<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 APRIL 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 1-13292
THE SCOTTS COMPANY
(Exact name of registrant as specified in its charter)
OHIO 31-1414921
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
41 SOUTH HIGH STREET, SUITE 3500
COLUMBUS, OHIO 43215
(Address of principal executive offices)
(Zip Code)
(614) 719-5500
(Registrant's telephone number, including area code)
NO CHANGE
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
27,961,206 Outstanding at May 11, 2000
Common Shares, voting, no par value
<PAGE> 2
THE SCOTTS COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
Page No.
<S> <C>
Part I. Financial Information:
Item 1. Financial Statements
Condensed, Consolidated Statements of Operations - Three and six month
periods ended April 1, 2000 and April 3, 1999........................... 3
Condensed, Consolidated Statements of Cash Flows - Six month periods
ended April 1, 2000 and April 3, 1999................................... 4
Condensed, Consolidated Balance Sheets - April 1, 2000, April 3, 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 4. Submission of Matters to a Vote of Security Holders..................... 40
Item 6. Exhibits and Reports on Form 8-K........................................ 40
Signatures...................................................................... 41
Exhibit Index................................................................... 42
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SCOTTS COMPANY AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
APRIL 1, APRIL 3, APRIL 1, APRIL 3,
2000 1999 2000 1999
--------- --------- --------- ---------
(restated) (restated)
<S> <C> <C> <C> <C>
Net sales .................................................... $ 720.7 $ 631.5 $ 912.3 $ 815.9
Cost of sales ................................................ 407.6 362.6 525.3 482.3
--------- --------- --------- ---------
Gross profit ......................................... 313.1 268.9 387.0 333.6
Gross commission earned from agency agreement ................ 9.0 12.6 9.2 17.6
Costs associated with agency agreement ....................... 2.1 0.4 5.7 0.8
--------- --------- --------- ---------
Net commission earned from agency agreement .......... 6.9 12.2 3.5 16.8
Operating expenses:
Advertising and promotion ............................ 98.2 86.0 121.9 102.7
Selling, general and administrative .................. 84.4 72.5 153.1 126.4
Amortization of goodwill and other intangibles ....... 7.4 4.9 13.0 9.4
Restructuring and other charges ...................... -- -- -- 1.4
Other expense (income), net .......................... (2.5) 0.4 (1.9) 0.3
--------- --------- --------- ---------
Income from operations ....................................... 132.5 117.3 104.4 110.2
Interest expense ............................................. 25.9 24.6 49.6 34.4
--------- --------- --------- ---------
Income before income taxes ................................... 106.6 92.7 54.8 75.8
Income taxes ................................................. 43.2 38.0 22.2 31.1
--------- --------- --------- ---------
Net income before extraordinary item ......................... 63.4 54.7 32.6 44.7
Extraordinary loss on early extinguishment of debt, net of tax -- 5.4 -- 5.8
--------- --------- --------- ---------
Net income ................................................... 63.4 49.3 32.6 38.9
Payments to preferred shareholders ........................... -- 2.5 6.4 4.9
--------- --------- --------- ---------
Income available to common shareholders ...................... $ 63.4 $ 46.8 $ 26.2 $ 34.0
========= ========= ========= =========
Basic earnings per common share:
Before extraordinary item ............................ $ 2.27 $ 2.86 $ 0.94 $ 2.17
Extraordinary item, net of tax ....................... -- 0.30 -- 0.32
--------- --------- --------- ---------
2.27 2.56 0.94 1.85
Diluted earnings per common share:
Before extraordinary item ............................ $ 2.15 $ 1.81 $ 0.88 $ 1.48
Extraordinary item, net of tax ....................... -- 0.18 -- 0.19
--------- --------- --------- ---------
2.15 1.63 0.88 1.29
Common shares used in basic earnings per share calculation ... 27.9 18.3 28.0 18.3
========= ========= ========= =========
Common shares and potential common shares used in
diluted earnings per share calculation ............... 29.5 30.3 29.8 30.2
========= ========= ========= =========
</TABLE>
See notes to condensed, consolidated financial statements
3
<PAGE> 4
THE SCOTTS COMPANY AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
APRIL 1, APRIL 3,
2000 1999
---- ----
(restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................. $ 32.6 $ 38.9
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization ....................................... 34.3 25.0
Net change in certain components of working capital ................. (271.4) (303.9)
Net change in other assets and liabilities and other adjustments .... (9.8) (20.1)
--------- ---------
Net cash used in operating activities ............................. (214.3) (260.1)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment ................................. (20.1) (26.6)
Investment in acquired businesses, net of cash acquired ..................... (0.8) (492.4)
Other, net .................................................................. 1.8 (6.4)
--------- ---------
Net cash used in investing activities ............................. (19.1) (525.4)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving and bank lines of credit ..................... 286.5 327.8
Gross borrowings under term loans ........................................... -- 525.0
Gross repayments under term loans ........................................... (12.4) --
Issuance of 8 5/8% Senior Subordinated Notes ................................ -- 330.0
Extinguishment of $97.1 million 9 7/8% Senior Subordinated Notes ............ -- (104.1)
Repayment of outstanding balance on previous credit facility ................ -- (241.0)
Settlement of interest rate locks ........................................... -- (12.9)
Financing and issuance fees ................................................. -- (22.6)
Payments to preferred shareholders .......................................... (6.4) (7.3)
Repurchase of treasury shares ............................................... (23.9) --
Other, net .................................................................. (9.4) (0.6)
--------- ---------
Net cash provided by financing activities ........................... 234.4 794.3
--------- ---------
Effect of exchange rate changes on cash ............................................. (1.6) (0.5)
--------- ---------
Net (decrease) increase in cash ..................................................... (0.6) 8.3
Cash and cash equivalents at beginning of period .................................... 30.3 10.6
--------- ---------
Cash and cash equivalents at end of period .......................................... $ 29.7 $ 18.9
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Investment in Acquired Businesses:
Fair value of assets acquired, net of cash .......................... $ 3.0 $ 631.2
Liabilities assumed ................................................. -- (101.8)
--------- ---------
Net assets acquired ................................................. 3.0 529.4
Notes issued to seller .............................................. 2.2 37.0
Cash paid ........................................................... 0.8 492.4
</TABLE>
See notes to condensed, consolidated financial statements
4
<PAGE> 5
THE SCOTTS COMPANY AND SUBSIDIARIES
CONDENSED, CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
UNAUDITED
---------
APRIL 1, APRIL 3, SEPTEMBER 30,
ASSETS 2000 1999 1999
---- ---- ----
(restated)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ..................................... $ 29.7 $ 18.9 $ 30.3
Accounts receivable, less allowances of
$14.7, $13.1 and $16.4, respectively .................. 649.3 589.6 201.4
Inventories, net .............................................. 366.3 334.6 313.2
Current deferred tax asset .................................... 26.5 22.3 29.3
Prepaid and other assets ...................................... 63.6 52.6 67.5
---------- ---------- ----------
Total current assets ................................ 1,135.4 1,018.0 641.7
Property, plant and equipment, net .................................... 258.1 240.8 259.4
Intangible assets, net ................................................ 796.2 786.9 794.1
Other assets .......................................................... 80.2 60.2 74.4
---------- ---------- ----------
Total assets ........................................ $ 2,269.9 $ 2,105.9 $ 1,769.6
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt ............................................... $ 183.2 $ 213.9 $ 56.4
Accounts payable .............................................. 281.7 178.2 133.5
Accrued liabilities ........................................... 287.6 220.8 177.0
---------- ---------- ----------
Total current liabilities ........................... 752.5 612.9 366.9
Long-term debt ........................................................ 1,014.7 1,003.0 893.6
Other liabilities ..................................................... 61.6 58.3 65.8
---------- ---------- ----------
Total liabilities ................................... 1,828.8 1,674.2 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 ................................ 388.1 208.9 213.9
Retained earnings ............................................. 156.3 110.6 130.1
Treasury stock, 3.5, 2.8, and 2.9 shares, respectively, at cost (85.1) (56.9) (61.9)
Accumulated other comprehensive expense ....................... (18.5) (8.4) (12.9)
---------- ---------- ----------
Total shareholders' equity .......................... 441.1 431.7 443.3
---------- ---------- ----------
Total liabilities and shareholders' equity ............................ $ 2,269.9 $ 2,105.9 $ 1,769.6
========== ========== ==========
</TABLE>
See notes to condensed, consolidated financial statements
5
<PAGE> 6
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(All amounts are in millions except per share data or as otherwise noted)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Scotts Company is engaged in the manufacture and sale of lawn care and
garden products. The Company's major customers include mass merchandisers,
home improvement centers, large hardware chains, independent hardware
stores, nurseries, garden centers, food and drug stores, 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 April 1, 2000 and April 3,
1999, and the related condensed, consolidated statements of operations and
cash flows for the three and six month periods ended April 1, 2000 and
April 3, 1999 are unaudited; however, in the opinion of management, such
financial statements contain all adjustments necessary for the fair
presentation of the Company's financial position and results of operations.
Interim results reflect all normal recurring adjustments and are not
necessarily indicative of results for a full year. The interim financial
statements and notes are presented as specified by Regulation S-X of the
Securities and Exchange Commission, and should be read in conjunction with
the financial statements and accompanying notes in Scotts' fiscal 1999
Annual Report on Form 10-K.
Revenue Recognition
Revenue is recognized when products are shipped and when title and risk of
loss transfer to the customer. For certain large multi-location customers,
products may be shipped to third-party warehousing locations. Revenue is
not recognized until the customer places orders against that inventory and
acknowledges in writing ownership of the goods. Provisions for estimated
returns and allowances are recorded at the time of shipment based on
historical rates of return as a percentage of sales.
Advertising and Promotion
The Company advertises its branded products through national and regional
media, and through cooperative advertising programs with retailers.
Retailers are also offered pre-season stocking and in-store promotional
allowances. Certain products are also promoted with direct consumer rebate
programs. Advertising and promotion costs (including allowances and
rebates) incurred during the year are expensed ratably to interim periods
in relation to revenues. All advertising and promotion costs, except for
production costs, are expensed within the fiscal year in which such costs
are incurred. Production costs for advertising programs are deferred until
the period in which the advertising is first aired.
6
<PAGE> 7
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.
