<PAGE> 1
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 1-11593
THE SCOTTS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 31-1414921
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
41 SOUTH HIGH STREET, SUITE 3500
COLUMBUS, OHIO 43215
(Address of principal executive offices)
(Zip Code)
(614) 719-5500
(Registrant's telephone number, including area code)
NO CHANGE
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
27,953,206 Outstanding at February 14, 2000
Common Shares, voting, no par value
<PAGE> 2
THE SCOTTS COMPANY AND SUBSIDIARIES
INDEX
PAGE NO.
--------
Part I. Financial Information:
Item 1. Financial Statements
Condensed, Consolidated Statements of Operations - Three
month periods ended January 1, 2000 and January 2, 1999 3
Condensed, Consolidated Statements of Cash Flows - Three
month periods ended January 1, 2000 and January 2, 1999 4
Condensed, Consolidated Balance Sheets - January 1, 2000,
January 2, 1999 and September 30, 1999 5
Notes to Condensed, Consolidated Financial Statements 6-24
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 25-39
Part II. Other Information
Item 1. Legal Proceedings 40
Item 5. Other Information 40
Item 6. Exhibits and Reports on Form 8-K 40
Signatures 41
Exhibit Index 42
Page 2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SCOTTS COMPANY AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
JANUARY 1, JANUARY 2,
2000 1999
(restated)
---------- -------
<S> <C> <C>
Net sales $191.5 $184.4
Cost of sales 117.6 119.7
------- -------
Gross profit 73.9 64.7
Gross commission earned from agency agreement 0.3 5.0
Costs associated with agency agreement 3.7 0.4
------- -------
Net commission earned from agency agreement (3.4) 4.6
Operating expenses:
Advertising and promotion 23.7 16.7
Selling, general and administrative 68.1 53.9
Amortization of goodwill and other intangibles 5.5 4.5
Restructuring and other charges -- 1.4
Other expense (income), net 1.3 (0.1)
------- -------
Loss from operations (28.1) (7.1)
Interest expense 23.7 9.8
------- -------
Loss before income taxes (51.8) (16.9)
Income tax benefit (21.0) (6.9)
------- -------
Net loss before extraordinary item (30.8) (10.0)
Extraordinary loss on early extinguishment of debt,
net of tax -- 0.4
------- -------
Net loss (30.8) (10.4)
Payments to preferred shareholders 6.4 2.4
------- -------
Loss applicable to common shareholders $(37.2) $(12.8)
======= =======
Basic earnings per common share:
Before extraordinary item $ (1.32) $ (.68)
Extraordinary item, net of tax -- (.02)
------- -------
(1.32) (.70)
------- -------
Diluted earnings per common share:
Before extraordinary item $ (1.32) $ (.68)
Extraordinary item, net of tax -- (.02)
------- -------
(1.32) (.70)
------- -------
Common shares used in basic earnings per share
calculation 28.2 18.3
======= =======
Common shares and potential common shares used in
diluted earnings per share calculation 28.2 18.3
======= =======
</TABLE>
See notes to condensed, consolidated financial statements
Page 3
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THE SCOTTS COMPANY AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
JANUARY 1, JANUARY 2,
2000 1999
(restated)
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (30.8) $ (10.4)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 17.0 11.8
Net change in certain components of working capital (150.9) (134.9)
Net change in other assets and liabilities and
other adjustments (4.6) (29.9)
------- -------
Net cash used in operating activities (169.3) (163.4)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment (7.2) (13.8)
Investment in acquired businesses, net of cash acquired -- (160.7)
Other, net -- (7.6)
------- -------
Net cash used in investing activities (7.2) (182.1)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving and bank lines
of credit 202.1 88.6
Gross borrowings under term loans -- 525.0
Gross repayments under term loans (6.3) --
Repayment of outstanding balance on previous
credit facility -- (241.0)
Settlement of interest rate locks -- (15.2)
Financing and issuance fees -- (10.2)
Payments to preferred shareholders (6.4) (4.9)
Repurchase of treasury shares (21.0) --
Other, net (5.6) 0.9
------- -------
Net cash provided by financing activities 162.8 343.2
------- -------
Effect of exchange rate changes on cash (0.8) (0.1)
------- -------
Net decrease in cash (14.5) (2.4)
Cash and cash equivalents at beginning of period 30.3 10.6
------- -------
Cash and cash equivalents at end of period $ 15.8 $ 8.2
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Investment in Acquired Businesses:
Fair value of assets acquired, net of cash $ 259.1
Liabilities assumed (67.3)
-------
Net assets acquired 191.8
Notes issued to seller 35.7
Cash paid 4.8
Debt issued 151.3
</TABLE>
See notes to condensed, consolidated financial statements
Page 4
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THE SCOTTS COMPANY AND SUBSIDIARIES
CONDENSED, CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
UNAUDITED
----------------------------
JANUARY 1, JANUARY 2, SEPTEMBER 30,
2000 1999 1999
(restated)
-------- -------- --------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 15.8 $ 8.2 $ 30.3
Accounts receivable, less allowances of
$17.5, $8.6 and $16.4, respectively 225.3 206.7 201.4
Inventories, net 442.1 298.2 313.2
Current deferred tax asset 28.6 31.4 29.3
Prepaid and other assets 60.3 21.5 67.5
-------- -------- --------
Total current assets 772.1 566.0 641.7
-------- -------- --------
Property, plant and equipment, net 256.0 208.9 259.4
Intangible assets, net 774.0 608.6 794.1
Other assets 72.7 62.0 74.4
-------- -------- --------
Total assets $1,874.8 $1,445.5 $1,769.6
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 120.4 $ 24.4 $ 56.4
Accounts payable 149.5 112.5 133.5
Accrued liabilities 153.0 111.5 177.0
----- ----- -----
Total current liabilities 422.9 248.4 366.9
Long-term debt 1,006.5 754.8 893.6
Other liabilities 63.5 51.2 65.8
-------- -------- --------
Total liabilities 1,492.9 1,054.4 1,326.3
-------- -------- --------
Commitments and contingencies
Shareholders' equity:
Class A Convertible Preferred Stock, no
par value -- 177.3 173.9
Common shares, no par value per share,
$.01 stated value per share, issued 31.4,
21.1 and 21.3, respectively 0.3 0.2 0.2
Capital in excess of par value 387.9 208.9 213.9
Retained earnings 92.9 63.8 130.1
Treasury stock, 3.4, 2.8, and 2.9 shares,
respectively, at cost (82.9) (55.5) (61.9)
Accumulated other comprehensive expense (16.3) (3.6) (12.9)
-------- -------- --------
Total shareholders' equity 381.9 391.1 443.3
-------- -------- --------
Total liabilities and shareholders'
equity $1,874.8 $1,445.5 $1,769.6
======== ======== ========
</TABLE>
See notes to condensed, consolidated financial statements
Page 5
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NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(All amounts are in millions except per share data or otherwise noted)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Scotts Company is engaged in the manufacture and sale of lawn care
and garden products. The Company's major customers include mass
merchandisers, home improvement centers, large hardware chains,
independent hardware stores, nurseries, garden centers, food and drug
stores, golf courses, professional sports stadiums, lawn and landscape
service companies, commercial nurseries and greenhouses, and specialty
crop growers. The Company's products are sold in the United States,
Canada, the European Union, the Caribbean, South America, Southeast
Asia, the Middle East, Africa, Australia, New Zealand, Mexico, Japan,
and several Latin American countries.
Organization and Basis of Presentation
The condensed, consolidated financial statements include the accounts
of The Scotts Company and its subsidiaries, (collectively, the
"Company"). All material intercompany transactions have been
eliminated.
The condensed, consolidated balance sheets as of January 1, 2000 and
January 2, 1999, and the related condensed, consolidated statements of
operations and cash flows for the three month periods ended January 1,
2000 and January 2, 1999 are unaudited; however, in the opinion of
management, such financial statements contain all adjustments necessary
for the fair presentation of the Company's financial position and
results of operations. Interim results reflect all normal recurring
adjustments and are not necessarily indicative of results for a full
year. The interim financial statements and notes are presented as
specified by Regulation S-X of the Securities and Exchange Commission,
and should be read in conjunction with the financial statements and
accompanying notes in Scotts' fiscal 1999 Annual Report on Form 10-K.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying disclosures. The most significant
of these estimates are related to the allowance for doubtful accounts,
inventory valuation reserves, expected useful lives assigned to
property, plant and equipment and goodwill and other intangible assets,
legal and environmental accruals, post-retirement benefits, promotional
and consumer rebate liabilities, income taxes and contingencies.
Although these estimates are based on management's best knowledge of
current events and actions the Company may undertake in the future,
actual results ultimately may differ from the estimates.
Advertising and Promotion
The Company advertises its branded products through national and
regional media, and through cooperative advertising programs with
retailers. Retailers are also offered pre-season stocking and in-store
promotional allowances. Certain products are also promoted with direct
consumer rebate programs. Advertising and promotion costs (including
allowances and rebates) incurred during the year are expensed ratably
to interim periods in relation to revenues. All advertising and
promotion costs, except for production costs, are expensed within the
fiscal year in which such costs are incurred. Production costs for
advertising programs are deferred until the period in which the
advertising is first aired.
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Reclassifications
Certain reclassifications have been made in prior periods' financial
statements to conform to fiscal 2000 classifications.
2. RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS
The Company has restated its financial statements as of and for the
three months ended January 1, 2000. As disclosed in Note 3 to these
financial statements, the Company paid Monsanto Company ("Monsanto") a
marketing fee of $32 million in connection with the Roundup Agency and
marketing Agreement (the "Agreement"). The earnings originally reported
for fiscal 1999 and the first quarter of fiscal 2000 reflected
amortization of the marketing fee over a period of 20 years. However,
the Company believes that it is unlikely that the Agreement will
continue beyond ten years. Accordingly, the financial statements as of
and for the three months ended January 1, 2000 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.
"Costs associated with agency agreement" in the Company's Statements of
Operations for the first quarter of fiscal 2000 have been restated to
reflect the additional amortization of $1.6 million that was not
recognized in fiscal 1999 and $0.4 million representing one-quarter of
the additional amortization to be recognized in fiscal 2000. The
Balance Sheet as of January 1, 2000 and the Statements of Cash Flows
for the three months ended January 1, 2000 have been restated for this
correction. The impact of this restatement on the Company's financial
results as originally reported is summarized below:
As reported As restated
Net loss $(29.6) $(30.8)
Basic earnings per common share $(1.28) $(1.32)
Diluted earnings per common share $(1.28) $(1.32)
Retained earnings, end of period $ 94.1 $ 92.9
3. AGENCY AGREEMENT
Effective September 30, 1998, the Company entered into an agreement
with Monsanto Company for exclusive international marketing and agency
rights to Monsanto's consumer Roundup 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 business. Each year's percentage varies
in accordance with the terms of the agreement based on the achievement
of two earnings thresholds and commission rates that vary by threshold
and program year.
