FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 30, 2002
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)
14111 SCOTTSLAWN ROAD, MARYSVILLE, OHIO 43041
(Address of Principal Executive Offices) (Zip Code)
(937) 644-0011
(Registrant's Telephone Number, Including Area Code)
NO CHANGE
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether 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.
29,638,124 Outstanding at May 10, 2002
-------------------------- ---------------------------
Common Shares, no par value
THE SCOTTS COMPANY AND SUBSIDIARIES
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed, Consolidated Statements of Operations - Three and six month
periods ended March 30, 2002 and March 31, 2001.......................................... 2
Condensed, Consolidated Statements of Cash Flows - Six month periods
ended March 30, 2002 and March 31, 2001.................................................. 3
Condensed, Consolidated Balance Sheets - March 30, 2002, March 31, 2001
and September 30, 2001................................................................... 4
Notes to Condensed, Consolidated Financial Statements.................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................................. 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 41
Item 6. Exhibits and Reports on Form 8-K.............................................................. 41
Signatures ......................................................................................... 42
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SCOTTS COMPANY
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
MARCH 30, MARCH 31, MARCH 30, MARCH 31,
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales .............................................. $ 602.1 $ 713.5 $ 765.1 $ 860.5
Cost of sales .......................................... 362.1 421.6 493.1 537.3
Restructuring and other charges ........................ 0.1 -.- 1.1 -.-
------- ------- ------- -------
Gross profit ..................................... 239.9 291.9 270.9 323.2
Gross commission earned from agency agreement .......... 8.4 16.6 8.4 16.5
Costs associated with agency agreement ................. 5.8 4.6 11.7 9.1
------- ------- ------- -------
Net commission earned from agency agreement ...... 2.6 12.0 (3.3) 7.4
Operating expenses:
Advertising ...................................... 30.9 38.5 38.0 46.1
Selling, general and administrative .............. 84.1 91.5 159.4 168.9
Restructuring and other charges .................. 0.4 -.- 1.2 -.-
Amortization of goodwill and other intangibles ... 1.8 7.4 3.7 14.2
Other (income) expense, net ...................... (1.9) (1.4) (3.9) (2.5)
------- ------- ------- -------
Income from operations ................................. 127.2 167.9 69.2 103.9
Interest expense ....................................... 21.6 26.1 40.2 47.4
------- ------- ------- -------
Income before income taxes ............................. 105.6 141.8 29.0 56.5
Income taxes ........................................... 40.6 57.0 11.1 22.9
------- ------- ------- -------
Income before cumulative effect of accounting change ... 65.0 84.8 17.9 33.6
Cumulative effect of change in accounting for intangible
assets, net of tax ................................... -.- -.- (18.5) -.-
------- ------- ------- -------
Net income (loss) ...................................... $ 65.0 $ 84.8 $ (0.6) $ 33.6
======= ======= ======= =======
Basic earnings (loss) per share ........................ $ 2.23 $ 3.01 $ (0.02) $ 1.19
======= ======= ======= =======
Diluted earnings (loss) per share ...................... $ 2.06 $ 2.80 $ (0.02) $ 1.12
======= ======= ======= =======
Common shares used in basic earnings (loss)
per share calculation ................................ 29.1 28.2 29.0 28.2
======= ======= ======= =======
Common shares and potential common shares
used in diluted earnings (loss) per
share calculation...................................... 31.5 30.3 31.4 30.0
======= ======= ======= =======
See notes to condensed, consolidated financial statements
2
THE SCOTTS COMPANY
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
SIX MONTHS ENDED
----------------
MARCH 30, MARCH 31,
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ........................................................... $ (0.6) $ 33.6
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Cumulative effect of change in accounting for intangible assets .......... 29.8 -.-
Depreciation ............................................................. 16.0 16.0
Amortization ............................................................. 5.3 15.9
Deferred taxes ........................................................... (10.1) 2.1
Changes in assets and liabilities, net of acquired businesses:
Accounts receivable ................................................... (326.2) (477.0)
Inventories ........................................................... (58.3) (94.5)
Prepaid and other current assets ...................................... (10.4) (1.5)
Accounts payable ...................................................... 119.1 150.6
Accrued liabilities ................................................... 30.8 55.8
Other assets .......................................................... 2.0 2.6
Other liabilities ..................................................... (2.7) (10.6)
Other, net ............................................................... 5.5 (1.2)
------ ------
Net cash used in operating activities ................................. (199.8) (308.2)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property, plant and equipment .............................. (22.3) (26.7)
Investment in acquired businesses, net of cash acquired .................. (3.1) (12.2)
Payments on seller notes ................................................. (16.0) (10.4)
------ ------
Net cash used in investing activities ................................. (41.4) (49.3)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving and bank lines of credit .................. 196.6 376.3
Issuance of 8 5/8% senior subordinated notes, net of issuance costs ...... 70.2 -.-
Gross borrowings under term loans ........................................ -.- 260.0
Gross repayments under term loans ........................................ (14.9) (304.3)
Cash received from the exercise of stock options ......................... 10.3 10.4
------ ------
Net cash provided by financing activities ............................. 262.2 342.4
Effect of exchange rate changes on cash ..................................... (2.2) (0.1)
------ ------
Net increase (decrease) in cash ............................................. 18.8 (15.2)
Cash and cash equivalents at beginning of period ............................ 18.7 33.0
------ ------
Cash and cash equivalents at end of period .................................. $ 37.5 $ 17.8
====== ======
See notes to condensed, consolidated financial statements
3
THE SCOTTS COMPANY
CONDENSED, CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
---------
MARCH 30, MARCH 31, SEPTEMBER 30,
2002 2001 2001
--------- --------- -------------
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 37.5 $ 17.8 $ 18.7
Accounts receivable, less allowances of $25.2,
$11.0 and $23.9, respectively ................................. 547.0 693.0 220.8
Inventories, net ................................................. 426.8 402.0 368.4
Current deferred tax asset ....................................... 52.2 27.6 52.2
Prepaid and other assets ......................................... 44.6 67.1 34.1
-------- -------- --------
Total current assets .......................................... 1,108.1 1,207.5 694.2
Property, plant and equipment, net .................................. 313.4 297.0 310.7
Goodwill and other intangible assets, net ........................... 744.1 770.0 771.1
Other assets ........................................................ 74.7 72.4 67.0
-------- -------- --------
Total assets .................................................. $2,240.3 $2,346.9 $1,843.0
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt .................................................. $ 205.6 $ 298.2 $ 71.3
Accounts payable ................................................. 270.1 303.7 150.9
Accrued liabilities .............................................. 218.3 225.0 208.0
Accrued taxes .................................................... 35.9 41.0 14.9
-------- -------- --------
Total current liabilities ..................................... 729.9 867.9 445.1
Long-term debt ...................................................... 921.1 910.0 816.5
Other liabilities ................................................... 72.4 49.8 75.2
-------- -------- --------
Total liabilities ............................................. 1,723.4 1,827.7 1,336.8
======== ======== ========
Commitments and contingencies
Shareholders' equity:
Preferred shares, no par value, none issued ...................... -.- -.- -.-
Common shares, no par value per share, $.01 stated
value per share, issued 31.3, 31.3 and 31.3, respectively ..... 0.3 0.3 0.3
Capital in excess of par value ................................... 400.1 390.6 398.3
Retained earnings ................................................ 211.7 230.4 212.3
Treasury stock, 2.1, 2.9, and 2.6 shares, respectively, at cost .. (61.4) (74.6) (70.0)
Accumulated other comprehensive loss ............................. (33.8) (27.5) (34.7)
-------- -------- --------
Total shareholders' equity .......................................... 516.9 519.2 506.2
-------- -------- --------
Total liabilities and shareholders' equity .......................... $2,240.3 $2,346.9 $1,843.0
======== ======== ========
See notes to condensed, consolidated financial statements
4
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Scotts Company and its subsidiaries (collectively "Scotts" or the
"Company") are engaged in the manufacture and sale of lawn care and
garden products. The Company's major customers include home improvement
centers, mass merchandisers, large hardware chains, independent
hardware stores, nurseries, garden centers, food and drug stores, lawn
and landscape service companies, commercial nurseries and greenhouses,
and specialty crop growers. The Company's products are sold in the
United States, Canada, the European Union, the Caribbean, South
America, Southeast Asia, the Middle East, Africa, Australia, New
Zealand, Mexico, Japan, and several Latin American countries. We also
operate the Scotts LawnService(R) business which provides lawn, and
tree and shrub fertilization, insect control and other related
services.
ORGANIZATION AND BASIS OF PRESENTATION
The condensed, consolidated financial statements include the accounts
of The Scotts Company and its subsidiaries. All material intercompany
transactions have been eliminated.
The condensed, consolidated balance sheets as of March 30, 2002 and
March 31, 2001, and the related condensed, consolidated statements of
operations for the three month and six month periods then ended and
condensed, consolidated statements of cash flows for the six month
periods then ended, 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, results
of operations and cash flows. 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 2001 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. Provisions for estimated returns and
allowances are recorded at the time of shipment based on historical
rates of return applied to allowances as a percentage of sales.
ADVERTISING AND PROMOTION
Scotts advertises its branded products through national and regional
media, and through cooperative advertising programs with retailers.
Retailers are also offered in-store promotional allowances and in prior
years were offered pre-season stocking 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. All amounts paid or payable to
customers or consumers in connection with the purchase of our products
are recorded as a reduction of net sales.
DERIVATIVE INSTRUMENTS
In the normal course of business, Scotts is exposed to fluctuations in
interest rates and the value of foreign currencies. Scotts has
established policies and procedures that govern the management of these
exposures through the use of a variety of financial instruments. Scotts
employs various financial instruments, including forward exchange
contracts, and
5
swap agreements, to manage certain of the exposures when practical. By
policy, Scotts does not enter into such contracts for the purpose of
speculation or use leveraged financial instruments. The Company's
derivative activities are managed by the chief financial officer and
other senior management of the Company in consultation with the Finance
Committee of the Board of Directors. These activities include
establishing a risk-management philosophy and objectives, providing
guidelines for derivative-instrument usage and establishing procedures
for control and valuation, counterparty credit approval and the
monitoring and reporting of derivative activity. Scotts' objective in
managing its exposure to fluctuations in interest rates and foreign
currency exchange rates is to decrease the volatility of earnings and
cash flows associated with changes in the applicable rates and prices.
To achieve this objective, Scotts primarily enters into forward
exchange contracts and swap agreements whose values change in the
opposite direction of the anticipated cash flows. Derivative
instruments related to forecasted transactions are considered to hedge
future cash flows, and the effective portion of any gains or losses are
included in other comprehensive income until earnings are affected by
the variability of cash flows. Any remaining gain or loss is recognized
currently in earnings. The cash flows of the derivative instruments are
expected to be highly effective in achieving offsetting cash flows
attributable to fluctuations in the cash flows of the hedged risk. If
it becomes probable that a forecasted transaction will no longer occur,
the derivative will continue to be carried on the balance sheet at fair
value, and gains and losses that were accumulated in other
comprehensive loss will be recognized immediately in earnings.
To manage certain of its cash flow exposures, Scotts has entered into
forward exchange contracts and interest rate swap agreements. The
forward exchange contracts are designated as hedges of the Company's
foreign currency exposure associated with future cash flows. Amounts
payable or receivable under forward exchange contracts are recorded as
adjustments to selling, general and administrative expense. The
interest rate swap agreements are designated as hedges of the Company's
interest rate risk associated with certain variable rate debt. Amounts
payable or receivable under the swap agreements are recorded as
adjustments to interest expense. Unrealized gains or losses resulting
from valuing these swaps at fair value are recorded in other
comprehensive income.
Scotts adopted FAS 133 as of October 2000. Since adoption, there have
been no gains or losses recognized in earnings for hedge
ineffectiveness or due to excluding a portion of the value from
measuring effectiveness.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying
disclosures. 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 2002 classifications.
2. MARKETING AGREEMENT
Effective September 30, 1998, the Company entered into an agreement
with Monsanto Company ("Monsanto", now known as Pharmacia Corporation)
for exclusive domestic and international marketing and agency rights to
Monsanto's consumer Roundup(R) herbicide products. Under the terms of
the agreement, the Company is entitled to receive an annual commission
from Monsanto in consideration for the performance of its duties as
agent. The annual commission is calculated as a percentage of the
actual earnings before interest and income taxes (EBIT), as defined in
the agreement, of the Roundup(R) business. Each year's percentage
varies in accordance with the terms of the agreement based on the
achievement of two earnings thresholds and on commission rates that
vary by threshold and program year.
The agreement also requires the Company to make fixed annual payments
to Monsanto as a contribution against the overall expenses of the
Roundup(R) business. The annual fixed payment is defined as $20
million. However, portions of the annual payments for the first three
years of the agreement are deferred. No payment was required for the
first year
6
(fiscal 1999), a payment of $5 million was required for the second year
and a payment of $15 million was required for the third year so that a
total of $40 million of the contribution payments were deferred.
Beginning in the fifth year of the agreement, the annual payments to
Monsanto increase to at least $25 million, which include per annum
interest charges at 8%. The annual payments may be increased above $25
million if certain significant earnings targets are exceeded. If all of
the deferred contribution amounts are paid prior to 2018, the annual
contribution payments revert to $20 million. Regardless of whether the
deferred contribution amounts are paid, all contribution payments cease
entirely in 2018.
The Company is recognizing a charge each year associated with the
annual contribution payments equal to the required payment for that
year. The Company is not recognizing a charge for the portions of the
contribution payments that are deferred until the time those deferred
amounts are paid. The Company considers this method of accounting for
the contribution payments to be appropriate after consideration of the
likely term of the agreement, the Company's ability to terminate the
agreement without paying the deferred amounts, and the fact that
approximately $18.6 million of the deferred amount is never paid, even
if the agreement is not terminated prior to 2018, unless significant
earnings targets are exceeded.
The express terms of the agreement permit the Company to terminate the
agreement only upon Material Breach, Material Fraud or Material Willful
Misconduct by Monsanto, as such terms are defined in the agreement, or
upon the sale of the Roundup business by Monsanto. In such instances,
the agreement permits the Company to avoid payment of any deferred
contribution and related per annum charge. The Company's basis for not
recording a financial liability to Monsanto for the deferred portions
of the annual contribution and per annum charge is based on our
assessment and consultations with our legal counsel and the Company's
independent accountants. In addition, the Company has obtained a legal
opinion from The Bayard Firm, P.A., which concluded, subject to certain
qualifications, that if the matter were litigated, a Delaware court
would likely conclude that the Company is entitled to terminate the
agreement at will, with appropriate prior notice, without incurring
significant penalty, and avoid paying the unpaid deferred amounts. We
have concluded that, should the Company elect to terminate the
agreement at any balance sheet date, it will not incur significant
economic consequences as a result of such action.
