is recognized as
expense in the period the claim is incurred. This cost was $7.7 million, $11.0
million and $8.6 million in fiscal 2000, 1999, and 1998, respectively. The
Company is self-insured for State of Ohio workers compensation up to $0.5
million per claim. Claims in excess of stated limits of liability and claims for
workers compensation outside of the State of Ohio are insured with commercial
carriers.
NOTE 8. DEBT
<TABLE>
<CAPTION>
September 30,
--------------------------
2000 1999
---------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Revolving loans under credit facility $ 37.3 $ 64.2
Term loans under credit facility 452.2 509.0
Senior subordinated notes 319.2 318.0
Notes due to sellers 36.4 37.0
Notes due to the State of Ohio 7.9 0.0
Foreign bank borrowings and term loans 7.1 17.6
Capital lease obligations and other 2.7 4.2
------ ------
862.8 950.0
Less current portions 49.4 56.4
------ ------
$813.4 $893.6
====== ======
</TABLE>
----
79
<PAGE> 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities of short- and long-term debt, including capital leases for the
next five fiscal years and thereafter are as follows:
<TABLE>
<CAPTION>
Capital Other
Leases Debt
---------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
2001 $1.7 $ 47.7
2002 0.5 53.0
2003 0.4 51.1
2004 0.1 43.7
2005 0.0 91.7
Thereafter 0.0 572.9
---- ------
$2.7 $860.1
Less: amounts representing interest 0.0 (4.0)
---- ------
$2.7 $856.1
==== ======
</TABLE>
On December 4, 1998, Scotts and certain of its subsidiaries entered into a
new credit facility which provides for borrowings in the aggregate principal
amount of $1.025 billion and consists of term loan facilities in the aggregate
amount of $525 million and a revolving credit facility in the amount of $500
million. Proceeds from borrowings under the new credit facility of approximately
$241.0 million were used to repay amounts outstanding under the then existing
credit facility. The Company recorded a $0.4 million extraordinary loss, net of
tax, in connection with the retirement of the previous facility.
The term loan facilities consist of three tranches. The Tranche A Term Loan
Facility consists of three sub-tranches of French Francs, German Deutsche Marks
and British Pounds Sterling in an aggregate principal amount of $265 million
which are to be repaid quarterly over a 6 1/2 year period. The Tranche B Term
Loan Facility is a 7 1/2 year term loan facility in an aggregate principal
amount of $140 million, which is to be repaid in nominal quarterly installments
for the first 6 1/2 years and in substantial quarterly installments in the final
year. The Tranche C Term Loan Facility is a 8 1/2 year term loan facility in an
aggregate principal amount of $120 million, which is to be repaid in nominal
quarterly installments for the first 7 1/2 years and in substantial quarterly
installments in the final year.
The revolving credit facility provides for borrowings up to $500 million,
which are available on a revolving basis over a term of 6 1/2 years. A portion
of the revolving credit facility not to exceed $100 million is available for the
issuance of letters of credit. A portion of the facility not to exceed $225
million is available for borrowings in optional currencies, including German
Deutsche Marks, British Pounds Sterling, French Francs, Belgian Francs, Italian
Lira and other specified currencies, provided that the outstanding revolving
loans in optional currencies other than British Pounds Sterling does not exceed
$120 million. The outstanding principal amount of all revolving credit loans may
not exceed $150 million for at least 30 consecutive days during any calendar
year.
Interest rates and commitment fees pursuant to the new credit facility vary
according to the Company's leverage ratios and also within tranches. The
weighted-average interest rate on the Company's variable rate borrowings at
September 30, 2000 was 8.78%. In addition, the new credit facility required that
the Company enter into hedge agreements to the extent necessary to provide that
at least 50% of the aggregate principal amount of the 8 5/8% Senior Subordinated
Notes due 2009 and term loan facilities was subject to a fixed interest rate.
Financial covenants include minimum net worth, interest coverage and net
leverage ratios. Other covenants include limitations on indebtedness, liens,
mergers, consolidations, liquidations and dissolutions, sale of assets, leases,
dividends, capital expenditures, and investments, among others. The Company and
all of its domestic subsidiaries pledged substantially all of their personal,
real and intellectual property assets as collateral on the borrowings under the
credit facility. The Company and its subsidiaries also pledged the stock in
foreign subsidiaries that borrow under the credit facility.
Approximately $13.6 million of financing costs associated with the new
credit facility have been deferred as of September 30, 2000 and are being
amortized over a period of approximately 7 years, beginning in fiscal year 1999.
----
80
<PAGE> 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 5, 2000, the Company amended its current credit facility to
refinance the Tranche B and C Term Loan Facilities and to increase the revolving
credit facility to $575 million. See further description of the amendment to the
credit facility in Note 18.
In January 1999, the Company completed an offering of $330 million of
8 5/8% Senior Subordinated 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. The
Company recorded an extraordinary loss before tax on the extinguishment of the
9 7/8% Notes of approximately $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. Approximately $11.4 million of issuance costs associated with the
8 5/8% Notes have been deferred as of September 30, 1999 and are being amortized
over the term of the Notes.
In August 1999, the Company repurchased the remaining $2.9 million of the
9 7/8% Notes, resulting in an extraordinary loss, net of tax, of $0.1 million.
The Company entered into two interest rate locks in fiscal 1998 to hedge
its anticipated interest rate exposure on the 8 5/8% Notes offering. The total
amount paid under the interest rate locks of $12.9 million has been recorded as
a reduction of the 8 5/8% Notes' carrying value and is being amortized over the
life of the 8 5/8% Notes as interest expense.
In conjunction with the acquisitions of Rhone-Poulenc Jardin and Sanford
Scientific, notes were issued for certain portions of the total purchase price
that are to be paid in annual installments over a four-year period. The present
value of remaining note payments is $24.0 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 conjunction with the other acquisitions discussed in Note 5, notes were
issued for certain portions of the total purchase price that are to be paid in
annual installments over periods ranging from four to five years. The present
value of remaining note payments is $8.3 million. The Company is imputing
interest on the non-interest bearing notes using an interest rate prevalent for
similar instruments at the time of the acquisitions (approximating 8%).
The foreign term loans of $6.0 million issued on December 12, 1997, have an
8-year term and bear interest at 1% below LIBOR. The present value of these
loans at September 30, 2000 was $3.2 million. The loans are denominated in
British Pounds Sterling and can be redeemed, on demand, by the note holder. The
foreign bank borrowings of $3.9 million at September 30, 2000 represent lines of
credit for foreign operations and are denominated in French Francs.
In February 1998, the Company had entered into a credit facility to replace
its then existing credit facility, which resulted in an extraordinary loss of
$0.7 million, net of tax, for the write off of unamortized deferred financing
costs.
NOTE 9. SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
STOCK
Class A Convertible Preferred Stock, no par value:
Authorized 0.2 shares 0.2 shares
Issued 0.0 shares 0.2 shares
Common shares, no par value
Authorized 100.0 shares 50.0 shares
Issued 31.3 shares 21.3 shares
</TABLE>
Class A Convertible Preferred Stock ("Preferred Shares") with a face amount
of $195.0 million was issued in conjunction with the 1995 Miracle-Gro merger
transactions. These Preferred Shares had a 5% dividend yield and were
convertible upon shareholder demand into common shares at any time and at
----
81
<PAGE> 82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Scotts' option after May 2000 at $19.00 per common share. The conversion feature
associated with the Preferred Shares issued in connection with the Miracle-Gro
merger transactions was negotiated as an integral part of the overall
transaction. The conversion price exceeded the fair market value of the
Company's common shares on the date the two companies reached agreement and,
therefore, the Preferred Shares did not provide for a beneficial conversion
feature. Additionally, warrants to purchase 3.0 million common shares of Scotts
were issued as part of the purchase price. The warrants are exercisable upon
shareholder demand for 1.0 million common shares at $21.00 per share, 1.0
million common shares at $25.00 per share and 1.0 million common shares at
$29.00 per share. The exercise term for the warrants expires September 2003. The
fair value of the warrants at issuance has been included in capital in excess of
par value in the Company's Consolidated Balance Sheets.
In October 1999, all of the then outstanding Preferred Shares were
converted into 10.0 million common shares. In exchange for the early conversion,
Scotts paid the holders of the Preferred Shares $6.4 million. The amount
represents the dividends on the Preferred Shares that otherwise would have been
payable through May 2000, the month during which the Preferred Shares could
first be redeemed by Scotts. In addition, Scotts agreed to accelerate the
termination of many of the standstill provisions in the Miracle-Gro merger
agreement that would otherwise have terminated in May 2000. These standstill
provisions include the provisions related to the Board of Directors and voting
restrictions, as well as restrictions on transfer. Therefore, the former
shareholders of Stern's Miracle-Gro Products, Inc., including Hagedorn
Partnership, L.P., may vote their common shares freely in the election of
directors and generally on all matters brought before Scotts' shareholders.
Following the conversion and the termination of the standstill provisions
described above, the former shareholders of Miracle-Gro own approximately 42% of
Scotts' outstanding common shares and have the ability to significantly control
the election of directors and approval of other actions requiring the approval
of Scotts' shareholders.
The limitations on the ability of the former shareholders of Miracle-Gro to
acquire additional voting securities of the Company contained in the merger
agreement terminated as of October 1, 1999, except for the restriction under
which the former shareholders of Miracle-Gro may not acquire, directly or
indirectly, beneficial ownership of Voting Stock (as that term is defined in the
Miracle-Gro merger agreement) representing more than 49% of the total voting
power of the outstanding Voting Stock, except pursuant to a tender offer for
100% of that total voting power, which tender offer is made at a price per share
which is not less than the market price per share on the last trading day before
the announcement of the tender offer and is conditioned upon the receipt of at
least 50% of the Voting Stock beneficially owned by shareholders of the Company
other than the former shareholders of Miracle-Gro and their affiliates and
associates. In fiscal 1999, certain of the Preferred Shares were converted into
0.2 million common shares at the holders' option.