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 April 1, 2000 and
for the three and six months then ended. 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 two quarters 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
six months ended April 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 three and six months ended April 1, 2000 have been
restated to reflect the additional amortization of $1.6 million that was not
recognized in fiscal 1999 and the additional amortization to be recognized
in fiscal 2000. The Balance Sheet as of April 1, 2000 and the Statements of
Cash Flows for the six months ended April 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:
<TABLE>
<CAPTION>
As reported As restated
Three months ended April 1, 2000
--------------------------------
<S> <C> <C>
Net income $63.6 $63.4
Basic earnings per common share $2.28 $2.27
Diluted earnings per common share $2.16 $2.15
Retained earnings, end of period $157.7 $156.3
Six months ended April 1, 2000
------------------------------
Net income $34.0 $32.6
Basic earnings per common share $0.99 $0.94
Diluted earnings per common share $0.93 $0.88
Retained earnings, end of period $157.7 $156.3
</TABLE>
3. AGENCY AGREEMENT
Effective September 30, 1998, the Company entered into an agreement with
Monsanto Company ("Monsanto") for exclusive domestic and international
marketing and agency rights to Monsanto's consumer Roundup(R) herbicide
products. Under the terms of the agreement, the Company is entitled to
receive an annual commission from Monsanto in consideration for the
performance of its duties as agent. The annual commission is calculated as
a percentage of the actual earnings before interest and income taxes
(EBIT), as defined in the agreement, of the Roundup(R) business. Each
year's percentage varies in accordance with the terms of the agreement
based on the achievement of two earnings thresholds and commission rates
that vary by threshold and program year.
The agreement 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 for the first three years of the agreement
are deferred. No payment was required for the first year (fiscal 1999), a
payment of $5 million 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 contribution
payments that are deferred until 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
not 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 April 1, 2000, contribution payments
and related per annum charges of approximately $29.2 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 six 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 (at the option of both parties, the agreement can be renewed
for up to 20 years for the European Union countries). For countries outside
of the European Union, the agreement continues indefinitely unless
terminated by either party. The agreement provides Monsanto with the right
to terminate the agreement for an event of default (as defined in the
agreement) by the Company or a change in control of Monsanto or sale of the
Roundup business. The agreement provides the Company with the right to
terminate the agreement in certain circumstances including an event of
default by Monsanto or the sale of the Roundup business. Unless Monsanto
terminates the agreement for an event of default by the Company, Monsanto
is required to pay a termination fee to the Company that varies by program
year. The termination fee is $150 million for each of the first five
program years and declines to a minimum of $16 million if the program
continues for years 11 through 20.
In consideration for the rights granted to the Company under the agreement
for North America, the Company was required to pay a marketing fee of $32
million to Monsanto. The Company has deferred this amount on the basis that
the payment will provide a future benefit through commissions that will be
earned under the agreement and is amortizing the balances over ten years,
which is the estimated likely term of the agreement.
7
<PAGE> 8
In fiscal 1999, the Company recognized commission income under the
agreement during interim periods based on the estimated percentage of EBIT
that would be payable to the Company as commission for the year applied to
the actual EBIT for the Roundup(R) business for the interim period.
Commission income recorded for the full year is calculated by applying the
threshold commission structure for that year to the actual EBIT of the
Roundup business for the year. Beginning with the first quarter of fiscal
2000, the Company has adopted SEC Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements". Accordingly, the Company
will not recognize commission income until actual Roundup EBIT reaches the
first commission threshold for the year. The annual contribution payment,
if any, is recognized ratably 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 and substantially all of the
remainder has been paid in fiscal 2000.
1998 Charges
During fiscal 1998, the Company recorded charges of $9.3 million in
connection with its decision to close nine composting sites. As of
September 30, 1999, $0.9 million remained accrued in the Company's
consolidated balance sheet for losses to be incurred under contractual
commitments and remaining lease obligations (a detailed discussion and
rollforward is included in the Company's fiscal 1999 Annual Report on Form
10-K). For the first six months of fiscal 2000, $0.5 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 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. If the final purchase price differs from the original estimate, it
is likely that any difference would not be amortized over future periods,
but rather would be reflected as an adjustment to working capital.
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 $193 million; however, subsequent adjustments for reductions in
acquired working capital have resulted in a final purchase price of
approximately $147 million.
In connection with the acquisition, the Company entered into a Research and
Development Access Rights Agreement with Rhone-Poulenc. In exchange for the
rights provided under the agreement, the Company will make four annual
payments of 39 million French Francs each beginning on October 1, 1999. The
present value of the payments (approximately $23.2 million) is being
amortized over the life of the agreement.
Each of the above acquisitions was made in exchange for cash or notes due
to seller and was accounted for under the purchase method of accounting.
Accordingly, the purchase prices have been allocated to the assets acquired
and liabilities assumed based on their estimated fair values at the date of
acquisition. Final determination of the purchase
8
<PAGE> 9
price of the Ortho business, as well as the allocation of the purchase
price to the net assets acquired was not complete as of April 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.
SIX MONTHS ENDED
----------------
APRIL 3, 1999
-------------
Net sales ......................................... $ 848.9
Income before extraordinary loss .................. 36.3
Net income ........................................ 30.5
Basic earnings per share:
Before extraordinary loss ......................... $ 1.72
After extraordinary loss .......................... 1.40
Diluted earnings per share:
Before extraordinary loss ......................... $ 1.20
After extraordinary loss .......................... $ 1.01
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.
6. INVENTORIES
Inventories, net of provisions for slow moving and obsolete inventory of
$27.8 million, $21.5 million, and $30.5 million, respectively, consisted
of:
<TABLE>
<CAPTION>
APRIL 1, APRIL 3, SEPTEMBER 30,
2000 1999 1999
-------- -------- ------------
<S> <C> <C> <C>
Finished goods ............... $ 281.7 $ 246.8 $ 206.4
Raw materials ................ 83.6 87.4 106.5
--------- --------- ---------
FIFO cost .................... 365.3 334.2 312.9
LIFO reserve ................. 1.0 0.4 0.3
--------- --------- ---------
Total ........................ $ 366.3 $ 334.6 $ 313.2
========= ========= =========
7. INTANGIBLE ASSETS, NET
APRIL 1, APRIL 3, SEPTEMBER 30,
2000 1999 1999
---- ---- ----
Goodwill ..................... $ 526.2 $ 625.8 $ 508.6
Trademarks ................... 192.8 137.9 207.9
Other ........................ 77.2 23.2 77.6
--------- --------- ---------
Total ........................ $ 796.2 $ 786.9 $ 794.1
========= ========= =========
</TABLE>
9
<PAGE> 10
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
APRIL 1, APRIL 3, SEPTEMBER 30,
2000 1999 1999
<S> <C> <C> <C>
Revolving loans under credit facility .... $ 349.5 $ 322.8 $ 64.2
Term loans under credit facility ......... 481.4 509.9 509.0
Senior Subordinated Notes ................ 318.6 320.0 318.0
Notes due to sellers ..................... 36.6 37.5 37.0
Foreign bank borrowings and term loans ... 9.6 22.0 17.6
Capital lease obligations and other ...... 2.2 4.7 4.2
---------- ---------- --------
1,197.9 1,216.9 950.0
Less current portions .................... 183.2 213.9 56.4
---------- ---------- --------
$ 1,014.7 $ 1,003.0 $ 893.6
========== ========== ========
</TABLE>
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. The Company was in violation of the minimum net worth
covenant measured as of January 1, 2000. The violation was reported to the
administrative agent on February 11, 2000, as required by the credit
facility. On February 15, 2000, the Company obtained a waiver of this
covenant violation from its bank group for the first quarter violation
only. The Company was in compliance with all of its debt covenants as of
April 1, 2000.
In January 1999, the Company completed an offering of $330 million of 8
5/8% Senior Subordinated Notes ("the Notes") due 2009. The net proceeds
from the offering, together with borrowings under the Company's credit
facility, were used to fund the Ortho acquisition and to repurchase
approximately 97% of Scotts $100.0 million outstanding 9 7/8% Senior
Subordinated Notes due August 2004. In August 1999, the Company repurchased
the remaining $2.9 million of the 9 7/8% Senior Subordinated Notes.
The Company entered into two interest rate locks in fiscal 1998 to hedge
its anticipated interest rate exposure on the Notes offering. The total
amount paid under the interest rate locks of $12.9 million has been
recorded as a reduction of the Notes' carrying value and is being amortized
over the life of the Notes as interest expense.
In conjunction with the acquisitions of Rhone-Poulenc Jardin and Sanford
Scientific, Inc., notes were issued for certain portions of the total
purchase price or other consideration that are to be paid in annual
installments over a four-year period. The present value of remaining note
payments is $25.1 million and $4.0 million, respectively. The Company is
imputing interest on the non-interest bearing notes using an interest rate
prevalent for similar instruments at the time of acquisition (approximately
9% and 8%, respectively).
In March 2000, the Company acquired certain residual international
intellectual property including peat marketing rights and goodwill from
Bord na Mona Horticulture Limited. The purchase of the intellectual
property was made through the issuance of a promissory note containing five
annual payments. The present value of these payments, approximately $5.2
million, is included in Notes Due to Sellers above. The Company is imputing
interest on the notes using an 8% interest rate.
The foreign term loans of $3.9 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 $5.7 million at April 1, 2000 represent lines of
credit for foreign operations and are denominated in French Francs and
Canadian Dollars.
10
<PAGE> 11
9. EARNINGS PER COMMON SHARE
The following table presents information necessary to calculate basic and
diluted earnings per common share ("EPS").
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
APRIL 1, APRIL 3, APRIL 1, APRIL 3,
2000 1999 2000 1999
---- ---- ---- ----
(restated) (restated)
<S> <C> <C> <C> <C>
Net income before extraordinary item ........................... $ 63.4 $ 54.7 $ 32.6 $ 44.7
Extraordinary loss on early extinguishment of debt, net of taxes -- 5.4 -- 5.8
-------- -------- -------- --------
Net income ..................................................... 63.4 49.3 32.6 38.9
Payments to preferred shareholders ............................. -- 2.5 6.4 4.9
-------- -------- -------- --------
Income available to common shareholders ........................ $ 63.4 $ 46.8 $ 26.2 $ 34.0
======== ======== ======== ========
Weighted-average common shares outstanding during the period ... 27.9 18.3 28.0 18.3
Assuming conversion of Class A Convertible Preferred Stock ..... -- 10.3 -- 10.3
Assuming exercise of warrants .................................. 0.9 0.9 1.0 0.8
Assuming exercise of options ................................... 0.7 0.8 0.8 0.8
-------- -------- -------- --------
Weighted-average number of common shares outstanding
and potential common shares ............................ 29.5 30.3 29.8 30.2
-------- -------- -------- --------
Basic earnings per common share:
Before extraordinary loss .............................. 2.27 2.86 0.94 2.17
Extraordinary loss, net of tax ......................... -- 0.30 -- 0.32
-------- -------- -------- --------
$ 2.27 $ 2.56 $ 0.94 $ 1.85
======== ======== ======== ========
Diluted earnings per common share:
Before extraordinary loss and impact of early conversion
of preferred shares .................................. 2.15 1.81 1.09 1.48
Extraordinary loss, net of tax ......................... -- 0.18 -- 0.19
Impact of early conversion of preferred shares ......... -- -- 0.21 --
-------- -------- -------- --------
$ 2.15 $ 1.63 $ 0.88 $ 1.29
======== ======== ======== ========
</TABLE>
11
<PAGE> 12
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 and six months ended April 1, 2000
and April 3, 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 1, APRIL 3, APRIL 1, APRIL 3,
2000 1999 2000 1999
---- ---- ---- ----
(restated) (restated)
<S> <C> <C> <C> <C>
Net income ................................. $ 63.4 $ 49.3 $ 32.6 $ 38.9
Other comprehensive income (expense):
Foreign currency translation adjustments ... (2.2) (4.8) (5.6) (5.2)
------- ------- ------- -------
Comprehensive income ....................... $ 61.2 $ 44.5 $ 27.0 $ 33.7
======= ======= ======= =======
</TABLE>
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 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.