The Bayard Firm was special Delaware counsel retained during fiscal
2000 solely for the limited purpose of providing a legal opinion in
support of the contingent liability treatment of the agreement
previously adopted by the Company and has neither generally represented
or advised the Company nor participated in the preparation or review of
the Company's financial statements or any SEC filings. The terms of
such opinion specifically limit the parties who are entitled to rely on
it.
The Company's conclusion is not free from challenge and, in fact, would
likely be challenged if the Company were to terminate the agreement. If
it were determined that, upon termination, the Company must pay any
remaining deferred contribution amounts and related per annum charges,
the resulting charge to earnings could have a material impact on the
Company's results of operations and financial position. At March 30,
2002, contribution payments and related per annum charges of
approximately $48.3 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 period then ended.
Monsanto has disclosed that it is accruing the $20 million fixed
contribution fee per year beginning in the fourth quarter of Monsanto's
fiscal year 1998, plus interest on the deferred portion.
The agreement has a term of seven years for all countries within the
European Union (at the option of both parties, the agreement can be
renewed for up to 20 years for the European Union countries). For
countries outside of the European Union, the agreement continues
indefinitely unless terminated by either party. The agreement provides
Monsanto with the right to terminate the agreement for an event of
default (as defined in the agreement) by the Company or a change in
control of Monsanto or the sale of the Roundup(R) business. The
agreement provides the Company with the right to terminate the
agreement in certain circumstances including an event of default by
Monsanto or the sale of the Roundup(R) business. Unless Monsanto
terminates the agreement for an event of default by the Company,
Monsanto is required to pay a termination fee to the Company that
varies by program year. The termination fee is $150 million for each of
the first five program years, gradually declines to $100 million by
year ten of the program and then declines to a minimum of $16 million
if the program continues for years 11 through 20.
7
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 the
expense relating to this amount on the basis that the payment will
provide a future benefit through commissions that will be earned under
the agreement and is amortizing the balance over ten years, which is
the estimated likely term of the agreement.
3. RESTRUCTURING AND OTHER CHARGES
2002 CHARGES
Under accounting principles generally accepted in the United States of
America, certain restructuring costs related to relocation of
personnel, equipment and inventory are to be expensed in the period the
costs are actually incurred. During the first six months of fiscal
2002, inventory relocation costs of approximately $1 million were
incurred and paid and were recorded as restructuring and other charges
in cost of sales. Approximately $1.2 million of employee relocation
costs were also incurred and paid in the first six months of fiscal
2002 and were recorded as operating expenses. These charges related to
restructuring activities initiated in the third and fourth quarters of
fiscal 2001.
2001 CHARGES
During the third and fourth quarters of fiscal 2001, the Company
recorded $75.7 million of restructuring and other charges, primarily
associated with the closure or relocation of certain manufacturing and
administrative facilities. The $75.7 million in charges was segregated
in the Statements of Operations in two components: (i) $7.3 million
included in cost of sales for the write-off of inventory that was
rendered unusable as a result of the restructuring activities and (ii)
$68.4 million included in selling, general and administrative costs.
Included in the $68.4 million charge in selling, general and
administrative costs was $20.4 million to write-down to fair value
certain property and equipment and other assets; $5.8 million of
facility exit costs; $27.0 million of severance costs; and $15.2
million in other restructuring and other costs. The severance costs
related to reduction in force initiatives and facility closures and
consolidations in North America and Europe covering approximately 340
administrative, production, selling and other employees. Remaining
severance costs are expected to be paid in fiscal 2002 with some
payments extending into 2003. All other fiscal 2001 restructuring
related activities and costs are expected to be completed by the end of
fiscal 2002.
The following is a rollforward of the cash portion of the restructuring
and other charges accrued in the third and fourth quarters of fiscal
2001:
BALANCE BALANCE
DESCRIPTION TYPE CLASSIFICATION SEPT. 30, 2001 PAYMENT MARCH 30, 2002
----------- ---- -------------- -------------- ------- --------------
($ MILLIONS)
Severance........................ Cash SG&A $ 25.1 $ 13.5 $ 11.6
Facility exit costs.............. Cash SG&A 5.2 1.8 3.4
Other related costs.............. Cash SG&A 7.0 6.4 0.6
------------ ------------ -----------
Total cash.................... $ 37.3 $ 21.7 $ 15.6
============ ============ ===========
8
4. INVENTORIES
Inventories, net of provisions for slow moving and obsolete inventory
of $25.0 million, $21.6 million, and $22.3 million, respectively,
consisted of:
MARCH 30, MARCH 31, SEPTEMBER 30,
2002 2001 2001
---- ---- ----
($ MILLIONS)
Finished goods......................................... $ 352.1 $ 312.2 $ 295.8
Raw materials.......................................... 74.7 89.8 72.6
------------- ------------- -------------
Total ............................................. $ 426.8 $ 402.0 $ 368.4
============= ============= =============
5. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Effective October 1, 2001, Scotts adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets".
In accordance with this standard, goodwill and certain other intangible
assets, primarily tradenames, have been classified as indefinite-lived
assets no longer subject to amortization. Indefinite-lived assets are
subject to impairment testing upon adoption and at least annually. The
impairment analysis was completed in the second quarter of 2002, taking
into account additional guidance provided by EITF 02-07 "Unit of
Measure for Testing Impairment of Indefinite-Lived Intangibles Assets".
The value of all indefinite-lived tradenames as of October 1, 2001 was
determined using a "royalty savings" methodology that was employed when
the businesses associated with these tradenames were acquired but using
updated estimates of sales and profitability. As a result, a pre-tax
impairment loss of $29.8 million was recorded for the writedown of the
value of the tradenames in our International Consumer businesses in
Germany, France and the United Kingdom. This transitional impairment
charge was recorded as a cumulative effect of accounting change, net of
tax, as of October 1, 2001. After completing this initial valuation and
impairment of tradenames, an initial assessment for goodwill impairment
was performed. It was determined that a goodwill impairment charge was
not required.
The useful lives of intangible assets still subject to amortization
were not revised as a result of the adoption of Statement 142.
The following table presents goodwill and intangible assets as of the
end of each period presented.
MARCH 30, 2002 MARCH 31, 2001 SEPTEMBER 30, 2001
-------------- -------------- ------------------
GROSS NET GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
------ ------------ ------ ------ ------------ ------ ------ ------------ ------
($ MILLIONS)
Amortized Intangible Assets:
Technology............................ $ 58.8 $(18.2) $ 40.6 $61.0 $(14.8) $ 46.2 $ 61.9 $(15.8) $ 46.1
Customer accounts..................... 23.0 (2.5) 20.5 23.2 (1.8) 21.4 24.1 (2.5) 21.6
Tradenames............................ 11.4 (2.0) 9.4 11.4 (1.3) 10.1 11.3 (1.6) 9.7
Other................................. 44.7 (32.8) 11.9 44.4 (31.3) 13.1 47.2 (32.6) 14.6
------ ------ ------
Total amortized intangible assets, net 82.4 90.8 92.0
Unamortized Intangible Assets:
Tradenames............................ 318.6 360.0 349.0
Other................................. 3.1 3.1 3.2
------ ------ -----
Total intangible assets, net ....... 404.1 453.9 444.2
Goodwill.............................. 340.0 316.1 326.9
------ ------ ------
Total goodwill and intangible assets, net $744.1 $770.0 $771.1
====== ====== ======
During the first half of fiscal 2002, our Scotts LawnService(R)
business acquired several lawn care businesses. The assets and
liabilities of these businesses were recorded at their fair values as
of the dates of acquisition. The fair value of customer accounts,
customer lists and non-compete agreements were determined based on
their estimated impact on discounted future cash flows. The excess of
the amounts paid for these businesses over the fair values of the
assets was recorded as goodwill. The fair value of customer accounts
acquired during the first six months of fiscal 2002 was $1.6 million;
the value assigned to non-compete agreements was $0.8 million. Customer
accounts
9
are being amortized over an estimated seven year life; non-compete
agreements are amortized over the contract periods which range from
three to five years. Total goodwill added during the first half of
fiscal 2002 was $20.5 million. Goodwill was reduced by $4.8 million and
tradenames by $1.8 million as a result of the settlement reached with
Rhone-Poulenc Jardin regarding litigation related to the price paid for
international consumer businesses we acquired in Europe in 1998. The
effects of exchange rate fluctuations resulted in the changes in
balances not otherwise explained by the impairment charge, the
settlement with Rhone-Poulenc Jardin or the acquisition activity
described above.
The following table presents a reconciliation of recorded net income to
adjusted net income and related earnings per share data as if the
provision of Statement 142 relating to non-amortization of
indefinite-lived intangible assets had been adopted as of the earliest
period presented.
FOR THE PERIODS
ENDED MARCH 31,
2001
----
THREE MONTHS SIX MONTHS
------------ ----------
($ MILLIONS, EXCEPT PER SHARE DATA)
Net income
Reported net income.......................................................... $ 84.8 $ 33.6
Goodwill amortization........................................................ 3.1 6.0
Tradename amortization....................................................... 2.5 4.8
Taxes........................................................................ (1.3) (2.5)
---------- ----------
Net income as adjusted....................................................... $ 89.1 $ 41.9
========== =========
Basic EPS
Reported net income.......................................................... $ 3.01 $ 1.19
Goodwill amortization........................................................ 0.11 0.21
Tradename amortization....................................................... 0.09 0.17
Taxes........................................................................ (0.05) (0.09)
----------- -----------
Net income as adjusted....................................................... $ 3.16 $ 1.48
=========== ==========
Diluted EPS
Reported net income.......................................................... $ 2.80 $ 1.12
Goodwill amortization........................................................ 0.10 0.20
Tradename amortization....................................................... 0.08 0.16
Taxes........................................................................ (0.04) (0.08)
----------- -----------
Net income as adjusted....................................................... $ 2.94 $ 1.40
=========== ==========
Estimated amortization expense is as follows:
YEAR ENDED
SEPTEMBER 30, $ MILLIONS
------------- ----------
2002........................................................ $ 4.6
2003........................................................ 4.2
2004........................................................ 3.1
2005........................................................ 2.7
2006........................................................ 2.7
10
6. LONG-TERM DEBT
MARCH 30, MARCH 31, SEPTEMBER 30,
2002 2001 2001
---- ---- ----
($ MILLIONS)
Revolving loans under credit facility............................ $ 284.6 $ 402.8 $ 94.7
Term loans under credit facility................................. 378.4 404.7 398.6
Senior Subordinated Notes........................................ 391.2 319.9 320.5
Notes due to sellers ............................................ 48.6 59.5 53.7
Foreign bank borrowings and term loans........................... 11.8 12.0 9.4
Capital lease obligations and other ............................. 12.1 9.3 10.9
-------------- -------------- --------------
1,126.7 1,208.2 887.8
Less current portions............................................ 205.6 298.2 71.3
-------------- -------------- --------------
$ 921.1 $ 910.0 $ 816.5
============== ============== ==============
On December 4, 1998, The Scotts Company and certain of its subsidiaries
entered into a credit facility (the "Original Credit Agreement") which
provided for borrowings in the aggregate principal amount of $1.025
billion and consisted of term loan facilities in the aggregate amount
of $525 million and a revolving credit facility in the amount of $500
million. Proceeds from borrowings under the Original Credit Agreement
of approximately $241.0 million were used to repay amounts outstanding
under the then existing credit facility.
On December 5, 2000, The Scotts Company and certain of its subsidiaries
entered into an Amended and Restated Credit Agreement (the "Amended
Credit Agreement"), amending and restating in its entirety the Original
Credit Agreement. Under the terms of the Amended Credit Agreement, the
revolving credit facility was increased from $500 million to $575
million and the net worth covenant was amended.
In December 2001, the Amended Credit Agreement was amended to redefine
earnings under the covenants, to eliminate the net worth covenant and
to modify the covenants pertaining to interest coverage and leverage
and amends how proceeds from future equity or subordinated debt
offerings, if any, will be used towards mandatory prepayments of
revolving credit facility borrowings.
The term loan facilities consist of two tranches. The Tranche A Term
Loan Facility consists of three sub-tranches of Euros and British
Pounds Sterling in an aggregate principal amount of $265 million which
are to be repaid quarterly over a 6 1/2 year period. The Tranche B Term
Loan Facility replaced the Tranche B and Tranche C facilities from the
Original Credit Agreement. Those facilities were prepayable without
penalty. The new Tranche B Term Loan Facility has an aggregate
principal amount of $260 million and is repayable in installments as
follows: quarterly installments of $0.25 million beginning June 30,
2001 through December 31, 2006, quarterly installments of $63.5 million
beginning March 31, 2007 through September 30, 2007 and a final
quarterly installment of $63.8 million on December 31, 2007.
The revolving credit facility provides for borrowings of up to $575
million, which are available on a revolving basis over a term of 6 1/2
years. A portion of the revolving credit facility not to exceed $100
million is available for the issuance of letters of credit. A portion
of the facility not to exceed $258.8 million is available for
borrowings in optional currencies, including Euros, British Pounds
Sterling and other specified currencies, provided that the outstanding
revolving loans in optional currencies other than British Pounds
Sterling does not exceed $138 million. The outstanding principal amount
of all revolving credit loans may not exceed $150 million for at least
30 consecutive days during any calendar year. The December 2001
amendment increased the amount that may be borrowed in optional
currencies to $360 million from $258.8 million.
Interest rates and commitment fees under the Amended Credit Agreement
vary according to the Company's leverage ratios and interest rates also
vary within tranches. The weighted-average interest rate on the
Company's variable rate borrowings at March 30, 2002 was 7.16% and at
September 30, 2001 was 7.85%. In addition, the Amended Credit Agreement
requires that Scotts enter into hedge agreements to the extent
necessary to provide that at least 50% of the aggregate principal
amount of the 8 5/8% Senior Subordinated Notes due 2009 and term loan
facilities is subject to a
11
fixed interest rate or interest rate protection for a period of not
less than three years.
Financial covenants include interest coverage and net leverage ratios.