The agreement requires the Company to make fixed annual payments to
Monsanto as a contribution against the overall expenses of the Roundup
business. The annual fixed payment is defined as $20 million, however
portions of the annual payments of the first three years of the
agreement are deferred. No payment was required for the first year
(fiscal 1999), a payment of $5 million is 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
contributions payments that are deferred with such time that 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 amounts
are 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 January 1,
2000, contribution payments and related per annum charges of
approximately $24.9 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 three months 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. For countries outside the European Union the agreement
continues indefinitely unless terminated by either party. The agreement
provides Monsanto with the right to terminate the agreement for an
event of default (as defined in the agreement) by the Company or a
change in control of Monsanto or sale of the Roundup business. The
agreement provides the Company with the right to terminate the
agreement for an event of default by Monsanto or the sale of the
Roundup business. Unless Monsanto terminates the agreement for an
event of default by the Company or the Company terminates the agreement
pursuant to a sale of the Roundup business 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 and declines to a minimum of $16 million for program 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 business for the interim
period. Commission income recorded for the full year is calculated by
applying the threshold commission structure for that year to the actual
EBIT of Roundup business for the year, net of the annual contribution
payment. 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 in fiscal 2000 until actual Roundup EBIT
reaches the first commission threshold for the year. The annual
contribution payment is recognized evenly throughout the year.
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
the cost to sever approximately 60 in-house sales associates that were
terminated in fiscal 1999. Approximately $1.1 million of severance
payments were made to these former associates during fiscal 1999, $0.1
million was paid in the first quarter of fiscal 2000 and the remainder
is expected to be paid in fiscal 2000.
1998 CHARGES
During fiscal 1998, the Company recorded charges of $9.3 million in
connection with its decision to close nine composting sites. As of
September 30, 1999, $0.9 million remained accrued in the Company's
consolidated balance sheet for costs to be incurred under contractual
commitments and remaining lease obligations (a detailed discussion and
rollforward is included in the Company's fiscal 1999 Annual Report on
Form 10-K). In the first quarter of fiscal 2000, $0.3 million of the
remaining obligations had been paid. The Company expects to make all
remaining payments in fiscal 2000.
5. ACQUISITIONS
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. The Company has subsequently provided Monsanto
with its estimate of working capital, which
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would result in a substantial reduction in the total purchase price.
Monsanto has subsequently provided the Company with a revised
assessment of working capital which would increase the final purchase
price. The Company and Monsanto have resolved many of the items in
dispute and are currently in negotiations to resolve the remaining
disputed items.
In October 1998, the Company acquired Rhone-Poulenc Jardin ("RPJ"),
continental Europe's largest consumer lawn and garden products company.
Management's initial estimate of the purchase price for Rhone-Poulenc
Jardin was $216 million; however, subsequent adjustments for reductions
in acquired working capital have resulted in a final purchase price of
approximately $170 million.
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. Final determination of the purchase
price of the Ortho business, as well as the allocation of the purchase
price to the net assets acquired was not complete as of January 1,
2000. The excess of the estimated purchase price for the Ortho business
over the value of tangible assets acquired is currently recorded as an
intangible asset and is being amortized over a period of 35 years.
The following unaudited pro forma results of operations give effect to
the Ortho acquisition as if it had occurred on October 1, 1998.
THREE MONTHS ENDED
------------------
JANUARY 2,
1999
------
Net sales $204.3
Loss before extraordinary loss (19.5)
Net loss (19.9)
Basic earning per share:
Before extraordinary loss $ (1.20)
After extraordinary loss (1.22)
Diluted earnings per share:
Before extraordinary loss $ (1.20)
After extraordinary loss $ (1.22)
The pro forma information provided does not purport to be indicative of
actual results of operations if the Ortho acquisition had occurred as
of October 1, 1998 and is not intended to be indicative of future
results or trends.
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6. INVENTORIES
Inventories, net of provisions for slow moving and obsolete inventory
of $30.9 million, $15.0 million, and $30.5 million, respectively,
consisted of:
JANUARY 1, JANUARY 2, SEPTEMBER 30,
2000 1999 1999
------ ------ ------
Finished goods $346.5 $227.3 $206.4
Raw materials 94.6 70.4 106.5
----- ----- -----
FIFO cost 441.1 297.7 312.9
LIFO reserve 1.0 0.5 0.3
----- ----- -----
Total $442.1 $298.2 $313.2
===== ===== =====
7. INTANGIBLE ASSETS, NET
JANUARY 1, JANUARY 2, SEPTEMBER 30,
2000 1999 1999
------ ------ ------
Goodwill $499.1 $386.6 $508.6
Trademarks 202.4 141.9 207.9
Other 72.5 80.1 77.6
----- ----- -----
Total $774.0 $608.6 $794.1
===== ===== =====
8. LONG-TERM DEBT
JANUARY 1, JANUARY 2, SEPTEMBER 30,
2000 1999 1999
------ ------ ------
Revolving loans under credit facility $ 257.8 $ 98.3 $ 64.2
Term loans under credit facility 502.9 525.0 509.0
Senior Subordinated Notes 318.3 99.5 318.0
Notes due to sellers 30.9 42.8 37.0
Foreign bank borrowings and term loans 14.2 9.0 17.6
Capital lease obligations and other 2.8 4.6 4.2
------- ----- -----
1,126.9 779.2 950.0
Less current portions 120.4 24.4 56.4
------- ----- -----
$1,006.5 $754.8 $893.6
======= ===== =====
On December 4, 1998, the Company and certain of its subsidiaries
entered into a credit facility which provides for borrowings in the
aggregate principal amount of $1.025 billion and consists of term loan
facilities in the aggregate amount of $525 million and a revolving
credit facility in the amount of $500 million. Financial covenants
included as part of the facility include, amongst others, minimum net
worth, interest coverage and net leverage ratios. At January 1, 2000,
the Company was in violation of the minimum net worth covenant. On
February 15, 2000, the Company obtained a waiver of its first quarter
violation. The waiver precludes the bank group from calling the
borrowings under the credit facility based on the first quarter
violation but does not waive any future covenant violations.
In January 1999, the Company completed an offering of $330 million of 8
5/8% Senior Subordinated Notes ("the Notes") due 2009. The net proceeds
from the offering, together with borrowings under the Company's credit
facility, were used to fund the Ortho acquisition and to repurchase
approximately 97% of Scotts $100.0 million outstanding 9 7/8% Senior
Subordinated Notes due August 2004. In August 1999, the Company
repurchased the remaining $2.9 million of the 9 7/8% Senior
Subordinated Notes.
The Company entered into two interest rate locks in fiscal 1998 to
hedge its anticipated interest rate exposure on the Notes offering. The
total amount paid under the interest rate locks of $12.9 million has
been recorded as a reduction of the Notes' carrying value and is being
amortized over the life of the Notes as interest expense.
In conjunction with the acquisitions of Rhone-Poulenc Jardin and
Sanford Scientific, 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 $25.9
million and $5.0 million,
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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.
The foreign term loans of $3.9 million issued on December 12, 1997,
have an 8-year term and bear interest at 1% below LIBOR. The loans are
denominated in Pounds Sterling and can be redeemed, on demand, by the
note holder. The foreign bank borrowings of $10.3 million at January 1,
2000 represent lines of credit for foreign operations and are
denominated in French Francs, Australian Dollars and Dutch Gilders.
9. EARNINGS PER COMMON SHARE
The following table presents information necessary to calculate basic
and diluted earnings per common share ("EPS"). For each period
presented, basic and diluted EPS are equal since common share
equivalents (stock options, Class A Convertible Preferred Stock and
warrants) outstanding for each period were anti-dilutive and thus not
considered in the diluted earnings per common share calculations. The
Company did not include 2.1 million and 11.8 million potentially
dilutive shares in its diluted earnings per share calculation for the
three months ended January 1, 2000 and January 2, 1999, respectively,
because to do so would have been anti-dilutive.
THREE MONTHS ENDED
------------------
JANUARY 1, JANUARY 2,
2000 1999
(restated)
------ ------
Net loss before extraordinary item $(30.8) $(10.0)
Extraordinary item, net of tax -- 0.4
------ ------
Net loss (30.8) (10.4)
Payments to preferred shareholders (6.4) (2.4)
------ ------
Loss applicable to common shareholders $(37.2) $(12.8)
====== ======
Weighted-average common shares
outstanding during the period 28.2 18.3
====== ======
Basic and diluted earnings per common
share before extraordinary item $(1.32) $ (.68)
Extraordinary item, net of tax $ -- $ (.02)
------ ------
Basic and diluted earnings per common
share $(1.32) $ (.70)
====== ======
10. STATEMENT OF COMPREHENSIVE INCOME
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income". SFAS 130 requires that changes in the amounts of certain
items, including foreign currency translation adjustments, be presented
in the Company's financial statements. The components of other
comprehensive income and total comprehensive income for the three
months ended January 1, 2000 and January 2, 1999 are as follows:
THREE MONTHS ENDED
------------------
JANUARY 1, JANUARY 2,
2000 1999
(restated)
------ ------
Net loss $(30.8) $(10.4)
Other comprehensive income (expense):
Foreign currency translation
adjustments (3.4) (0.4)
----- -----
Comprehensive income (expense) $(34.2) $(10.8)
===== =====
11. 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
Page 10
<PAGE> 11
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 new Voluntary Action Program ("VAP"),
the possible remediation of several discontinued on-site waste disposal
areas dating back to the early operations of its Marysville facility.
In February 1997, the Company learned that the Ohio Environmental
Protection Agency was referring certain matters relating to
environmental conditions at the Company's Marysville site, including
the existing wastewater treatment plants and the discontinued on-site
waste disposal areas, to the Ohio Attorney General's Office.
Representatives from the Ohio Environmental Protection Agency, the Ohio
Attorney General and the Company continue to meet to discuss these
issues.