12
<PAGE> 13
Ohio Environmental Protection Agency
The Company has assessed and addressed environmental issues regarding the
wastewater treatment plants which had operated at the Marysville facility.
The Company decommissioned the old wastewater treatment plants and has
connected the facility's wastewater system with the City of Marysville's
municipal treatment system. Additionally, the Company has been assessing,
under Ohio's Voluntary Action Program ("VAP"), the possible remediation of
several discontinued on-site waste disposal areas dating back to the early
operations of its Marysville facility.
In February 1997, the Company learned that the Ohio Environmental
Protection Agency was referring certain matters relating to environmental
conditions at the Company's Marysville site, including the existing
wastewater treatment plants and the discontinued on-site waste disposal
areas, to the Ohio Attorney General's Office. Representatives from the Ohio
Environmental Protection Agency, the Ohio Attorney General and the Company
continue to meet to discuss these issues.
In June 1997, the Company received formal notice of an enforcement action
and draft Findings and Orders from the Ohio Environmental Protection
Agency. The draft Findings and Orders elaborated on the subject of the
referral to the Ohio Attorney General alleging: potential surface water
violations relating to possible historical sediment contamination possibly
impacting water quality; inadequate treatment capabilities of the Company's
existing and currently permitted wastewater treatment plants; and that the
Marysville site is subject to corrective action under the Resource
Conservation Recovery Act ("RCRA"). In late July 1997, the Company received
a draft judicial consent order from the Ohio Attorney General which covered
many of the same issues contained in the draft Findings and Orders
including RCRA corrective action. As a result of on-going discussions, the
Company received a revised draft of a judicial consent order from the Ohio
Attorney General in late April 1999. Subsequently, the Company replied to
the Ohio Attorney General with another revised draft. Comments on that
draft were received from the Ohio Attorney General in February 2000, and
Scotts replied with another revised draft in March 2000.
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 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
13
<PAGE> 14
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.
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 of
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
14
<PAGE> 15
subsidiaries have failed to pay AgrEvo approximately $0.6 million. AgrEvo
is requesting damages in this amount, as well as pre and post-judgment
interest and attorneys' fees and costs. The Company's subsidiaries have
moved to dismiss or stay this action. On January 31, 2000, the Delaware
court stayed AgrEvo's action pending (a) the resolution of a motion to
amend the action in the Southern District of New York and (b) resolution of
the New York action.
Bramford
In the United Kingdom, major discharges of waste to air, water and land are
regulated by the Environment Agency. The Scotts (UK) Ltd. fertilizer
facility in Bramford (Suffolk), United Kingdom, is subject to environmental
regulation by this Agency. Two manufacturing processes at this facility
require process authorizations and previously required a waste management
license (discharge to a licensed waste disposal lagoon having ceased in
July 1999). The Company expects to surrender the waste management license
in consultation with the Environment Agency. In connection with the renewal
of an authorization, the Environment Agency has identified the need for
remediation of the lagoon, and the potential for remediation of a former
landfill at the site. The Company intends to comply with the reasonable
remediation concerns of the Environment Agency. The Company previously
installed an environmental enhancement to the facility to the satisfaction
of the Environment Agency and believes that it has adequately addressed the
environmental concerns of the Environment Agency regarding emissions to air
and groundwater. Although The Scotts Company (UK) Ltd. has retained an
environmental consulting firm to research remediation designs, The Scotts
Company (UK) Ltd. and the Environment Agency have not agreed on a final
plan for remediating the lagoon and the landfill. The Company has reserved
for its estimate of the probable loss to be incurred in connection with
this matter.
Other
The Company has determined that quantities of cement containing asbestos
material at certain manufacturing facilities in the United Kingdom should
be removed. The Company has reserved for the estimate of costs to be
incurred for this matter.
General
The Company has accrued $9.9 million at April 1, 2000 for the environmental
matters described above. The significant components of the accrual are: (i)
costs for site remediation of $6.9 million; (ii) costs for asbestos
abatement of $2.5 million; and (iii) fines and penalties of $0.5 million.
The significant portion of the costs accrued as of April 1, 2000 are
expected to be paid in fiscal 2000 and 2001; however, payments are expected
to be made through fiscal 2003 and possibly for a period thereafter.
The Company believes that the amounts accrued as of April 1, 2000 are
adequate to cover its known environmental expenses based on current facts
and estimates of likely outcome. However, the adequacy of these accruals is
based on several significant assumptions:
(i) that the Company has identified all of the significant sites that must
be remediated;
(ii) that there are no significant conditions of potential contamination
that are unknown to the Company;
(iii) that potentially contaminated soil can be remediated in place rather
than having to be removed; and
(iv) that only specific stream sediment sites with unacceptable levels of
potential contaminant will be remediated.
If there is a significant change in the facts and circumstances surrounding
these assumptions, it could have a material impact on the ultimate outcome
of these matters and the Company's results of operations, financial
position and cash flows.
12. CONVERSION OF PREFERRED STOCK
In October 1999, all of the then outstanding shares of Class A Convertible
Preferred Stock were converted into approximately 10.1 million common
shares. The Company paid the holders of the Preferred Stock $6.4 million.
The amount represents the dividends on the Preferred Stock that otherwise
would have been payable through May 2000, the month
15
<PAGE> 16
during which the Preferred Stock could first be redeemed by the Company. In
fiscal 1999, certain of the Preferred Stock was converted into 0.2 million
common shares at the 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 is required, however, to
conform its interim period revenue recognition policies for the commission
under the Roundup(R) marketing agreement to be consistent with the staff's
views and has adopted the guidance in the first quarter of fiscal 2000.
Under the new guidance, the Company must defer the recognition of
commission earned in interim periods until minimum earnings thresholds are
achieved. There will be no impact on the commission earned on an annual
basis.
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, Ortho and Canadian
business units.
The North American Consumer segment specializes in dry, granular
slow-release lawn fertilizers, lawn fertilizer combination and lawn control
products, grass seed, spreaders, water-soluble and controlled-release
garden and indoor plant foods, plant care products, and potting soils,
barks, mulches and other growing media products, and 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.
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 and six month periods ended
April 1, 2000 have been restated as discussed in Note 2.
<TABLE>
<CAPTION>
N.A. OTHER/
(in millions) CONSUMER PROFESSIONAL INTERNATIONAL CORPORATE TOTAL
------------- -------- ------------ ------------- --------- -----
Sales:
<S> <C> <C> <C> <C> <C> <C>
2000 YTD $ 650.3 $ 65.2 $ 196.8 $ 912.3
1999 YTD $ 531.7 $ 73.4 $ 210.8 $ 815.9
2000 Q2 $ 548.7 $ 41.5 $ 130.5 $ 720.7
1999 Q2 $ 458.9 $ 40.9 $ 131.7 $ 631.5
Operating Income (Loss):
2000 YTD $ 121.5 $ 3.4 $ 19.4 $ (39.9) $ 104.4
1999 YTD $ 101.7 $ 6.4 $ 33.9 $ (31.8) $ 110.2
2000 Q2 $ 128.3 $ 3.8 $ 21.3 $ (20.9) $ 132.5
1999 Q2 $ 104.3 $ 6.4 $ 23.4 $ (16.8) $ 117.3
Operating Margin:
2000 YTD 18.7% 5.2% 9.9% nm 11.4%
1999 YTD 19.1% 8.7% 16.1% nm 13.5%
2000 Q2 23.4% 9.2% 16.3% nm 18.4%
1999 Q2 22.7% 15.6% 17.8% nm 18.6%
Total Assets:
2000 YTD $ 1,410.5 $ 205.4 $ 566.6 $ 87.4 $ 2,269.9
1999 YTD $ 1,239.9 $ 220.1 $ 589.0 $ 56.9 $ 2,105.9
</TABLE>
nm Not meaningful.
Operating income reported for the Company's three operating segments
represents earnings before amortization of intangible assets, interest and
taxes, since this is the measure of profitability used by management.
Accordingly, Corporate operating loss for the six month periods ended April
1, 2000 and April 3, 1999 includes amortization of certain intangible
assets, corporate general and administrative expenses, and certain "other"
income/expense not allocated to the business segments. In the first quarter
of fiscal 2000, management changed the measure of profitability for the
business segments as compared to the method used at September 30, 1999, to
include the allocation of certain costs to the business segments which
historically were included in Corporate costs. Such costs include research
and development, administrative and certain "other" income/expense items
which could be directly attributable to a business segment. The results
shown above for the six months of fiscal 1999 have been adjusted to conform
to the fiscal 2000 basis of presentation.
Total assets reported for the Company's operating segments include the
intangible assets for the acquired business within those segments.
Corporate assets primarily include deferred financing and debt issuance
costs, Corporate fixed assets as well as deferred tax assets.
15. SUBSEQUENT EVENTS
The Company has recently become aware of consumer complaints relating to
the dispensing system for two pesticide products, one of which is marketed
through the agency agreement with Monsanto. The Company has brought the
situation to the attention of the appropriate governmental regulatory
agencies and its retail partners. It is currently evaluating potential
alternative courses of action including: relabeling products currently in
inventory and at retailers to enhance instructions on the proper use of the
dispensing system; making adjustments to the dispensing system for those
products; and implementing voluntary return programs. The Company is
evaluating the possible costs associated with these potential courses of
action but, as of this filing, is uncertain as to the actual courses of
action and therefore their ultimate cost. It is also uncertain what portion
of the final costs will be borne by the Company because of the agency
agreement, possible insurance recoveries, and potential recourse from
third party manufacturers. The Company anticipates that any costs that it
will bear will be incurred in the third and fourth quarters of fiscal 2000.
17
<PAGE> 18
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTORS
In January 1999, the Company issued $330 million of 8 5/8% Senior
Subordinated Notes due 2009 to qualified institutional buyers under the
provisions of Rule 144A of the Securities Act of 1993. The Company is in
the process of registering these Notes under the Securities Act.