Other covenants include limitations on indebtedness, liens, mergers,
consolidations, liquidations and dissolutions, sale of assets, leases,
dividends, capital expenditures, and investments. The Scotts Company
and all of its domestic subsidiaries pledged substantially all of their
personal, real and intellectual property assets as collateral for the
borrowings under the Amended Credit Agreement. The Scotts Company and
its subsidiaries also pledged the stock in foreign subsidiaries that
borrow under the Amended Credit Agreement.
Approximately $16.9 million of financing costs associated with the
revolving credit facility have been deferred as of March 30, 2002 and
are being amortized over a period of approximately 7 years, beginning
in fiscal year 1999.
In January 1999, The Scotts Company completed an offering of $330
million of 8 5/8% Senior Subordinated Notes due 2009. The net proceeds
from the offering, together with borrowings under the Original Credit
Agreement, were used to fund the Ortho acquisition and to repurchase
approximately $97 million of outstanding 9 7/8% Senior Subordinated
Notes due August 2004. The Company recorded an extraordinary loss
before tax on the extinguishment of the 9 7/8% Notes of approximately
$9.3 million, including a call premium of $7.2 million and the
write-off of unamortized issuance costs and discounts of $2.1 million.
In August 1999, Scotts repurchased the remaining $2.9 million of the 9
7/8% Notes, resulting in an extraordinary loss, net of tax, of $0.1
million.
In January 2002, The Scotts Company completed an offering of $70
million of 8 5/8% Senior Subordinated Notes due 2009. The net proceeds
from the offering were used to pay down borrowings on our revolving
credit facility. The notes were issued at a premium of $1.8 million.
The issuance costs associated with the offering totaled $1.6 million.
Both the premium and the issuance costs are being amortized over the
life of the notes.
Scotts entered into two interest rate locks in fiscal 1998 to hedge its
anticipated interest rate exposure on the $330 million 8 5/8% Notes
offering. The total amount paid under the interest rate locks of $12.9
million has been recorded as a reduction of the 8 5/8% Notes' carrying
value and is being amortized over the life of the 8 5/8% Notes as
interest expense. Approximately $11.8 million of issuance costs
associated with the 8 5/8% Notes were deferred and are being amortized
over the term of the Notes.
In conjunction with the acquisitions of Rhone-Poulenc Jardin and
Sanford Scientific, notes were issued for certain portions of the total
purchase price that are to be paid in annual installments over a
four-year period. The present value of the remaining note payments is
$7.6 million and $3 million, respectively. The Company is imputing
interest on the non-interest bearing notes using an interest rate
prevalent for similar instruments at the time of acquisition
(approximately 9% and 8%, respectively). In conjunction with other
acquisitions, notes were issued for certain portions of the total
purchase price that are to be paid in annual installments over periods
ranging from four to five years. The present value of remaining note
payments is $22.9 million. The Company is imputing interest on the
non-interest bearing notes using an interest rate prevalent for similar
instruments at the time of the acquisitions (approximately 8%).
In conjunction with the Substral(R) acquisition, notes were issued for
certain portions of the total purchase price that are to be paid in
semi-annual installments over a two-year period. The present value of
remaining note payments total $14.1 million. The interest rate on these
notes is 5.5%.
The foreign term loans of $2.7 million issued on December 12, 1997,
have an 8-year term and bear interest at 1% below LIBOR. The loans are
denominated in British Pounds Sterling and can be redeemed, on demand,
by the note holder. The foreign bank borrowings of $9.2 million at
March 30, 2002 and $9.0 million at March 31, 2001 represent lines of
credit for foreign operations and are primarily denominated in French
Francs.
12
7. STATEMENT OF COMPREHENSIVE INCOME
The components of other comprehensive income and total comprehensive
income for the three and six months ended March 30, 2002 and March 31,
2001 are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 30, MARCH 31, MARCH 30, MARCH 31,
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss).................................... $ 65.0 $ 84.8 $ (0.6) $ 33.6
Other comprehensive income (expense):
Foreign currency translation adjustments............. (0.5) (0.2) (0.1) 3.2
Change in valuation of derivative instruments........ 1.5 (1.2) 1.0 (0.7)
---------- ----------- ------------ -------------
Comprehensive income................................. $ 66.0 $ 83.4 $ 0.3 $ 36.1
========== ========== =========== ============
8. 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.
ENVIRONMENTAL MATTERS
In June 1997, the Ohio Environmental Protection Agency ("Ohio EPA")
initiated an enforcement action against us with respect to alleged
surface water violations and inadequate treatment capabilities at our
Marysville facility and seeking corrective action under the federal
Resource Conservation Recovery Act. The action relates to several
discontinued on-site disposal areas which date back to the early
operations of the Marysville facility that we had already been
assessing under a voluntary action program of the state. Since
initiation of the action, we have continued to meet with the Ohio
Attorney General and the Ohio EPA in an effort to complete negotiations
of an amicable resolution of these issues. On December 3, 2001, an
agreed judicial Consent Order was submitted to the Union County Common
Pleas Court and was entered by the court on January 25, 2002.
Now that the Consent Order has been entered, we have paid a $275,000
fine and must satisfactorily remediate the Marysville site. We have
continued our remediation activities with the knowledge and oversight
of the Ohio EPA. We are currently evaluating our expected liability
related to this matter based on the fine paid and remediation actions
that we have taken and that we expect to take in the future.
In addition to the dispute with the Ohio EPA, we are negotiating with
the Philadelphia District of the U.S. Army Corps of Engineers ("Corps")
regarding the terms of site remediation and the resolution of the
Corps' civil penalty demand in connection with our prior peat
harvesting operations at our Lafayette, New Jersey facility. We are
also addressing remediation concerns raised by the Environment Agency
of the United Kingdom with respect to emissions to air and groundwater
at our Bramford (Suffolk), United Kingdom facility. We have reserved
for our estimates of probable losses to be incurred in connection with
each of these matters.
13
Regulations and environmental concerns also exist surrounding peat
extraction in the United Kingdom and the European Union. In August
2000, English Nature, the nature conservation advisory body to the U.K.
government notified us that three of our peat harvesting sites in the
United Kingdom were under consideration as possible "Special Areas of
Conservation" under European Union Law. In April 2002 we reached
agreement with English Nature to transfer our interests in the
properties and for the immediate cessation of all but a limited amount
of peat extraction on one of the three sites. In consideration we will
receive amounts totaling $23.8 million from English Nature. As a result
of this transaction we have withdrawn our objection to the proposed
European designations as Special Areas of Conservation and will
undertake restoration work on the sites for which we will receive
additional compensation from English Nature. We consider that we have
sufficient raw material supplies available to replace the peat
extracted from such sites. See Note 9 to the Condensed, Consolidated
Financial Statements for more details.
The Company has determined that quantities of cement containing
asbestos material at certain manufacturing facilities in the United
Kingdom should be removed.
At March 30, 2002, $5.7 million is accrued for the environmental
matters described herein. The significant components of the accrual are
costs for site remediation of $3.9 million and costs for asbestos
abatement of $1.8 million. The significant portion of the costs accrued
as of March 30, 2002 are expected to be paid in fiscal 2002 and 2003;
however, payments could be made for a period thereafter.
We believe that the amounts accrued as of March 30, 2002 are adequate
to cover known environmental exposures based on current facts and
estimates of likely outcome. However, the adequacy of these accruals is
based on several significant assumptions:
(i) that we have 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; and
(iii) that with respect to the agreed judicial Consent Order in
Ohio, that potentially contaminated soil can be remediated in
place rather than having to be removed and only specific
stream segments will require remediation as opposed to the
entire stream.
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.
For the six months ended March 30, 2002, we made approximately $1.5
million in environmental expenditures, compared with approximately $0.6
million in environmental capital expenditures and $2.1 million in other
environmental expenses for the entire fiscal year 2001. Management
anticipates that environmental capital expenditures and other
environmental expenses for the remainder of fiscal year 2002 will not
differ significantly from those incurred in fiscal year 2001.
AgrEvo ENVIRONMENTAL HEALTH, INC.
---------------------------------
On June 3, 1999, AgrEvo Environmental Health, Inc. ("AgrEvo") (which
subsequently changed its name to Aventis Environmental Health Science
USA LP) filed a complaint in the U.S. District Court for the Southern
District of New York (the "New York Action"), against the Company, a
subsidiary of the Company and Monsanto 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 contract by Monsanto. Scotts purchased a consumer
herbicide business from AgrEvo in May 1998. AgrEvo claims in the suit
that Scotts' subsequent agreement to become Monsanto's exclusive sales
and marketing agent for Monsanto's consumer Roundup(R) business
violated the federal antitrust laws. AgrEvo contends that Monsanto
attempted to or did monopolize the market for non-selective herbicides
and conspired with Scotts to eliminate the herbicide Scotts previously
purchased from AgrEvo, which competed with Monsanto's Roundup(R), in
order to achieve or maintain a monopoly position in that market. AgrEvo
also contends that Scotts'
14
execution of various agreements with Monsanto, including the Roundup(R)
marketing agreement, as well as Scotts' subsequent actions, violated
the purchase agreements between AgrEvo and Scotts.
AgrEvo is requesting unspecified damages as well as affirmative
injunctive relief, and seeking to have the courts invalidate the
Roundup(R) marketing agreement as violative of the federal antitrust
laws. On September 20, 1999, Scotts filed an answer denying liability
and asserting counterclaims that it was fraudulently induced to enter
into the agreement for the purchase of the consumer herbicide business
and the related agreements, and that AgrEvo breached the
representations and warranties contained in these agreements. On
October 1, 1999, Scotts moved to dismiss the antitrust allegations
against it on the ground that the claims fail to state claims for which
relief may be granted. On October 12, 1999, AgrEvo moved to dismiss
Scotts' counterclaims. On May 5, 2000, AgrEvo amended its complaint to
add a claim for fraud and to incorporate the Delaware Action described
below. Thereafter, Scotts moved to dismiss the new claims, and the
defendants renewed their pending motions to dismiss. On June 2, 2000,
the court (i) granted Scotts' motion to dismiss the fraud claim AgrEvo
had added to its complaint; (ii) granted AgrEvo's motion to dismiss
Scotts' fraudulent-inducement counterclaim; (iii) denied AgrEvo's
motion to dismiss Scotts' counterclaims related to breach of
representations and warranties; and (iv) denied defendants' motion to
dismiss the antitrust claims. On July 14, 2000, Scotts served an answer
to AgrEvo's amended complaint and re-pleaded its fraud counterclaim.
Under the indemnification provisions of the Roundup(R) marketing
agreement, Monsanto and Scotts each have requested that the other
indemnify against any losses arising from this lawsuit. On September 5,
2001, the magistrate judge, over the objections of Scotts and Monsanto,
allowed AgrEvo to file another amended complaint to add claims
transferred to it by its German parent, AgrEvo GmbH, and its 100
percent commonly owned affiliate, AgrEvo USA Company. Scotts and
Monsanto have objected to the magistrate judge's order allowing the new
claims. The district court will resolve these objections; if sustained,
the newly-added claims will be stricken.
On June 29, 1999, AgrEvo also filed a complaint in the Superior Court
of the State of Delaware (the "Delaware Action") against two of the
Company's subsidiaries seeking damages for alleged breach of contract.
AgrEvo alleges that, under the contracts by which a subsidiary of the
Company purchased a herbicide business from AgrEvo in May 1998, two of
the Company's subsidiaries have failed to pay AgrEvo approximately $0.6
million. AgrEvo is requesting damages in this amount, as well as pre-
and post-judgment interest and attorneys' fees and costs. The Company's
subsidiaries have moved to dismiss or stay this action. On January 31,
2000, the Delaware court stayed AgrEvo's action pending the resolution
of a motion to amend the New York Action, and the resolution of the New
York Action. The Company's subsidiaries intend to vigorously defend the
asserted claims.
If the above actions are determined adversely to the Company, the
result could have a material adverse effect on the Company's results of
operations, financial position and cash flows. The Company believes
that it will prevail in the AgrEvo matter and that any potential
exposure that the Company may face cannot be reasonably estimated.
Therefore, no accrual has been established related to these matters.
CENTRAL GARDEN & PET COMPANY
----------------------------
SCOTTS V. CENTRAL GARDEN, SOUTHERN DISTRICT OF OHIO.
On June 30, 2000, the Company filed suit against Central Garden & Pet
Company in the U.S. District Court for the Southern District of Ohio
(the "Ohio Action") to recover approximately $17 million in outstanding
accounts receivable from Central Garden with respect to the Company's
2000 fiscal year. The Company's complaint was later amended to seek
approximately $24 million in accounts receivable and additional damages
for other breaches of duty.
On April 13, 2001, Central Garden filed an answer and counterclaim in
the Ohio action. On April 24, 2001, Central Garden filed an amended
counterclaim. Central Garden's counterclaims included allegations that
the Company and Central Garden had entered into an oral agreement in
April 1998 whereby the Company would allegedly share with Central
Garden the benefits and liabilities of any future business integration
between the Company and Pharmacia Corporation (formerly Monsanto).
Based on these allegations, Central Garden asserted several causes of
action, including fraudulent misrepresentation, and sought damages in
excess of $900 million. In addition, Central Garden asserted various
other causes of action, including breach of written contract and
quantum valebant, and sought damages
15
in excess of $76 million based on the allegations that Central Garden
was entitled to receive a cash payment rather than a credit for the
value of inventory Central Garden alleged was improperly seized by the
Company.
In April 2002, trial on the remaining claims and counterclaims took
place in this action. Prior to the conclusion of the trial, the court
dismissed certain of Central Garden's counterclaims as well as the
Company's claims that Central Garden breached other duties owed to the
Company. On April 22, 2002, a jury returned a verdict in favor of the
Company for $22.5 million and for Central Garden on its remaining
counterclaims in an amount of approximately $12.1 million. $11.0
million of the $12.1 million awarded to Central Garden was largely
undisputed and involved monies withheld from Central Garden by the
Company after Central Garden had ceased paying its bills in June, 2000.
The remaining $1.1 million awarded to Central Garden, the verdict in
favor of the Company and the court's dismissal of Central Garden's
counterclaim are subject to post-trial motions.
Prior to trial, the court dismissed Central Garden's $900 million
counterclaim for breach of oral agreement and promissory estoppel, and
entered summary judgment against Central Garden on Central Garden's
$900 million counterclaim for fraudulent misrepresentation. In
addition, as a result of entry of summary judgment against Central
Garden in the Missouri Action (discussed below) on Central Garden's $76
million counterclaim for illegal inventory seizure, that claim has been
resolved.
PHARMACIA CORPORATION V. CENTRAL GARDEN, CIRCUIT COURT OF ST. LOUIS,
MISSOURI.