In June 1997, the Company received formal notice of an enforcement
action and draft Findings and Orders from the Ohio Environmental
Protection Agency. The draft Findings and Orders elaborated on the
subject of the referral to the Ohio Attorney General alleging:
potential surface water violations relating to possible historical
sediment contamination possibly impacting water quality; inadequate
treatment capabilities of the Company's existing and currently
permitted wastewater treatment plants; and that the Marysville site is
subject to corrective action under the Resource Conservation Recovery
Act ("RCRA"). In late July 1997, the Company received a draft judicial
consent order from the Ohio Attorney General which covered many of the
same issues contained in the draft Findings and Orders including RCRA
corrective action. As a result of on-going discussions, the Company
received a revised draft of a judicial consent order from the Ohio
Attorney General in late April 1999. Subsequently, the Company replied
to the Ohio Attorney General with another revised draft, which is the
focus of current negotiations.
In accordance with the Company's past efforts to enter into Ohio's VAP,
the Company submitted to the Ohio Environmental Protection Agency a
"Demonstration of Sufficient Evidence of VAP Eligibility Compliance" on
July 8, 1997. Among other issues contained in the VAP submission, was a
description of the Company's ongoing efforts to assess potential
environmental impacts of the discontinued on-site waste disposal areas
as well as potential remediation efforts. Under the statutes covering
VAP, an eligible participant in the program is not subject to State
enforcement actions for those environmental matters being addressed. On
October 21, 1997, the Company received a letter from the Director of
the Ohio Environmental Protection Agency denying VAP eligibility based
upon the timeliness of and completeness of the submittal. The Company
has appealed the Director's action to the Environmental Review Appeals
Commission. No hearing date has been set and the appeal remains
pending. While negotiations continue, the Company has been voluntarily
addressing a number of the historical onsite waste disposal areas with
the knowledge of the Ohio Environmental Protection Agency. Interim
measures consisting of capping two onsite waste disposal areas have
been implemented.
The Company is continuing to meet with the Ohio Attorney General and
the Ohio Environmental Protection Agency in an effort to negotiate an
amicable resolution of these issues but is unable at this stage to
predict the outcome of the negotiations. While negotiations have
narrowed the unresolved issues
Page 11
<PAGE> 12
between the Company and the Ohio Attorney General/Ohio Environmental
Protection Agency, several critical issues remain the subject of
ongoing discussions. 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 in any such action.
Since receiving the notice of enforcement action in June 1997,
management has continually assessed the potential costs that may be
incurred to satisfactorily remediate the Marysville site and to pay any
penalties sought by the State. Because the Company and the Ohio
Environmental Protection Agency have not agreed as to the extent of any
possible contamination and an appropriate remediation plan, the Company
has developed and initiated an action plan to remediate the site based
on its own assessments and consideration of specific actions which the
Ohio Environmental Protection Agency will likely require. Because the
extent of the ultimate remediation plan is uncertain, management is
unable to predict with certainty the costs that will be incurred to
remediate the site and to pay any penalties. Management estimates that
the range of possible loss that could be incurred in connection with
this matter is $2 million to $10 million. The Company has accrued for
the amount it considers to be the most probable within that range and
believes the outcome will not differ materially from the amount
reserved. Many of the issues raised by the State are already being
investigated and addressed by the Company during the normal course of
conducting business.
LAFAYETTE
In July 1990, the Philadelphia District of the U.S. Army Corps of
Engineers ("Corps") directed that peat harvesting operations be
discontinued at Hyponex's Lafayette, New Jersey facility, based on its
contention that peat harvesting and related activities result in the
"discharge of dredged or fill material into waters of the United
States" and, therefore, require a permit under Section 404 of the Clean
Water Act. In May 1992, the United States filed suit in the U.S.
District Court for the District of New Jersey seeking a permanent
injunction against such harvesting, and civil penalties in an
unspecified amount. If the Corps' position is upheld, it is possible
that further harvesting of peat from this facility would be prohibited.
The Company is defending this suit and is asserting a right to recover
its economic losses resulting from the government's actions. The suit
was placed in administrative suspense during fiscal 1996 in order to
allow the Company and the government an opportunity to negotiate a
settlement, and it remains suspended while the parties develop,
exchange and evaluate technical data. In July 1997, the Company's
wetlands consultant submitted to the government a draft remediation
plan. Comments were received and a revised plan was submitted in early
1998. Further comments from the government were received during 1998
and 1999. The Company believes agreement on the remediation plan has
essentially been reached. Before this suit can be fully resolved,
however, the Company and the government must reach agreement on the
government's civil penalty demand. The Company has reserved for its
estimate of the probable loss to be incurred under this proceeding.
Furthermore, management believes the Company has sufficient raw
material supplies available such that service to customers will not be
materially adversely affected by continued closure of this peat
harvesting operation.
Page 12
<PAGE> 13
AGREVO ENVIRONMENTAL HEALTH
On June 3, 1999, AgrEvo Environmental Health, Inc. ("AgrEvo") filed a
complaint in the District Court for the Southern District of New York,
against the Company, a subsidiary of the Company and Monsanto seeking
damages and injunctive relief for alleged antitrust violations and
breach of contract by the Company and its subsidiary and antitrust
violations and tortious interference with contact by Monsanto. The
Company purchased a consumer herbicide business from AgrEvo in May
1998. AgrEvo claims in the suit that the Company's subsequent agreement
to become Monsanto's exclusive sales and marketing agent for Monsanto's
consumer Roundup(R) business violated the federal antitrust laws.
AgrEvo contends that Monsanto attempted to or did monopolize the market
for non-selective herbicides and conspired with the Company to
eliminate the herbicide the Company previously purchased from AgrEvo,
which competed with Monsanto's Roundup(R), in order to achieve or
maintain a monopoly position in that market. AgrEvo also contends that
the Company's execution of various agreements with Monsanto, including
the Roundup(R) marketing agreement, as well as the Company's subsequent
actions, violated the purchase agreements between AgrEvo and the
Company.
AgrEvo is requesting unspecified damages as well as affirmative
injunctive relief, and seeking to have the court invalidate the
Roundup(R) marketing agreement as violative of the federal antitrust
laws. On September 20, 1999, the Company filed an answer denying
liability and asserting counterclaims that it was fraudulently induced
to enter into the agreement for purchase of the consumer herbicide
business and the related agreements, and that AgrEvo breached the
representations and warranties contained in those agreements. On
October 1, 1999, the Company moved to dismiss the antitrust allegations
against it on the ground that the claims fail to state claims for which
relief may be granted. On October 12, 1999, AgrEvo moved to dismiss
the Company's counterclaims. On January 27, 2000, AgrEvo sought leave
to move to amend its complaint to add a claim for fraud and to
incorporate the Delaware action described below. 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
for the State of Delaware 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 action in the Southern District of New York.
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
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<PAGE> 14
intends to comply with the reasonable remediation concerns of the
Environment Agency. The Company previously installed an environmental
enhancement to the facility to the satisfaction of the Environment
Agency and believes that it has adequately addressed the environmental
concerns of the Environment Agency regarding emissions to air and
groundwater. The Company and the Environment Agency have not agreed on
a final plan for remediating the lagoon and the landfill. The Company
has reserved for its estimate of the probable loss to be incurred in
connection with this matter.
OTHER
The Company has determined that quantities of cement containing
asbestos material at certain manufacturing facilities in the United
Kingdom should be removed. The Company has reserved for the estimate of
costs to be incurred for this matter.
Page 14
<PAGE> 15
12. CONVERSION OF PREFERRED STOCK
In October 1999, all of the then outstanding Class A Convertible
Preferred Shares were converted into 10.1 million common shares. The
Company 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 the Company. In fiscal
1999, certain of the Preferred Shares were converted into 0.2 million
common shares at the holders option.
13. 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 will be 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 will not impact the commission earned on an annual
basis.
Page 15
<PAGE> 16
14. SEGMENT INFORMATION
The Company is divided into three reportable segments--North American
Consumer, Professional and International. The North American Consumer
segment consists of the Lawns, Gardens, Growing Media and Ortho
business units.
The North American Consumer segment specializes in dry, granular
slow-release lawn fertilizers, lawn fertilizer combination and lawn
control products, grass seed, spreaders, water-soluble and
controlled-release garden and indoor plant foods, plant care products,
and potting soils, barks, mulches and other growing media products, and
pesticides products. Products are marketed to mass merchandisers, home
improvement centers, large hardware chains, nurseries and gardens
centers.
The Professional segment is focused on a full line of turf and
horticulture products including controlled-release and water-soluble
fertilizers and plant protection products, grass seed, spreaders,
custom application services and growing media. Products are sold to
golf courses, professional baseball, football and soccer stadiums, lawn
and landscape service companies, commercial nurseries and greenhouses
and specialty crop growers.
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.
Page 16
<PAGE> 17
The following table presents segment financial information in
accordance with SFAS No. 131. "Disclosures about Segments of an
Enterprise and Related Information". Pursuant to that statement, the
presentation of the segment financial information is consistent with
the basis used by management (i.e., certain costs not allocated to
business segments for internal management reporting purposes are not
allocated for purposes of this presentation). Amounts as of and for the
three months ended January 1, 2000 have been restated as discussed in
Note 2.
<TABLE>
<CAPTION>
N.A. OTHER/
(in millions) CONSUMER PROFESSIONAL INTERNATIONAL CORPORATE TOTAL
------------- -------- ------------ ------------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Sales:
Q1 2000 $ 101.6 $ 23.6 $ 66.3 $ 191.5
Q1 1999 $ 72.8 $ 32.5 $ 79.1 $ 184.4
Operating Income (Loss):
Q1 2000 $ (6.9) $ (0.3) $ (1.9) $(19.0) $ (28.1)
Q1 1999 (2.0) (0.6) 9.5 (14.0) (7.1)
Operating Margin:
Q1 2000 (6.8%) (1.3%) (2.9%) nm (14.7%)
Q1 1999 (2.7%) (1.8%) 12.0% nm (3.9%)
Total Assets:
Q1 2000 1,075.7 200.9 508.6 89.6 1,874.8
Q1 1999 661.4 194.0 535.1 55.0 1,445.5
nm Not meaningful.
</TABLE>
Operating 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 three month
periods ended January 1, 2000 and January 2, 1999 includes amortization
of certain intangible assets, corporate general and administrative
expenses, and certain "other" income/expense not allocated to the
business segments. In the first quarter of fiscal 2000, management
changed the measure of profitability for the business segments as
compared to the method used at September 30, 1999, to include the
allocation of certain costs to the business segments which historically
were included in corporate costs. Such costs include research and
development, administrative and certain "other" income/expense items
which could be directly attributable to a business segment. The results
shown above for the first quarter of fiscal 1999 have been reclassified
to conform to the fiscal 2000 basis of presentation.