The Notes are general obligations of the Company and are guaranteed by all
of the existing wholly-owned domestic subsidiaries and all future
wholly-owned, significant (as defined in Regulation S-X) domestic
subsidiaries of the Company. These subsidiary guarantors jointly and
severally guarantee the Company's obligations under the Notes. The
guarantees represent full and unconditional general obligations of each
subsidiary that are subordinated in right of payment to all existing and
future senior debt of that subsidiary but are senior in right of payment to
any future junior subordinated debt of that subsidiary. The following
unaudited information presents consolidating Statements of Operations,
Statements of Cash Flows and Balance Sheets for the three and six-month
periods ended April 1, 2000 and April 3, 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.
18
<PAGE> 19
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 1, 2000 (IN MILLIONS)
(UNAUDITED AND RESTATED)
<TABLE>
<CAPTION>
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales ............................................ $437.6 $150.0 $133.1 $720.7
Cost of sales ........................................ 253.0 79.9 74.7 407.6
------ -------- ------ ------- -------
Gross profit ......................................... 184.6 70.1 58.4 -- 313.1
Gross commission earned from agency agreement ........ 7.3 0.3 1.4 9.0
Costs associated with agency agreement ............... 1.9 -- 0.2 2.1
------ -------- ------ ------- -------
Net commission ............................... 5.4 0.3 1.2 -- 6.9
Operating Expenses:
Advertising and promotion .................... 60.7 19.6 17.9 98.2
Selling, general and administrative .......... 52.5 7.0 24.9 84.4
Amortization of goodwill and other intangibles 4.0 1.2 2.2 7.4
Equity income ................................ (28.9) 28.9 --
Intracompany allocations ..................... (9.9) 7.1 2.8 --
Other expense (income), net .................. 1.1 (3.6) (2.5)
------ -------- ------ ------ -------
Income (loss) from operations ........................ 110.5 39.1 11.8 (28.9) 132.5
Interest expense ..................................... 23.6 (3.6) 5.9 25.9
------ -------- ------ ------ -------
Income (loss) before income taxes .................... 86.9 42.7 5.9 (28.9) 106.6
Income taxes ......................................... 23.5 17.1 2.6 43.2
------ -------- ------ ------ -------
Net income (loss) .................................... $63.4 25.6 3.3 (28.9) 63.4
====== ======== ====== ====== =======
</TABLE>
FOR THE SIX MONTHS ENDED APRIL 1, 2000 (IN MILLIONS)
(UNAUDITED AND RESTATED)
<TABLE>
<CAPTION>
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales ............................................ $518.5 $191.6 $202.2 $ 912.3
Cost of sales ........................................ 304.5 107.5 113.3 525.3
------ -------- ------ ------ -------
Gross profit ......................................... 214.0 84.1 88.9 -- 387.0
Gross commission earned from agency agreement ........ 6.7 0.4 2.1 9.2
Costs associated with agency agreement ............... 5.2 0.1 0.4 5.7
------ -------- ------ ------ -------
Net commission ............................... 1.5 0.3 1.7 -- 3.5
Operating Expenses:
Advertising and promotion .................... 71.4 23.5 27.0 121.9
Selling, general and administrative .......... 90.3 14.0 48.8 153.1
Amortization of goodwill and other intangibles 5.0 3.6 4.4 13.0
Equity income ................................ (22.9) 22.9 --
Intracompany allocations ..................... (12.1) 7.9 4.2 --
Other expense (income), net .................. 3.4 (5.2) (0.1) (1.9)
------ -------- ------ ------ -------
Income (loss) from operations ........................ 80.4 40.6 6.3 (22.9) 104.4
Interest expense ..................................... 41.2 (3.7) 12.1 49.6
------ -------- ------ ------ -------
Income (loss) before income taxes .................... 39.2 44.3 (5.8) (22.9) 54.8
Income taxes ......................................... 6.6 17.9 (2.3) 22.2
------ -------- ------ ------ -------
Net income (loss) .................................... 32.6 26.4 (3.5) (22.9) 32.6
====== ======== ====== ====== =======
</TABLE>
19
<PAGE> 20
STATEMENT OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED APRIL 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............................................... $ 32.6 $ 26.3 $ (3.5) $ (22.8) $ 32.6
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization............................ 17.3 9.2 7.8 34.3
Equity income ........................................... (22.8) 22.8 0.0
Net change in certain components of working capital...... (155.3) (79.9) (36.2) (271.4)
Net changes in other assets and
liabilities and other adjustments..................... (4.5) (6.3) 1.0 (9.8)
-------- -------- ------- --------- --------
Net cash used in operating activities....................... (132.7) (50.7) (30.9) 0.0 (214.3)
-------- -------- ------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment.............. (12.2) (2.4) (5.5) (20.1)
Investments in acquired businesses ...................... (0.8) (0.8)
Other, net............................................... 0.1 1.7 1.8
--------- --------- ------- --------- ---------
Net cash used in investing activities....................... (12.1) (2.4) (4.6) 0.0 (19.1)
-------- -------- ------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving and bank
lines of credit....................................... 248.4 1.2 36.9 286.5
Gross repayments under term loans........................ (1.0) (11.4) (12.4)
Payments to preferred shareholders....................... (6.4) (6.4)
Repurchase of treasury shares............................ (23.9) (23.9)
Intracompany financing................................... (58.3) 49.5 8.8 --
Other, net............................................... (3.4) (6.0) (9.4)
-------- -------- ------- --------- --------
Net cash provided by financing activities................... 155.4 50.7 28.3 0.0 234.4
-------- -------- ------- --------- --------
Effect of exchange rate changes on cash..................... 0.0 0.0 (1.6) 0.0 (1.6)
-------- -------- ------- --------- --------
Net increase (decrease) in cash............................. 10.6 (2.4) (8.8) 0.0 (0.6)
Cash and cash equivalents, beginning of period.............. 8.5 3.1 18.7 30.3
-------- -------- ------- --------- --------
Cash and cash equivalents, end of period.................... $ 19.1 $ 0.7 $ 9.9 $ 0.0 $ 29.7
======== ======== ======= ========= ========
</TABLE>
20
<PAGE> 21
BALANCE SHEET
AS OF APRIL 1, 2000 (IN MILLIONS)
(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................................ $ 19.1 $ 0.7 $ 9.9 $ 29.7
Accounts receivable, net................................. 363.0 122.8 163.5 649.3
Inventories, net......................................... 207.1 89.3 69.9 366.3
Current deferred tax asset............................... 26.5 26.5
Prepaid and other assets................................. 32.3 31.3 63.6
-------- -------- ---------- ----------- ---------
Total current assets................................ 648.0 212.8 274.6 -- 1,135.4
Property, plant and equipment, net.......................... 162.8 55.3 40.0 258.1
Intangible assets, net...................................... 260.3 271.2 264.7 796.2
Other assets................................................ 60.7 6.6 12.9 80.2
Investment in affiliates.................................... 807.4 (807.4) 0.0
Intracompany assets......................................... 320.6 (320.6) 0.0
-------- -------- ---------- ---------- ---------
Total assets........................................ $1,939.2 866.5 592.2 (1,128.0) 2,269.9
======== ======== ========== ========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt.......................................... 161.8 6.2 15.2 183.2
Accounts payable......................................... 144.4 43.6 93.7 281.7
Accrued liabilities...................................... 126.5 107.5 53.6 287.6
-------- -------- ---------- ----------- ---------
Total current liabilities........................... 432.7 157.3 162.5 -- 752.5
Long-term debt.............................................. 702.2 1.7 310.8 1,014.7
Other liabilities........................................... 40.0 21.6 61.6
Intracompany liabilities.................................... 308.9 11.7 (320.6) 0.0
-------- ------- --------- ---------- --------
Total liabilities................................... 1,483.8 159.0 506.6 (320.6) 1,828.8
Commitments and contingencies
Shareholders' equity:
Investment from parent................................ 489.1 59.8 (548.9) --
Common shares, no par value per share,
$.01 stated value per share......................... 0.3 0.3
Capital in excess of par value........................ 388.1 388.1
Retained earnings..................................... 156.3 218.6 39.9 (258.5) 156.3
Treasury stock, 3.4 shares at cost.................... (85.1) (85.1)
Accumulated other comprehensive
expense............................................. (4.2) (0.2) (14.1) (18.5)
-------- -------- --------- ----------- ---------
Total shareholders' equity......................... 455.4 707.5 85.6 (807.4) 441.1
-------- -------- ---------- ---------- ---------
Total liabilities and shareholders' equity.................. $1,939.2 $ 866.5 $ 592.2 $ (1,128.0) $ 2,269.9
======== ======== ========== ========== =========
</TABLE>
21
<PAGE> 22
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 3, 1999 (IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales................................................... $ 328.2 $ 169.9 $ 133.4 $ 631.5
Cost of sales............................................... 186.0 104.3 72.3 362.6
---------- ---------- ---------- ----------- ---------
Gross profit................................................ 142.2 65.6 61.1 -- 268.9
Gross commission earned from agency agreement............... 12.6 12.6
Costs associated with agency agreement...................... 0.4 0.4
---------- ---------- ---------- ----------- ---------
Net commission........................................... 12.2 -- -- -- 12.2
Operating Expenses:
Advertising and promotion................................ 52.7 15.8 17.5 86.0
Selling, general and administrative...................... 42.0 7.1 23.4 72.5
Amortization of goodwill and other intangibles........... 1.1 2.3 1.5 4.9
Equity income ........................................... (23.2) 23.2 -
Intracompany allocations................................. (14.2) 13.9 0.3 -
Other (income) expenses, net............................. 2.1 (1.2) (0.5) 0.4
---------- ---------- ---------- ----------- ---------
Income (loss) from operations............................... 93.9 27.7 18.9 (23.2) 117.3
Interest expense............................................ 17.8 6.8 24.6
---------- ---------- ---------- ----------- ---------
Income (loss) before income taxes........................... 76.1 27.7 12.1 (23.2) 92.7
Income taxes................................................ 21.4 11.7 4.9 38.0
---------- ---------- ---------- ----------- ---------
Net income (loss)........................................... $ 54.7 $ 16.0 $ 7.2 $ (23.2) $ 54.7
========== ========== ========== =========== =========
</TABLE>
FOR THE SIX MONTHS ENDED APRIL 3, 1999 (IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales................................................... $ 383.8 $ 217.7 $ 214.4 $ 815.9
Cost of sales............................................... 225.8 139.4 117.1 482.3
---------- ---------- ---------- ----------- ---------
Gross profit................................................ 158.0 78.3 97.3 -- 333.6
Gross commission earned from agency agreement............... 17.6 17.6
Costs associated with agency agreement...................... 0.8 0.8
---------- ---------- ---------- ----------- ---------
Net commission........................................... 16.8 -- -- -- 16.8
Operating Expenses:
Advertising and promotion................................ 58.3 19.2 25.2 102.7
Selling, general and administrative...................... 71.4 12.1 42.9 126.4
Amortization of goodwill and other intangibles........... 1.3 4.5 3.6 9.4
Restructuring and other charges.......................... 1.4 - 1.4
Equity income ........................................... (23.3) - 23.3 --
Intracompany allocations................................. (21.4) 20.3 1.1 --
Other (income) expenses, net............................. 3.5 (2.7) (0.5) 0.3
---------- ---------- ---------- ----------- ---------
Income (loss) from operations............................... 83.6 24.9 25.0 (23.3) 110.2
Interest expense............................................ 24.3 0.1 10.0 34.4
---------- ---------- ---------- ----------- ---------
Income (loss) before income taxes........................... 59.3 24.8 15.0 (23.3) 75.8
Income taxes................................................ 14.6 10.4 6.1 31.1
---------- ---------- ---------- ----------- ---------
Income (loss) before extraordinary item..................... 44.7 14.4 8.9 (23.3) 44.7
Extraordinary loss on early
extinguishment of debt, net of income tax ............... 5.8 5.8
---------- ---------- ---------- ----------- ---------
Net income (loss)........................................... $ 38.9 $ 14.4 $ 8.9 $ (23.3) $ 38.9
========== ========== ========== =========== =========
</TABLE>
22
<PAGE> 23
STATEMENT OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED APRIL 3, 1999 (IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 38.9 $ 14.4 $ 8.9 $ (23.3) $ 38.9
Adjustments to reconcile net income......................