On June 30, 2000 Pharmacia Corporation filed suit against Central
Garden in Missouri state court ("Missouri Action") seeking unspecified
damages allegedly due Pharmacia under a series of agreements, generally
referred to as the four-year "Alliance Agreement" between Pharmacia and
Central Garden. Scotts was, for a short time, an assignee of the
Alliance Agreement, which Scotts has reassigned to Pharmacia. Pursuant
to an order granting Central Garden's motion, on January 18, 2001,
Pharmacia joined Scotts as a nominal defendant in the Missouri state
court action.
On January 29, 2001, Central Garden filed its answer and cross-claims
and counterclaims in the Missouri action. On June 23, 2001, Scotts
filed a cross-claim against Central Garden for an equitable accounting
to establish the parties' relative financial positions under the
Alliance Agreement at the conclusion of that that agreement. On August
10, 2001, the Missouri court granted Central Garden leave to file
amended counterclaims and cross-claims relating to the Alliance
Agreement and seeking an unspecified amount of damages. The claims then
pending in Missouri against Scotts were for declaratory relief and an
accounting, various breaches of contract, breach of an indemnification
agreement, promissory estoppel, promissory fraud and unfair business
practices under Section 17200 of the California Business and
Professions Code. By order of the Missouri court, Central Garden's
unfair business practices claims were stayed pending resolution of the
action pending between the parties in the United States District Court
for the Northern District of California.
On October 1, 2001, Scotts moved for summary judgment on Central
Garden's claims of breach of an indemnification agreement, promissory
estoppel and promissory fraud. On November 15, 2001, the Missouri court
held a hearing on Scotts' summary judgment motion and took the motion
under submission.
On January 28, 2002, Central Garden and Pharmacia reported that they
reached a settlement in the Missouri action pursuant to which Pharmacia
dismissed its claims against Central Garden in the Missouri action, and
Central Garden dismissed its counterclaims against Pharmacia in the
Missouri action and its claims against Pharmacia in the California
federal and state actions described below. In connection with its
settlement with Pharmacia, Central Garden also dismissed all of its
legal claims against Scotts arising under the Alliance Agreements,
reserving only such equitable claims as it might have under the
Alliance Agreements. We are still reviewing the effect of this
settlement on Scotts, but we do not believe that it will have a
material adverse impact on our on-going litigation with Central Garden.
CENTRAL GARDEN V. SCOTTS & PHARMACIA, NORTHERN DISTRICT OF CALIFORNIA.
On July 7, 2000, Central Garden filed suit against the Company and
Pharmacia in the U.S. District Court for the Northern District of
California (San Francisco Division) alleging various claims, including
breach of contract and violations of federal antitrust laws, and
seeking an unspecified amount of damages and injunctive relief. On
October 26,
16
2000, the District Court granted the Company's motion to dismiss
Central Garden's breach of contract claims for lack of subject matter
jurisdiction. On November 17, 2000, Central Garden filed an amended
complaint in the District Court, re-alleging various claims for
violations of federal antitrust laws and also alleging state antitrust
claims under the Cartwright Act, Section 16726 of the California
Business and Professions Code. The trial date for the California
federal action is set for July 15, 2002. As described above, Central
Garden and Pharmacia have settled some or all of their claims relating
to this action.
On April 15, 2002, the Company and Central Garden each filed summary
judgment motions in this action. In addition, the Company filed motions
to disqualify Central Garden's expert witnesses. The Company also
amended its answer to assert the defense of res judicata based upon
entry of summary judgment on Central Garden's fraudulent
misrepresentation claim in the Ohio Action (described above).
CENTRAL GARDEN V. SCOTTS & PHARMACIA, CONTRA COSTA SUPERIOR COURT.
On October 31, 2000, Central Garden filed an additional complaint
against the Company and Pharmacia in the California Superior Court for
Contra Costa County. That complaint seeks to assert the breach of
contract claims previously dismissed by the District Court in the
California federal action described above, and additional claims under
Section 17200 of the California Business and Professions Code. On
December 4, 2000, the Company and Pharmacia jointly filed a motion to
stay this action based on the pendency of prior lawsuits (including the
three actions described above) that involve the same subject matter. By
order dated February 23, 2001, the Superior Court stayed the action
pending before it.
On April 6, 2001, Central Garden filed a motion to lift the stay of the
Contra Costa County action. Scotts and Pharmacia filed a joint
opposition to Central Garden's motion. On May 4, 2001, the Court issued
a tentative ruling denying Central Garden's motion to lift the stay of
the action. Central Garden did not challenge the tentative ruling,
which accordingly became the ruling of the court. Consequently, all
claims in the Contra Costa action remain stayed. As described above,
Central Garden and Pharmacia have settled some or all of their claims
relating to this action.
Scotts believes that all of Central Garden's federal and state claims
are entirely without merit and intend to vigorously defend against
them. If the above actions are determined adversely to Scotts, the
result could have a material adverse effect on Scotts' results of
operations, financial position and cash flows. Scotts believes that it
will prevail in the Central Garden matters and that any potential
exposure that Scotts may face cannot be reasonably estimated.
Therefore, no accrual has been established related to claims brought
against Scotts by Central Garden.
9. SUBSEQUENT EVENTS
In April 2002, agreement was reached with English Nature to cease peat
extraction at sites owned or leased by us in the United Kingdom. In
late April approximately $18 million was received to immediately
suspend all but a limited amount of peat extraction at the sites. An
additional $2.8 million was also received for the sale of peat
inventory to English Nature for use in the site restoration activities.
The gain from cessation payments, after writing off the remaining
undepreciated historical costs of the related assets will be recorded
in the third fiscal quarter of fiscal 2002. $6.3 million of the $18
million proceeds pertains to rental of certain bogs in future periods
and thus will be deferred and recorded as income in fiscal 2003 and
2004.
Also in April 2002, a jury returned a verdict in our favor for $22.5
million owed to us by Central Garden & Pet. We were also ordered to pay
Central Garden & Pet $12.1 million owed to them, $11.0 million of which
we had withheld payment on, pending resolution of this dispute. The
additional $1.1 million is subject to post trial motions. After final
entry of judgment, the verdict is subject to appeal. Accordingly, the
Company will not record any amounts related to the settlement of this
matter until such time as the appeal period expires or, if an appeal is
entered, the appeal process is completed. The Company expects that the
settlement of this matter will not have an adverse affect on its
financial position or results of operations.
17
10. NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued Statement of Accounting Standard No.
143, "Accounting for Asset Retirement Obligations". SFAS No. 143
addresses accounting and reporting standards for legal obligations
associated with the retirement of tangible long-lived assets. SFAS No.
143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002. Scotts is in the process of evaluating
the impact of SFAS No. 143 on its financial statements and will adopt
the provisions of this statement in the first quarter of fiscal year
2003.
In August 2001, the FASB issued Statement of Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
SFAS No. 144 supersedes Financial Accounting Standard No. 121, "
Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" and Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations; Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequent Occurring and Events and Transactions". SFAS No. 144
addresses accounting and reporting standards for the impairment or
disposal of long-lived assets. It is effective for financial statements
issued for fiscal years beginning after December 15, 2001. The Company
is in the process of evaluating the impact of SFAS No. 144 on its
financial statements and will adopt the provisions of this statement in
the first quarter of fiscal year 2003.
In April 2002, the Financial Accounting Standards Board issued
Statement 145 "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections". This
statement rescinds FASB Statement No. 4, Reporting Gains and Losses
from Extinguishment of Debt, and an amendment of that Statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement also rescinds FASB Statement No. 44,
Accounting for intangible Assets of Motor Carriers. This Statement
amends FASB Statement No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed
conditions. The provisions of this Statement related to the rescission
of Statement 4 shall be applied in fiscal years beginning after May 15,
2002. Scotts is currently evaluating the impact that the standard will
have on future periods.
11. SUPPLEMENTAL CASH FLOW INFORMATION
SIX MONTHS ENDED
MARCH 30, MARCH 31,
2002 2001
---- ----
($ MILLIONS)
Net assets acquired................................. $ 22.9 $ 7.4
Cash paid .......................................... 10.7 7.4
Notes issued to seller.............................. 12.2 0.0
18
12. EARNINGS PER COMMON SHARE
The following table presents information necessary to calculate basic
and diluted earnings per common share. Basic earnings per common share
are computed by dividing net income available to common shareholders by
the weighted average number of common shares outstanding. Options to
purchase 0.1 and 0.1 million shares of common stock for the three and
six month periods ended March 30, 2002, and 0.1 and 0.4 million shares
for the three and six month periods ended March 31, 2001 respectively
were not included in the computation of diluted earnings per common
share. These options were excluded from the calculation because the
exercise price of these options was greater than the average market
price of the common shares in the respective periods, and therefore,
they are antidilutive.
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
MARCH 30, MARCH 31, MARCH 30, MARCH 31,
2002 2001 2002 2001
---- ---- ---- ----
($ MILLIONS, EXCEPT PER SHARE DATA)
NET INCOME (LOSS):
Income before cumulative effect of accounting change ...................... $ 65.0 $ 84.8 $ 17.9 $ 33.6
Cumulative effect of change in accounting for intangible assets, net of tax -.- -.- (18.5) -.-
------ ------ ------ ------
Net income (loss) ......................................................... $ 65.0 $ 84.8 $ (0.6) $ 33.6
====== ====== ====== ======
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Weighted-average common shares outstanding during the period ............. 29.1 28.2 29.0 28.2
Basic earnings (loss) per common share:
Before cumulative effect of accounting change ........................ $ 2.23 $ 3.01 $ 0.62 $ 1.19
Cumulative effect of change in accounting for intangible assets,
net of tax -.- -.- (0.64) -.-
------ ------ ------ ------
After cumulative effect of accounting change ......................... $ 2.23 $ 3.01 $(0.02) $ 1.19
====== ====== ====== ======
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Weighted-average common shares outstanding during the period .............. 29.1 28.2 29.0 28.2
Potential common shares:
Assuming exercise of options ......................................... 1.0 1.0 1.1 0.8
Assuming exercise of warrants ........................................ 1.4 1.1 1.3 1.0
------ ------ ------ ------
Weighted-average number of common shares outstanding and dilutive
potential common shares .............................................. 31.5 30.3 31.4 30.0
Diluted earnings (loss) per common share:
Before cumulative effect of accounting change ........................ $ 2.06 $ 2.80 $ 0.57 $ 1.12
Cumulative effect of change in accounting for intangible assets,
net of tax -.- -.- (0.59) -.-
------ ------ ------ ------
After cumulative effect of accounting change ......................... $ 2.06 $ 2.80 $(0.02) $ 1.12
====== ====== ====== ======
13. SEGMENT INFORMATION
For fiscal 2002, the Company is divided into four reportable segments -
North American Consumer, Scotts LawnService(R), Global Professional and
International Consumer. The North American Consumer segment consists of
the Lawns, Gardens, Growing Media, Ortho and Canadian business units.
These segments differ from those used in the prior year due to
segregating of the Scotts LawnService(R) business from the North
American Consumer business because of a change in reporting structure
whereby Scotts LawnService(R) no longer reports to senior management of
the North American Consumer segment.
The North American Consumer segment specializes in dry, granular
slow-release lawn fertilizers, lawn fertilizer combination and lawn
control products, grass seed, spreaders, water-soluble and
controlled-release garden and indoor plant foods, plant care products,
and potting soils, barks, mulches and other growing media products, and
pesticide products. Products are marketed to mass merchandisers, home
improvement centers, large hardware chains, nurseries and gardens
centers.
The Scotts LawnService(R) segment provides lawn fertilization, insect
control and other related services such as core aeration primarily to
residential consumers through company-owned branches and franchises. In
most company markets, Scotts LawnService(R) also offers tree and shrub
fertilization, disease and insect control treatments and, in our larger
branches, we also offer an exterior barrier pest control service.
The Global Professional segment is focused on a full line of
horticulture products including controlled-release and water-soluble
fertilizers and plant protection products, grass seed, spreaders,
custom application services and growing media. Products are sold to
lawn and landscape service companies, commercial nurseries and
greenhouses and specialty
19
crop growers.
The International Consumer segment provides products similar to those
described above for the North American Consumer segment to consumers in
countries other than the United States and Canada.
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). Prior period amounts have
been restated to conform to this basis of presentation.
NORTH AMERICAN SCOTTS GLOBAL INTERNATIONAL OTHER/
CONSUMER LAWNSERVICE(R) PROFESSIONAL CONSUMER CORPORATE TOTAL
-------------- -------------- ------------ ------------- --------- -----
($ millions)
Net Sales:
2002 YTD.............................. $ 530.0 $ 16.1 $ 90.6 $ 128.4 $ -.- $ 765.1
2001 YTD.............................. $ 612.8 $ 9.3 $ 94.4 $ 144.0 $ -.- $ 860.5
2001 Q2............................... $ 452.1 $ 7.4 $ 54.4 $ 88.2 $ -.- $ 602.1
2001 Q2............................... $ 546.0 $ 4.4 $ 58.5 $ 104.6 $ -.- $ 713.5
Income (loss) from Operations:
2002 YTD.............................. $ 95.3 $ (10.1) $ 8.8 $ 9.1 $ (28.6) $ 74.5
2001 YTD.............................. $ 130.6 $ (4.4) $ 9.6 $ 11.8 $ (27.8) $ 119.8
2002 Q2............................... $ 124.7 $ (8.0) $ 9.0 $ 15.7 $ (11.6) $ 129.8
2001 Q2............................... $ 164.7 $ (4.5) $ 10.4 $ 20.5 $ (14.9) $ 176.2
Operating Margin:
2002 YTD.............................. 18.0% (62.7%) 9.7% 7.1% nm% 9.7%
2001 YTD.............................. 21.3% (47.3%) 10.2% 8.2% nm% 13.9%
2002 Q2............................... 27.6% (108.1%) 16.5% 17.8% nm% 21.6%
2001 Q2............................... 30.2% (102.3%) 17.8% 19.6% nm% 24.7%
Goodwill:
2002 Q2............................... $ 169.4 $ 46.3 $ 50.4 $ 73.9 $ -.- $ 340.0
2001 Q2............................... $ 170.1 $ 16.4 $ 57.1 $ 72.5 $ -.- $ 316.1
Total Assets:
2002 Q2............................... $1,443.7 $ 62.3 $ 158.0 $ 477.4 $ 98.9 $ 2,240.3
2001 Q2............................... $1,520.5 $ 23.3 $ 171.5 $ 548.4 $ 83.2 $ 2,346.9
nm Not meaningful.