Under The Scotts Company 1992 Long Term Incentive Plan (the "1992 Plan"),
stock options, stock appreciation rights and performance share awards were
granted to officers and other key employees of the Company. The 1992 Plan also
provided for the grant of stock options to non-employee directors of the
Company. The maximum number of common shares that may be issued upon the
exercise of options granted under the Plan is 1.7 million, plus the number of
common shares surrendered to exercise options (other than director options)
granted under the 1992 Plan, up to a maximum of 1.0 million surrendered common
shares. Vesting periods under the 1992 Plan vary and are determined by the
Compensation and Organization Committee of the Company's Board of Directors.
Under The Scotts Company 1996 Stock Option Plan (the "1996 Plan"), stock
options may be granted to officers, other key employees and non-employee
directors of the Company. The maximum number of common shares that may be issued
under the 1996 Plan is 5.5 million. Vesting periods under the 1996 Plan vary and
are determined by the Compensation and Organization Committee of the Company's
Board of Directors.
----
82
<PAGE> 83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregate stock option activity consists of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
---------------------------------------------------------------------
2000 1999 1998
--------------------- --------------------- ---------------------
Number of WTD. Avg. Number of WTD. Avg. Number of WTD. Avg.
Shares Price Shares Price Shares Price
------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Beginning balance 4.9 $26.33 3.8 $20.70 2.6 $18.35
Options granted 0.3 37.39 1.4 35.70 1.4 29.43
Options exercised (0.1) 19.46 (0.2) 16.51 (0.1) 16.60
Options canceled (0.2) 36.87 (0.1) 30.94 (0.1) 29.63
---- ---- ----
Ending balance 4.9 26.67 4.9 26.33 3.8 20.70
---- ---- ----
Exercisable at September
30 2.7 $21.45 1.9 $19.77 1.8 $18.17
</TABLE>
The following summarizes certain information pertaining to stock options
outstanding and exercisable at September 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------- --------------------
WTD. Avg. WTD. Avg. WTD. Avg.
Range of No. of Remaining Exercise No. of Exercise
Exercise Prices Options Life Price Options Price
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$9.90 0.1 1.05 $ 9.90 0.1 $ 9.90
$15.00 - $20.00 1.7 5.02 18.32 1.6 17.77
$20.00 - $25.00 0.3 5.86 19.10 0.4 21.32
$25.00 - $30.00 0.7 7.18 27.86 0.2 27.96
$30.00 - $35.00 1.1 8.17 31.74 0.3 32.38
$35.00 - $40.00 0.9 8.84 36.07 0.1 35.89
$40.00 - $46.38 0.1 8.47 37.17 0.0 --
--- ------ --- ------
4.9 $26.42 2.7 $21.45
=== ====== === ======
</TABLE>
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which changes the measurement,
recognition and disclosure standards for stock-based compensation. The Company,
as allowable, has adopted SFAS No. 123 for disclosure purposes only.
The fair value of each option granted has been estimated on the grant date
using the Black-Scholes option-pricing model based on the following assumptions
for those granted in fiscal 2000, 1999 and 1998: (1) expected market-price
volatility of 27.05%, 24.44% and 23.23%, respectively; (2) risk-free interest
rates of 6.0%, 6.0% and 4.3%, respectively; and (3) expected life of options of
6 years. The estimated weighted-average fair value per share of options granted
during fiscal 2000, 1999 and 1998 was $14.94, $13.64 and $9.28, respectively.
Had compensation expense been recognized for fiscal 2000, 1999 and 1998 in
accordance with provisions of SFAS No. 123, the Company would have recorded net
income and earnings per share as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------------------------------------------------------------------------------------------
(in millions, except per share data)
<S> <C> <C> <C>
Net income used in basic earnings per
share calculation $59.4 $55.3 $31.3
Net income used in diluted earnings per
share calculation $59.4 $45.3 $21.5
Earnings per share:
Basic $2.12 $2.50 $1.15
Diluted $2.00 $1.82 $1.03
</TABLE>
----
83
<PAGE> 84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The pro forma amounts shown above are not necessarily representative of the
impact on net income in future years as additional option grants may be made
each year.
In fiscal 1998, the Company sold 0.3 million put options which gave the
holder the option to sell the Company's common shares to the Company at a strike
price of $35.32. The options could only be exercised on their expiration date in
May 1999 and expired unused. The premium received on the sale of the put options
was considered additional paid-in capital. The put options did not impact the
Company's earnings per share calculation during fiscal 1999 since they would
have been anti-dilutive. The impact of the put options on the fiscal 1998
earnings per share calculation was less than $0.01 per share.
NOTE 10. EARNINGS PER COMMON SHARE
The following table presents information necessary to calculate basic and
diluted earnings per common share.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------------------------------
(in millions, except per share data)
<S> <C> <C> <C>
BASIC EARNINGS PER COMMON SHARE:
Net income before extraordinary loss $73.1 $69.1 $37.0
Net income 73.1 63.2 36.3
Class A Convertible Preferred Stock dividend (6.4) (9.7) (9.8)
----- ----- -----
Income available to common shareholders 66.7 53.5 26.5
Weighted-average common shares outstanding
during the period 27.9 18.3 18.7
Basic earnings per common share
Before extraordinary item $2.39 $3.25 $1.46
After extraordinary item $2.39 $2.93 $1.42
DILUTED EARNINGS PER COMMON SHARE:
Net income used in diluted earnings per
common share calculation $66.7 $63.2 $36.3
Weighted-average common shares outstanding
during the period 27.9 18.3 18.7
Potential common shares:
Assuming conversion of Class A Convertible
Preferred Stock 0.0 10.2 10.3
Assuming exercise of options 0.8 1.0 0.7
Assuming exercise of warrants 0.9 1.0 0.6
----- ----- -----
Weighted-average number of common shares
outstanding and dilutive potential common
shares 29.6 30.5 30.3
Diluted earnings per common share
Before extraordinary item $2.25 $2.27 $1.22
After extraordinary item $2.25 $2.08 $1.20
</TABLE>
Basic earnings per common share is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
during the period.
Diluted earnings per share is computed by dividing net income by the
weighted-average number of common shares and dilutive potential common shares
(stock options, Class A Convertible Preferred Stock and warrants) outstanding
during each period.
----
84
<PAGE> 85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. INCOME TAXES
The provision for income taxes, net of tax benefits associated with the
1999 and 1998 extraordinary losses of $4.1 million and $0.5 million,
respectively, consists of the following:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Currently payable:
Federal
$27.8 $34.5 $22.1
State
3.6 4.4 3.9
Foreign
4.3 4.4 2.7
Deferred:
Federal
6.9 0.5 (4.0)
State
0.6 0.0 (0.3)
----- ----- -----
Income tax expense $43.2 $43.8 $24.4
===== ===== =====
</TABLE>
The domestic and foreign components of income before taxes are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Domestic
$107.1 $100.0 $57.1
Foreign
9.2 6.9 3.5
------ ------ -----
Income before taxes $116.3 $106.9 $60.6
====== ====== =====
</TABLE>
A reconciliation of the federal corporate income tax rate and the effective
tax rate on income before income taxes is summarized below:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory income tax rate 35.0% 35.0% 35.0%
Effect of foreign operations (0.3) (0.7) (1.6)
Goodwill amortization and other effects
resulting from purchase accounting 2.7 3.0 4.6
State taxes, net of federal benefit 2.4 2.6 3.8
Resolution of previous contingencies (2.8) -- --
Other 0.2 1.1 (1.5)
----- ----- -----
Effective income tax rate 37.2% 41.0% 40.3%
===== ===== =====
</TABLE>
The net current and non-current components of deferred income taxes
recognized in the Consolidated Balance Sheets at September 30 are:
<TABLE>
<CAPTION>
2000 1999 1998
------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Net current assets
$21.6 $32.3 $20.8
Net non-current assets (liability)
19.7 11.3 (1.2)
----- ----- -----
Net assets $41.3 $43.6 $19.6
===== ===== =====
</TABLE>
----
85
<PAGE> 86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------------
2000 1999
----------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
ASSETS
Inventories $ 11.5 $ 6.1
Accrued liabilities 33.3 35.5
Postretirement benefits 14.3 9.6
Foreign net operating losses 1.9 1.9
Other 12.9 14.1
------ ------
Gross deferred tax assets 73.9 67.2
Valuation allowance (1.1) (1.1)
------ ------
Net deferred tax assets 72.8 66.1
LIABILITIES
Property, plant and equipment (18.2) (22.5)
Other (13.3)
------ ------
Net assets $ 41.3 $ 43.6
====== ======
</TABLE>
Net operating loss carryforwards in foreign jurisdictions were $1.9 million
at September 30, 2000 and 1999, respectively. The use of these acquired
carryforwards is subject to limitations imposed by the tax laws of each
applicable country.
As a result of tax planning strategies developed and implemented in fiscal
1999, the Company realized $0.8 million of certain net operating losses during
fiscal 1999. The valuation allowance of $1.1 million at September 30, 2000 and
September 30, 1999 is to provide for operating losses for which the benefits are
not expected to be realized. The foreign net operating losses of $1.9 million
can be carried forward indefinitely.
NOTE 12. FINANCIAL INSTRUMENTS
A description of the Company's financial instruments and the methods and
assumptions used to estimate their fair values is as follows:
LONG-TERM DEBT
At September 30, 2000 and 1999, the Company had $330 million outstanding of
8 5/8% Senior Subordinated Notes due 2009 that were issued through a private
offering. The fair value of these notes was estimated based on recent trading
information. Variable rate debt outstanding at September 30, 2000 and 1999
consisted of revolving borrowings and term loans under the Company's credit
facility and local bank borrowings for certain of the Company's foreign
operations. The carrying amounts of these borrowings are considered to
approximate their fair values.