to net cash used in operating activities:
Depreciation and amortization.......................... 9.1 8.8 7.1 25.0
Equity income ......................................... (23.3) 23.3
Net change in certain components of
working capital....................................... (218.3) 36.6 (122.2) (303.9)
Net changes in other assets and liabilities and other
adjustments........................................... (22.6) (3.7) 6.2 (20.1)
---------- ---------- --------- ----------- ---------
Net cash used in operating activities....................... (216.2) 56.1 (100.0) -- (260.1)
---------- ---------- --------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment.............. (22.7) (2.0) (1.9) (26.6)
Investments in acquired businesses,
net of cash acquired.................................. (337.8) (3.5) (151.1) (492.4)
Other, net............................................... (7.0) 1.6 (1.0) (6.4)
---------- ---------- --------- ----------- ---------
Net cash used in investing activities....................... (367.5) (3.9) (154.0) -- (525.4)
---------- ---------- --------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving and bank
lines of credit....................................... 379.3 (0.7) (50.8) 327.8
Gross borrowings under term loans........................ 260.0 265.0 525.0
Repayment of outstanding balance on
previous credit facility.............................. (241.0) (241.0)
Issuance of 8 5/8% Senior Subordinated Notes............. 330.0 330.0
Extinguishment of 9 7/8% Senior Subordinated Notes....... (104.1) (104.1)
Dividends on Class A Convertible Preferred Stock......... (7.3) (7.3)
Intracompany financing................................... 10.9 (51.0) 40.1
Other, net............................................... (36.1) (36.1)
---------- ---------- ---------- ----------- ---------
Net cash provided by financing activities................... 591.7 (51.7) 254.3 -- 794.3
---------- ---------- --------- ----------- ---------
Effect of exchange rate changes on cash..................... 0.0 0.0 (0.5) 0.0 (0.5)
Net increase (decrease) in cash............................. 8.0 0.5 (0.2) -- 8.3
Cash and cash equivalents, beginning of period.............. 4.9 (2.1) 7.8 -- 10.6
---------- ---------- --------- ----------- ---------
Cash and cash equivalents, end of period.................... $ 12.9 $ (1.6) $ 7.6 $ -- $ 18.9
========== ========== ========= =========== =========
</TABLE>
23
<PAGE> 24
BALANCE SHEET
AS OF APRIL 3, 1999 (IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
ASSETS
Current Assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents................................ $ 12.9 $ (1.6) $ 7.6 $ 18.9
Accounts receivable, net................................. 403.7 4.9 181.0 589.6
Inventories, net......................................... 186.3 72.4 75.9 334.6
Current deferred tax asset............................... 22.3 22.3
Prepaid and other assets................................. 34.8 5.0 12.8 52.6
---------- --------- ---------- ---------- ---------
Total current assets................................ 660.0 80.7 277.3 -- 1,018.0
Property, plant and equipment, net.......................... 140.9 61.6 38.3 240.8
Intangible assets, net...................................... 220.9 273.5 292.5 786.9
Other assets................................................ 56.0 2.6 1.6 60.2
Investment in affiliates.................................... 749.7 (749.7) 0.0
Intracompany assets......................................... 322.1 (322.1) 0.0
----------- ---------- ---------- ---------- ---------
Total assets........................................ 1,827.5 740.5 609.7 (1,071.8) 2,105.9
=========== ========== ========== ========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt.......................................... 189.8 0.4 23.7 213.9
Accounts payable......................................... 109.9 18.2 50.1 178.2
Accrued liabilities...................................... 97.9 69.1 53.8 220.8
----------- ---------- ---------- ---------- ---------
Total current liabilities........................... 397.6 87.7 127.6 -- 612.9
Long-term debt.............................................. 650.8 2.5 349.7 1,003.0
Other liabilities........................................... 31.1 6.2 21.0 58.3
Intracompany liabilities.................................... 308.1 14.0 (322.1) 0.0
----------- ---------- ---------- ---------- ---------
Total liabilities................................... 1,387.6 96.4 512.3 (322.1) 1,674.2
Commitments and contingencies
Shareholders' equity:
Class A Convertible Preferred Stock, no par value........ 177.3 489.1 177.3
Investment from parent................................... 57.4 (546.5) 0.0
Common shares, no par value per
share, $.01 stated value per
share................................................. 0.2 0.2
Capital in excess of par value........................... 208.9 208.9
Retained earnings........................................ 110.6 155.0 48.2 (203.2) 110.6
Treasury stock, 2.8 shares at cost....................... (56.9) (56.9)
Accumulated other comprehensive expense.................. (0.2) (8.2) (8.4)
----------- ---------- ---------- ---------- ---------
Total shareholders' equity.......................... 439.9 644.1 97.4 (749.7) 431.7
----------- ---------- ---------- ---------- ---------
Total liabilities and shareholders' equity.................. $ 1,827.5 $ 740.5 $ 609.7 $ (1,071.8) $ 2,105.9
=========== ========== ========== ========== =========
</TABLE>
24
<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 the first six
months of fiscal 2000, we spent $121.9 million on advertising and promotional
activities, which is a significant increase over fiscal 1999 spending levels. We
have applied this consumer marketing focus over the past several years, and we
believe that Scotts continues to receive a significant return on these increased
marketing expenditures. For example, sales in our Consumer Lawns business group
increased 16.7% for the first six months of fiscal 2000 compared to the same
period in fiscal 1999. We believe that this dramatic sales growth resulted
primarily from our increased consumer-oriented marketing efforts. We expect that
we will continue to focus our marketing efforts toward the consumer and to
increase consumer marketing expenditures in the future to drive market share and
sales growth.
Scotts' sales are seasonal in nature and are susceptible to global weather
conditions, primarily in North America and Europe. For instance, periods of wet
weather can slow fertilizer sales but can create increased demand for pesticide
sales. Periods of dry, hot weather can have the opposite effect on fertilizer
and pesticide sales. We believe that our recent acquisitions diversify both our
product line risk and geographic risk to weather conditions.
On September 30, 1998, Scotts entered into a long-term marketing agreement with
Monsanto for its consumer Roundup(R) herbicide products. Under the marketing
agreement, Scotts and Monsanto will jointly develop global consumer and trade
marketing programs for Roundup(R), and Scotts has assumed responsibility for
sales support, merchandising, distribution, logistics and certain administrative
functions. In addition, in January 1999 Scotts purchased from Monsanto the
assets of its worldwide consumer lawn and garden businesses, exclusive of the
Roundup(R) business, for $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.
25
<PAGE> 26
Over the past few years, we have made several other acquisitions to strengthen
our global market position in the lawn and garden category. In October 1998, we
purchased Rhone-Poulenc Jardin, a leading European lawn and garden business, for
approximately $147.0 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.
RESULTS OF OPERATIONS
The following table sets forth sales by business segment for the three and six
months ended April 1, 2000 and April 3, 1999:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
North American Consumer:
Lawns .......................... $ 282.6 $ 244.1 $ 330.5 $ 283.2
Gardens ........................ 69.5 61.3 83.7 74.5
Growing Media .................. 98.4 79.3 118.2 99.4
Ortho .......................... 84.4 63.8 102.6 63.8
Canada ......................... 13.8 10.4 15.3 10.8
-------- -------- -------- --------
Total .......... 548.7 458.9 650.3 531.7
Professional ................... 41.5 40.9 65.2 73.4
International .................. 130.5 131.7 196.8 210.8
-------- -------- -------- --------
Consolidated ................... $ 720.7 $ 631.5 $ 912.3 $ 815.9
======== ======== ======== ========
</TABLE>
26
<PAGE> 27
The following table sets forth the components of income and expense as a
percentage of sales for the three and six months ended April 1, 2000 and April
3, 1999:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net sales ............................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales ........................................ 56.6 57.4 57.6 59.1
----- ----- ----- -----
Gross profit ......................................... 43.4 42.6 42.4 40.9
Gross commission earned from agency agreement ........ 1.3 2.0 1.0 2.2
Contribution expenses under agency agreement ......... 0.3 -- 0.6
----- ----- ----- -----
Net commission ............................... 1.0 2.0 0.4 2.2
Operating expenses:
Advertising and promotion .................... 13.6 13.6 13.4 12.6
Selling, general and administrative .......... 11.7 11.5 16.7 15.5
Amortization of goodwill and other intangibles 1.1 0.8 1.5 1.3
Restructuring and other charges .............. -- -- -- 0.2
Other expense (income), net .................. (0.3) 0.1 (0.2) 0.0
----- ----- ----- -----
Income from operations ............................... 18.3 18.6 11.4 13.5
Interest expense ..................................... 3.6 3.9 5.4 4.2
----- ----- ----- -----
Income before income taxes ........................... 14.7 14.7 6.0 9.3
Income taxes ......................................... 5.9 6.0 2.4 3.8
----- ----- ----- -----
Net income before extraordinary item ................. 8.8 8.7 3.6 5.5
Extraordinary item, net of tax ....................... 0.0 0.9 -- 0.7
----- ----- ----- -----
Net income ........................................... 8.8 7.8 3.6 4.8
Payments to preferred shareholders ................... 0.0 0.4 0.7 0.6
----- ----- ----- -----
Income available to common shareholders .............. 8.8% 7.4% 2.9% 4.2%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED APRIL 1, 2000 VERSUS THREE MONTHS ENDED APRIL 3, 1999
Sales for the second quarter ended April 1, 2000 were $720.7 million, an
increase of 14.1% over the second quarter ended April 3, 1999 of $631.5 million.