Income (loss) from Operations reported for Scotts' four operating
segments represents earnings before amortization, interest and taxes,
since this is the measure of profitability used by management.
Accordingly, corporate operating loss for the three and six months
ended March 30, 2002 and March 31, 2001 includes amortization of
certain assets, corporate general and administrative expenses, and
certain "other" income/expense not allocated to the business segments
and North America restructuring charges.
Total assets reported for Scotts' operating segments include the
intangible assets for the acquired business within those segments.
Corporate assets primarily include deferred financing and debt
issuance costs, corporate intangible assets as
20
well as deferred tax assets.
14. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTORS
In January 1999, the Company issued $330 million of 8 5/8% Senior
Subordinated Notes due 2009 to qualified institutional buyers under the
provisions of Rule 144A of the Securities Act of 1933. These Notes were
subsequently registered in December 2000. In January 2002, the Company
issued an additional $70 million of Senior Subordinated Notes but has
not yet publicly registered the new notes.
The Notes are general obligations of The Scotts Company and are
guaranteed by all of the existing wholly-owned, domestic subsidiaries
and all future wholly-owned, significant (as defined in Regulation S-X
of the Securities and Exchange Commission) domestic subsidiaries of The
Scotts Company. These subsidiary guarantors jointly and severally
guarantee The Scotts 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 for the three and six-month periods ended March 30, 2002
and March 31, 2001 and consolidating Statements of Cash Flows and
Balance Sheets for the six month periods ended March 30, 2002 and March
31, 2001. Separate unaudited financial statements of the individual
guarantor subsidiaries have not been provided because management does
not believe they would be meaningful to investors.
21
THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 30, 2002 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
Net sales........................................... $ 439.3 $30.9 $131.9 $ $602.1
Cost of sales ...................................... 317.4 (37.5) 82.2 362.1
Restructuring and other charges..................... 0.1 0.1
------- ----- ------ ------ ------
Gross profit ....................................... 121.9 68.4 49.6 239.9
Gross commission earned from agency agreement ...... 7.6 0.8 8.4
Costs associated with agency agreement ............. 5.8 5.8
------- ----- ------ ------ ------
Net commission earned from agency agreement...... 1.8 -.- 0.8 2.6
Operating expenses:
Advertising...................................... 19.0 4.0 7.9 30.9
Selling, general and administrative.............. 50.4 4.9 28.8 84.1
Restructuring and other charges.................. 0.4 0.4
Amortization of intangible assets ............... 0.1 0.7 1.0 1.8
Equity loss in subsidiaries......................... (38.8) 38.8 -.-
Intracompany allocations............................ (9.8) 7.4 2.4 -.-
Other (income) expense, net ........................ (1.0) (0.9) (1.9)
------- ----- ------ ------ ------
Income (loss) from operations ...................... 102.4 52.4 11.2 (38.8) 127.2
Interest (income) expense .......................... 19.4 (3.5) 5.7 21.6
------- ----- ------ ------ ------
Income (loss) before income taxes .................. 83.0 55.9 5.5 (38.8) 105.6
Income taxes ....................................... 17.0 21.5 2.1 40.6
------- ----- ------ ------ ------
Income (loss) before cumulative effect of accounting
change 66.0 34.4 3.4 (38.8) 65.0
Cumulative effect of change in accounting for
intangible assets, net of tax ...................... -.-
------- ----- ------ ------ ------
Net income (loss)................................... $ 66.0 $34.4 $ 3.4 $(38.8) $65.0
======= ===== ====== ====== =====
FOR THE SIX MONTHS ENDED MARCH 30, 2002 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
Net sales........................................... $ 491.0 $ 79.2 $194.9 $ $765.1
Cost of sales ...................................... 353.6 13.4 126.1 493.1
Restructuring and other charges..................... 1.0 0.1 1.1
------- ------- ------ ----- -----
Gross profit ....................................... 136.4 65.8 68.7 270.9
Gross commission earned from agency agreement ...... 7.3 1.1 8.4
Costs associated with agency agreement ............. 11.7 11.7
------- ------- ------ ----- -----
Net commission earned from agency agreement...... (4.4) -.- 1.1 (3.3)
Operating expenses:
Advertising .................................... 22.4 4.7 10.9 38.0
Selling, general and administrative.............. 94.3 8.6 56.5 159.4
Restructuring and other charges.................. 1.1 0.1 1.2
Amortization of intangible assets ............... 0.2 1.4 2.1 3.7
Equity income in subsidiaries....................... 6.2 (6.2) -.-
Intracompany allocations............................ (13.3) 9.3 4.0 -.-
Other (income) expense, net ........................ (0.3) (2.0) (1.6) (3.9)
------- ------- ------ ----- -----
Income (loss) from operations ...................... 21.4 43.7 (2.1) 6.2 69.2
Interest (income) expense .......................... 36.9 (7.1) 10.4 40.2
------- ------- ------ ----- -----
Income (loss) before income taxes .................. (15.5) 50.8 (12.5) 6.2 29.0
Income taxes ....................................... (3.6) 19.5 (4.8) 11.1
------- ------- ------ ----- -----
Income (loss) before cumulative effect of accounting
change (11.9) 31.3 (7.7) 6.2 17.9
Cumulative effect of change in accounting for
intangible assets, net of tax .................... 11.3 (3.8) (26.0) (18.5)
------- ------- ------ ----- -----
Net income (loss)................................... $ (0.6) $ 27.5 $(33.7) $ 6.2 $(0.6)
======= ======= ====== ===== =====
22
THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 30, 2002 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss). .................................. $ (0.6) $ 27.5 $(33.7) $ 6.2 $ (0.6)
Adjustments to reconcile net income (loss) to net to
cash used in operating activities:
Cumulative effect of change in accounting for
intangible assets ............................. 3.8 26.0 29.8
Depreciation ..................................... 4.2 9.7 2.1 16.0
Amortization ..................................... 1.0 2.8 1.5 5.3
Deferred taxes.................................... (10.1) (10.1)
Equity (income) loss in non-guarantors............ 6.2 (6.2) -.-
Net change in certain components
of working capital ............................... (165.6) 6.8 (86.2) (245.0)
Net changes in other assets and
liabilities and other adjustments................. 3.3 1.5 4.8
------- ------ ------ ------ -------
Net cash provided by (used in) operating activities.. (161.6) 50.6 (88.8) -.- (199.8)
------- ------ ------ ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES.................
Investment in property, plant and equipment.......... (6.6) (14.7) (1.0) (22.3)
Investment in acquired businesses,
net of cash acquired.............................. (3.1) (3.1)
Payments on seller notes............................. (16.0) (16.0)
------- ------ ------ ------ -------
Net cash used in investing activities................ (6.6) (14.7) (20.1) -.- (41.4)
------- ------ ------ ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving
and bank lines of credit ......................... 86.4 110.2 196.6
Gross borrowings under term loans.................... -.-
Gross repayments under term loans.................... (0.2) (14.7) (14.9)
Issuance of 8 5/8% senior subordinated notes......... 70.2 70.2
Cash received from the exercise of stock options..... 10.3 10.3
Intracompany financing .............................. 23.2 (36.5) 13.3 -.-
------- ------ ------ ------ -------
Net cash provided (used in) by financing activities.. 189.9 (36.5) 108.8 -.- 262.2
------- ------ ------ ------ -------
Effect of exchange rate changes on cash.............. (2.2) -.- (2.2)
------- ------ ------ ------ -------
Net increase (decrease) in cash...................... 21.7 (0.6) (2.3) -.- 18.8
Cash and cash equivalents, beginning of period....... 3.4 0.6 14.7 -.- 18.7
------- ------ ------ ------ -------
Cash and cash equivalents, end of period............. $ 25.1 $ -.- $ 12.4 $ -.- $ 37.5
======= ====== ====== ====== =======
23
THE SCOTTS COMPANY
BALANCE SHEET
AS OF MARCH 30, 2002 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents......................... $ 25.1 $ $ 12.4 $ $37.5
Accounts receivable, net ......................... 222.0 122.6 202.4 547.0
Inventories, net ................................. 261.5 79.0 86.3 426.8
Current deferred tax asset........................ 52.2 0.5 (0.5) 52.2
Prepaid and other assets.......................... 20.6 2.3 21.7 44.6
--------- ------- ------- ---------- --------
Total current assets........................... 581.4 204.4 322.3 -.- 1,108.1
Property, plant and equipment, net .................. 199.2 76.6 37.6 313.4
Goodwill and other intangible assets, net ........... 31.7 471.2 241.2 744.1
Other assets ........................................ 61.1 2.5 11.1 74.7
Investment in affiliates............................. 931.3 (931.3) -.-
Intracompany assets ................................. 159.7 (159.7) -.-
--------- ------- ------- ---------- --------
Total assets................................... $ 1,804.7 $ 914.4 $ 612.2 $ (1,091.0) $2,240.3
========= ======= ======= ========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt................................... $ 166.3 $ 7.3 $ 32.0 $ $ 205.6
Accounts payable.................................. 125.9 43.0 101.2 270.1
Accrued liabilities............................... 129.8 18.7 69.8 218.3
Accrued taxes..................................... 28.9 2.5 4.5 35.9
--------- ------- ------- ---------- --------
Total current liabilities...................... 450.9 71.5 207.5 -.- 729.9
Long-term debt....................................... 590.0 5.3 325.8 921.1
Other liabilities.................................... 45.5 1.9 25.0 72.4
Intracompany liabilities............................. 141.0 18.7 (159.7) -.-
--------- ------- ------- ---------- --------
Total liabilities.............................. 1,227.4 78.7 577.0 (159.7) 1,723.4
--------- ------- ------- ---------- --------
Commitments and contingencies
Shareholders' equity:
Investment from parent............................ 483.0 41.8 (524.8) -.-
Preferred shares, no par value.................... -.-
Common shares, no par value per share,
$.01 stated value per share.................... 0.3 0.3
Capital in excess of par value.................... 400.1 400.1
Retained earnings................................. 246.4 355.1 16.7 (406.5) 211.7
Treasury stock, 2.1 shares at cost................ (61.4) (61.4)
Accumulated other comprehensive expense........... (8.1) (2.4) (23.3) (33.8)
--------- ------- ------- ---------- --------
Total shareholders' equity........................... 577.3 835.7 35.2 (931.3) 516.9
--------- ------- ------- ---------- --------
Total liabilities and shareholders' equity........... $ 1,804.7 $ 914.4 $ 612.2 $ (1,091.0) $2,240.3
========= ======= ======= ========== ========
24
THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
Net sales ................................................. $380.7 $185.7 $147.1 $713.5
Cost of sales ............................................. 239.6 93.5 88.5 421.6
Restructuring and other charges ........................... -.-
------ ------ ------ ------ ------
Gross profit .............................................. 141.1 92.2 58.6 -.- 291.9
Gross commission earned from agency agreement ............. 14.9 1.7 16.6
Costs associated with agency agreement .................... 4.6 4.6
------ ------ ------ ------ ------
Net commission earned from agency agreement ............ 10.3 -.- 1.7 -.- 12.0
Operating expenses:
Advertising ............................................ 21.7 9.0 7.8 38.5
Selling, general and administrative .................... 51.7 10.7 29.1 91.5
Restructuring and other charges ........................ -.-
Amortization of goodwill and other intangibles ......... 3.2 1.6 2.6 7.4
Equity loss in subsidiaries ............................... (46.4) 46.4 -.-
Intracompany allocations .................................. (10.9) 8.6 2.3 -.-
Other expense (income), net ............................... (1.4) (1.4)
------ ------ ------ ------ ------
Income (loss) from operations ............................. 133.5 62.3 18.5 (46.4) 167.9
Interest (income) expense ................................. 23.0 (3.8) 6.9 26.1
------ ------ ------ ------ ------
Income (loss) before income taxes ......................... 110.5 66.1 11.6 (46.4) 141.8
Income taxes .............................................. 25.7 26.6 4.7 57.0
------ ------ ------ ------ ------
Income (loss) before cumulative effect of accounting change 84.8 39.5 6.9 (46.4) 84.8
Cumulative effect of change in accounting for intangible
assets, net of tax -.-
------ ------ ------ ------ ------
Net income (loss) ......................................... $ 84.8 $ 39.5 $ 6.9 $(46.4) $ 84.8
====== ====== ====== ====== ======
FOR THE SIX MONTHS ENDED MARCH 31, 2001 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
Net sales ................................................. $419.5 $234.2 $206.8 $860.5
Cost of sales ............................................. 264.3 146.2 126.8 537.3
Restructuring and other charges ........................... -.-
------ ------ ------ ------ -----
Gross profit .............................................. 155.2 88.0 80.0 -.- 323.2
Gross commission earned from agency agreement ............. 14.5 2.0 16.5
Costs associated with agency agreement .................... 9.1 9.1
------ ------ ------ ------ -----
Net commission earned from agency agreement ............ 5.4 -.- 2.0 -.- 7.4
Operating expenses:
Advertising ............................................ 25.3 10.3 10.5 46.1
Selling, general and administrative .................... 93.6 18.9 56.4 168.9
Restructuring and other charges ........................ -.-
Amortization of goodwill and other intangibles ......... 6.0 3.3 4.9 14.2
Equity loss in subsidiaries ............................... (22.1) 22.1 -.-
Intracompany allocations .................................. (24.0) 19.7 4.3 -.-
Other expense (income), net ............................... (2.4) (0.1) (2.5)
------ ------ ------ ------ -----
Income (loss) from operations ............................. 84.2 35.8 6.0 (22.1) 103.9
Interest (income) expense ................................. 42.7 (7.5) 12.2 47.4
------ ------ ------ ------ -----
Income (loss) before income taxes ......................... 41.5 43.3 (6.2) (22.1) 56.5
Income taxes .............................................. 7.9 17.5 (2.5) 22.9
Restructuring and other charges -.-
------ ------ ------ ------ -----
Income (loss) before cumulative effect of accounting change 33.6 25.8 (3.7) (22.1) 33.6
Cumulative effect of change in accounting for intangible
assets, net of tax -.-
------ ------ ------ ------ -----
Net income (loss) ......................................... $ 33.6 $ 25.8 $ (3.7) $(22.1) $33.6
====== ====== ====== ====== =====
25
THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED MARCH 31, 2001 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ................................ $ 33.6 $ 25.8 $(3.7) $(22.1) $ 33.6
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Cumulative effect of change in accounting for
intangible assets .......................... -.-
Depreciation .................................. 2.9 9.7 3.4 16.0
Amortization .................................. 7.7 3.3 4.9 15.9
Deferred taxes ................................ 2.1 2.1
Equity (income) loss in subsidiaries .......... (22.1) 22.1 -.-
Net change in certain components of
working capital ............................ (179.6) (102.3) (84.7) (366.6)
Net changes in other assets and
liabilities and other adjustments .......... 1.7 (11.7) 0.8 (9.2)
------ ------ ------ ------ ------
Net cash used in operating activities ............ (153.7) (75.2) (79.3) -.- (308.2)
------ ------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment ...... (20.4) (3.3) (3.0) (26.7)
Investments in acquired businesses,
net of cash acquired .......................... (0.4) (0.1) (11.7) (12.2)