Total assets reported for the Company's operating segments include the
intangible assets for the acquired business within those segments.
Corporate assets primarily include deferred financing and debt issuance
costs, corporate fixed assets as well as deferred tax assets.
Page 17
<PAGE> 18
15. 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
intends to register these Notes under the Securities Act.
The Notes are general obligations of the Company and are guaranteed by
all of the existing wholly-owned domestic subsidiaries and all future
wholly-owned, significant (as defined in Regulation S-X) domestic
subsidiaries of the Company. These subsidiary guarantors jointly and
severally guarantee the Company's obligations under the Notes. The
guarantees represent full and unconditional general obligations of each
subsidiary that are subordinated in right of payment to all existing
and future senior debt of that subsidiary but are senior in right of
payment to any future junior subordinated debt of that subsidiary. The
following unaudited information presents consolidating Statements of
Operations, Statements of Cash Flows and Balance Sheets for the three
month periods ended January 1, 2000 and January 2, 1999.
Separate unaudited financial statements of the individual guarantor
subsidiaries have not been provided because management does not believe
they would be meaningful to investors.
Page 18
<PAGE> 19
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 1, 2000 (in millions)
(Unaudited and restated)
<TABLE>
<CAPTION>
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales $ 80.3 $ 42.1 $ 69.1 $191.5
Cost of sales 51.1 27.9 38.6 117.6
------ ------ ------ ------ ------
Gross profit 29.2 14.2 30.5 -- 73.9
Gross commission earned from agency agreement 0.3 0.3
Contribution expenses under agency agreement 3.7 3.7
------ ------ ------ ------ ------
Net commission earned from agency agreement (3.4) -- -- -- (3.4)
Operating Expenses:
Advertising and promotion 10.7 4.1 8.9 23.7
Selling, general and administration 38.9 5.1 24.1 68.1
Amortization or goodwill and other
intangibles 1.1 2.1 2.3 5.5
Equity income in non-guarantors 5.4 (5.4) --
Intracompany allocations (1.9) 0.6 1.3 --
Other expense (income), net 2.3 (0.9) (0.1) 1.3
------ ------ ------ ------ ------
Income (loss) from operations (30.7) 3.2 (6.0) 5.4 (28.1)
Interest expense 17.6 (0.1) 6.2 23.7
------ ------ ------ ------ ------
Income (loss) before income taxes (48.3) 3.3 (12.2) 5.4 (51.8)
Income taxes (17.5) 1.5 (5.0) (21.0)
------ ------ ------ ------ ------
Net income (loss) $(30.8) 1.8 (7.2) 5.4 (30.8)
====== ====== ====== ====== ======
</TABLE>
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<PAGE> 20
STATEMENT OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED JANUARY 1, 2000 (in millions)
(Unaudited and restated)
<TABLE>
<CAPTION>
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (30.8) $ 1.8 $ (7.2) $ 5.4 $ (30.8)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 8.8 4.5 3.7 17.0
Equity income in non-guarantors 5.4 (5.4) --
Net change in certain components of
working capital (84.6) (45.2) (21.1) (150.9)
Net changes in other assets and
liabilities and other adjustments (1.0) (0.8) (2.8) (4.6)
--------- --------- --------- --------- --------
Net cash used in operating activities (102.2) (39.7) (27.4) -- (169.3)
--------- --------- --------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant
and equipment (4.7) (0.9) (1.6) (7.2)
--------- --------- --------- --------- --------
Net cash used in investing activities (4.7) (0.9) (1.6) -- (7.2)
--------- --------- --------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving and bank
lines of credit 174.7 (0.2) 27.6 202.1
Gross borrowings under term loans --
Gross repayments under term loans (0.5) (5.8) (6.3)
Dividends on Class A Convertible
Preferred Stock (6.4) (6.4)
Repurchase of treasury shares (21.0) (21.0)
Intracompany financing (47.0) 39.9 7.1 --
Other, net 0.2 (5.8) (5.6)
--------- --------- --------- --------- --------
Net cash provided by financing activities 100.0 39.7 23.1 162.8
--------- --------- --------- --------- --------
Effect of exchange rate changes on cash (0.8) (0.8)
--------- --------- --------- --------- --------
Net decrease in cash (6.9) (0.9) (6.7) (14.5)
Cash and cash equivalents,
beginning of period 8.5 3.1 18.7 30.3
--------- --------- --------- --------- --------
Cash and cash equivalents,
end of period $ 1.6 $ 2.2 $ 12.0 $ -- $ 15.8
========= ========= ========= ========= ========
</TABLE>
Page 20
<PAGE> 21
BALANCE SHEET
AS OF JANUARY 1, 2000 (in millions, except share information)
(Unaudited and restated)
<TABLE>
<CAPTION>
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1.6 $ 2.2 $ 12.0 $ 15.8
Accounts receivable, net 112.0 32.4 80.9 225.3
Inventories, net 254.7 101.7 85.7 442.1
Current deferred tax asset 28.1 0.5 28.6
Prepaid and other assets 38.2 2.7 19.4 60.3
-------- -------- ------ -------- --------
Total current assets 434.6 139.5 198.0 -- 772.1
Property, plant and equipment, net 156.9 58.6 40.5 256.0
Intangible assets, net 225.8 266.5 281.7 774.0
Other assets 63.4 9.3 72.7
Investment in affiliates 701.2 (701.2) 0.0
Intracompany assets -- 254.7 (254.7) 0.0
-------- -------- ------- ------- --------
Total assets 1,581.9 719.3 529.5 (955.9) 1,874.8
======== ======== ====== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt 93.9 1.2 25.3 120.4
Accounts payable 78.8 21.2 49.5 149.5
Accrued liabilities 30.4 88.4 34.2 153.0
-------- -------- ------ ------- --------
Total current liabilities 203.1 110.8 109.0 -- 422.9
Long-term debt 701.0 305.5 1,006.5
Other liabilities 41.5 0.8 21.2 63.5
Intracompany liabilities 242.3 12.4 (254.7) --
-------- -------- ------ ------- --------
Total liabilities 1,187.9 111.6 448.1 (254.7) 1,492.9
Commitments and contingencies
Shareholders' equity:
Investment from parent 413.6 57.4 (471.0) --
Common shares, no par value per share,
$.01 stated value per share 0.3 0.3
Capital in excess of par value 387.9 387.9
Retained earnings 92.9 194.1 36.1 (230.2) 92.9
Treasury stock, 3.4 shares at cost (82.9) (82.9)
Accumulated other comprehensive
income (4.2) (12.1) (16.3)
-------- -------- ------ ------- --------
Total shareholders' equity 394.0 607.7 81.4 (701.2) 381.9
-------- -------- ------ ------- --------
Total liabilities and shareholders'
equity $1,581.9 $ 719.3 $529.5 $(955.9) $1,874.8
======== ======== ====== ======= ========
</TABLE>
Page 21
<PAGE> 22
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 2, 1999 (in millions)
(Unaudited)
<TABLE>
<CAPTION>
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales $ 55.6 $ 47.7 $81.1 $184.4
Cost of sales 39.7 35.0 45.0 119.7
------ ------ ----- ----- ------
Gross profit 15.9 12.7 36.1 -- 64.7
Gross commission earned from agency agreement 5.0 5.0
Contribution expenses under agency agreement (0.4) (0.4)
------ ------ ----- ----- ------
Net commission earned from agency agreement 4.6 -- -- -- 4.6
Operating Expenses:
Advertising and promotion 5.8 3.3 7.6 16.7
Selling, general and administration 29.5 4.7 19.7 53.9
Amortization or goodwill and other
intangibles 0.1 2.3 2.1 4.5
Restructuring and other changes 1.4 1.4
Equity income in non-guarantors (0.1) 0.1 --
Intracompany allocations (7.3) 6.4 0.9 --
Other expenses, net 1.4 (1.3) (0.2) (0.1)
------ ------ ----- ----- ------
Income (loss) from operations (10.3) (2.7) 6.0 (0.1) (7.1)
Interest expense 6.5 0.1 3.2 9.8
------ ------ ----- ----- ------
Income (loss) before income taxes (16.8) (2.8) 2.8 (0.1) (16.9)
Income taxes (6.8) (1.2) 1.1 (6.9)
------ ------ ----- ----- ------
Income (loss) before extraordinary item (10.0) (1.6) 1.7 (0.1) (10.0)
Extraordinary loss on early
extinguishment of debt, net
of income tax benefit 0.4 0.4
------ ------ ----- ----- ------
Net income (loss) $(10.4) $ (1.6) $ 1.7 $(0.1) $(10.4)
====== ====== ===== ===== ======
</TABLE>
Page 22
<PAGE> 23
STATEMENT OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED JANUARY 2, 1999 (in millions)
(Unaudited)
<TABLE>
<CAPTION>
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (10.4) $ (1.6) $ 1.7 $ (0.1) $ (10.4)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 3.2 4.4 4.2 11.8
Equity income in non-guarantors (0.1) 0.1
Net Change in certain components of
working capital (24.0) (65.0) (45.9) (134.9)
Net changes in other assets and (35.2) (4.8) 10.1 (29.9)
--------- --------- --------- --------- --------
Net cash used in operating activities (66.5) (67.0) (29.9) -- (163.4)
--------- --------- --------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant
and equipment (10.9) (1.2) (1.7) (13.8)
Investments in acquired businesses,
net of cash acquired (3.5) (157.2) (160.7)
Other (7.3) (0.3) (7.6)
--------- --------- --------- --------- --------
Net cash used in investing activities (18.2) (4.7) (159.2) (182.1)
--------- --------- --------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving and bank
lines of credit 185.4 (96.8) 88.6
Gross borrowings under term loans 260.0 265.0 525.0
Gross repayments under term loans --
Repayment of outstanding balance on
previous credit facility (241.0) (241.0)
Dividends on Class A Convertible
Preferred Stock (4.9) (4.9)
Intracompany financing (92.9) 70.4 22.5 --
Other, net (24.5) (24.5)
--------- --------- --------- --------- --------
Net cash provided by financing activities 82.1 70.4 190.7 343.2
--------- --------- --------- --------- --------
Effect of exchange rate changes on cash (0.1) (0.1)
--------- --------- --------- --------- --------
Net increase (decrease) in cash (2.6) (1.3) 1.5 (2.4)
Cash and cash equivalents,
beginning of period 4.9 (2.1) 7.8 10.6
Cash and cash equivalents, --------- --------- --------- --------- --------
end of period $ 2.3 $ (3.4) $ 9.3 $ -- $ 8.2
========= ========= ========= ========= ========
</TABLE>
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BALANCE SHEET
AS OF JANUARY 2, 1999 (IN MILLIONS, EXCEPT SHARE INFORMATION)
(Unaudited)
<TABLE>
<CAPTION>
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2.3 $ (3.4) $ 9.3 $ 8.2
Accounts receivable, net 80.4 32.8 93.5 206.7
Inventories, net 104.1 118.4 75.7 298.2
Current deferred tax asset 20.4 0.4 10.6 31.4
Prepaid and other assets 10.0 1.2 10.3 21.5
------- ------ ------ ------- --------
Total current assets 217.2 149.4 199.4 -- 566.0
Property, plant and equipment, net 106.6 63.4 38.9 208.9
Intangible assets, net 9.0 282.4 317.2 608.6
Other assets 61.8 -- 0.2 62.0
Investment in affiliates 651.0 -- -- (651.0) 0.0
Intracompany assets -- -- 0.2 (0.2) 0.0
------- ------ ------ ------- --------