On a pro forma basis, assuming that the Ortho acquisition had occurred on
October 1, 1998, sales for the second quarter of fiscal 2000 were 11.8% higher
than pro forma sales for the second quarter of fiscal 1999 of $644.6 million.
The increase in pro forma sales was driven primarily by increases in sales in
the North American Consumer segment.
North American Consumer segment sales were $548.7 million in the second quarter
of fiscal 2000, an increase of $89.8 million, or 19.6%, over sales for the
second quarter of fiscal 1999 of $458.9 million. Sales in the Consumer Lawns
business group within this segment increased $38.5 million, or 15.8%, from
fiscal 1999 to fiscal 2000, primarily due to continuing category growth being
driven by successful pull marketing strategies. Sales in the Consumer Gardens
business group increased $8.2 million, or 13.4%, from the second quarter of
fiscal 1999 to fiscal 2000, primarily due to strong volume in the specialty
fertilizers and feeders product lines, as well as the introduction of new
products such as Weed Prevent(R) introduced in fiscal 2000. Sales in the
Consumer Growing Media business group increased $19.1 million, or 24.1%, from
the second quarter of fiscal 1999, primarily due to increased demand for
value-added products such as Miracle-Gro Potting Soils(R). On a proforma basis,
sales in the Ortho business group increased 9.8% from the second quarter of
fiscal 1999, reflecting improved volume at certain large retailers and increased
investment in media advertising. Selling price changes did not have a material
impact in the North American Consumer segment in the second quarter of fiscal
2000.
Professional segment sales of $41.5 million in the second quarter of fiscal 2000
were slightly higher than the second quarter of fiscal 1999 sales of $40.9
million. The slight increase is due to improvement in sales of Horticulture
products within this segment, offset by a decrease in sales for the Professional
Turf group 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.
27
<PAGE> 28
International segment sales of $130.5 million in the second quarter of fiscal
2000 were slightly lower than sales for the second quarter of fiscal 1999 of
$131.7 million. Excluding a $10.9 million adverse impact of changes in exchange
rates, sales for the International segment increased 7.4% compared to the prior
year period. The increase is primarily due to improved results in the segment's
continental European consumer businesses, driven by increased consumer marketing
spending.
Gross profit increased to $313.1 million in the second quarter of fiscal 2000,
an increase of 16.4% over fiscal 1999 gross profit of $268.9 million. As a
percentage of sales, gross profit was 43.4% of sales for fiscal 2000 compared to
42.6% of sales for the second quarter of fiscal 1999. This increase in
profitability on sales was driven by a successful shift to direct distribution,
higher production levels and improved efficiencies in the Company's production
plants, and a shift in sales mix toward higher margin products, particularly
within the Consumer Lawns and Consumer Growing Media business groups.
The "commission earned from agency agreement" in the second quarter of fiscal
2000 represents gross commission of $9.0 million, compared to $12.6 million in
the second quarter of fiscal 1999. In the prior year, we recorded commission
based on our estimated pro-rata share of Roundup(R) EBIT for the second quarter.
In fiscal 2000, in accordance with revenue recognition guidance recently put
forward by the SEC, we did not record commission under the Roundup(R) agency
agreement until minimum EBIT thresholds as required by the agreement were
achieved. We do not expect that this policy will have any effect on the
recognition of commission on a full-year basis. Contribution costs of $2.1
million recorded in the second quarter of fiscal 2000 represent amortization of
$0.8 million related to 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
April 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
April 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 April 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.
Advertising and promotion expenses for the second quarter of fiscal 2000 were
$98.2 million, an increase of $12.2 million, or 14.2% over fiscal 1999
advertising and promotion expenses of $86.0 million. This increase was primarily
due to 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 second quarter of fiscal
2000 were $84.4 million, an increase of $11.9 million, or 16.4% over similar
expenses in the second quarter of fiscal 1999 of $72.5 million. As a percentage
of sales, selling, general and administrative expenses were 11.7% for the second
quarter of fiscal 2000 compared to 11.5% for fiscal 1999. The increase in
selling, general and administrative expenses was primarily related to increased
infrastructure expenses within the North American Consumer segment and increased
legal costs associated with the legal proceedings described in Note 10 to the
condensed consolidated financial statements.
Amortization of goodwill and other intangibles increased to $7.4 million in the
second quarter of fiscal 2000, compared to $4.9 million in the prior year, due
to additional goodwill and other intangibles resulting from revised estimates of
the excess purchase price for the Ortho acquisition.
Other income for the second quarter of fiscal 2000 was $2.5 million compared to
other expense of $0.4 million in the prior year. The improvement in income was
primarily due to increases in royalty income compared to the prior year stemming
from additional royalty arrangements in fiscal 2000.
Income from operations for the second quarter of fiscal 2000 was $132.5 million
compared to $117.3 million for the second quarter of fiscal 1999. The increase
was primarily due to the favorable sales and margin factors described above,
partially offset by a reduction in Roundup(R) commission as discussed above.
Interest expense for the second quarter of fiscal 2000 was $25.9 million, an
increase of $1.3 million over fiscal 1999 interest expense of $24.6 million. The
slight increase in interest expense was due to increased borrowings to fund the
Ortho acquisition offset by reductions in working capital, and an increase in
average borrowing rates under our credit facility.
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Income tax expense was $43.2 million for fiscal 2000 compared to a $38.0 million
in the prior year due to increases in income recognized in the second quarter of
fiscal 2000. The Company's effective tax rate did not change significantly from
fiscal 2000 to fiscal 1999.
In conjunction with the Ortho acquisition, in January 1999 Scotts completed an
offering of $330 million of 8 5/8% Senior Subordinated Notes due 2009. The net
proceeds from this offering, together with borrowings under our bank facility,
were used to fund the Ortho acquisition and repurchase approximately 97% of the
then outstanding $100 million 9 7/8% Senior Subordinated Notes due August 2004.
Scotts recorded an extraordinary loss on the extinguishment of the 9 7/8% notes
of $9.3 million, including a call premium of $7.2 million and the write-off of
unamortized issuance costs and discounts of $2.1 million.
Scotts reported net income of $63.4 million for the second quarter of fiscal
2000 (as restated), or $2.15 per common share on a diluted basis, compared to
net income of $49.3 million for fiscal 1999, or $1.81 per common share on a
diluted basis before the impact of extraordinary items.
SIX MONTHS ENDED APRIL 1, 2000 VERSUS SIX MONTHS ENDED APRIL 3, 1999
Net sales for the six months ended April 1, 2000 were $912.3 million, an
increase of 11.8% over the six months ended April 3, 1999 of $815.9 million. On
a pro forma basis, assuming that the Ortho acquisition had occurred on October
1, 1998, sales for the six months of fiscal 2000 were 7.5% higher than pro forma
sales for the six months of fiscal 1999 of $848.9 million. The increase in pro
forma sales was driven primarily by increases in sales in the North American
Consumer segment, partially offset by decreases in the Professional and
International segments as discussed below.
North American Consumer segment sales were $650.3 million for the six months of
fiscal 2000, an increase of $118.6 million, or 22.3%, over sales for the six
months of fiscal 1999 of $531.7 million. Sales in the Consumer Lawns business
group within this segment increased $47.3 million, or 16.7%, from fiscal 1999 to
fiscal 2000, primarily due to continuing category growth being driven by
successful pull marketing strategies. Sales in the Consumer Gardens business
group increased $9.2 million, or 12.4%, from the six months of fiscal 1999 to
fiscal 2000, primarily due to strong volume in the specialty fertilizers and
feeders product lines, as well as the introduction of new products such as Weed
Prevent(R) introduced in fiscal 2000. Sales in the Consumer Growing Media
business group increased $18.8 million, or 18.9%, from the six months of fiscal
1999, primarily due to increased demand for value-added products such as
Miracle-Gro Potting Soils(R). On a proforma basis, sales in the Ortho business
group increased 6.0% from the six months of fiscal 1999, reflecting improved
volume at certain large retailers and increased investment in media advertising.
Selling price changes did not have a material impact in the North American
Consumer segment in the six months of fiscal 2000.
Professional segment sales of $65.2 million in the six months of fiscal 2000
were $8.2 million lower than the six months of fiscal 1999 sales of $73.4
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 were slightly improved
in comparison to the prior year period.
International segment sales of $196.8 million in the six months of fiscal 2000
were $14.0 million lower than sales for the six months of fiscal 1999 of $210.8
million. Excluding a $17.0 million adverse impact of changes in exchange rates,
sales for the International segment increased slightly compared to the prior
year period. The slight increase is primarily due to improved results in the
segment's continental European consumer businesses, partially offset by
decreases in the segment's U.K. consumer business. The results for the consumer
U.K. business reflect a change in distribution methods that shift certain sales
from the first and second quarters to the second and third quarters.
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Gross profit increased to $387.0 million in the six months of fiscal 2000, an
increase of 16.0% over fiscal 1999 gross profit of $333.6 million. As a
percentage of sales, gross profit was 42.4% of sales for fiscal 2000 compared to
40.9% of sales for the six months of fiscal 1999. This increase in profitability
on sales was driven by a successful shift to direct distribution, higher
production levels and improved efficiencies in the Company's production plants,
and a shift in sales mix toward higher margin products, particularly within the
Consumer Lawns and Consumer Growing Media business groups.
The "commission earned from agency agreement" in the six months of fiscal 2000
represents gross commission of $9.2 million, compared to $17.6 million in the
six months of fiscal 1999. In the prior year, we recorded commission based on
our estimated pro-rata share of Roundup(R) EBIT for the six months. In fiscal
2000, in accordance with revenue recognition guidance recently put forward by
the SEC, we did not record commission under the Roundup(R) agency agreement
until minimum EBIT thresholds as required by the agreement were achieved. The
decrease in commission is primarily due to a reduction in trade inventory levels
as compared to the prior year. We do not expect that this policy will have any
effect on the recognition of commission on a full-year basis. Costs associated
with the agency agreement of $5.7 million recorded in the six months of fiscal
2000 represent amortization of $3.2 million related to amortization of the
marketing fee paid to Monsanto and $2.5 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 six months ended
April 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 six months ended April
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 six months
ended April 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.