INTEREST RATE SWAP AGREEMENTS
At September 30, 2000 and 1999, the Company had outstanding five interest
rate swaps with major financial institutions that effectively convert
variable-rate debt to a fixed rate. One swap has a notional amount of 20.0
million British Pounds Sterling under a five-year term expiring in April 2002
whereby the Company pays 7.6% and receives three-month LIBOR. The remaining four
swaps have notional amounts between $20 million and $35 million ($105 million in
total) with three, four or five year terms commencing in January 1999. Under the
terms of these swaps, the Company pays rates ranging from 5.05% to 5.18% and
receives three-month LIBOR.
The Company enters into interest rate swap agreements as a means to hedge
its interest rate exposure on debt instruments. In addition, the Company's
credit facility requires that the Company enter into hedge agreements to the
extent necessary to provide that at least 50% of the aggregate principal amount
of the Senior Subordinated Notes and term loans is subject to a fixed rate.
Since the interest rate swaps have been designated as hedging instruments, their
fair values are not reflected in the Company's Consolidated Balance Sheets. Net
amounts to be received or paid under the swap agreements are reflected as
adjustments to interest expense. The fair value of the swap agreements was
determined
----
86
<PAGE> 87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
based on the present value of the estimated future net cash flows using implied
rates in the applicable yield curve as of the valuation date.
INTEREST RATE LOCKS
In fiscal 1998, the Company entered into two contracts, each with notional
amounts of $100.0 million, to lock the treasury rate component of the Company's
anticipated offering of debt securities in the first quarter of fiscal 1999. One
of the interest rate locks expired in October 1998 and was rolled over into a
new rate lock that expired in February 1999. The other rate lock expired in
February 1999.
The Company entered into the interest rate locks to hedge its interest rate
exposure on the offering of the 8 5/8% Senior Subordinated Notes due 2009. Since
the interest rate locks were designated as hedging instruments, their fair value
was not reflected in the Company's Consolidated Balance Sheets. The net amount
to be received or paid under the interest rate locks is reflected as an
adjustment to the carrying amount of the 8 5/8% Notes.
The estimated fair values of the Company's financial instruments are as
follows for the fiscal years ended September 30:
<TABLE>
<CAPTION>
2000 1999
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C>
Revolving and term loans under credit facility
$489.5 $489.5 $573.2 $573.2
Senior subordinated notes
330.0 318.5 330.0 316.0
Foreign bank borrowings and term loans
7.1 7.1 17.6 17.6
Interest rate swap agreements
-- 2.6 -- 2.8
</TABLE>
Excluded from the fair value table above are the following items that are
included in the Company's total debt balances at September 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------------------------
<S> <C> <C>
Amounts paid to settle treasury locks (10.8) (12.0)
Non-interest bearing notes 36.4 37.0
Capital lease obligations 1.8 4.2
</TABLE>
The fair value of the non-interest bearing notes is not considered
determinable since there is no established market for notes with similar
characteristics and since they represent notes that were negotiated between the
Company and the seller as part of transactions to acquire businesses.
NOTE 13. OPERATING LEASES
The Company leases buildings, land and equipment under various
noncancellable lease agreements for periods of two to six years. The lease
agreements generally provide that the Company pay taxes, insurance and
maintenance expenses related to the leased assets. Certain lease agreements
contain purchase options. At September 30, 2000, future minimum lease payments
were as follows:
<TABLE>
<CAPTION>
(in millions)
<S> <C>
2001 $11.8
2002 8.7
2003 6.1
2004 3.4
2005 1.6
Thereafter 3.8
-----
Total minimum lease payments $35.4
=====
</TABLE>
The Company also leases transportation and production equipment under
various one-year operating leases, which provide for the extension of the
initial term on a monthly or annual basis. Total rental
----
87
<PAGE> 88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expenses for operating leases were $12.8 million, $18.5 million and $13.5
million for fiscal 2000, 1999 and 1998, respectively. The total to be received
from sublease rentals in place at September 30, 2000 is $4.3 million.
NOTE 14. COMMITMENTS
The Company has entered into the following purchase commitments:
SUBSTRAL(R): On June 15, 2000, the Company signed an Asset Purchase
Agreement to acquire the Substral(R) brand and consumer plant care business from
Henkel KGaA as of December 31, 2000. Substral(R) is a leading consumer
fertilizer brand in many European countries including Germany, Austria, Belgium,
France and the Nordics. Under the terms of the agreement, the Company will
acquire specified working capital and intangible assets associated with the
Substral(R) business; however, ownership of these assets will not transfer to
the Company until December 31, 2000 and payments will be made subsequent to that
date. The purchase price will be determined based on the value of the working
capital assets acquired and the performance of the business for the period from
June 15, 2000 to December 31, 2000. The Company has not reflected the
acquisition of the Substral(R) business in its fiscal 2000 financial statements
because the Company had not assumed ownership of any assets associated with the
Substral(R) business as of September 30, 2000 and the results of operations for
the Substral(R) business prior to December 31, 2000 are retained by the seller.
SEED: The Company is obligated to make future purchases based on estimated
yields and other market purchase commitments. At September 30, 2000, estimated
annual seed purchase commitments were as follows:
<TABLE>
<CAPTION>
(in millions)
<S> <C>
2001 $62.1
2002 $37.4
2003 $20.6
2004 $ 6.1
2005 $ 1.7
</TABLE>
The Company made purchases of $31.2 million and $24.0 million under this
obligation in fiscal 2000 and 1999, respectively.
UREA: The Company is obligated to purchase 100,000 tons of urea annually.
The value to the Company based on current market prices of urea is approximately
$15.0 million. The purchase commitments expire September 30, 2001. The Company
purchased 250,000 tons and 172,000 tons under this obligation in fiscal 2000 and
1999, respectively.
GLUFOSINATE AMMONIUM: Under the terms of the agreement to acquire the AgrEvo
pesticides business, the Company is obligated to purchase glufosinate ammonium
valued at $12.6 million (approximately 315,000 pounds) through September 2001.
If the Company does not purchase product with a value of $12.6 million, the
Company is required to provide cash settlement in an amount equal to 50% of the
shortfall. In connection with the sale of this business in February 1999, the
purchaser agreed to purchase a minimum of 50,000 pounds of glufosinate ammonium
through September 2001. The Company has not purchased any glufosinate ammonium
under this commitment through September 30, 2000.
----
88
<PAGE> 89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PEAT: In March 2000, the Company entered in a contract to purchase peat over
the next ten years. Upon the execution of this contract, the previous peat
contract was terminated. The purchase obligations under the March 2000 contract
are as follows:
<TABLE>
<CAPTION>
Approximate Value
Cubic Meters Based on Average Prices
--------------------------------------------------------------------------------------
<S> <C> <C>
2001 1,039,000 $1,488,000
2002 1,046,000 $1,498,000
2003 1,067,000 $1,528,000
2004 1,088,000 $1,558,000
2005 1,110,000 $1,590,000
Thereafter 3,962,000 $5,674,000
</TABLE>
The arrangement can be extended another ten years at the Company's option.
If the Company does not purchase required amounts, the Company will be required
to provide cash settlement equal to 50% of the quantity shortfall multiplied by
the average product price. The Company purchased 183,000 cubic meters of peat
during the first six months of fiscal 2000 (under the original peat contract)
and 485,000 cubic meters of peat during the second six months of fiscal 2000
(under the terms of the new contract). The Company purchased 517,650 cubic
meters of peat under the original peat contract in fiscal 1999.
MEDIA ADVERTISING: The Company has committed to purchase $27.0 million of
airtime for both national and regional television advertising in fiscal 2001.
NOTE 15. 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 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
----
89
<PAGE> 90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the Company 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.
The Company is continuing to meet with the Ohio Attorney General and the
Ohio Environmental Protection Agency in an effort to complete negotiations of an
amicable resolution of these issues. 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 the 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 on-site
waste disposal areas with the knowledge of the Ohio Environmental Protection
Agency. Interim measures consisting of capping two on-site 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. As of September 30, 2000, 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 of Ohio 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 suspension 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
----
90
<PAGE> 91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 as of September 30, 2000. 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.
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 reduce emissions to both air and ground water. Additional work is
being undertaken to further reduce emissions to groundwater and surface water.
Scotts believes that it has adequately addressed the environmental concerns of
the Environment Agency regarding emissions to air and groundwater. The Scotts
Company (UK) Ltd. has retained an environmental consulting firm to research
remediation designs. The Company and the Environment Agency are in discussions
over the 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 as of September 30, 2000.
OTHER ENVIRONMENTAL MATTERS
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 as of September 30, 2000.
The Company has accrued $8.9 million at September 30, 2000 for the
environmental matters described in Note 15. The significant components of the
accrual are: (i) costs for site remediation of $6.3 million; (ii) costs for
asbestos abatement of $2.1 million; and (iii) fines and penalties of $0.5
million. The significant portion of the costs accrued as of September 30, 2000
are expected to be paid in fiscal 2001 and 2002; however, payments are expected
to be made through fiscal 2003 and possibly for a period thereafter.
The Company believes that the amounts accrued as of September 30, 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.
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.
----
91
<PAGE> 92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AGREVO ENVIRONMENTAL HEALTH, INC.
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 U.S. District Court for the Southern District of
New York (the "New York Action"), against the Company, a subsidiary of the
Company and Monsanto (now Pharmacia) 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 the purchase of the
consumer herbicide business and the related agreements, and that AgrEvo breached
the representations and warranties contained in these 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 the 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 defendant's 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 the resolution of a motion to amend the New York Action, and the
resolution of the New York Action. The Company's subsidiaries intend to
vigorously defend the asserted claims.