Payments on seller notes ......................... (1.8) (8.6) (10.4)
------ ------ ------ ------ ------
Net cash used in investing activities ............ (20.8) (5.2) (23.3) -.- (49.3)
------ ------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving
and bank lines of credit ...................... 228.5 147.8 376.3
Gross borrowings under term loans ................ 260.0 260.0
Gross repayments under term loans ................ (257.5) (46.8) (304.3)
Cash received from exercise of stock options ..... 10.4 10.4
Intracompany financing ........................... (71.9) 80.7 (8.8) -.-
------ ------ ------ ------ ------
Net cash provided by financing activities ........ 169.5 80.7 92.2 342.4
Effect of exchange rate changes on cash .......... (0.1) (0.1)
------ ------ ------ ------ ------
Net increase (decrease) in cash .................. (5.0) 0.3 (10.5) -.- (15.2)
Cash and cash equivalents, beginning of period ... 16.0 (0.6) 17.6 -.- 33.0
------ ------ ------ ------ ------
Cash and cash equivalents, end of period ......... $ 11.0 $ (0.3) $ 7.1 -.- $ 17.8
====== ====== ====== ====== ======
26
THE SCOTTS COMPANY
BALANCE SHEET
AS OF MARCH 31, 2001 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ............. $ 11.0 $ (0.3) $ 7.1 $ $ 17.8
Accounts receivable, net .............. 366.5 112.8 213.7 693.0
Inventories, net ...................... 241.1 78.6 82.3 402.0
Current deferred tax asset ............ 28.1 0.5 (1.0) 27.6
Prepaid and other assets .............. 47.5 1.5 18.1 67.1
-------- -------- -------- ---------- --------
Total current assets ............... 694.2 193.1 320.2 -.- 1,207.5
Property, plant and equipment, net ....... 185.5 73.7 37.8 297.0
Goodwill and other intangible assets, net 271.6 230.7 267.7 770.0
Other assets ............................. 62.5 9.9 72.4
Investment in affiliates ................. 954.8 (954.8) -.-
Intracompany assets ...................... 447.1 4.1 (451.2) -.-
-------- -------- -------- ---------- --------
Total assets ....................... $2,168.6 $ 944.6 $ 639.7 $(1,406.0) $2,346.9
======== ======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt ....................... $ 276.5 $ 0.8 $ 20.9 $ $ 298.2
Accounts payable ...................... 146.8 57.6 99.3 303.7
Accrued liabilities ................... 156.9 20.2 47.9 225.0
Accrued taxes ......................... 31.9 3.3 5.8 41.0
-------- -------- -------- ---------- --------
Total current liabilities .......... 612.1 81.9 173.9 -.- 867.9
Long-term debt ........................... 549.7 360.3 910.0
Other liabilities ........................ 33.6 16.2 49.8
Intracompany liabilities ................. 451.2 (451.2) -.-
-------- -------- -------- ---------- --------
Total liabilities .................. 1,646.6 81.9 550.4 (451.2) 1,827.7
-------- -------- -------- ---------- --------
Commitments and contingencies
Shareholders' equity:
Investment from parent ................ 590.5 52.7 (643.2) -.-
Preferred shares, no par value ........ -.-
Common shares, no par value per share,
$.01 stated value per share ........ 0.3 0.3
Capital in excess of par value ........ 390.6 390.6
Retained earnings ..................... 230.3 275.2 36.5 (311.6) 230.4
Treasury stock, 2.9 shares at cost .... (74.6) (74.6)
Accumulated other comprehensive expense (24.6) (3.0) 0.1 (27.5)
-------- -------- -------- ---------- --------
Total shareholders' equity ............... 522.0 862.7 89.3 (954.8) 519.2
-------- -------- -------- ---------- --------
Total liabilities and shareholders' equity $2,168.6 $ 944.6 $ 639.7 $(1,406.0) $2,346.9
======== ======== ======== ========== ========
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Scotts is a leading manufacturer and marketer of consumer branded
products for lawn and garden care and professional horticulture in the United
States and Europe. Our operations are divided into four business segments: North
American Consumer, Scotts LawnService(R), International Consumer, and Global
Professional. The North American Consumer segment includes the Lawns, Gardens,
Growing Media, Ortho and Canadian business groups.
As a leading consumer branded lawn and garden company, we focus on our
consumer marketing efforts, including advertising and consumer research, to
create demand to pull products through the retail distribution channels. In the
past three years, we have spent approximately 5% of our gross sales annually on
media advertising to support and promote our products and brands. 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 marketing
expenditures. We expect that we will continue to focus our marketing efforts
toward the consumer and to make a significant investment in consumer marketing
expenditures in the future to drive market share and sales growth.
Our sales 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 past acquisitions have diversified both our product line
risk and geographic risk to weather conditions.
Our operations are also seasonal in nature. In fiscal 2001, net sales
by quarter were 8.7%, 42.1%, 35.2% and 14.0% of total year net sales,
respectively. Operating losses were reported in the first and fourth quarters of
fiscal 2001 while significant profits were recorded for the second and third
quarters. The sales trend in fiscal 2002 is expected to follow a somewhat
different pattern due to retailer initiatives to reduce their investment in
inventory and improve their inventory turns. We believe that this has caused a
sales shift from the second quarter to the third and fourth quarters that
coincides more closely to when consumers buy our products. Accordingly, sales to
our retail customers and earnings in the second quarter of fiscal 2002 are down
from the prior year but we expect the shortfall to reverse over the second half
of the fiscal year. The foregoing is our assessment of current trends related to
our customers' changing inventory management practices; however, there can be no
assurance that the fiscal year 2002 revenue shortfall experienced through the
second quarter of fiscal year 2002 will be recovered during the balance of the
fiscal year.
In the third and fourth quarter of fiscal 2001, restructuring and
other charges of $75.7 million were recorded for reductions in force, facility
closures, asset writedowns, and other related costs. Certain costs associated
with this restructuring initiative, including costs related to the relocation of
equipment, personnel and inventory, were not recorded as part of the
restructuring costs in 2001. These costs are being recorded as they are incurred
in fiscal 2002 as required under generally accepted accounting principles.
In fiscal 2001, Scotts adopted accounting policies that required
certain amounts payable to customers or consumers related to the purchase of our
products to be recorded as a reduction in net sales rather than as advertising
and promotion expense (e.g., volume rebates). In fiscal 2002, Scotts adopted
EITF-00-25, "Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products". This
standard requires Scotts to record certain of its cooperative advertising
expenditures as reductions of net sales rather than as advertising and promotion
expense. Results for fiscal 2001 have been reclassified to conform to this new
presentation method for these expenses.
In addition, in fiscal 2002 we adopted Statement of Accounting
Standards No. 142, "Goodwill and Other Intangible Assets". This statement
eliminates the requirement to amortize indefinite-lived intangible assets and
goodwill. It also requires an initial impairment test on all indefinite-lived
assets as of the date of adoption of this standard and impairment tests done at
least annually thereafter. As a result of adopting the standard as of October 1,
2001, amortization expense for the first half of fiscal 2002 was reduced by
approximately $10.8 million. The full year effect in fiscal 2002 is expected to
exceed $21.0 million.
We completed our impairment analysis in the second quarter of 2002,
taking into account additional guidance provided by EITF 02-07, "Unit of Measure
for Testing Impairment of Indefinite-Lived Intangible Assets". As a result, a
pre-tax impairment
28
charge related to the value of tradenames in our German, French and United
Kingdom consumer businesses of $29.8 million was recorded as of October 1, 2001.
After taxes, the net charge was $18.5 million. There is no goodwill impairment
as of the date of adoption. See Note 5 to the Condensed, Consolidated
Statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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, 2001
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.
Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to customer programs and incentives, product returns, bad debts,
inventories, intangible assets, income taxes, restructuring, environmental
matters, contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. The estimates that we believe are most
critical to our reporting of results of operation and financial position are as
follows:
- We continually assess the adequacy of our reserves for
uncollectible accounts due from customers. However, future changes
in our customers' operating performance and cash flows or in
general economic conditions could have an impact on their ability
to fully pay these amounts which could have a material impact on
our operating results.
- Reserves for product returns are based upon historical data and
current program terms and conditions with our customers. Changes
in economic conditions, regulatory actions or defective products
could result in actual returns being materially different than the
amounts provided for in our interim or annual results of
operations.
- Reserves for excess and obsolete inventory are based on a variety
of factors, including product changes and improvements, changes in
ingredient availability and regulatory acceptance, new product
introductions and estimated future demand. The adequacy of our
reserves could be materially affected by changes in the demand for
our products or by regulatory or competitive actions.
- As described more fully in the notes to the unaudited condensed,
consolidated financial statements, we are involved in significant
environmental and legal matters which have a high degree of
uncertainty associated with them. We continually assess the likely
outcomes of these matters and the adequacy of amounts, if any,
provided for these matters. There can be no assurance that the
ultimate outcomes will not differ materially from our assessment
of them. There can also be no assurance that all matters that may
be brought against us or that we may bring against other parties
are known to us at any point in time.
Also, as described more fully in the notes to the unaudited condensed,
consolidated financial statements, we have not accrued the deferred contribution
under the Roundup(R) marketing agreement with Monsanto or the interest thereon.
The Company considers this method of accounting for the contribution payments
to be appropriate after consideration of the likely term of the agreement, the
Company's ability to terminate the agreement without paying the deferred
amounts, and the fact that approximately $18.6 million of the deferred amount
is never paid, even if the agreement is not terminated prior to 2018, unless
significant earnings targets are exceeded. At March 30, 2002, contribution
payments and related per annum charges of approximately $48.3 million had been
deferred under the agreement.
29
RESULTS OF OPERATIONS
The following table sets forth sales by business segment for the three
and six month periods ended March 30, 2002 and March 31, 2001:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
-------------------------- ------------------------
MARCH 30, MARCH 31, MARCH 30, MARCH 31,
2002 2001 2002 2001
---- ---- ---- ----
North American Consumer:
Lawns......................................... $ 223.8 $ 288.2 $ 250.7 $ 304.9
Gardens....................................... 54.9 61.6 63.5 69.4
Growing Media................................. 91.5 94.5 114.6 114.2
Ortho......................................... 66.6 81.5 83.4 97.1
Canada........................................ 11.8 12.6 12.6 13.6
Other......................................... 3.5 7.6 5.2 13.6
---------- --------- --------- ---------
Total...................................... 452.1 546.0 530.0 612.8
Scotts LawnService(R).............................. 7.4 4.4 16.1 9.3
International Consumer........................... 88.2 104.6 128.4 144.0
Global Professional.............................. 54.4 58.5 90.6 94.4
---------- --------- --------- ---------
Consolidated..................................... $ 602.1 $ 713.5 $ 765.1 $ 860.5
========== ========= ========== =========
The following table sets forth the components of income and expense as a
percentage of sales for the three and six month periods ended March 30, 2002 and
March 31, 2001:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
-------------------------- ------------------------
MARCH 30, MARCH 31, MARCH 30, MARCH 31,
2002 2001 2002 2001
---- ---- ---- ----
Net sales........................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................... 60.2 59.1 64.5 62.4
Restructuring and other charges.................. - - 0.1 -
Gross profit..................................... 39.8 40.9 35.4 37.6
Commission earned from agency agreement, net..... 0.4 1.7 (0.4) 0.9
Operating expenses:
Advertising................................... 5.1 5.4 5.0 5.4
Selling, general and administrative........... 14.0 12.8 20.8 19.6
Restructuring and other charges............... - - 0.2 -
Amortization of goodwill and other intangibles... 0.3 1.0 0.5 1.7
Other income, net................................ (0.3) (0.2) (0.5) (0.3)
------- ------- --------- -------
Income from operations........................... 21.1 23.5 9.0 12.1
Interest expense................................. 3.6 3.7 5.3 5.5
------- ------- --------- -------
Income before income taxes and cumulative
effect of accounting change................... 17.5 19.9 3.8 6.6
Income taxes..................................... 6.7 8.0 1.5 2.7
------- ------- --------- -------
Income before cumulative effect of
accounting change............................. 10.8 11.9 2.3 3.9
Cumulative effect of change in accounting for
intangible assets, net of tax................. - - (2.4) -
------- ------- --------- -------
Net income (loss)................................ 10.8% 11.9% (0.1)% 3.9%
======= ======= ========= =======
THREE MONTHS ENDED MARCH 30, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
Net sales for the three months ended March 30, 2002 were $602.1
million, a decrease of 15.6% from net sales for the three months ended March 31,
2001 of $713.5 million.
30
North American Consumer segment net sales were $452.1 million in the
second quarter of fiscal 2002, a decrease of $93.4 million, or 17.2%, from net
sales for the second quarter of fiscal 2001 of $546 million. Net sales of the
Lawns, Ortho and Gardens businesses were adversely impacted by retailer
initiatives to reduce inventories and take shipments closer to when the consumer
buys the products. We believe this has caused a shift of sales to the trade from
the second quarter to the second half of fiscal 2002. The Growing Media business
was less affected by this shift because their supply chain is separate from the
other businesses and has historically operated on more of a "just in time"
basis. Net sales in the "Other" category under North America Consumer segment
are sales under a supply agreement. These sales fluctuate based on the
customer's needs but are not material to our results.
Scotts LawnService(R) revenues increased 68.2% from $4.4 million in
the second quarter of fiscal 2001 to $7.4 million in the second quarter of
fiscal 2002. The growth in revenue reflects the growth in the business from the
acquisitions completed in late winter and early spring of fiscal 2002, new
branch openings in late winter of fiscal 2002 and the growth in customers from
our spring 2002 and fall 2001 marketing campaigns.
Net sales for the International Consumer segment were $88.2 million in
the second quarter of fiscal 2002, which were $16.4 million, or 15.7%, lower
than net sales for the second quarter of fiscal 2001. Sales growth for this
segment also was affected by customers in Europe waiting until closer to the
season to place orders for delivery in an effort to control inventory levels.