Advertising and promotion expenses for the six months of fiscal 2000 were $121.9
million, an increase of $19.2 million, or 18.7%, over fiscal 1999 advertising
and promotion expenses of $102.7 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 six months of fiscal 2000
were $153.1 million, an increase of $26.7 million, or 21.1%, over similar
expenses in the six months of fiscal 1999 of $126.4 million. As a percentage of
sales, selling, general and administrative expenses were 16.7% for the six
months of fiscal 2000 compared to 15.5% for fiscal 1999. The increase in
selling, general and administrative expenses was primarily related to additional
selling and administrative costs needed to support the increased sales levels in
the Consumer Lawns business group, infrastructure expenses within the
International segment, 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 $13.0 million in the
six months of fiscal 2000, compared to $9.4 million in the prior year, due to
additional intangibles resulting from the Ortho acquisition.
Restructuring and other charges were $1.4 million in the six months of fiscal
1999. These charges represent severance costs associated with the reorganization
of North American Professional Business Group to strengthen distribution and
technical sales support, integrate brand management across market segments and
reduce annual operating expenses. To date, substantially all payments have been
made.
Other income for the six months of fiscal 2000 was $1.9 million compared to
other expense of $0.3 million in the prior year. The increase in income was
primarily due to increases in royalty income compared to the prior year stemming
from additional royalty arrangements in fiscal 2000.
Income from operations for the six months of fiscal 2000 was $104.4 million
compared to $110.2 million for the six months of fiscal 1999. The decrease was
primarily due to a reduction in Roundup(R) commission as discussed above,
partially offset by the improved sales and margins described above.
Interest expense for the six months of fiscal 2000 was $49.6 million, an
increase of $15.2 million over fiscal 1999 interest expense of $34.4 million.
The increase in interest expense was due to increased borrowings to fund the
Ortho acquisition and an increase in average borrowing rates under our credit
facility, partially offset by reduced working capital requirements.
Income tax expense was $22.2 million for fiscal 2000 compared to a $31.1 million
in the prior year due to reduced income recognized in the six months of fiscal
2000. The Company's effective tax rate did not change significantly from fiscal
2000 to fiscal 1999.
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In conjunction with the Ortho acquisition, in January 1999 Scotts completed an
offering of $330 million of 8 5/8% Senior Subordinated Notes due 2009. The net
proceeds from this offering, together with borrowings under our credit facility,
were used to fund the Ortho acquisition and repurchase the then outstanding $100
million 9 7/8% Senior Subordinated Notes due August 2004. Scotts recorded an
extraordinary loss on the extinguishment of the 9 7/8% notes of $9.3 million,
including a call premium of $7.2 million and the write-off of unamortized
issuance costs and discounts of $2.1 million.
Scotts reported net income of $32.6 million for the six months of fiscal 2000
(as restated), or $0.88 per common share on a diluted basis, compared to net
income of $38.9 million for fiscal 1999, or $1.48 per common share on a diluted
basis before the impact of extraordinary items. The diluted earnings per share
for the six months of fiscal 2000 is net of a one-time reduction of $0.21 per
share resulting from the early conversion of preferred stock in October 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities totaled $214.3 million for the six months
ended April 1, 2000 compared to a use of $260.1 million for the six months ended
April 3, 1999. The seasonal nature of our operations generally requires cash to
fund significant increases in working capital (primarily inventory and accounts
receivable) during the first and second quarters. The third fiscal quarter is a
period for collecting accounts receivable and liquidating inventory levels. The
decrease in cash used in operating activities for the six months of fiscal 2000
compared to the prior year is attributable to a significant decrease in the
amount of working capital used during the period as well as the payment of
Roundup(R) marketing fees made in the first quarter of fiscal 1999.
Cash used in investing activities was $19.1 million for the six months of fiscal
2000 compared to $525.4 million in the prior year. In the first quarter of
fiscal 1999, we purchased the Rhone-Poulenc Jardin and Asef businesses for
approximately $170 million (excluding consideration for rights acquired under an
access rights agreement with Rhone-Poulenc Jardin). In the second quarter of
fiscal 1999, we purchased from Monsanto the assets of its worldwide consumer
lawn and garden businesses, exclusive of the Roundup(R) business, for $300
million plus an amount for normalized working capital. Additionally, capital
investments decreased by $6.5 million to $20.1 million in the six months of
fiscal 2000 compared to $26.6 million in the six months of fiscal 1999.
Financing activities generated cash of $234.4 million for the six months ended
April 1, 2000 compared to $794.3 million in the prior year. In the first quarter
of fiscal 1999, Scotts borrowed funds under its credit facility in order to
purchase the Rhne-Poulenc Jardin and Asef businesses, to pay marketing fees
associated with the Roundup(R) agency agreement, to pay financing fees
associated with the new credit facility and to settle the then outstanding
interest rate locks (as described below). In the second quarter of fiscal 1999,
Scotts completed an offering of $330 million of 8 5/8% Senior Subordinated Notes
due 2009. The net proceeds from this offering, together with borrowings under
our credit facility, were used to fund the Ortho acquisition and repurchase
approximately 97% of the then outstanding $100 million 9 7/8% Senior
Subordinated Notes due August 2004.
Total debt was $1,197.9 million as of April 1, 2000, an increase of $247.9
million compared with debt at September 30, 1999 and a decrease of $19.0
compared with debt levels at April 3, 1999. The decrease in debt compared to
April 3, 1999 was primarily due to the reduction in 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.
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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 April 1, 2000, 1,106,295
common shares (or $40.6 million) have been repurchased under this repurchase
program limit. The timing and amount of any purchases under the repurchase
program will be at our discretion and will depend upon market conditions and our
operating performance and liquidity.
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.
The Company was in violation of the minimum net worth covenant measured as of
January 1, 2000. The violation was reported to the administrative agent on
February 11, 2000, as required by the credit facility. On February 15, 2000, the
Company obtained a waiver of this covenant violation from its bank group for the
first quarter violation only. The Company was in compliance with all its debt
covenants as of April 1, 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 and six months ended
April 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.
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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 incurred approximately
$5.5 million to address potential year 2000 risks. 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 April 2000, we have not experienced any significant issues related to
the ability of our information technology and business systems to recognize the
year 2000. In addition, we have not experienced any significant supply
difficulties related to our vendors' year 2000 readiness. While we believe that
we have taken adequate precautions against year 2000 systems issues, there can
be no assurance that we will not encounter business interruption or other issues
related to the year 2000 in the future.
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 March 29, 2000, the Company signed a definitive agreement to sell its North
American Professional Turf business. The Company expects the transaction to
close in the third quarter of fiscal 2000. 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 six months of fiscal 2000 are in line with management's
expectations and position us to continue our trend of significant sales and
earnings growth. We are coming off a very strong fiscal 1999 as we reported
record sales of $1.65 billion, achieved market share growth in every one of our
major U. S. categories and established a number one market share position in
most of the significant lawn and garden categories across the world. The
performance in 1999 reflected the successful continuation of our primary growth
drivers: to emphasize consumer-oriented marketing efforts to pull demand through
distribution channels, and to make strategic acquisitions to increase market
share in global markets and within segments of the lawn and garden category.
Looking forward, we maintain the following broad tenets to our strategic plan:
(1) Promote and capitalize on the strengths of the Scotts(R),
Miracle-Gro(R), Hyponex(R) and Ortho(R) industry-leading brands, as
well as our portfolio of powerful brands in our international markets.
This involves a commitment to investors and retail partners that we
will support these brands through advertising and promotion unequaled
in the lawn and garden consumables market. In the Professional
categories, it signifies a commitment to customers to provide value as
an integral element in their long-term success;
(2) Commit to continuously study and improve knowledge of the market, the
consumer and the competition;
(3) Simplify product lines and business processes, to focus on those that
deliver value, evaluate marginal ones and eliminate those that lack
future prospects; and
(4) Achieve world leadership in operations, leveraging technology and
know-how to deliver outstanding customer service and quality.
As part of our ongoing strategic plans, management has established
challenging, but realistic, financial goals, including:
(1) Sales growth of 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 that 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 OUR FINANCIAL
RESULTS.
Weather conditions in North America and Europe have a significant
impact on the timing of sales in the spring selling season and overall
annual sales. Periods of wet weather can slow fertilizer sales, while
periods of dry, hot weather can decrease pesticide sales. In addition,
an abnormally cold spring throughout North America and/or Europe could
adversely affect both fertilizer and pesticides sales and therefore
our financial results.
- OUR HISTORICAL SEASONALITY COULD IMPAIR OUR ABILITY TO MAKE INTEREST
PAYMENTS ON INDEBTEDNESS.
Because our products are used primarily in the spring and summer, our
business is highly seasonal. For the past two fiscal years,
approximately 70% to 75% of our sales have occurred in the second and
third fiscal quarters combined. Our working capital needs and our
borrowings peak during our first fiscal quarter because we are
generating fewer revenues while incurring expenditures in preparation
for the spring selling season. If cash on hand is insufficient to
cover interest payments due on our indebtedness at a time when we are
unable to draw on our credit facility, this seasonality could
adversely affect our ability to make interest payments as required by
our indebtedness. Adverse weather conditions could heighten this risk.
- PUBLIC PERCEPTIONS THAT THE PRODUCTS WE PRODUCE AND MARKET ARE NOT
SAFE COULD ADVERSELY AFFECT US.
We manufacture and market a number of complex chemical products, such
as fertilizers, herbicides and pesticides, bearing one of our brands.
On occasion, customers allege that some of these products fail to
perform up to expectations or cause damage or injury to individuals or
property. Public perception that our products are not safe, whether
justified or not, could impair our reputation, damage our brand names
and materially adversely affect our business.
- OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL
HEALTH AND PREVENT US FROM FULFILLING OUR OBLIGATIONS.
Our substantial indebtedness could:
- make it more difficult for us to satisfy our obligations;
- increase our vulnerability to general adverse economic and
industry conditions;
- limit our ability to fund future working capital, capital
expenditures, research and development costs and other
general corporate requirements;
- require us to dedicate a substantial portion of cash flow
from operations to payments on our indebtedness, which would
reduce the cash flow available to fund working capital,
capital expenditures, research and development efforts and
other general corporate requirements;
- limit our flexibility in planning for, or reacting to,
changes in our business and the industry in which we
operate;
- place us at a competitive disadvantage compared to our
competitors that have less debt; and
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- limit our ability to borrow additional funds.
If we fail to comply with any of the financial or other
restrictive covenants of our indebtedness, our indebtedness could
become due and payable in full prior to its stated due date. We
cannot be sure that our lenders would waive a default or that we
could pay the indebtedness in full if it were accelerated.
- TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT
OF CASH, WHICH WE MAY NOT BE ABLE TO GENERATE.