If the above actions are determined adversely to the Company, the result
could have a material adverse effect on our results of operations, financial
position and cash flows.
CENTRAL GARDEN & PET COMPANY
On June 30, 2000, the Company 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 its outstanding accounts receivable from Central
Garden with respect to the Company's 2000 fiscal year. The Company's complaint
was later amended to seek approximately $24 million in accounts receivable and
additional damages for other breaches of duty. Pharmacia (formerly Monsanto)
also filed suit against Central Garden in Missouri state court, seeking
unspecified damages allegedly due Pharmacia under a four-year alliance agreement
between Pharmacia and Central Garden.
----
92
<PAGE> 93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 7, 2000, Central Garden filed suit against the Company and
Pharmacia in the U.S. District Court for the Northern District of California
(San Francisco Division) alleging various claims, including breach of contract
and violations of federal antitrust laws, and seeking an unspecified amount of
damages and injunctive relief. On October 26, 2000, after a notice hearing, the
District Court dismissed all of Central Garden's breach of contract claims for
lack of subject matter jurisdiction. On November 17, 2000, Central Garden filed
an amended complaint in the District Court, re-alleging various claims for
violations of federal antitrust laws and also alleging state antitrust claims
under the Cartwright Act, Section 16726 of the California Business and
Professions Code. On October 31, 2000, Central Garden filed an additional
complaint against the Company and Pharmacia in the California Superior Court of
Contra Costa County. The complaint seeks to assert the breach of contract claims
previously dismissed by the District Court and additional claims under
sec. 17200 of the California Business and Professional Code. On December 4,
2000, defendants Scotts and Pharmacia jointly filed a motion to stay this action
based on the pendency of prior lawsuits (including the two described above) that
involve the same subject matter. Defendants' motion to stay is set for hearing
on January 19, 2001. The Company believes that Central Garden's federal and
state claims are entirely without merit and intends to vigorously defend against
them.
NOTE 16. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of trade accounts receivable.
The Company sells its consumer products to a wide variety of retailers,
including mass merchandisers, home centers, independent hardware stores,
nurseries, garden outlets, warehouse clubs and local and regional chains.
Professional products are sold to commercial nurseries, greenhouses, landscape
services, and growers of specialty agriculture crops.
At September 30, 2000, 69% of the Company's accounts receivable was due
from customers in North America. Approximately 88% of these receivables were
generated from the Company's North American Consumer Business Group. The most
significant concentration of receivables within this segment was from home
centers, which accounted for 13% of the Company's receivables balance at
September 30, 2000. No other retail concentrations (e.g., mass merchandisers,
independent hardware stores, etc. in similar markets) accounted for more than
10% of the Company's accounts receivable balance at September 30, 2000.
The remaining 12% of North American accounts receivable was generated from
the Company's North American Professional Business Group. Due to seasonality,
the North American Professional segment accounts for a share of the Company's
receivable balance at September 30, 2000 that is disproportionate to its share
of total company sales for the year. As a result of the changes in distribution
methods made in fiscal 1999 for the North American Professional Business Group,
nearly all products are sold through distributors. Accordingly, nearly all of
the North American Professional Business Group's accounts receivable at
September 30, 2000 is due from distributors.
The 31% of accounts receivable generated outside of North America is due
from retailers, distributors, nurseries and growers. No concentrations of or
individual customers within this group account for more than 10% of the
Company's accounts receivable balance at September 30, 2000.
At September 30, 2000, the Company's concentrations of credit risk were
similar to those existing at September 30, 1999 except that the North American
Professional Business Group accounted for one-third of North American
receivables at that time.
The Company's two largest customers accounted for the following percentage
of net sales in each respective period:
<TABLE>
<CAPTION>
Largest 2nd Largest
Customer Customer
---------------------------------------------------------------------------------------------
<S> <C> <C>
2000 22.9% 8.9%
1999 17.4% 11.6%
1998 16.8% 10.6%
</TABLE>
----
93
<PAGE> 94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales to the Company's two largest customers are reported within the
Company's North American Consumer segment. No other customers accounted for more
than 10% of fiscal 2000, 1999 or 1998 net sales.
NOTE 17. OTHER EXPENSE (INCOME)
Other expense (income) consisted of the following for the fiscal years
ended September 30:
<TABLE>
<CAPTION>
2000 1999 1998
-------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Royalty income $(5.1) $(4.0) $(3.4)
Gain on sale of ProTurf(R) business (4.6)
Asset valuation and write-off charges 1.8 1.2 2.3
Foreign currency losses 0.9 0.1 2.5
Other, net 1.0 (0.9) (0.1)
----- ----- -----
Total $(6.0) $(3.6) $ 1.3
===== ===== =====
</TABLE>
NOTE 18. SUBSEQUENT EVENTS
On December 5, 2000, the Company entered into an Amended and Restated
Credit Agreement (the "Amended Agreement"). Under the terms of the Amended
Agreement, the Company entered into a new Tranche B Term Loan Facility with an
aggregate principal amount of $260 million, the proceeds of which repaid the
then outstanding principal amount of the original Tranche B and C facilities.
The new Tranche B Term Loan Facility will be repaid in quarterly installments of
$0.25 million beginning June 30, 2001 through December 31, 2006, quarterly
installments of $63.5 million beginning March 31, 2007 through September 30,
2007 and a final quarterly installment of $63.8 million on December 31, 2007.
The new Tranche B Term Loan Facility will bear interest at a variable rate that
is less than the rates on the original Tranche B and C facilities. Under the
terms of the Amended Agreement, the Revolving Credit Facility was increased from
$500 million to $575 million and the net worth covenant under the original
credit facility was amended to be measured only during the Company's second
through fourth fiscal quarters. At the time the Company entered into the Amended
Agreement, the amounts outstanding under the original Tranche B and C facilities
were prepayable without penalty.
NOTE 19. 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 was 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. The
impact of conforming the Company's interim period revenue recognition policies
for the commission under the Roundup(R) marketing agreement will require the
Company to defer the recognition of commission earned in interim periods but
does not impact the commission earned on an annual basis.
In May 2000, the Financial Accounting Standards Board's Emerging Issues
Task Force (EITF) reached a consensus on Issue No. 00-14, "Accounting for
Certain Sales Incentives." This issue addresses the recognition, measurement,
and income statement classification for various types of sales incentives
----
94
<PAGE> 95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
including: discounts, coupons, rebates and free products. The Company has not
yet determined the impact of this standard; however, it may result in the
reclassification of certain expenses from advertising and promotion to a
reduction of net sales. EITF 00-14 is effective for periods beginning after June
30, 2001.
NOTE 20. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
2000 1999 1998
------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Interest paid (net of amount
capitalized) $88.3 $ 63.6 $ 31.5
Income taxes paid 10.0 50.3 38.6
Dividends declared not paid 0.0 2.5 0.0
Businesses acquired:
Fair value of assets acquired, net
of cash 4.8 691.2 197.3
Liabilities assumed 0.0 (149.3) (45.9)
----- ------- ------
Net assets acquired 4.8 541.9 151.4
Cash paid 2.7 4.8 0.4
Notes issued to seller 2.2 35.7 0.0
Debt issued $ 0.0 $ 501.4 $151.0
</TABLE>
NOTE 21. SEGMENT INFORMATION
For fiscal 2000, the Company was divided into three reportable
segments -- North American Consumer, North American Professional and
International. The North American Consumer segment consists of the Consumer
Lawns, Consumer Gardens, Consumer Growing Media, Consumer Ortho and Consumer
Canada Business Groups.
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 pesticides products. Products are marketed to
mass merchandisers, home improvement centers, large hardware chains, nurseries
and gardens centers.
The North American Professional segment is focused on a full line of
horticulture products including controlled-release and water-soluble fertilizers
and plant protection products, grass seed, and growing media. Products are sold
to landscape service companies, commercial nurseries and greenhouses and
specialty crop growers. Prior to June 2000, this segment also included the
Company's ProTurf(R) 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
----
95
<PAGE> 96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
allocated for purposes of this presentation). Prior periods have been restated
to conform to this basis of presentation.
<TABLE>
<CAPTION>
N.A. N.A.
Consumer Professional International Corporate Total
----------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Net Sales:
2000 $1,261.2 $127.6 $375.5 $ -- $1,764.3
1999 1,097.0 159.4 391.9 1,648.3
1998 733.7 179.4 199.9 1,113.0
Operating Income (Loss):
2000 $ 243.1 $ 1.7 $ 34.7 $ (69.3) $ 210.2
1999 203.1 20.5 47.8 (75.3) 196.1
1998 117.3 23.5 25.0 (71.7) 94.1
Operating Margin:
2000 19.3% 1.3% 9.2% 11.9%
1999 18.5 12.8 12.2 nm 11.9
1998 16.0 13.1 12.5 nm 8.5
Depreciation and
Amortization:
2000 $ 42.5 $ 4.1 $ 12.8 $ 6.9 $ 66.3
1999 35.9 3.3 15.1 5.9 60.2
1998 24.1 2.7 7.7 3.3 37.8
Capital Expenditures:
2000 $ 32.1 $ 9.8 $ 9.5 $ 21.1 $ 72.5
1999 22.5 5.7 10.6 27.9 66.7
1998 19.6 9.2 5.1 7.4 41.3
Long-Lived Assets:
2000 $ 681.4 $ 97.8 $271.3 $ 58.0 $1,108.5
1999 649.0 98.5 322.7 57.7 1,127.9
Total Assets:
2000 $1,102.7 $151.8 $422.4 $ 84.5 $1,761.4
1999 1,010.1 176.9 496.7 85.9 1,769.6
</TABLE>
---------------
nm Not meaningful.