Total assets 1,045.6 495.2 555.9 (651.2) 1,445.5
======= ====== ====== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt 0.4 0.7 23.3 24.4
Accounts payable 57.9 10.8 43.8 112.5
Accrued liabilities 13.8 48.0 49.7 111.5
---- ---- ---- ------- --------
Total current liabilities 72.1 59.5 116.8 -- 248.4
Long-term debt 425.9 -- 328.9 754.8
Other liabilities 30.5 5.5 15.2 51.2
Intracompany liabilities 122.6 (122.4) -- (0.2) 0.0
------ ------ ------ ------- --------
Total liabilities 651.1 (57.4) 460.9 (0.2) 1,054.4
Commitments and contingencies
Shareholders' equity:
Class A Convertible Preferred
Stock, no par value 177.3 177.3
Investment from parent 413.6 57.4 (471.0) 0.0
Common shares, no par value per
share, $.01 stated value per
share, issued 21.1 shares in
1998 and 1997 0.2 0.2
Capital in excess of par value 208.9 208.9
Retained earnings 63.8 139.0 41.0 (180.0) 63.8
Treasury stock, 2.8 shares at cost (55.5) (55.5)
Accumulated other comprehensive
income (0.2) (3.4) (3.6)
------ ------ ------ ------- --------
Total shareholders' equity 394.5 552.6 95.0 (651.0) 391.1
-------- ------ ------ ------- --------
Total liabilities and shareholders'
equity $1,045.6 $495.2 $555.9 $(651.2) $1,445.5
======== ====== ====== ======= ========
</TABLE>
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<PAGE> 25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(ALL AMOUNTS ARE IN MILLIONS EXCEPT PER SHARE DATA OR AS OTHERWISE NOTED)
OVERVIEW
Scotts is a leading manufacturer and marketer of consumer branded products for
lawn and garden care, professional turf care and professional horticulture
businesses in the United States and Europe. Our operations are divided into
three business segments: North American Consumer, Professional and
International. The North American Consumer segment includes the Lawns, Gardens,
Growing Media and Ortho 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 1999, we
spent $189.0 million on advertising and promotional activities, which is a
significant increase over fiscal 1998 spending levels. We have applied this
consumer marketing focus over the past several years, and we believe that Scotts
continues to receive a significant return on these increased marketing
expenditures. For example, sales in our Consumer Lawns business group increased
24.9% from fiscal 1998 to fiscal 1999. We believe that this dramatic sales
growth resulted primarily from our increased consumer-oriented marketing
efforts. We expect that we will continue to focus our marketing efforts toward
the consumer and to increase consumer marketing expenditures in the future to
drive market share and sales growth.
Scotts' sales are seasonal in nature and are susceptible to global weather
conditions, primarily in North America and Europe. For instance, periods of wet
weather can slow fertilizer sales but can create increased demand for pesticide
sales. Periods of dry, hot weather can have the opposite effect on fertilizer
and pesticide sales. We believe that our recent acquisitions diversify both our
product line risk and geographic risk to weather conditions.
On September 30, 1998, Scotts entered into a long-term marketing agreement with
Monsanto for its consumer Roundup(R) herbicide products. Under the marketing
agreement, Scotts and Monsanto will jointly develop global consumer and trade
marketing programs for Roundup(R), and Scotts has assumed responsibility for
sales support, merchandising, distribution, logistics and certain administrative
functions. In addition, in January 1999 Scotts purchased from Monsanto the
assets of its worldwide consumer lawn and garden businesses, exclusive of the
Roundup(R) business, for $300 million plus an amount for normalized working
capital. These transactions with Monsanto will further our strategic objective
of significantly enhancing our position in the pesticides segment of the
consumer lawn and garden category. These businesses make up the Ortho business
group within the North American Consumer segment.
We believe that these transactions provide us with several strategic benefits
including immediate market penetration, geographic expansion, brand leveraging
opportunities, and the achievement of substantial cost savings. With the Ortho
acquisition, we are currently a leader by market share in all five segments of
the U.S. consumer lawn and garden category: lawn fertilizer, garden fertilizer,
growing media, grass seeds and pesticides. We believe that we are now positioned
as the only national company with a complete offering of consumer products.
The addition of strong pesticide brands completes our product portfolio of
powerful branded consumer lawn and garden products that should provide Scotts
with brand leveraging opportunities for revenue growth. For example, our
strengthened market position should create category management opportunities to
enhance shelf positioning, consumer communication, trade incentives and trade
programs. In addition, significant synergies have been and should continue to be
realized from the combined businesses, including reductions in general and
administrative, sales, distribution, purchasing, research and development and
corporate overhead costs. We have redirected, and expect to continue to
redirect, a portion of these cost savings into increased consumer marketing
spending in support of the Ortho(R) brand.
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Over the past two years, we have made several other acquisitions to strengthen
our global market position in the lawn and garden category. In October 1998, we
purchased Rhone-Poulenc Jardin, a leading European lawn and garden business, for
approximately $170.0 million. This acquisition provides a significant addition
to our existing European platform and strengthens our foothold in the
continental European consumer lawn and garden market. Through this acquisition,
we have established a strong presence in France, Germany, Austria, and the
Benelux countries. This acquisition may also mitigate, to a certain extent, our
susceptibility to weather conditions by expanding the regions in which we
operate.
In December 1998, we acquired Asef Holding B.V., a privately-held
Netherlands-based lawn and garden products company. In February 1998, we
acquired EarthGro, Inc., a Northeastern U.S. growing media producer. In December
1997, we acquired Levington Group Limited, a leading producer of consumer and
professional lawn fertilizer and growing media in the United Kingdom. In January
1997, we acquired the approximate two-thirds interest in Miracle Holdings
Limited which we did not already own. Miracle Holdings owns Miracle Garden Care
Limited, a manufacturer and distributor of lawn and garden products in the
United Kingdom. These acquisitions are consistent with our stated objective of
becoming the world's foremost branded lawn and garden company.
The following discussion and analysis of the consolidated results of operations
and financial position should be read in conjunction with our Condensed,
Consolidated Financial Statements included elsewhere in this report. Scotts'
Annual Report on Form 10-K for the fiscal year ended September 30, 1999 includes
additional information about the Company, our operations, and our financial
position, and should be read in conjunction with this Quarterly Report on Form
10-Q.
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RESULTS OF OPERATIONS
The following table sets forth sales by business segment for the three months
ended January 1, 2000 and January 2, 1999:
FOR THE THREE MONTHS ENDED PERIOD TO
JANUARY 1, JANUARY 2, PERIOD
2000 1999 % CHANGE
---- ---- --------
North American Consumer:
Lawns $ 47.9 $ 39.1 22.5%
Gardens 14.2 13.2 7.6
Growing Media 19.9 20.0 (0.5)
Ortho 18.2 -- NA
Canada 1.4 0.5 180.0
------ -----
Total 101.6 72.8 39.6
Professional 23.6 32.5 (27.4)
International 66.3 79.1 (16.2)
------ -----
Consolidated $191.5 $184.4 3.9%
====== =====
The following table sets forth the components of income and expense as a
percentage of sales for the three months ended January 1, 2000 and January 2,
1999:
FOR THE THREE
MONTHS ENDED
------------
JANUARY 1, JANUARY 2,
2000 1999
---- ----
Net sales 100.0% 100.0%
Cost of sales 61.4 64.9
----- -----
Gross profit 38.6 35.1
Commission earned from agency agreement, net (1.8) 2.7
Operating expenses:
Advertising and promotion 12.4 9.1
Selling, general and administrative 35.6 29.2
Amortization of goodwill and other intangibles 3.1 2.7
Restructuring and other charges 0.0 0.8
Other expense (income), net 0.7 (0.1)
----- -----
Loss from operations (14.7) (3.9)
Interest expense 12.4 5.3
----- -----
Loss before income taxes (27.1) (9.2)
Income tax benefit (11.0) (3.7)
----- -----
Net loss before extraordinary item (16.1) (5.4)
Extraordinary item, net of tax 0.0 0.2
----- -----
Net loss (16.1) (5.6)
Payments to preferred shareholders 3.3 1.3
----- -----
Loss applicable to common shareholders (19.4)% (6.9)%
===== =====
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THREE MONTHS ENDED JANUARY 1, 2000 VERSUS THREE MONTHS ENDED JANUARY 2, 1999
Sales for the three months ended January 1, 2000 were $191.5 million, an
increase of 3.9% over the three months ended January 2, 1999 of $184.4 million.
On a pro forma basis, assuming that the Ortho acquisition had occurred on
October 1, 1998, sales for the first quarter of fiscal 2000 were 6.3% lower than
pro forma sales for the first quarter of fiscal 1999 of $204.3 million. The
decrease in pro forma sales was driven primarily by decreases in sales in the
Professional and International segments as discussed below.
North American Consumer segment sales were $101.6 million in the first quarter
of fiscal 2000, an increase of $28.8 million, or 39.6%, over sales for the first
quarter of fiscal 1999 of $72.8 million. Sales in the Consumer Lawns business
group within this segment increased $8.8 million, or 22.5%, from fiscal 1999 to
fiscal 2000, reflecting increased early season sales to distributors facilitated
by improved product availability when compared to the prior year. Sales in the
Consumer Gardens business group increased $1.0 million, or 7.6%, from the first
quarter of fiscal 1999 to fiscal 2000, primarily due to strong volume in the
specialty fertilizers and feeders product lines. On a proforma basis, sales in
the Ortho business group declined 9.0% from the first quarter of fiscal 1999,
reflecting initiatives to reduce trade inventory levels for certain significant
retailers. Selling price changes did not have a material impact in the North
American Consumer segment in the first quarter of fiscal 2000.