Net sales for the Global Professional segment were $54.4 million in
the second quarter of fiscal 2002, which were $4.1 million, or 7.0%, lower than
net sales for the second quarter of fiscal 2001. Revenue was impacted as
growers in the United States held off on product purchases until their current
crops moved through the retail channels as they are also under similar
pressures to delay shipment until closer to the consumer purchase of green
goods.
Gross profit was $239.9 million in the second quarter of fiscal 2002,
a decrease of $52.0 million from gross profit of $291.9 million in the second
quarter of fiscal 2001. As a percentage of net sales, gross profit was 39.8% of
sales in the second quarter of fiscal 2002 compared to 40.9% in the second
quarter of fiscal 2001. The decline in gross profit as a percentage of sales
resulted from lower sales volume in the quarter which reduced the margin
percentage due to fixed costs related to warehousing. The decline in gross
margin percentage is also due to a shift in product mix, particularly in our
North American Lawns, International Consumer and Global Professional businesses.
We also experienced lower margins in Scotts LawnService(R) due to fixed
operating expenses for recently acquired and newly opened branches incurred
during the low revenue winter months.
The net commission earned from agency agreement in the second quarter
of fiscal 2002 was net income of $2.6 million compared to net income of $12.0
million in the second quarter of fiscal 2001. The decreased income from the
prior year is primarily due to the increase in the contribution payment due to
Monsanto to $20 million in fiscal 2002 compared to $15 million in fiscal 2001
and lower sales during the quarter that we believe is due to the shift in the
retailer order pattern described above.
...
Advertising expenses in the second quarter of fiscal 2002 were $30.9
million, a decrease of $7.6 million from the second quarter of fiscal 2001 of
$38.5 million. As a percentage of sales, advertising expense was 5.1% in the
second quarter of 2002 compared to 5.4% in the second quarter of fiscal 2001.
The decline is due to lower advertising rates in 2002 and the Ortho business'
focus in 2002 on in-store promotional activities and radio which is less costly
than television.
Selling, general and administrative expenses in the second quarter of
fiscal 2002 were $84.1 million compared to $91.5 million for the second quarter
of fiscal 2001. The decrease from the second quarter of fiscal 2001 to the
second quarter of fiscal 2002 is due to lower costs resulting from the cost
cutting and restructuring activities that occurred in fiscal 2001, offset in
part by higher costs for information technology services and legal fees. The
second quarter of fiscal 2002 includes $0.1 million of restructuring costs in
costs of goods sold related to the redeployment of inventory from closed plants
and warehouses and $0.4 million in selling, general and administrative expenses
related to the relocation of personnel. Under generally accepted accounting
principles in the United States, these costs have been expensed in the period
incurred.
Amortization of goodwill and intangibles in the second quarter of
fiscal 2002 was $1.8 million compared to $7.4 million in the second quarter of
fiscal 2001, primarily due to the cessation of amortization of certain
indefinite-lived intangibles and goodwill under the provisions of a new
accounting standard. See Note 5 of Notes to Condensed, Consolidated Financial
31
Statements (Unaudited).
Other income was $1.9 million for the second quarter of fiscal 2002,
compared to other income of $1.4 million in the second quarter of fiscal 2001.
The increase is due to charges incurred in the first half of fiscal 2001 for a
product defect that did not recur in fiscal 2002.
Income from operations for the second quarter of fiscal 2002 was
$127.2 million, compared with $167.9 million for the second quarter of fiscal
2001. The decrease in income from operations from the prior year is the result
of lower sales, offset by lower selling, general and administrative expenses and
the effect of the change in accounting for amortization of indefinite-lived
assets.
Interest expense for the second quarter of fiscal 2002 was $21.6
million, a decrease of $4.5 million from interest expense for the second quarter
of fiscal 2001 of $26.1 million. The decrease in interest expense was primarily
due to a reduction in average borrowings for the quarter as compared to the
prior year, and lower interest rates on our variable rate debt.
Income tax expense for the second quarter of fiscal 2002 was $40.6
million, compared with an income tax expense for the second quarter of fiscal
2001 of $57.0 million. The decrease in tax expense from the prior year is the
result of the lower pre-tax income for the second quarter of fiscal 2002 for the
reasons noted above. The lower estimated income tax rate for the second quarter
of fiscal 2002 of 38.5% compared to 40.2% for the second quarter of fiscal 2001
was due to the elimination of amortization expense for book purposes that was
not deductible for tax purposes.
The Company reported a net income of $65.0 million for the second
quarter of fiscal 2002, or $2.06 per common share on a diluted basis, compared
to a net income of $84.8 million for the second quarter of fiscal 2001, or $2.80
per common share on a diluted basis. Diluted shares increased to 31.5 million
from 30.3 million due to option exercises during the past year and the effect of
a higher stock price on the number of common stock equivalents.
SIX MONTHS ENDED MARCH 30, 2002 COMPARED TO SIX MONTHS ENDED MARCH 31, 2001
Net sales for the six months ended March 30, 2002 were $765.1 million,
a decrease of 11.1% from net sales for the six months ended March 31, 2001 of
$860.5 million.
North American Consumer segment net sales were $530.0 million in the
first six months of fiscal 2002, a decrease of $82.8 million, or 13.5%, from net
sales for the first six months of fiscal 2001 of $612.8 million. Net sales for
the second quarter of fiscal 2002 represented over 85% of North American
Consumer net sales for the first half of fiscal 2002. Thus, net sales for the
first half of fiscal 2002 were affected by the same retailer order trends that
impacted sales in the second quarter. Net sales in the "Other" category under
North America Consumer segment are sales under a supply agreement. These sales
fluctuate based on the customer's needs but are not material to our results.
Scotts LawnService(R) revenues increased 73.1% from $9.3 million in
the first half of fiscal 2001 to $16.1 million in the first half of fiscal 2002.
The growth in revenue reflects the growth in the business from the acquisitions
completed in late winter and early spring of fiscal 2002, new branch openings in
late winter of fiscal 2002 and the growth in customers from our spring 2002 and
fall 2001 marketing campaigns.
Net sales for the International Consumer segment were $128.4 million
in the first half of fiscal 2002, which were $15.6 million, or 10.8%, lower than
net sales for the first half of fiscal 2001. We believe that sales declined due
to our customers waiting until closer to the season to place orders for
delivery in an effort to control inventory levels which defers sales into the
second half of fiscal 2002.
Net sales for the Global Professional segment were $90.6 million in
the first six months of fiscal 2002, which were $3.8 million, or 4.0%, lower
than net sales for the first six months of fiscal 2001. The revenue growth
decline was primarily in North America where growers have increased their
focus on managing inventory levels.
32
Gross profit was $270.9 million in the first six months of fiscal
2002, a decrease of $52.3 million from gross profit of $323.2 million in the
first six months of fiscal 2001. As a percentage of net sales, gross profit was
35.4% of sales in the first half of fiscal 2002 compared to 37.6% in the first
half of fiscal 2001. The decline in gross profit as a percentage of sales
resulted from a shift in product mix toward lower margin growing media and seed
sales and away from higher margin fertilizer and control product sales which
occur later in the spring season. The margin percentage was also impacted by
fixed costs being a higher percentage of a lower sales volume. We also
experienced lower margins in Scotts LawnService(R) due to fixed operating
expenses for recently acquired and newly opened branches incurred during the low
revenue winter months.
The net commission earned from agency agreement in the first half of
fiscal 2002 was expense of $3.3 million compared to income of $7.4 million in
the first half of fiscal 2001. The decrease from the prior year is primarily due
to the increase in the contribution payment due to Monsanto to $20 million in
fiscal 2002 compared to $15 million in fiscal 2001 and lower sales in the
Roundup business due to the shift in the retailer order pattern described above.
Advertising expenses in the first six months of fiscal 2002 were $38.0
million, a decrease of $8.1 million from advertising expenses in the first six
months of fiscal 2001 of $46.1 million. The decrease in advertising expenses
from the prior year is primarily due to lower rates and the change in the focus
of Ortho advertising as described above.
Selling, general and administrative expenses in the first half of
fiscal 2002 were $159.4 million compared to $168.9 million for the first half of
fiscal 2001. The decrease from the first half of fiscal 2001 to the first half
of fiscal 2002 is due to lower costs resulting from the cost cutting and
restructuring activities that occurred in fiscal 2002, offset in part by higher
spending on information services and legal matters. The first half of fiscal
2002 includes $1.1 million of restructuring costs in costs of goods sold related
to the redeployment of inventory from closed plants and warehouses and $1.2
million in selling, general and administrative expenses related to the
relocation of personnel. Under generally accepted accounting principles in the
United States, these costs have been expensed in the period incurred.
Amortization of goodwill and intangibles in the first half of fiscal
2002 was $3.7 million compared to $14.2 million in the first half of fiscal
2001, primarily due to the adoption of the new accounting standard described
above. See Note 5 of Notes to Condensed, Consolidated Financial Statements
(Unaudited).
Other income was $3.9 million for the first half of fiscal 2002,
compared to other income of $2.5 million in the first half of fiscal 2001. The
increase is due primarily to the gain on sale of an idled growing media plant in
Florida in the first quarter of fiscal 2002.
Income from operations for the first six months of fiscal 2002 was
$69.2 million, compared with $103.9 million for the first six months of fiscal
2001. The decrease in income from operations from the prior year is the result
of the lower net sales, offset by lower selling, general and administrative
expenses and the effect of the change in accounting for amortization of
indefinite-lived assets.
Interest expense for the first half of fiscal 2002 was $40.2 million,
a decrease of $7.2 million from interest expense for the first half of fiscal
2001 of $47.4 million. The decrease in interest expense was primarily due to a
reduction in average borrowings for the quarter as compared to the prior year,
and lower interest rates on our variable rate debt.
Income tax expense for the first half of fiscal 2002 was $11.1
million, compared with an income tax expense for the first half of fiscal 2001
of $22.9 million. The decrease in tax expense from the prior year is the result
of the lower pre-tax income for the first half of fiscal 2002 for the reasons
noted above and the lower estimated income tax rate for the first half of fiscal
2002 of 38.3% compared to 40.5% for the first half of fiscal 2001 due to the
elimination of amortization expense for book purposes that was not deductible
for tax purposes.
The Company reported income before cumulative effect of accounting
changes of $17.9 million for the first six months of fiscal 2002, compared to
$33.6 million for the first six months of fiscal 2001. After the charge of $29.8
million ($18.5 million, net of tax), for the impairment of tradenames in our
German, French and United Kingdom businesses, net income for the first six
months of fiscal 2002 was a net loss of $0.6 million, or $.02 per share,
compared to net income of $33.6 million or $1.12 per
33
diluted share.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $199.8 million for the six
months ended March 30, 2002 compared to a use of cash of $308.2 million for the
six months ended March 31, 2001. The seasonal nature of our operations generally
requires cash to fund significant increases in working capital (primarily
inventory) during the first half of the year. Receivables and payables also
build substantially in the second quarter in line with increasing sales as the
season begins. These balances liquidate over the latter part of the second half
of the year as the lawn and garden season winds down. Cash used in operations
was lower in the first half of fiscal 2002 due to lower inventory production in
the period, lower accounts receivable and improved collection and lower income
tax payments due to lower net income in the fiscal year ended September 30, 2001
compared to the fiscal year ended September 30, 2000.
Cash used in investing activities was $41.4 million for the first six
months of fiscal 2002 compared to $49.3 million in the prior year period.
Investments in acquired businesses declined due to the acquisition of Substral
at the end of the first quarter of fiscal 2001 while payments on seller notes
increased because of payments made on the Substral deferred purchase obligation
in the first half of fiscal 2002. Cash payments on acquisitions completed by
Scotts LawnService(R) during both years were similar. However, the total value
of acquisitions by Scotts LawnService(R) in the first half of fiscal 2002 was up
by over $15 million from the first half of fiscal 2001.
Financing activities provided cash of $262.2 million for the first six
months of fiscal 2002 compared to providing $342.4 million in the prior year.
The decrease in cash from financing activities was primarily due to a decrease
in borrowings under our credit facility to fund operations due to improved cash
flows from operations as noted above, partially offset by the $70 million
issuance of senior subordinated notes in January 2002. The net proceeds were
used to pay down borrowings on our revolving credit facility.
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 $1.1 billion and consists of
term loan facilities in the aggregate amount of $525 million and a revolving
credit facility in the amount of $575 million.
Total debt was $1,126.7 million as of March 30, 2002, a decrease of
$81.5 million compared with total debt at March 31, 2001 of $1,208.2. The
decrease in debt compared to the prior year was primarily due to scheduled debt
repayments on our term loans during fiscal 2001 and lower borrowings on our
revolver to support operations during the first half of fiscal 2002.
We did not repurchase any treasury shares in fiscal 2001 or in the
first half of fiscal 2002.
Scotts has no off balance sheet financing except for operating leases
which are disclosed in the Notes to Consolidated Financial Statements included
in the Company's fiscal 2001 Annual Report on Form 10-K or any financial
arrangements with any related parties. All related party transactions are with
and between our subsidiaries or management. All material intercompany
transactions are eliminated in our consolidated financial statements. All
transactions with management are fully described and disclosed in our proxy
statement. Such transactions pertain primarily to office space provided to and
administrative services provided by Hagedorn Partnership, L.P. and do not exceed
$150,000 per annum.
In March 2002 litigation with Rhone-Poulenc Jardin concerning the
amount paid for businesses acquired in 1998 was settled for a cash payment of
$10.4 million of which $0.8 million was interest. After payment of legal fees of
$2.6 million, the net proceeds of $6.9 were recorded as reductions in goodwill
and other indefinite-lived intangible assets.
In April 2002, our subsidiary in the United Kingdom reached agreement
with English Nature on the cessation of peat extraction activities at three peat
bogs leased by us. In late April 2002, we received payments totaling $18.1
million, for the transfer of our interests in the properties and for the
immediate cessation of all but a limited amount of peat extraction on one of the
three sites. An additional $2.8 million was received for peat inventory sold to
English Nature which will be used for
34
restoration activities to be conducted at the various sites. We will also
receive compensation for services rendered from time to time in assisting
English Nature in restoration activities. Further amounts of $2.9 million will
be payable to us on cessation of peat extraction on the remaining site before
October 2004 and the final transfer of interests in the property.