Operating income (loss) 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 fiscal years ended September 30,
2000, 1999 and 1998 includes amortization of certain intangible assets,
corporate general and administrative expenses and certain "other" income/expense
not allocated to the business segments. Total assets reported for the Company's
operating segments include the intangible assets for the acquired businesses
within those segments. Corporate assets primarily include deferred financing and
debt issuance costs, corporate fixed assets as well as deferred tax assets.
----
96
<PAGE> 97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for fiscal 2000 and 1999. We have restated our financial statements for each of
the first three quarters of fiscal 2000. In connection with the Roundup(R)
marketing agreement, we were required to pay a marketing fee of $32 million. The
earnings originally reported for those quarters reflected amortization of the
marketing fee over a period of 20 years. However, we believe that it is unlikely
that this agreement will continue beyond ten years. Accordingly, the financial
statements for those quarters have been restated to correct for the error in the
amortization period and now reflect amortization of the marketing fee over a
period of ten years.
<TABLE>
<CAPTION>
1st Qtr 2nd Qtr 3rd Qtr
(restated) (restated) (restated) 4th Qtr Full Year
--------------------------------------------------------------------------------------------------------------------
(in millions, except for share data)
<S> <C> <C> <C> <C> <C>
FISCAL 2000
Net sales $ 191.5 $ 720.7 $ 598.3 $253.8 $1,764.3
Gross profit 73.9 313.1 242.2 82.8 712.0
Income (loss) before
extraordinary item (30.8) 63.4 52.8 (12.3) 73.1
Net income (loss) (30.8) 63.4 52.8 (12.3) 73.1
Basic earnings (loss) per
common share $ (1.32) $ 2.27 $ 1.89 $(0.44) $ 2.39
Common shares used in
basic EPS calculation 28.2 27.9 27.9 28.0 27.9
Diluted earnings (loss)
per common share $ (1.32) $ 2.15 $ 1.77 $(0.44) $ 2.25
Common shares and
dilutive potential
common shares used in
diluted EPS calculation 28.2 29.5 29.7 28.0 29.6
</TABLE>
<TABLE>
<CAPTION>
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Full Year
--------------------------------------------------------------------------------------------------------------------
(in millions, except for share data)
<S> <C> <C> <C> <C> <C>
FISCAL 1999
Net sales $ 184.4 $ 631.5 $ 586.2 $246.2 $1,648.3
Gross profit 64.7 268.9 236.4 89.2 659.2
Income (loss) before
extraordinary item (10.0) 54.7 41.6 (17.2) 69.1
Net income (loss) (10.4) 49.3 41.6 (17.3) 63.2
Basic earnings (loss) per
common share $ (0.70) $ 2.56 $ 2.14 $(1.07) $ 2.93
Common shares used in
basic EPS calculation 18.3 18.3 18.3 18.3 18.3
Diluted earnings (loss)
per common share $ (0.70) $ 1.63 $ 1.35 $(1.08) $ 2.08
Common shares and
dilutive potential
common shares used in
diluted EPS calculation 18.3 30.3 30.9 18.3 30.5
</TABLE>
NOTES:
Certain reclassifications have been made within interim periods.
The Company's business is highly seasonal with approximately 75% of sales
occurring in the second and third fiscal quarters combined.
----
97
<PAGE> 98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23. 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 1993. 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 of the Securities and Exchange
Commission) 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 information presents consolidating Statements of Operations,
Statements of Cash Flows and Balance Sheets for the three years ended September
30, 2000. Separate audited financial statements of the individual guarantor
subsidiaries have not been provided because management does not believe they
would be meaningful to investors.
----
98
<PAGE> 99
THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
(IN MILLIONS)
<TABLE>
<CAPTION>
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $923.7 $443.7 $396.9 $1,764.3
Cost of sales 559.1 272.9 220.3 1,052.3
------ ------ ------ ------ --------
Gross profit 364.6 170.8 176.6 712.0
Gross commission earned from
marketing agreement 34.3 0.9 4.0 39.2
Contribution expenses under
marketing agreement 9.0 0.2 0.7 9.9
------ ------ ------ ------ --------
Net commission earned from
marketing agreement 25.3 0.7 3.3 29.3
Advertising and promotion 111.6 47.4 50.1 209.1
Selling, general and administrative 183.2 24.7 94.8 302.7
Amortization of goodwill and other
intangibles 10.6 5.3 9.4 25.3
Equity income in non-guarantors (56.2) $ 56.2
Intracompany allocations (8.5) 1.0 7.5
Other expenses (income), net 1.9 (8.1) 0.2 (6.0)
------ ------ ------ ------ --------
Income from operations 147.3 101.2 17.9 (56.2) 210.2
Interest expense 70.2 23.7 93.9
------ ------ ------ ------ --------
Income before income taxes 77.1 101.2 (5.8) (56.2) 116.3
Income taxes 4.0 41.5 (2.3) 43.2
------ ------ ------ ------ --------
Net income $ 73.1 $ 59.7 $ (3.5) $(56.2) $ 73.1
====== ====== ====== ====== ========
</TABLE>
----
99
<PAGE> 100
THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
(IN MILLIONS)
<TABLE>
<CAPTION>
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 73.1 $ 59.7 $ (3.5) $(56.2) $ 73.1
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 16.0 8.0 5.0 29.0
Amortization 10.9 16.5 9.9 37.3
Equity income in non-guarantors (56.2) 56.2
Loss on sale of fixed assets 0.6 1.8 2.0 4.4
Gain on sale of business (4.6) (4.6)
Changes in assets and
liabilities, net of acquired
businesses:
Accounts receivable 48.3 (43.5) 1.6 6.4
Inventories (18.2) 12.5 11.5 5.8
Prepaid and other current
assets (13.0) 1.2 2.6 (9.2)
Accounts payable (5.0) 17.9 6.5 19.4
Accrued taxes and other
liabilities 59.0 (12.7) (16.3) 30.0
Other assets (1.8) (6.5) 3.6 (4.7)
Other liabilities 3.1 (1.0) (8.5) (6.4)
Other, net (10.2) 1.5 (0.3) (9.0)
------ ------ ------ ------ ------
Net cash provided by operating
activities 102.0 55.4 14.1 171.5
------ ------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and
equipment (53.2) (9.0) (10.3) (72.5)
Proceeds from sale of equipment 1.8 1.8
Investments in non-guarantors (11.8) (4.1) (2.4) (18.3)
Other net 0.5 0.5
------ ------ ------ ------ ------
Net cash used in investing activities (64.5) (13.1) (10.9) (88.5)
------ ------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings under
revolving and bank lines of
credit (48.2) 4.5 (7.0) (50.7)
Dividends on Class A Convertible
Preferred Stock (6.4) (6.4)
Repurchase of treasury shares (23.9) (23.9)
Cash received from exercise of
stock options 2.8 2.8
Intercompany financing 38.7 (45.2) 6.5
Other, net 7.0 (8.0) (1.0)
------ ------ ------ ------ ------
Net cash used in financing activities (30.0) (40.7) (8.5) (79.2)
Effect of exchange rate changes on
cash (1.1) (1.1)
------ ------ ------ ------ ------
Net increase (decrease) in cash 7.5 1.6 (6.4) 2.7
Cash and cash equivalents, beginning
of period 8.5 3.1 18.7 30.3
------ ------ ------ ------ ------
Cash and cash equivalents, end of
period $ 16.0 $ 4.7 $ 12.3 $ 0.0 $ 33.0
====== ====== ====== ====== ======
</TABLE>
----
100
<PAGE> 101
THE SCOTTS COMPANY
BALANCE SHEET
AS OF SEPTEMBER 30, 2000
(IN MILLIONS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash $ 16.0 $ 4.7 $ 12.3 $ 33.0
Accounts receivable, net 103.2 44.6 68.2 216.0
Inventories, net 189.5 60.3 57.7 307.5
Current deferred tax asset 26.1 (1.0) 25.1
Prepaid and other assets 42.2 2.5 17.6 62.3
-------- ------ ------ --------- --------
Total current assets 377.0 111.1 155.8 643.9
Property, plant and equipment,
net 192.7 59.2 38.6 290.5
Intangible assets, net 81.2 420.2 241.7 743.1
Other assets 66.2 6.5 11.2 83.9
Investment in affiliates 840.3 $ (840.3)
Intracompany assets 251.1 (251.1)
-------- ------ ------ --------- --------
Total assets 1,557.4 848.1 447.3 (1,091.4) 1,761.4
======== ====== ====== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt 29.6 2.6 17.2 49.4
Accounts payable 81.6 26.3 45.1 153.0
Accrued liabilities 108.9 75.4 23.1 207.4
-------- ------ ------ --------- --------
Total current liabilities 220.1 104.3 85.4 0.0 409.8
Long-term debt 556.5 3.4 253.5 813.4
Other liabilities 41.9 (0.3) 18.7 60.3
Intracompany liabilities 243.2 7.9 (251.1)
-------- ------ ------ --------- --------
Total liabilities 1,061.7 107.4 365.5 (251.1) 1,283.5
Commitments and Contingencies
Shareholders' equity:
Investment from parent 488.7 59.8 (548.5)
Common shares, no par value
share, $.01 stated value per
share, issued 31.3 shares
issued in 2000 0.3 0.3
Capital in excess of stated
value 389.3 389.3
Retained earnings 196.8 252.0 39.8 (291.8) 196.8
Treasury stock, 3.4 shares at
cost (83.5) (83.5)
Accumulated other comprehensive
income (7.2) (17.8) (25.0)
-------- ------ ------ --------- --------
Total shareholders' equity 495.7 740.7 81.8 (840.3) 477.9
-------- ------ ------ --------- --------
Total liabilities and
shareholders' equity $1,557.4 $848.1 $447.3 $(1,091.4) $1,761.4
======== ====== ====== ========= ========
</TABLE>
----
101
<PAGE> 102
THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $831.6 $410.9 $405.8 $1,648.3
Cost of sales 515.2 249.3 224.6 989.1
------ ------ ------ ------ --------
Gross profit 316.4 161.6 181.2 659.2
Gross commission earned from
marketing agreement 28.6 1.2 0.5 30.3
Contribution expenses under
marketing agreement 1.6 1.6
------ ------ ------ ------ --------