Professional segment sales of $23.6 million in the first quarter of fiscal 2000
were $8.9 million lower than first quarter of fiscal 1999 sales of $32.5
million. The decrease in sales for the Professional segment was primarily due to
lower sales of ProTurf(R) products. In the second quarter of fiscal 1999, we
changed from selling direct to customers to selling through distributors. The
timing of this change and continuing performance issues with one of our largest
ProTurf(R) distributors caused sales to decrease when compared to the prior
year. Sales of horticulture products within this segment also decreased
year-to-year as a result of de-emphasizing early season incentives to
distributors which previously contributed to high pre-season inventory levels.
International segment sales of $66.3 million in the first quarter of fiscal 2000
were $12.8 million lower than sales for the first quarter of fiscal 1999 of
$79.1 million. The decrease in sales was primarily due to shifting our business
models in the United Kingdom and France toward direct distribution to customers
and away from using third-party distributors. This change is expected to reduce
pre-season inventory levels and shift sales from the first quarter to the
remainder of the year.
Gross profit increased to $73.9 million in the first quarter of fiscal 2000, an
increase of 14.2% over fiscal 1999 gross profit of $64.7 million. As a
percentage of sales, gross profit was 38.6% of sales for fiscal 2000 compared to
35.1% of sales for the first quarter of fiscal 1999. This increase in
profitability on sales was driven by decreased unit costs for products
manufactured in our Marysville facility reflecting higher production levels and
improved efficiencies this year and a shift in sales mix toward higher margin
products, particularly within the Consumer Lawns business group.
The "commission earned from agency agreement" in the first quarter of fiscal
2000 represents net costs incurred of $3.4 million compared to income of $4.6
million in the first quarter of fiscal 1999. In the prior year, we recorded
commission based on our estimated pro-rata share of Roundup(R) EBIT for the
quarter. In fiscal 2000, in accordance with revenue recognition guidance
recently put forward by the SEC, we will not record commission under the
Roundup(R) agency agreement until minimum EBIT thresholds as required by the
agreement are achieved. We expect to begin recognizing commission in the second
quarter of fiscal 2000 and do not expect that this policy will have any effect
on the recognition of commission on a full-year basis. The costs of $3.7 million
recorded in the first quarter of fiscal 2000 primarily represents amortization
of $2.4 million related to the amortization of the marketing fee paid to
Monsanto and $1.3 million related to the fiscal 2000 contribution payment due to
Monsanto as required by the marketing agreement.
We have restated our financial statements as of and for the three months ended
January 1, 2000. In connection with the Agency and Marketing Agreement with
Monsanto for consumer Roundup products, we were required to pay a marketing fee
of $32 million. The earnings originally reported for the three months ended
January 1, 2000 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 as of and for
the three months ended January 1, 2000 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. A more detailed discussion of the restatement
and the Roundup agreement is presented in Notes 2 and 3 to the quarterly
financial statements.
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Advertising and promotion expenses in the first quarter of fiscal 2000 were
$23.7 million, an increase of $7.0 million, or 41.9% over fiscal 1999
advertising and promotion expenses of $16.7 million. This increase was primarily
due to advertising and promotion expenses for the Ortho business, support of the
increase in sales within the North American Consumer segment and investments in
advertising and promotion to drive future sales growth in the International
segment.
Selling, general and administrative expenses in the first quarter of fiscal 2000
were $68.1 million, an increase of $14.2 million, or 26.3% over similar expenses
in the first quarter of fiscal 1999 of $53.9 million. As a percentage of sales,
selling, general and administrative expenses were 35.6% for the first quarter of
fiscal 2000 compared to 29.2% for fiscal 1999. The increase in selling, general
and administrative expenses was primarily related to support of the increased
sales levels in the Consumer Lawns business group, infrastructure expenses
within the International segment, and selling, general and administrative
expenses for the Ortho business group which were not incurred in the first
quarter of fiscal 1999 due to the timing of the acquisition in January 1999.
Amortization of goodwill and other intangibles increased to $5.5 million in the
first quarter of fiscal 2000, compared to $4.5 million in the prior year, due to
additional intangibles resulting from the Ortho acquisition.
Restructuring and other charges were $1.4 million in the first quarter of fiscal
1999. These charges represent severance costs associated with the reorganization
of North American Professional Business Group to strengthen distribution and
technical sales support, integrate brand management across market segments and
reduce annual operating expenses. To date, approximately $1.2 million has been
paid.
Other expense for the first quarter of fiscal 2000 was $1.3 million compared to
other income of $0.1 million in the prior year. The increase in expense was
primarily due to losses associated with the disposal of fixed assets.
Loss from operations for the first quarter of fiscal 2000 was $28.1 million
compared to $7.1 million for the first quarter of fiscal 1999. The increase in
the loss was primarily due to the factors described above: lower sales in the
Professional segment; delayed sales in the International segment due to the
changes in distribution to retailers; and a reduction in Roundup(R) commission
as discussed above.
Interest expense for the first quarter of fiscal 2000 was $23.7 million, an
increase of $13.9 million over fiscal 1999 interest expense of $9.8 million. The
increase in interest expense was due to increased borrowings to fund the Ortho
acquisition and increased working capital, and an increase in average borrowing
rates under our credit facility.
Income tax benefit was $21.0 million for fiscal 2000 compared to a benefit of
$6.9 million in the prior year due to the increased loss recognized in the first
quarter of fiscal 2000. The Company's effective tax rate did not change
significantly from quarter to quarter.
On December 4, 1998, Scotts and certain of its subsidiaries entered into a
credit facility and used borrowings under the facility to repay amounts
outstanding under the then existing credit facility. The write-off of deferred
financing costs associated with the previous credit facility resulted in an
extraordinary loss in the first quarter of fiscal 1999, net of income taxes, of
$0.4 million.
Scotts reported a net loss of $30.8 million for the first quarter of fiscal 2000
(as restated), or $1.32 loss per common share on a basic and diluted basis,
compared to a net loss of $10.4 million for fiscal 1999, or $0.70 loss per
common share on a basic and diluted basis. Due to the early conversion of the
then outstanding preferred shares on October 1, 1999, as discussed in "Liquidity
and Capital Resources", there were approximately 28.2 million shares outstanding
for the first quarter of fiscal 2000. There were 18.3 million common shares
outstanding during the first quarter of fiscal 1999.
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<PAGE> 30
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities totaled $169.3 million for the three months
ended January 1, 2000 compared to a use of $163.4 million for the three months
ended January 2, 1999. The seasonal nature of our operations generally requires
cash to fund significant increases in working capital (primarily inventory and
accounts receivable) during the first and second quarters. The third fiscal
quarter is a period for collecting accounts receivable and liquidating inventory
levels. The slight increase in cash used in operating activities for the first
quarter of fiscal 2000 compared to the prior year is attributable to the
increased loss in the quarter and the build of inventory levels to meet
anticipated seasonal demand, partially offset by a smaller increase in accounts
receivable resulting from the factors affecting sales as described above and the
payment of Roundup(R) marketing fees made in the first quarter of fiscal 1999.
Cash used in investing activities was $7.2 million for the first quarter of
fiscal 2000 compared to $182.1 million in the prior year. In the first quarter
of fiscal 1999, we purchased the Rhone-Poulenc Jardin and Asef businesses for
approximately $160 million. Additionally, capital investments decreased by $6.6
million to $7.2 million in the first quarter of fiscal 2000 compared to $13.8
million in the first quarter of fiscal 1999.
Financing activities generated cash of $162.8 million for the three months ended
January 1, 2000 compared to $343.2 million in the prior year. In the first
quarter of fiscal 1999, Scotts borrowed funds under its credit facility in order
to purchase the Rhone-Poulenc Jardin and Asef businesses, to pay marketing fees
associated with the Roundup(R) agency agreement, to pay financing fees
associated with the new credit facility and to settle the then outstanding
interest rate locks (as described below). In addition, on October 1, 1999, all
of the then outstanding Class A Convertible Preferred Shares were converted into
10.1 million common shares. In connection with the conversion, the Company 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
the Company.
Total debt was $1,126.9 million as of January 1, 2000, an increase of $176.9
million compared with debt at September 30, 1999 and an increase of $347.7
compared with debt levels at January 2, 1999. The increase in debt period to
period was primarily due to funding the Ortho acquisition and increased working
capital levels as described above.
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.
At January 1, 2000, the Company was in violation of the minimum net worth
covenant contained in the credit agreement. On February 15, 2000, the Company
obtained a waiver of its first quarter violation. The waiver precludes the bank
group from calling the borrowings under the credit facility based on the first
quarter violation but does not waive any future violations.
The Company could incur significant adverse consequences if it continues to be
in default of any of its debt covenants and is unable to obtain a waiver for any
default, including having to repay all then outstanding borrowings under its
credit facility and potential fees and higher interest costs to secure new
borrowing facilities. The Company anticipates that it will be in compliance with
its debt covenants at the end of its second fiscal quarter and for the remaining
quarters in fiscal 2000.
We funded the acquisition of the Rhone-Poulenc Jardin and Asef businesses with
borrowings under our credit facility. Additional borrowings under the credit
facility, along with proceeds from the January 1999 offering of $330 million of
10-year 8 5/8% Senior Subordinated Notes due 2009, were used to fund the Ortho
acquisition and to repurchase approximately 97% of Scotts' then outstanding
$100.0 million 9 7/8% Senior Subordinated Notes.
Coincidental with the notes offering, Scotts settled its then outstanding
interest rate lock for approximately $3.6 million. We entered into two interest
rate locks in fiscal 1998 to hedge the anticipated interest rate exposure on the
$330 million note offering. In October 1998, we terminated one of the interest
rate locks for $9.3 million and entered into a new interest rate lock
instrument. The total amount paid under the interest rate locks of $12.9 million
has been deferred and is being amortized over the life of the notes.
In July 1998, our Board of Directors authorized the repurchase of up to $100
million of our common shares on the open market or in privately negotiated
transactions on or prior to September 30, 2001. As of January 1, 2000, 1,025,495
common shares (or $37.7 million) have been repurchased under the new repurchase
program limit. The timing and amount of any purchases under the new repurchase
program will be at our discretion and will depend upon market conditions and our
operating performance and liquidity.