Our ability to make payments on and to refinance our indebtedness
and to fund planned capital expenditures and research and
development efforts will depend on our ability to generate cash
in the future. This, to some extent, is subject to general
economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control. We cannot assure that
our business will generate sufficient cash flow from operations
or that currently anticipated cost savings and operating
improvements will be realized on schedule or at all. We also
cannot assure that future borrowings will be available to us
under our credit facility in amounts sufficient to enable us to
pay our indebtedness or to fund other liquidity needs. We may
need to refinance all or a portion of our indebtedness, on or
before maturity. We cannot assure that we will be able to
refinance any of our indebtedness on commercially reasonable
terms or at all.
- WE MIGHT NOT BE ABLE TO INTEGRATE OUR RECENT ACQUISITIONS INTO
OUR BUSINESS OPERATIONS SUCCESSFULLY.
We have made several substantial acquisitions in the past four
years. The acquisition of the Ortho business represents the
largest acquisition we have ever made. The success of any
completed acquisition depends, and the success of the Ortho
acquisition will depend, on our ability to effectively integrate
the acquired business. We believe that our recent acquisitions
provide us with significant cost saving opportunities. However,
if we are not able to successfully integrate Ortho, Rhone-Poulenc
Jardin or our other acquired businesses, we will not be able to
maximize such cost saving opportunities. Rather, the failure to
integrate these acquired businesses, because of difficulties in
the assimilation of operations and products, the diversion of
management's attention from other business concerns, the loss of
key employees or other factors, could materially adversely affect
our financial results.
- BECAUSE OF THE CONCENTRATION OF OUR SALES TO A SMALL NUMBER OF
RETAIL CUSTOMERS, THE LOSS OF ONE OR MORE OF OUR TOP CUSTOMERS
COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS.
Our top 10 North American retail customers together accounted for
approximately 52% of our fiscal 1999 sales and 41% of our
outstanding accounts receivable as of September 30, 1999. Our top
three customers, Home Depot, Wal*Mart and Kmart represented
approximately 17%, 12% and 9% of our fiscal 1999 sales. These
customers hold significant positions in the retail lawn and
garden market. The loss of, or reduction in orders from, Home
Depot, Wal*Mart, Kmart or any other significant customer could
have a material adverse effect on our business and our financial
results, as could customer disputes regarding shipments, fees,
merchandise 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
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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. For
fiscal 1999, our commission under the Roundup Marketing Agreement
constituted approximately 26% of our income before taxes.
Our methylene-urea product composition patent, which covers
Scotts Turf Builder(R), Scotts Turf Builder(R) with Plus 2(TM)
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. For fiscal 1999, sales of products utilizing our
methylene-urea product composition patent accounted for
approximately 18% of our total sales.
- THE INTERESTS OF THE FORMER MIRACLE-GRO SHAREHOLDERS COULD
CONFLICT WITH THOSE OF OUR OTHER SHAREHOLDERS.
The former shareholders of Stern's Miracle-Gro Products, Inc.,
through Hagedorn Partnership, L.P., beneficially own
approximately 42% of the outstanding common shares of Scotts on a
fully diluted basis. The former Miracle-Gro shareholders have
sufficient voting power to significantly control the election of
directors and the approval of other actions requiring the
approval of our shareholders. The interests of the former
Miracle-Gro shareholders could conflict with those of our other
shareholders.
- COMPLIANCE WITH ENVIRONMENTAL AND OTHER PUBLIC HEALTH REGULATIONS
COULD INCREASE OUR COST OF DOING BUSINESS.
Local, state, federal and foreign laws and regulations relating
to environmental matters affect us in several ways. All products
containing pesticides must be registered with the U.S.
Environmental Protection Agency and, in many cases, with similar
state and/or foreign agencies before they can be sold. The
inability to obtain or the cancellation of any registration could
have an adverse effect on us. The severity of the effect would
depend on which products were involved, whether another product
could be substituted and whether our competitors were similarly
affected. We attempt to anticipate regulatory developments and
maintain registrations of, and access to, substitute chemicals.
We may not always be able to avoid or minimize these risks.
The Food Quality Protection Act, enacted by the U.S. Congress in
August 1996, establishes a standard for food-use pesticides,
which is that a reasonable certainty of no harm will result from
the cumulative effect of pesticide exposures. Under this act, the
U.S. Environmental Protection Agency is evaluating the cumulative
risks from dietary and non-dietary exposures to pesticides. The
pesticides in our products,
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which are also used on foods, will be evaluated by the U.S.
Environmental Protection Agency as part of this non-dietary
exposure risk assessment. It is possible that the U.S.
Environmental Protection Agency may decide that a pesticide we
use in our products, would be limited or made unavailable. We
cannot predict the outcome or the severity of the effect of the
U.S. Environmental Protection Agency's evaluation. We believe
that we should be able to obtain substitute ingredients if
selected pesticides are limited or made unavailable, but there
can be no assurance that we will be able to do so for all
products.
Regulations regarding the use of some pesticide and fertilizer
products may include requirements that only certified or
professional users apply the product or that the products be used
only in specified locations. Users may be required to post
notices on properties to which products have been or will be
applied and may be required to notify individuals in the vicinity
that products will be applied in the future. The use of some
ingredients has been banned. Even if we are able to comply with
all such regulations and obtain all necessary registrations, we
cannot assure that our products, particularly pesticide products,
will not cause injury to the environment or to people under all
circumstances. The costs of compliance, remediation or products
liability have adversely affected operating results in the past
and could materially affect future quarterly or annual operating
results.
The harvesting of peat for our growing media business has come
under increasing regulatory and environmental scrutiny. In the
United States, state regulations frequently require us to limit
our harvesting and to restore the property to its intended use.
In some locations we have been required to create water retention
ponds to control the sediment content of discharged water. In the
United Kingdom, our peat extraction efforts are also the subject
of legislation. Since 1990, we have been involved in litigation
with the Philadelphia District of the U.S. Army Corps of
Engineers involving our peat harvesting operations at Hyponex's
Lafayette, New Jersey facility. The Corps of Engineers is seeking
a permanent injunction against harvesting and civil penalties in
an unspecified amount. While we are unable to predict the
outcome of the negotiations on this matter, we have accrued for
our estimate of the probable loss. If the ultimate settlement of
this proceeding differs significantly from the amount we have
accrued, it could material impact our results of operations,
financial position or cash flows.
In addition to the regulations already described, local, state,
federal, and foreign agencies regulate the disposal, handling and
storage of waste, air and water discharges from our facilities.
In June 1997, the Ohio Environmental Protection Agency gave us
formal notice of an enforcement action concerning our old,
decommissioned wastewater treatment plants that had once operated
at our Marysville facility. The Ohio EPA action alleges surface
water violations relating to possible historical sediment
contamination, inadequate treatment capabilities at our existing
and currently permitted wastewater treatment plants and the need
for corrective action under the Resource Conservation Recovery
Act. We are continuing to meet with the Ohio EPA and the Ohio
Attorney General's office to negotiate an amicable resolution of
these issues. We are currently unable to predict the ultimate
outcome of this matter.
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 April 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
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assurance that we will not encounter business interruption or
other issues related to the year 2000 in the future.
- 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
See Footnote 10 to the Condensed, Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of shareholders of the Company (the "Annual
Meeting") was held in Columbus, Ohio on February 15, 2000.
The result of the vote of the shareholders for the matter of the
election of three directors, for terms of three years each, submitted
to the shareholders at the Annual Meeting, is as follows:
NOMINEE VOTES FOR WITHHELD
------- --------- --------
John Kenlon 25,637,513 585,464
John M. Sullivan 25,632,279 590,698
L. Jack Van Fossen 25,633,475 589,502
Each of the nominees was elected. The other directors whose terms of
office continue after the Annual Meeting are Joseph P. Flannery,
Horace Hagedorn, Albert E. Harris, Patrick J. Norton, Charles M.
Berger, James Hagedorn, Karen G. Mills and John Walker, Ph.D.
The result of the vote of the shareholders for the matter of the
amendment to the Company's Amended Articles of Incorporation, to
increase the authorized number of common shares from 50,000,000 to
100,000,000, is as follows:
VOTES FOR VOTES AGAINST ABSTAIN NOT VOTED
--------- ------------- ------- ---------
24,245,392 1,954,792 22,793 2,298,029
The proposal to amend the Company's Amended Articles of
Incorporation, was adopted.
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 no Current Reports on Form 8-K for the
quarter covered by this Report.
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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 May 16, 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 APRIL 1, 2000
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
3(d) Certificate of Amendment by Shareholders to *
Articles of the Registrant as filed with the
Ohio Secretary of State on February 25, 2000
3(e) Amended Articles of Incorporation of the *
Registrant (reflecting amendments through
February 25, 2000) [for SEC reporting
compliance purposes only -- not filed with
the Ohio Secretary of State]
4(h) Waiver No. 2, dated as of *
February 14, 2000, to
the Credit Agreement, dated as of
December 4, 1998, as amended by
the Waiver, dated as of January
19, 1999, and the Amendment
No. 1 and Consent, dated as of
October 13, 1999, among the Registrant;
OM Scott International Investments Ltd.,
Miracle Garden Care Limited, Scotts
Holdings Limited, Hyponex Corporation,
Scotts Miracle-Gro Products, Inc.,
Scotts-Sierra Horticultural Products
Company, Republic Tool & Manufacturing
Corp., Scotts-Sierra Investments, Inc.,
Scotts France Holdings SARL, Scotts
Holding GmbH, Scotts Celaflor GmbH & Co.
KG, Scotts France SARL, Scotts Asef
BVBA (fka Scotts Belgium 2 BVBA),
The Scotts Company (UK) Ltd.,
Scotts Canada Ltd., Scotts Europe B.V.,
ASEF B.V., Scotts Australia PTY Ltd.,
and other subsidiaries of the Registrant who
are also borrowers from time to time;
the lenders party thereto; The Chase
Manhattan Bank as Administrative Agent;
Salomon Smith Barney, Inc. as
Syndication Agent; Credit Lyonnais
Chicago Branch and Bank One, Michigan,
as successor to NBD Bank, as
Co-Documentation Agents; and Chase
Securities Inc., as Lead Arranger and
Book Manager
10(b) The Scotts Company 1992 Long Term *
Incentive Plan (as amended through
May 15, 2000)
10(d) The Scotts Company 1996 Stock Option *
Plan (as amended through May 15, 2000)
10(l) Specimen form of Stock Option Agreement for
Non-Qualified Stock Options granted to
employees under The Scotts Company 1996 Stock
Option Plan (as amended through May 15, 2000)
10(w) The Scotts Company Millennium Growth Plan *
(effective October 1, 1999)
27 Financial Data Schedule *
* Previously filed
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