Net commission earned from
marketing agreement 27.0 1.2 0.5 28.7
Advertising and promotion 101.5 38.7 48.8 189.0
Selling, general and administrative 174.3 18.8 88.1 281.2
Amortization of goodwill and other
intangibles 5.1 9.4 9.3 23.8
Restructuring and other charges 1.4 1.4
Equity income in non-guarantors (55.7) $ 55.7
Intracompany allocations (19.7) 13.1 6.6
Other income, net 0.4 (3.3) (0.7) (3.6)
------ ------ ------ ------ --------
Income from operations 136.1 86.1 29.6 (55.7) 196.1
Interest expense 55.3 0.2 23.6 79.1
------ ------ ------ ------ --------
Income before income taxes 80.8 85.9 6.0 (55.7) 117.0
Income taxes 11.7 34.2 2.0 47.9
------ ------ ------ ------ --------
Income before extraordinary item 69.1 51.7 4.0 (55.7) 69.1
Extraordinary loss on early
extinguishment of debt, net of
income tax benefit 5.9 5.9
------ ------ ------ ------ --------
Net income $ 63.2 $ 51.7 $ 4.0 $(55.7) $ 63.2
====== ====== ====== ====== ========
</TABLE>
----
102
<PAGE> 103
THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 63.2 $ 51.7 $ 4.0 $(55.7) $ 63.2
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 12.9 9.6 6.5 29.0
Amortization 12.8 8.5 9.9 31.2
Equity income in
non-guarantors (55.7) 55.7
Extraordinary loss 5.9 5.9
Loss on sale of property 2.7 (1.0) 0.1 1.8
Changes in assets and
liabilities, net of acquired
businesses:
Accounts receivable 4.1 19.6 23.7
Inventories (27.9) 6.3 (21.6)
Prepaid and other current
assets (16.5) 1.9 (10.6) (25.2)
Accounts payable 14.8 (0.2) (3.9) 10.7
Accrued taxes and other
liabilities (10.5) 25.7 (25.4) (10.2)
Other assets (35.4) 0.7 (1.2) (35.9)
Other liabilities 9.8 (3.0) (4.6) 2.2
Other, net (1.4) 0.4 4.4 3.4
------- ------- ------- ------ -------
Net cash provided by (used in)
operating activities (21.2) 120.2 (20.8) 78.2
------- ------- ------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and
equipment (48.1) (7.9) (10.7) (66.7)
Proceeds from sale of equipment 1.0 0.5 1.5
Investments in acquired businesses,
net of cash acquired (350.1) (156.1) (506.2)
Other (1.0) 1.5 (0.7) (0.2)
------- ------- ------- ------ -------
Net cash used in investing activities (398.2) (5.9) (167.5) (571.6)
------- ------- ------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES
Gross borrowings under term loans 260.0 265.0 525.0
Gross repayments under term loans (1.0) (2.0) (3.0)
Net borrowings under revolving and
bank lines of credit 160.7 (95.4) 65.3
Repayment of outstanding balance on
old credit facility (241.0) (241.0)
Issuance of 8 5/8% Senior
Subordinated Notes 330.0 330.0
Extinguishment of 9 7/8% Senior
Subordinated Notes (107.1) (107.1)
Settlement of interest rate locks (12.9) (12.9)
Financing and issuance fees (24.1) (24.1)
Dividends on Class A Convertible
Preferred Stock (12.1) (12.1)
Repurchase of treasury shares (10.0) (10.0)
Cash received from exercise of
stock options 3.8 3.8
Investment from parent 76.7 (109.1) 32.4
------- ------- ------- ------ -------
Net cash provided by (used in)
financing activities 423.0 (109.1) 200.0 513.9
Effect of exchange rate changes on
cash 0.0 (0.8) (0.8)
------- ------- ------- ------ -------
Net increase in cash 3.6 5.2 10.9 19.7
Cash and cash equivalents, beginning
of period 4.9 (2.1) 7.8 10.6
------- ------- ------- ------ -------
Cash and cash equivalents, end of
period $ 8.5 $ 3.1 $ 18.7 $ 0.0 $ 30.3
======= ======= ======= ====== =======
</TABLE>
----
103
<PAGE> 104
THE SCOTTS COMPANY
BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(IN MILLIONS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash $ 8.5 $ 3.1 $ 18.7 $ 30.3
Accounts receivable, net 130.5 1.1 69.8 201.4
Inventories, net 171.2 72.8 69.2 313.2
Current deferred tax asset 28.1 0.5 0.7 29.3
Prepaid and other assets 43.6 3.7 20.2 67.5
-------- ------ ------ --------- --------
Total current assets 381.9 81.2 178.6 $ 0.0 641.7
Property, plant and equipment, net 156.5 60.3 42.6 259.4
Intangible assets, net 230.3 268.5 295.3 794.1
Other assets 64.7 9.7 74.4
Investment in affiliates 706.6 (706.6)
Intracompany assets 294.6 (294.6)
-------- ------ ------ --------- --------
Total assets 1,540.0 704.6 526.2 (1,001.2) 1,769.6
======== ====== ====== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt 26.2 1.5 28.7 56.4
Accounts payable 86.5 8.4 38.6 133.5
Accrued liabilities 93.3 27.9 36.5 157.7
Accrued taxes (43.8) 60.2 2.9 19.3
-------- ------ ------ --------- --------
Total current liabilities 162.2 98.0 106.7 0.0 366.9
Long-term debt 594.4 299.2 893.6
Other liabilities 42.1 0.7 23.0 65.8
Intracompany liabilities 289.3 5.3 (294.6) 0.0
-------- ------ ------ --------- --------
Total liabilities 1,088.0 98.7 434.2 (294.6) 1,326.3
Commitments and Contingencies
Shareholders' Equity:
Class A Convertible Preferred
Stock, no par value 173.9 173.9
Investment from parent 413.6 57.4 (471.0) 0.0
Common shares, no par value per
share, $.01 stated value per
share, 21.3 shares issued in
1999 0.2 0.2
Capital in excess of stated
value 213.9 213.9
Retained earnings 130.1 192.3 43.3 (235.6) 130.1
Treasury stock, 2.9 shares at
cost (61.9) (61.9)
Accumulated other comprehensive
income (4.2) (8.7) (12.9)
-------- ------ ------ --------- --------
Total shareholders' equity 452.0 605.9 92.0 (706.6) 443.3
-------- ------ ------ --------- --------
Total liabilities and
shareholders' equity $1,540.0 $704.6 $526.2 $(1,001.2) $1,769.6
======== ====== ====== ========= ========
</TABLE>
----
104
<PAGE> 105
THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $461.3 $444.6 $207.1 $1,113.0
Cost of sales 291.6 306.5 116.9 715.0
------ ------ ------ ------ --------
Gross profit 169.7 138.1 90.2 398.0
Advertising and promotion 55.8 27.5 21.1 104.4
Selling, general and administrative 101.4 24.5 44.0 169.9
Amortization of goodwill and other
intangibles 0.1 8.8 4.0 12.9
Restructuring and other charges 12.9 2.5 15.4
Equity income in non-guarantors (37.7) $ 37.7
Intracompany allocations (11.6) 10.3 1.3
Other expenses, net 5.7 (4.7) 0.3 1.3
------ ------ ------ ------ --------
Income from operations 56.0 58.8 17.0 (37.7) 94.1
Interest expense 20.5 0.6 11.1 32.2
------ ------ ------ ------ --------
Income before income taxes 35.5 58.2 5.9 (37.7) 61.9
Income taxes (1.5) 24.0 2.4 24.9
------ ------ ------ ------ --------
Income before extraordinary item 37.0 34.2 3.5 (37.7) 37.0
Extraordinary loss on early
extinguishment of debt, net of
income tax benefit 0.7 0.7
------ ------ ------ ------ --------
Net income $ 36.3 $ 34.2 $ 3.5 $(37.7) $ 36.3
====== ====== ====== ====== ========
</TABLE>
----
105
<PAGE> 106
THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $36.3 $ 34.2 $ 3.5 $(37.7) $ 36.3
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 8.2 9.1 4.3 21.6
Amortization 2.7 9.1 4.4 16.2
Equity income in non-guarantors (37.7) 37.7
Extraordinary loss 0.7 0.7
Restructuring and other charges 14.4 4.9 19.3
Loss on sale of property 2.2 0.1 2.3
Changes in assets and liabilities,
net of acquired businesses:
Accounts receivable (4.8) (5.7) 1.9 (8.6)
Inventories (3.4) (1.8) (0.5) (5.7)
Prepaid and other current assets (6.8) 4.6 0.1 (2.1)
Accounts payable 14.3 (4.6) (0.9) 8.8
Accrued taxes and other
Liabilities (19.1) 10.6 (5.9) (14.4)
Other assets 0.3 0.3
Other liabilities (5.8) 4.1 1.6 (0.1)
Other, net 2.5 (2.5) (3.6) (3.6)
------ ------ ------- ------ -------
Net cash (used in) provided by operating
activities (10.7) 71.9 9.8 71.0
------ ------ ------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and
equipment (30.9) (5.0) (5.4) (41.3)
Proceeds from sale of equipment 0.2 0.4 0.6
Investments in acquired businesses, net
of cash acquired (63.8) (87.6) (151.4)
------ ------ ------- ------ -------
Net cash used in investing activities (30.7) (68.4) (93.0) (192.1)
------ ------ ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving and bank
lines of credit 67.6 72.4 140.0
Dividends on Class A Convertible
Preferred Stock (7.3) (7.3)
Repurchase of common shares (15.3) (15.3)
Investments from parent (1.3) (5.4) 6.7
Other, net 1.0 1.0
------ ------ ------- ------ -------
Net cash provided by (used in) financing
activities 44.7 (5.4) 79.1 118.4
Effect of exchange rate changes on cash 0.3 0.3
------ ------ ------- ------ -------
Net increase (decrease) in cash 3.3 (1.9) (3.8) (2.4)
Cash and cash equivalents, beginning of
period 1.6 (0.2) 11.6 13.0
------ ------ ------- ------ -------
Cash and cash equivalents, end of period $ 4.9 $ (2.1) $ 7.8 $ 0.0 $ 10.6
====== ====== ======= ====== =======
</TABLE>
----
106
<PAGE> 107
THE SCOTTS COMPANY
BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(IN MILLIONS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash $ 4.9 $ (2.1) $ 7.8 $ 10.6
Accounts receivable, net 85.2 20.5 40.9 146.6
Inventories, net 66.5 81.4 29.8 177.7
Current deferred tax asset 20.4 0.4 20.8
Prepaid and other assets 8.4 1.7 1.4 11.5
------ ------ ------ ------- --------
Total current assets 185.4 101.9 79.9 $ 0.0 367.2
Property, plant and equipment, net 97.8 68.5 30.7 197.0
Intangible assets, net 12.1 273.0 150.0 435.1
Other assets 35.0 0.9 35.9
Investment in affiliates 652.0 (652.0) 0.0
Intracompany assets 219.1 4.5 (223.6) 0.0
------ ------ ------ ------- --------
Total assets 982.3 663.4 265.1 (875.6) 1,035.2
====== ====== ====== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt 0.3 1.2 11.8 13.3