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<PAGE> 31
Any repurchase will also be subject to the covenants contained in our credit
facility as well as our other debt instruments. The repurchased shares will be
held in treasury and will thereafter be used for the exercise of employee stock
options and for other valid corporate purposes. We anticipate that any
repurchases will be made in the open market or in privately negotiated
transactions, and that Hagedorn Partnership, L.P. will sell its pro rata share
(approximately 42%) of such repurchased shares in the open market.
As of January 1, 2000 the Company was in violation of the minimum net worth
covenant contained in our credit facility. The Company obtained a waiver to cure
default on February 15, 2000.
In our opinion, cash flows from operations and capital resources will be
sufficient to meet debt service and working capital needs during fiscal 2000,
and thereafter for the foreseeable future. However, we cannot ensure that our
business groups will generate sufficient cash flow from operations, that
currently anticipated cost savings and operating improvements will be realized
on schedule or at all, or that future borrowings will be available under our
credit facilities in amounts sufficient to pay indebtedness or fund other
liquidity needs. Actual results of operations will depend on numerous factors,
many of which are beyond our control. We cannot ensure that we will be able to
refinance any indebtedness, including our credit facility, on commercially
reasonable terms, or at all.
ENVIRONMENTAL MATTERS
We are subject to local, state, federal and foreign environmental protection
laws and regulations with respect to our business operations and believe we are
operating in substantial compliance with, or taking action aimed at ensuring
compliance with, such laws and regulations. We are involved in several
environmental related legal actions with various governmental agencies. While it
is difficult to quantify the potential financial impact of actions involving
environmental matters, particularly remediation costs at waste disposal sites
and future capital expenditures for environmental control equipment, in the
opinion of management, the ultimate liability arising from such environmental
matters, taking into account established reserves, should not have a material
adverse effect on our financial position; however, there can be no assurance
that the resolution of these matters will not materially affect future quarterly
or annual operating results. Additional information on environmental matters
affecting us is provided in Note 10 to the Company's unaudited Condensed,
Consolidated Financial Statements as of and for the three months ended January
1, 2000 and in the 1999 Annual Report on Form 10-K under "ITEM 1 BUSINESS...
ENVIRONMENTAL AND REGULATORY CONSIDERATIONS" and "ITEM 3 LEGAL PROCEEDINGS"
sections.
YEAR 2000 READINESS
In order to address issues surrounding the potential inability of our computer
software applications and other business systems to properly identify the Year
2000, we established a readiness program to assess the extent and impact of
potential business interruptions and other risks. The readiness program included
a review of all significant information technology systems within the Company,
as well as significant non-information technology business systems including
machinery and equipment operating control systems, telecommunications systems,
building air management systems, security and fire control systems and
electrical and natural gas systems. Remediation, upgrade or replacement of the
affected systems was made as necessary.
The readiness program also included evaluation of the year 2000 readiness of
significant third-party suppliers through confirmation and follow-up procedures,
including selected site assessments, where necessary.
Excluding the cost of internally dedicated resources, we have incurred
approximately $5.5 million to address potential year 2000 risks as of January 1,
2000. These costs, with the exception of relatively small capital expenditures,
were expensed as incurred and were funded through operating cash flows or from
borrowings under our credit facility. We do not expect to incur any significant
additional costs related to the year 2000 issue.
Through January 2000, we have not experienced any significant issues related to
the ability of our information technology and business systems to recognize the
year
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<PAGE> 32
2000. In addition, we have not experienced any significant supply difficulties
related to our vendors' year 2000 readiness. While we believe that we have taken
adequate precautions against year 2000 systems issues, there can be no assurance
that we will not encounter business interruption or other issues related to the
year 2000 in the future.
The Company's readiness program is an ongoing process and the estimates of costs
and completion dates for various components of the program described above are
subject to change.
ENTERPRISE RESOURCE PLANNING ("ERP")
In July 1998, we announced a project designed to bring our information system
resources in line with our current strategic objectives. The project includes
the redesign of certain key business processes in connection with the
installation of new software on a world-wide basis over the course of the next
several fiscal years. We estimate that the project will cost approximately $65
million, of which we expect 75% will be capitalized and depreciated over a
period of four to eight years. SAP has been selected as the primary software
provider for this project.
EURO
A new currency called the "Euro" has been introduced in certain Economic and
Monetary Union 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 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 this assessment. 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 materially adverse effect on our business,
operating results and financial condition.
RECENT DEVELOPMENTS
On February 7, 2000, the Company announced that it had signed a letter of intent
to sell its North American Professional Turf business. The Company expects the
transaction to close in the third quarter of fiscal 2000 and does not expect the
transaction to have a material impact on its fiscal 2000 results of operations.
The Company will retain the professional horticulture and grass seed segments of
its Professional Business Segment.
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MANAGEMENT'S OUTLOOK
Results for the first quarter of fiscal 2000 are in line with management's
expectations and position us to continue our trend of significant sales and
earnings growth. We are coming off a very strong fiscal 1999 as we reported
record sales of $1.65 billion, achieved market share growth in every one of our
major U. S. categories and established a number one market share position in
most of the significant lawn and garden categories across the world. The
performance in 1999 reflected the successful continuation of our primary growth
drivers: to emphasize consumer-oriented marketing efforts to pull demand through
distribution channels, and to make strategic acquisitions to increase market
share in global markets and within segments of the lawn and garden category.
Looking forward, we maintain the following broad tenets to our strategic plan:
(1) Promote and capitalize on the strengths of the Scotts(R),
Miracle-Gro(R), Hyponex(R) and Ortho(R) industry-leading
brands, as well as our portfolio of powerful brands in our
international markets. This involves a commitment to investors
and retail partners that we will support these brands through
advertising and promotion unequaled in the lawn and garden
consumables market. In the Professional categories, it
signifies a commitment to customers to provide value as an
integral element in their long-term success;
(2) Commit to continuously study and improve knowledge of the
market, the consumer and the competition;
(3) Simplify product lines and business processes, to focus on
those that deliver value, evaluate marginal ones and eliminate
those that lack future prospects; and
(4) Achieve world leadership in operations, leveraging technology
and know-how to deliver outstanding customer service and
quality.
As part of our ongoing strategic plans, management has established
challenging, but realistic, financial goals, including:
(1) Sales growth of 10% per year;
(2) An aggregate operating margin improvement of 1/2 to 1% per
year;
(3) Minimum compounded annual earnings per share growth of 15%
to 20%; and
(4) Return on equity of 18%.
FORWARD-LOOKING STATEMENTS
We have made and will make "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 in our Annual Report, Forms 10-K and 10-Q and in other
contexts relating to future growth and profitability targets, and strategies
designed to increase total shareholder value. Forward-looking statements
include, but are not limited to, information regarding our future economic
performance and financial condition, the plans and objectives of our management
and our assumptions regarding our performance and these plans and objectives.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information, so long as those statements are identified as forward-looking and
are accompanied by meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those
discussed in the forward-looking statements. We desire to take advantage of the
"safe harbor" provisions of the Act.
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The forward-looking statements that we make in our Annual Report, Forms 10-K and
10-Q and in other contexts represent challenging goals for our company, and the
achievement of these goals is subject to a variety of risks and assumptions and
numerous factors beyond our control. Important factors that could cause actual
results to differ materially from the forward-looking statements we make are
described below. All forward-looking statements attributable to us or persons
working on our behalf are expressly qualified in their entirety by the following
cautionary statements.
- ADVERSE WEATHER CONDITIONS COULD ADVERSELY IMPACT FINANCIAL
RESULTS.
Weather conditions in North America and Europe have a
significant impact on the timing of sales in the spring
selling season and overall annual sales. Periods of wet
weather can slow fertilizer sales, while periods of dry, hot
weather can decrease pesticide sales. In addition, an
abnormally cold spring throughout North America and/or Europe
could adversely affect both fertilizer and pesticides sales
and therefore our financial results.
- OUR HISTORICAL SEASONALITY COULD IMPAIR OUR ABILITY TO MAKE
INTEREST PAYMENTS ON INDEBTEDNESS.
Because our products are used primarily in the spring and
summer, our business is highly seasonal. For the past two
fiscal years, approximately 70% to 75% of our sales have
occurred in the second and third fiscal quarters combined. Our
working capital needs and our borrowings peak during our
second 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;
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- require us to dedicate a substantial portion of
cash flow from operations to payments on our
indebtedness, which would reduce the cash flow
available to fund working capital, capital
expenditures, research and development efforts and
other general corporate requirements;
- limit our flexibility in planning for, or reacting
to, changes in our business and the industry in which
we operate;
- place us at a competitive disadvantage compared to
our competitors that have less debt; and
- limit our ability to borrow additional funds.
If we fail to comply with any of the financial or other
restrictive covenants of our indebtedness, our indebtedness
could become due and payable in full prior to its stated due
date. We cannot be sure that our lenders would waive a default
or that we could pay the indebtedness in full if it were
accelerated.
- TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT
AMOUNT OF CASH, WHICH WE MAY NOT BE ABLE TO GENERATE.
Our ability to make payments on and to refinance our
indebtedness and to fund planned capital expenditures and
research and development efforts will depend on our ability to
generate cash in the future. This, to some extent, is subject
to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. We
cannot assure that our business will generate sufficient cash
flow from operations or that currently anticipated cost
savings and operating improvements will be realized on
schedule or at all. We also cannot assure that future
borrowings will be available to us under our credit facility
in amounts sufficient to enable us to pay our indebtedness or
to fund other liquidity needs. We may need to refinance all or
a portion of our indebtedness, on or before maturity. We
cannot assure that we will be able to refinance any of our
indebtedness on commercially reasonable terms or at all.
- WE MIGHT NOT BE ABLE TO INTEGRATE OUR RECENT ACQUISITIONS INTO
OUR BUSINESS OPERATIONS SUCCESSFULLY.
We have made several substantial acquisitions in the past four
years. The acquisition of the Ortho business represents the
largest acquisition we have ever made. The success of any
completed acquisition depends, and the success of the Ortho
acquisition will depend, on our ability to effectively
integrate the acquired business. We believe that our recent
acquisitions provide us with significant cost saving
opportunities. However, if we are not able to successfully
integrate Ortho, Rhone-Poulenc Jardin or our other acquired
businesses, we will not be able to maximize such cost saving
opportunities. Rather, the failure to integrate these acquired
businesses, because of difficulties in the assimilation of
operations and products, the diversion of management's
attention from other business concerns, the loss of key
employees or other factors, could materially adversely affect
our financial results.