Accounts payable 57.1 8.6 12.1 77.8
Accrued liabilities 68.2 27.0 29.7 124.9
Accrued taxes (26.9) 38.7 4.1 15.9
------ ------ ------ ------- --------
Total current liabilities 98.7 75.5 57.7 231.9
Long-term debt 223.0 136.2 359.2
Other liabilities 30.1 10.2 (0.1) 40.2
Intracompany liabilities 223.6 (223.6) 0.0
------ ------ ------ ------- --------
Total liabilities 575.4 85.7 193.8 (223.6) 631.3
Commitments and Contingencies
Shareholders' equity:
Class A Convertible Preferred
Stock, no par value 177.3 177.3
Investment from parent 437.1 35.0 (472.1) 0.0
Common shares, no par value per
share, $.01 stated value per
share, issued 21.1 shares in
1998 0.2 0.2
Capital in excess of stated value 208.9 208.9
Retained earnings 76.6 140.6 39.3 (179.9) 76.6
Treasury stock, 2.8 shares at cost (55.9) (55.9)
Accumulated other comprehensive
income (0.2) (3.0) (3.2)
------ ------ ------ ------- --------
Total shareholders' equity 406.9 577.7 71.3 (652.0) 403.9
------ ------ ------ ------- --------
Total liabilities and shareholders'
equity $982.3 $663.4 $265.1 $(875.6) $1,035.2
====== ====== ====== ======= ========
</TABLE>
----
107
<PAGE> 108
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Shareholders of The Scotts Company
Our audits of the consolidated financial statements referred to in our
report dated October 31, 2000 appearing in Item 14(a)(1) of this Annual Report
on Form 10-K, also included an audit of the financial statement schedules listed
in Item 14(a)(2) of this Form 10-K. In our opinion, these financial statement
schedules present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PRICEWATERHOUSECOOPERS LLP
Columbus, Ohio
October 31, 2000
----
108
<PAGE> 109
THE SCOTTS COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
(IN MILLIONS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
-------- --------- -------- --------- ---------- ---------
Balance Additions Deductions
at Charged Credited Balance
Beginning Reserves to and at End
Classification of Period Acquired Expense Write-Offs of Period
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Valuation and qualifying accounts
deducted from the assets to which
they apply:
Inventory reserve $30.5 $ 0.0 $ 9.7 $(20.1) $20.1
Allowance for doubtful accounts 16.4 0.0 4.8 (9.5) 11.7
</TABLE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
-------- --------- -------- --------- ---------- ---------
Balance Additions Deductions
at Charged Credited Balance
Beginning Reserves to and at End
Classification of Period Acquired Expense Write-Offs of Period
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Valuation and qualifying accounts
deducted from the assets to which
they apply:
Inventory reserve $12.0 $19.0 $12.9 $(13.4) $30.5
Allowance for doubtful accounts 6.3 3.4 11.1 (4.4) 16.4
</TABLE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
-------- --------- -------- --------- ---------- ---------
Balance Additions Deductions
at Charged Credited Balance
Beginning Reserves to and at End
Classification of Period Acquired Expense Write-Offs of Period
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Valuation and qualifying accounts
deducted from the assets to which
they apply:
Inventory reserve $11.8 $ 0.5 $ 4.8 $ (5.1) $12.0
Allowance for doubtful accounts 5.7 0.8 2.6 (2.8) 6.3
</TABLE>
----
109
<PAGE> 110
THE SCOTTS COMPANY
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description Location
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
2(a) Amended and Restated Agreement and Plan of Merger, Incorporated herein by reference to the
dated as of May 19, 1995, among Stern's Miracle-Gro Registrant's Current Report on Form 8-K
Products, Inc., Stern's Nurseries, Inc., dated May 31, 1995 (File No. 0-19768)
Miracle-Gro Lawn Products, Inc., Miracle-Gro [Exhibit 2(b)]
Products Limited, Hagedorn Partnership, L.P., the
general partners of Hagedorn Partnership, L.P.,
Horace Hagedorn, Community Funds, Inc., and John
Kenlon, The Scotts Company (the "Registrant"), and
ZYX Corporation
2(b) First Amendment to Amended and Restated Agreement Incorporated herein by reference to the
and Plan of Merger, made and entered into as of Registrant's Current Report on Form 8-K
October 1, 1999, among the Registrant, Scotts dated October 4, 1999 (File No. 1-11593)
Miracle-Gro Products, Inc. (as successor to ZYX [Exhibit 2]
Corporation and Stern's Miracle-Gro Products,
Inc.), Miracle-Gro Lawn Products, Inc., Miracle-Gro
Products Limited, Hagedorn Partnership, L.P.,
Community Funds, Inc., Horace Hagedorn and John
Kenlon, and James Hagedorn, Katherine Hagedorn
Littlefield, Paul Hagedorn, Peter Hagedorn, Robert
Hagedorn and Susan Hagedorn
2(c) Master Contract, dated September 30, 1998, by and Incorporated herein by reference to the
between Rhone-Poulenc Agro; the Registrant; Scotts Registrant's Current Report on Form 8-K
Celaflor GmbH & Co. K.G.; "David" dated October 22, 1998 (File No. 1-11593)
Sechsundfunfzigste Beteiligungs und [Exhibit 2]
Verwaltungsgesellschaft GmbH; Rhone-Poulenc Agro
Europe GmbH; Scotts France Holdings S.A.R.L.;
Scotts France S.A.R.L.; and Scotts Belgium 2
B.V.B.A.
2(d) Asset Purchase Agreement, dated as of November 11, Incorporated herein by reference to the
1998, between Monsanto Company (now Pharmacia Registrant's Annual Report on Form 10-K
Corporation) and the Registrant (replaces and for the fiscal year ended September 30,
supersedes Exhibit 2(a) to the Registrant's 1999 (File No. 1-11593) [Exhibit 2(d)]
Quarterly Report on Form 10-Q for the fiscal
quarter ended April 3, 1999 (File No. 1-11593))**
2(e)(i) U.S. Asset Purchase Agreement, dated as of March Incorporated herein by reference to the
29, 2000, by and among The Andersons, Inc. and The Registrant's Quarterly Report on Form 10-Q
Andersons Agriservices, Inc., as buyers, and the for the fiscal quarter ended July 1, 2000
Registrant and OMS Investments, Inc., as sellers (File No. 1-13292) [Exhibit 2(e)(i)]
2(e)(ii) Canadian Asset Purchase Agreement, dated as of Incorporated herein by reference to the
March 29, 2000, by and among The Nu-Gro Registrant's Quarterly Report on Form 10-Q
Corporation, as buyer, and the Registrant and OMS for the fiscal quarter ended July 1, 2000
Investments, Inc., as sellers (File No. 1-13292) [Exhibit 2(e)(ii)]
3(a) Amended Articles of Incorporation of the Registrant Incorporated herein by reference to the
(reflecting amendments through February 25, 2000) Registrant's Quarterly Report on Form 10-Q
[for SEC reporting compliance purposes only -- not for the fiscal quarter ended April 1, 2000
filed with the Ohio Secretary of State] (File No. 1-13292) [Exhibit 3(e)]
</TABLE>
----
110
<PAGE> 111
<TABLE>
<CAPTION>
Exhibit
No. Description Location
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
3(b) Regulations of the Registrant (reflecting Incorporated herein by reference to the
amendments adopted by the shareholders of the Registrant's Quarterly Report on Form 10-Q
Registrant on April 6, 1995) for the fiscal quarter ended April 1, 1995
(File No. 0-19768) [Exhibit 4(c)]
4(a) Form of Series A Warrant Included in Exhibit 2(a) above
4(b) Form of Series B Warrant Included in Exhibit 2(a) above
4(c) Form of Series C Warrant Included in Exhibit 2(a) above
4(d) Credit Agreement, dated as of December 4, 1998, by Incorporated herein by reference to the
and among the Registrant; OM Scott International Registrant's Current Report on Form 8-K
Investments Ltd., Miracle Garden Care Limited, dated December 11, 1998 (File No. 1-11593)
Scotts Holdings Limited, Hyponex Corporation, [Exhibit 4]
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 Belgium 2 BVBA and The Scotts Company
(UK) Ltd. as Subsidiary Borrowers; the lenders
party thereto; The Chase Manhattan Bank as
Administrative Agent; Salomon Smith Barney, Inc. as
Syndication Agent; Credit Lyonnais Chicago Branch
and NBD Bank as Co-Documentation Agents; and Chase
Securities Inc. as Lead Arranger and as Book
Manager
4(e) Waiver, dated as of January 19, 1999, to the Credit Incorporated herein by reference to the
Agreement, dated as of December 4, 1998, among the Registrant's Annual Report on Form 10-K
Registrant; OM Scott International Investments for the fiscal year ended September 30,
Ltd., Miracle Garden Care Limited, Scotts Holdings 1999 (File No. 1-11593) [Exhibit 4(e)]
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
Belgium 2 BVBA, The Scotts Company (UK) 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 NBD Bank
as Co-Documentation Agents; and Chase Securities
Inc., as Lead Arranger and Book Manager
</TABLE>
----
111
<PAGE> 112
<TABLE>
<CAPTION>
Exhibit
No. Description Location
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
4(f) Amendment No. 1 and Consent dated as of October 13, Incorporated herein by reference to the
1999 to the Credit Agreement, dated as of December Registrant's Annual Report on Form 10-K
4, 1998, as amended by the Waiver, dated as of for the fiscal year ended September 30,
January 19, 1999, among the Registrant; OM Scott 1999 (File No. 1-11593) [Exhibit 4(f)]
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 Belgium 2 BVBA, The
Scotts Company (UK) LTD., Scotts Canada Ltd.,
Scotts Europe B.V., ASEF B.V. 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 and NBD Bank as
Co-Documentation Agents; and Chase Securities Inc.