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- BECAUSE OF THE CONCENTRATION OF OUR SALES TO A SMALL NUMBER OF
RETAIL CUSTOMERS, THE LOSS OF ONE OR MORE OF OUR TOP CUSTOMERS
COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS.
Our top 10 North American retail customers together accounted
for approximately 52% of our fiscal 1999 sales and 41% of our
outstanding accounts receivable as of September 30, 1999. Our
top three customers, Home Depot, Wal*Mart and Kmart
represented approximately 17%, 12% and 9% of our fiscal 1999
sales. These customers hold significant positions in the
retail lawn and garden market. The loss of, or reduction in
orders from, Home Depot, Wal*Mart, Kmart or any other
significant customer could have a material adverse effect on
our business and our financial results, as could customer
disputes regarding shipments, fees, merchandise 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 year fiscal year period; or
- By more than 5% for each of two consecutive fiscal
years. Monsanto may not terminate the marketing
agreement, however, if we can demonstrate that the
sales decline was caused by a severe decline of
general economic conditions or a severe decline in
the lawn and garden market in the region rather than
by our failure to perform our duties under the
agreement.
- THE EXPIRATION OF PATENTS RELATING TO ROUNDUP(R) AND THE
SCOTTS TURF BUILDER(R) LINE OF PRODUCTS COULD SUBSTANTIALLY
INCREASE OUR COMPETITION IN THE UNITED STATES.
Glyphosate, the active ingredient in Roundup(R), is covered by
a patent in the United States that expires in September 2000.
Sales in the United States may decline as a result of
increased competition after the U.S. patent expires. Any
decline in sales would adversely affect our net commission
under the marketing agreement for consumer Roundup(R) products
and, therefore, our financial results. A sales decline could
also trigger Monsanto's regional termination right under the
marketing agreement.
Our methylene-urea product composition patent, which covers
Scotts Turf Builder(R), Scotts Turf Builder(R) with Plus 2(TM)
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.
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- THE INTERESTS OF THE FORMER MIRACLE-GRO SHAREHOLDERS COULD
CONFLICT WITH THOSE OF OUR OTHER SHAREHOLDERS.
The former shareholders of Stern's Miracle-Gro Products, Inc.,
through Hagedorn Partnership, L.P., beneficially own
approximately 42% of the outstanding common shares of Scotts
on a fully diluted basis. The former Miracle-Gro shareholders
have sufficient voting power to significantly control the
election of directors and the approval of other actions
requiring the approval of our shareholders. The interests of
the former Miracle-Gro shareholders could conflict with those
of our other shareholders.
- COMPLIANCE WITH ENVIRONMENTAL AND OTHER PUBLIC HEALTH
REGULATIONS COULD INCREASE OUR COST OF DOING BUSINESS.
Local, state, federal and foreign laws and regulations
relating to environmental matters affect us in several ways.
All products containing pesticides must be registered with the
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 us. 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 is
evaluating the cumulative risks from dietary and non-dietary
exposures to pesticides. The pesticides in our products, which
are also used on foods, will be evaluated by the U.S.
Environmental Protection Agency as part of this non-dietary
exposure risk assessment. It is possible that the U.S.
Environmental Protection Agency may decide that a pesticide we
use in our products, would be limited or made unavailable. We
cannot predict the outcome or the severity of the effect of
the U.S. Environmental Protection Agency's evaluation. We
believe that we should be able to obtain substitute
ingredients if selected pesticides are limited or made
unavailable, but there can be no assurance that we will be
able to do so for all products.
Regulations regarding the use of some pesticide and fertilizer
products may include requirements that only certified or
professional users apply the product or that the products be
used only in specified locations. Users may be required to
post notices on properties to which products have been or will
be applied and may be required to notify individuals in the
vicinity that products will be applied in the future. The use
of some ingredients has been banned. Even if we are able to
comply with all such regulations and obtain all necessary
registrations, we cannot assure that our products,
particularly pesticide products, will not cause injury to the
environment or to people under all circumstances.
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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, air and water discharges from
our facilities. In June 1997, the Ohio Environmental
Protection Agency gave us formal notice of an enforcement
action concerning our old, decommissioned wastewater treatment
plants that had once operated at our Marysville facility. The
Ohio EPA action alleges surface water violations relating to
possible historical sediment contamination, inadequate
treatment capabilities at our existing and currently permitted
wastewater treatment plants and the need for corrective action
under the Resource Conservation Recovery Act. We are
continuing to meet with the Ohio EPA and the Ohio Attorney
General's office to negotiate an amicable resolution of these
issues. We are currently unable to predict the ultimate
outcome of this matter.
During fiscal 1999, we made approximately $1.1 million in
environmental capital expenditures and $5.9 million in other
environmental expenses, compared with approximately $0.7
million in environmental capital expenditures and $3.1 million
in other environmental expenses in fiscal 1998. Management
anticipates that environmental capital expenditures and other
environmental expenses for fiscal 2000 will not differ
significantly from those incurred in fiscal 1999. If we are
required to significantly increase our actual environmental
capital expenditures and other environmental expenses, it
could adversely affect our financial results.
- OUR INABILITY, OR THE INABILITY OF OUR SUPPLIERS OR CUSTOMERS,
TO RECOGNIZE AND ADDRESS ISSUES RELATED TO THE YEAR 2000 WHICH
HAVE YET TO BE ENCOUNTERED, COULD ADVERSELY AFFECT OUR
OPERATIONS.
Through January 2000, we have not experienced any significant
issues related to the ability of our information technology
and business systems to recognize the year 2000. In addition,
we have not experienced any significant supply difficulties
related to our venders' year 2000 readiness. While we believe
that we have taken adequate precautions against year 2000
systems issues, there can be no assurance that we will not
encounter business interruption or other issues related to the
year 2000 in the future.
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could adversely affect our operations. In addition, the
failure of our retailer customers adequately to address the
year 2000 problem 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 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 materially adverse effect on us or our operating
results and financial condition.
- OUR SIGNIFICANT INTERNATIONAL OPERATIONS MAKE US MORE
SUSCEPTIBLE TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES AND TO
THE COSTS OF INTERNATIONAL REGULATION.
We currently operate manufacturing, sales and service
facilities outside of North America, particularly in the
United Kingdom, Germany and France.
Our international operations have increased with the
acquisitions of Levington, Miracle Garden, Ortho and
Rhone-Poulenc Jardin and with the marketing agreement for
consumer Roundup(R) products. In fiscal 1999, international
sales accounted for approximately 24% of our total sales.
Accordingly, we are subject to risks associated with
operations in foreign countries, including:
- fluctuations in currency exchange rates;
- limitations on the conversion of foreign currencies
into U.S. dollars;
- limitations on the remittance of dividends and
other payments by foreign subsidiaries;
- additional costs of compliance with local
regulations; and
- historically, higher rates of inflation than in the
United States.
The costs related to our international operations
could adversely affect our operations and financial
results in the future.
- WE COULD EXPERIENCE DIFFICULTIES WITH OUR IMPLEMENTATION OF
SAP THAT COULD ADVERSELY AFFECT OUR OPERATIONS.
Our implementation of SAP is in progress and is currently
being utilized to provide information to three of our business
groups. While the implementation has not created business
interruption to this point, there can be no assurance that we
will not experience difficulties in the remainder of the
implementation process over the next several years.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As noted in Note 10 to the Company's unaudited Condensed, Consolidated
Financial Statements as of and for the three months ended January 1,
2000, the Company is involved in several pending environmental matters.
Pending other material legal proceedings are as follows:
RHONE-POULENC, S.A., RHONE-POULENC AGRO S.A. AND HOECHST, A.G.
On October 15, 1999, Scotts began arbitration proceedings before the
International Chamber of Commerce against Rhone-Poulenc S.A. and
Rhone-Poulenc Agro S.A. (collectively, "Rhone-Poulenc") under
arbitration provisions contained in contracts relating to the purchase
by Scotts of Rhone-Poulenc's European lawn and garden business,
Rhone-Poulenc Jardin, in 1998. Scotts alleges that the combination of
Rhone-Poulenc and Hoescht Schering AgrEvo GmbH into a new entity,
Aventis S.A., will result in the violation of non-compete and other
provisions in the contracts mentioned above. In the arbitration
proceedings, Scotts is seeking injunctive relief as well as an award of
damages.
On January 7, 2000 the tribunal issued a segregated Record Agreement
and Order requiring Arentis S.A,. Rhone-Poulenc and any affiliate or
entity controlled by Arentis S.A. or Rhone-Poulenc to maintain a
segregated record of select sales of certain products.
Also on October 15, 1999, Scotts filed a Complaint styled The Scotts
Company, et al. v. Rhone-Poulenc, S.A., Rhone-Poulenc Agro S.A. and
Hoechst, A.G. in the Court of Common Pleas for Union County, Ohio,
seeking injunctive relief maintaining the status quo in aid of the
arbitration proceedings as well as an award of damages against Hoechst
for Hoechst's tortious interference with Scotts' contractual rights. On
October 19, 1999, the defendants removed the Union County action to the
United States District Court for the Southern District of Ohio. On
December 8, 1999, Scotts requested that this action be stayed pending
the outcome of the arbitration proceedings.
Scotts 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 5. OTHER INFORMATION
On February 7, 2000, the Company announced that it had signed a letter
of intent to sell its North American Professional Turf business. The
Company expects the transaction to close in the third quarter of fiscal
2000 and does not expect the transaction to have a material impact on
its fiscal 2000 results of operations. The Company will retain the
professional horticulture and grass seed segments of its Professional
Business Segment.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index at page 42 for a list of the exhibits included
herewith.
(b) The Registrant filed a Current Report on Form 8-K dated October 5,
1999, reporting under "Item 5. Other Events", the conversion by the
holders thereof of all the Class A Convertible Preferred Shares into
approximately 10.1 million common shares effective October 1, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE SCOTTS COMPANY
Dated February 15, 2000
/s/ Christopher L. Nagel
Principal Accounting Officer,
Vice President and Corporate
Controller
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THE SCOTTS COMPANY
QUARTERLY REPORT ON FORM 10-Q FOR
FISCAL QUARTER ENDED JANUARY 1, 2000
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
10(d) The Scotts Company 1996 Stock Option *
Plan (as amended through February 14,
2000)
27 Financial Data Schedule *
99 Press release regarding the sale of *
the North American Professional Turf
business.
* Previously filed
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