as Lead Arranger and Book Manager
4(g) Waiver No. 2, dated as of February 14, 2000, to the Incorporated herein by reference to the
Credit Agreement, dated as of December 4, 1998, as Registrant's Quarterly Report on Form 10-Q
amended by the Waiver, dated as of January 19, for the fiscal quarter ended April 1, 2000
1999, and the Amendment No. 1 and Consent, dated as (File No. 1-13292) [Exhibit 4(h)]
of October 13, 1999, 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>
----
112
<PAGE> 113
<TABLE>
<CAPTION>
Exhibit
No. Description Location
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
4(h) Amendment No. 2, dated as of June 9, 2000, to the Incorporated herein by reference to the
Credit Agreement, dated as of December 4, 1998, as Registrant's Quarterly Report on Form 10-Q
amended by the Waiver, dated as of January 19, for the fiscal quarter ended July 1, 2000
1999, the Amendment No. 1 and Consent, dated as of (File No. 1-13292) [Exhibit 4(i)]
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
4(i) Amended and Restated Credit Agreement, dated as of *
December 5, 2000, among the Registrant, as
Borrower; the subsidiaries of the Registrant who
are also borrowers from time to time; the lenders
party thereto; Salomon Smith Barney Inc., as
Syndication Agent; Credit Lyonnais New York Branch,
as Co-Documentation Agent; Bank One, Michigan, as
successor to NBD Bank, as Co-Documentation Agent;
The Chase Manhattan Bank as Administrative Agent;
and Chase Securities Inc., as Lead Arranger and
Book Manager
4(j) Indenture dated as of January 21, 1999 between The Incorporated herein by reference to the
Scotts Company and State Street Bank and Trust Registrant's Registration Statement on
Company, as Trustee Form S-4 filed on April 21, 1999
(Registration No. 333-76739) [Exhibit 4]
10(a) The O.M. Scott & Sons Company Excess Benefit Plan, Incorporated herein by reference to the
effective October 1, 1993 Annual Report on Form 10-K for the fiscal
year ended September 30, 1993, of The
Scotts Company, a Delaware corporation
(File No. 0-19768) [Exhibit 10(h)]
10(b) The Scotts Company 1992 Long Term Incentive Plan Incorporated herein by reference to the
(as amended through May 15, 2000) Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended April 1, 2000
(File No. 1-13292) [Exhibit 10(b)]
10(c) The Scotts Company 2000 Executive Annual Incentive *
Plan
</TABLE>
----
113
<PAGE> 114
<TABLE>
<CAPTION>
Exhibit
No. Description Location
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
10(d) The Scotts Company 1996 Stock Option Plan (as Incorporated herein by reference to the
amended through May 15, 2000) Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended April 1, 2000
(File No. 1-13292) [Exhibit 10(d)]
10(e) Specimen form of Stock Option Agreement (as amended Incorporated herein by reference to the
through August 1, 2000) for Non-Qualified Stock Registrant's Quarterly Report on Form 10-Q
Options granted to employees under The Scotts for the fiscal quarter ended July 1, 2000
Company 1996 Stock Option Plan (File No. 1-13292) [Exhibit 10(l)]
10(f) The Scotts Company Executive Retirement Plan Incorporated herein by reference to the
Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30,
1998 (File No. 1-11593) [Exhibit 10(j)]
10(g) The Scotts Company Millennium Growth Plan Incorporated herein by reference to the
(effective October 1, 1999) Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended April 1, 2000
(File No. 1-13292) [Exhibit 10(w)]
10(h) Employment Agreement, dated as of August 7, 1998, Incorporated herein by reference to the
between the Registrant and Charles M. Berger, and Registrant's Annual Report on Form 10-K
three attached Stock Option Agreements with the for the fiscal year ended September 30,
following effective dates: September 23, 1998, 1998 (File No. 1-11593) [Exhibit 10(n)]
October 21, 1998 and September 24, 1999
10(i) Stock Option Agreement, dated as of August 7, 1996, Incorporated herein by reference to the
between the Registrant and Charles M. Berger Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30,
1996 (File No. 1-11593) [Exhibit 10(m)]
10(j) Employment Agreement, dated as of May 19, 1995, Incorporated herein by reference to the
between the Registrant and James Hagedorn Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30,
1995 (File No. 1-11593) [Exhibit 10(p)]
10(k) Letter Agreement, dated December 23, 1996, between Incorporated herein by reference to the
the Registrant and Jean H. Mordo Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30,
1997 (File No. 1-11593) [Exhibit 10(p)]
10(l) Termination Letter Agreement, dated November 6, *
2000, between the Registrant and Jean H. Mordo
10(m) Letter Agreement, dated April 10, 1997, between the Incorporated herein by reference to the
Registrant and G. Robert Lucas Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30,
1997 (File No. 1-11593) [Exhibit 10(r)]
10(n) Letter Agreement, dated December 17, 1997, between Incorporated herein by reference to the
the Registrant and William R. Radon Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30,
1998 (File No. 1-11593) [Exhibit 10(s)]
</TABLE>
----
114
<PAGE> 115
<TABLE>
<CAPTION>
Exhibit
No. Description Location
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
10(o) Letter Agreement, dated March 30, 1998, between the Incorporated herein by reference to the
Registrant and William A. Dittman Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30,
1998 (File No. 1-11593) [Exhibit 10(t)]
10(p) Letter Agreement, dated March 16, 1999, between the Incorporated herein by reference to the
Registrant and Hadia Lefavre Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30,
1999 (File No. 1-11593) [Exhibit 10(p)]
10(q) Letter Agreement, dated June 8, 2000, between the *
Registrant and Patrick J. Norton
10(r) Contract of Employment, dated February 28, 1986, Incorporated herein by reference to the
between Rhodic (assumed by Scotts France SAS) and Registrant's Annual Report on Form 10-K
Christian Ringuet for the fiscal year ended September 30,
1999 (File No. 1-11593) [Exhibit 10(r)]
10(s) Employment Agreement, dated August 1, 1995, between Incorporated herein by reference to the
Scotts Europe B.V. (now Scotts International B.V.) Registrant's Annual Report on Form 10-K
and Laurens J.M. de Kort for the fiscal year ended September 30,
1999 (File No. 1-11593) [Exhibit 10(s)]
10(t) Service Agreement, dated September 9, 1998, between Incorporated herein by reference to the
Levington Horticulture Limited (nka The Scotts Registrant's Annual Report on Form 10-K
Company (UK) Ltd.) and Nicholas Kirkbride for the fiscal year ended September 30,
1999 (File No. 1-11593) [Exhibit 10(t)]
10(u) Exclusive Distributor Agreement -- Horticulture, Incorporated herein by reference to the
effective as of June 22, 1998, between the Registrant's Annual Report on Form 10-K
Registrant and AgrEvo USA for the fiscal year ended September 30,
1998 (File No. 1-11593) [Exhibit 10(v)]
10(v) Amended and Restated Exclusive Agency and Marketing Incorporated herein by reference to the
Agreement, dated as of September 30, 1998, between Registrant's Annual Report on Form 10-K
Monsanto Company (now Pharmacia Corporation) and for the fiscal year ended September 30,
the Registrant (replaces and supersedes Exhibit 1999 (File No. 1-11593) [Exhibit 10(v)]
2(b) to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended April 3, 1999
(File No. 1-11593))**
21 Subsidiaries of the Registrant *
23 Consent of Independent Accountants *
27 Financial Data Schedule *
</TABLE>
---------------
* Filed herewith.
** Certain portions of this Exhibit have been omitted based upon an Order
Granting Confidential Treatment from the Securities and Exchange Commission
("SEC"), dated March 17, 2000, extending through December 1, 2001.
----
115