Also, in late April 2002, a jury awarded us payment of $22.5 million
for amounts owed to us by Central Garden & Pet, a former distributor. At the
same time, we were ordered to pay Central Garden & Pet $12.1 million for fees
and credits owed to them. The verdict is subject to further revision by post
trial motions and is also appealable. The final outcome cannot be determined
until the final judgment is entered by the court and all appeals, if any, are
concluded. We are unable to predict at this time when the determination of a
final amount will occur.
In our opinion, cash flows from operations and capital resources will
be sufficient to meet debt service and working capital needs during fiscal 2002,
and thereafter for the foreseeable future. However, we cannot ensure that our
business groups will generate sufficient cash flow from operations or that
future borrowings will be available under our credit facilities in amounts
sufficient to pay indebtedness or fund other liquidity needs. Actual results of
operations will depend on numerous factors, many of which are beyond our
control. We cannot ensure that we will be able to refinance any indebtedness,
including our credit facility, on commercially reasonable terms, or at all.
ENVIRONMENTAL MATTERS
We are subject to local, state, federal and foreign environmental
protection laws and regulations with respect to our business operations and
believe we are operating in substantial compliance with, or taking action aimed
at ensuring compliance with, such laws and regulations. We are involved in
several legal actions with various governmental agencies related to
environmental matters. While it is difficult to quantify the potential financial
impact of actions involving environmental matters, particularly remediation
costs at waste disposal sites and future capital expenditures for environmental
control equipment, in the opinion of management, the ultimate liability arising
from such environmental matters, taking into account established reserves,
should not have a material adverse effect on our financial position; however,
there can be no assurance that the resolution of these matters will not
materially affect future quarterly or annual operating results. Additional
information on environmental matters affecting us is provided in Note 8 of the
Notes to Condensed, Consolidated Financial Statements (unaudited) as of and for
the six months ended March 30, 2002 and in the fiscal 2001 Annual Report on Form
10-K under the "ITEM 1. BUSINESS -- ENVIRONMENTAL AND REGULATORY CONSIDERATIONS"
and "ITEM 3. LEGAL PROCEEDINGS" sections.
RELATIONSHIPS WITH CUSTOMERS
We do not have long-term sales agreements or other contractual
assurances as to future sales to any of our major retail customers. In addition,
continued consolidation in the retail industry has resulted in an increasingly
concentrated retail base in North America. To the extent such concentration
continues to occur, our net sales and operating income may be increasingly
sensitive to a deterioration in the financial condition of, or other adverse
developments involving our relationship with, one or more customers. As a result
of consolidation in the retail industry, our customers are able to exert
increasing pressure on us with respect to pricing and new product introductions.
KMART
Kmart, one of our largest customers, filed for bankruptcy relief under
Chapter 11 of the bankruptcy code on January 22, 2002. Following such filing, we
recommenced shipping products to Kmart, and we intend to continue shipping
products to Kmart for the foreseeable future. If Kmart does not successfully
emerge from its bankruptcy reorganization, our business could be adversely
affected. We believe the reserves we have recorded for amounts due from Kmart as
of the date of its bankruptcy filing are adequate.
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
35
relating to future growth and profitability targets, and strategies designed to
increase total shareholder value. Forward-looking statements include, but are
not limited to, information regarding our future economic performance and
financial condition, the plans and objectives of our management and our
assumptions regarding our performance and these plans and objectives.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information, so long as those statements are identified as
forward-looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those discussed in the forward-looking statements. We desire to
take advantage of the "safe harbor" provisions of that Act.
The forward-looking statements that we make in our Annual Report,
Forms 10-K and 10-Q and in other contexts represent challenging goals for our
company, and the achievement of these goals is subject to a variety of risks and
assumptions and numerous factors beyond our control. Important factors that
could cause actual results to differ materially from the forward-looking
statements we make are described below. All forward-looking statements
attributable to us or persons working on our behalf are expressly qualified in
their entirety by the following cautionary statements:
- - ADVERSE WEATHER CONDITIONS COULD ADVERSELY IMPACT FINANCIAL RESULTS.
Weather conditions in North America and Europe have a significant
impact on the timing of sales in the spring selling season and overall annual
sales. Periods of wet weather can slow fertilizer sales, while periods of dry,
hot weather can decrease pesticide sales. In addition, an abnormally cold spring
throughout North America and/or Europe could adversely affect both fertilizer
and pesticide sales and therefore our financial results.
- - OUR HISTORICAL SEASONALITY COULD IMPAIR OUR ABILITY TO PAY OBLIGATIONS
AS THEY COME DUE IN ADDITION TO OUR OPERATING EXPENSES.
Because our products are used primarily in the spring and summer, our
business is highly seasonal. For the past two fiscal years, approximately 75% to
77% of our net sales have occurred in the second and third fiscal quarters
combined. We believe that for this fiscal year a significant portion of the
sales historically made by Scotts in the second fiscal quarter will be made in
the third fiscal quarter because Scotts' major customers have implemented
general policies to reduce their on hand inventories. The foregoing is our
assessment of current trends related to our customers' changing inventory
management practices; however, there can be no assurance that the fiscal year
2002 revenue shortfall experienced through the second quarter of fiscal year
2002 will be recovered during the balance of fiscal year 2002, or at all. Our
working capital needs and our borrowings peak near the middle of our second
fiscal quarter because we are generating fewer revenues while incurring
expenditures in preparation for the spring selling season. If cash on hand is
insufficient to pay our obligations as they come due, including interest
payments on our indebtedness, or our operating expenses, at a time when we are
unable to draw on our credit facility, this seasonality could have a material
adverse affect on our ability to conduct our business. 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, growing media, herbicides and pesticides, bearing our brands. On
occasion, customers and some current or former employees have alleged that some
products failed to perform up to expectations or have caused 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.
- - 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 70% of our fiscal year 2001 net sales
36
and 37% of our outstanding accounts receivable as of September 30, 2001. Our top
four customers, Home Depot, Wal*Mart, Kmart and Lowe's represented approximately
25%, 12%, 8% and 7%, respectively, of our fiscal year 2001 net sales. These
customers hold significant positions in the retail lawn and garden market. The
loss of, or reduction in orders from, Home Depot, Wal*Mart, Kmart, Lowe's 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.
We do not have long-term sales agreements or other contractual
assurances as to future sales to any of our major retail customers. In addition,
continued consolidation in the retail industry has resulted in an increasingly
concentrated retail base. To the extent such concentration continues to occur,
our net sales and operating income may be increasingly sensitive to
deterioration in the financial condition of, or other adverse developments
involving our relationship with, one or more customers. As a result of
consolidation in the retail industry, our customers are able to exert increasing
pressure on us with respect to pricing and new product introductions.
Kmart, one of our top customers, filed for bankruptcy relief under
Chapter 11 of the bankruptcy code on January 22, 2002. Following such filing, we
recommenced shipping products to Kmart, and we intend to continue shipping
products to Kmart for the foreseeable future. If Kmart does not successfully
emerge from its bankruptcy reorganization, our business could be adversely
affected.
- - OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL
HEALTH AND PREVENT US FROM FULFILLING OUR OBLIGATIONS.
We have a significant amount of debt. Our substantial indebtedness
could have important consequences. For example, it could:
- make it more difficult for us to satisfy our obligations;
- increase our vulnerability to general adverse economic and
industry conditions;
- require us to dedicate a substantial portion of cash flows
from operations to payments on our indebtedness, which would
reduce the cash flows available to fund working capital,
capital expenditures, research and development efforts and
other general corporate requirements;
- limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate;
- place us at a competitive disadvantage compared to our
competitors that have less debt;
- limit our ability to borrow additional funds; and
- expose us to risks inherent in interest rate fluctuations
because some of our borrowings are at variable rates of
interest, which could result in higher interest expense in the
event of increases in interest rates.
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 our 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
37
able to refinance any of our indebtedness on commercially reasonable terms or at
all.
- - RESTRICTIVE COVENANTS MAY ADVERSELY AFFECT US.
Our credit facility and the indenture governing our outstanding senior
subordinated notes contain restrictive covenants that require us to maintain
specified financial ratios and satisfy other financial condition tests. Our
ability to meet those financial ratios and tests can be affected by events
beyond our control, and we cannot assure that we will meet those tests. A
breach of any of these covenants could result in a default under our credit
facility and/or the senior subordinated notes. Upon the occurrence of an event
of default under our credit facility and/or the senior subordinated notes, the
lenders and/or noteholders could elect to declare all of our outstanding
indebtedness to be immediately due and payable and terminate all commitments to
extend further credit. We cannot be sure that our lenders or the noteholders
would waive a default or that we could pay the indebtedness in full if it were
accelerated.
- - IF MONSANTO WERE TO TERMINATE THE MARKETING AGREEMENT FOR CONSUMER
ROUNDUP(R) PRODUCTS, WE WOULD LOSE A SUBSTANTIAL SOURCE OF FUTURE
EARNINGS.
If we were to commit a serious default under the marketing agreement
with Monsanto for consumer Roundup(R) products, Monsanto may have the right to
terminate the agreement. If Monsanto were to terminate the marketing agreement
rightfully, we would not be entitled to any termination fee, and we would lose
all, or a significant portion, of the significant source of earnings we believe
the marketing agreement provides. Monsanto may also be able to terminate the
marketing agreement within a given region, including North America, without
paying us a termination fee if sales to consumers in that region decline:
- Over a cumulative three fiscal year period; or
- By more than 5% for each of two consecutive fiscal years.
- - THE EXPIRATION OF PATENTS RELATING TO ROUNDUP(R) AND THE SCOTTS TURF
BUILDER(R) LINE OF PRODUCTS COULD SUBSTANTIALLY INCREASE OUR
COMPETITION IN THE UNITED STATES.
Glyphosate, the active ingredient in Roundup(R), was subject to a
patent in the United States that expired iN September 2000. We cannot predict
the success of Roundup(R) now that glyphosate is no longer patented. Substantial
new competition in the United States could adversely affect us. Glyphosate is no
longer subject to patent in Europe and is not subject to patent in Canada. While
sales of Roundup(R) in such countries have continued to increase despite the
lack of patent protection, sales in the United States may decline as a result of
increased competition. Any such decline in sales would adversely affect our
financial results through the reduction of commissions as calculated under the
Roundup(R) marketing agreement. We are aware that Spectrum Brands produced
glyphosate one-gallon products for Home Depot and Lowe's to be sold under the
Real- Kill(R) and No-Pest(R) brand names, respectively, in fiscal year 2001.
Additional competitive products have been introduced in fiscal year 2002. It is
too early to determine whether these product introductions will have a material
adverse effect on our sales of Roundup(R).
Our methylene-urea product composition patent, which covered Scotts
Turf Builder(R), Scotts Turf Builder(R) Plus 2(R) with Weed Control and Scotts
Turf Builder(R) with Halts(R) Crabgrass Preventer, expired in July 2001. This
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.
- - HAGEDORN PARTNERSHIP, L.P. BENEFICIALLY OWNS APPROXIMATELY 40% OF THE
OUTSTANDING COMMON SHARES OF SCOTTS ON A FULLY DILUTED BASIS.
Hagedorn Partnership, L.P. beneficially owns approximately 40% of the
outstanding common shares of Scotts on a fully diluted basis and has sufficient
voting power to significantly influence the election of directors and the
approval of other actions requiring the approval of our shareholders.
38
- - COMPLIANCE WITH ENVIRONMENTAL AND OTHER PUBLIC HEALTH REGULATIONS
COULD INCREASE OUR COST OF DOING BUSINESS.
Local, state, federal and foreign laws and regulations relating to
environmental matters affect us in several ways. In the United States, all
products containing pesticides must be registered with the United States
Environmental Protection Agency ("U.S. EPA") and, in many cases, similar state
agencies before they can be sold. The inability to obtain or the cancellation of
any registration could have an adverse effect on our business. The severity of
the effect would depend on which products were involved, whether another product
could be substituted and whether 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. EPA is evaluating the cumulative
risks from dietary and non-dietary exposures to pesticides. The pesticides in
our products, certain of which may be used on crops processed into various food
products, continue to be evaluated by the U.S. EPA as part of this exposure risk
assessment. It is possible that the U.S. EPA or a third party active ingredient
registrant may decide that a pesticide we use in our products will be limited or
made unavailable to us. For example, in June 2000, DowAgroSciences, an active
ingredient registrant, voluntarily agreed to a gradual phase-out of residential
uses of chlorpyrifos, an active ingredient used by us in our lawn and garden
products. In December 2000, the U.S. EPA reached agreement with various parties,
including manufacturers of the active ingredient diazinon, regarding a phased
withdrawal of residential uses of products containing diazinon, used also by us
in our lawn and garden products. We cannot predict the outcome or the severity
of the effect of the U.S. EPA's continuing evaluations of active ingredients
used in our products.
The use of certain pesticide and fertilizer products is regulated by
various local, state, federal and foreign environmental and public health
agencies. Regulations regarding the use of some pesticide and fertilizer
products may include requirements that only certified or professional users
apply the product, that the products be used only in specified locations or that
certain ingredients not be used. Users may be required to post notices on
properties to which products have been or will be applied and may be required to
notify individuals in the vicinity that products will be applied in the future.
Even if we are able to comply with all such regulations and obtain all necessary
registrations, we cannot assure that our products, particularly pesticide
products, will not cause injury to the environment or to people under all
circumstances. The costs of compliance, remediation or products liability have
adversely affected operating results in the past and could materially affect
future quarterly or annual operating results.
The harvesting of peat for our growing media business has come under
increasing regulatory and environmental scrutiny. In the United States, state
regulations frequently require us to limit our harvesting and to restore the
property to an agreed-upon condition. 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.
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 ("Ohio EPA") initiated an enforcement action
against us with respect to alleged surface water violations and inadequate
treatment capabilities at our Marysville facility and seeking corrective action
under the Resource Conservation Recovery Act. We negotiated a mutually agreeable
resolution of these issues with the Ohio EPA and the Ohio Attorney General's
office in 2001. On December 3, 2001, an agreed judicial Consent Order was
submitted to the Union County Common Pleas Court and was entered by the court on
January 25, 2002.
For the six months ended March 30, 2002, we made approximately $1.5
million in environmental expenditures, compared with approximately $0.6 million
in environmental capital expenditures and $2.1 million in other environmental
expenses for the entire fiscal year 2001. Management anticipates that
environmental capital expenditures and other environmental expenses for the
remainder of fiscal year 2002 will not differ significantly from those incurred
in fiscal year 2001. The adequacy of these anticipated future expenditures is
based on our operating in substantial compliance with applicable environmental
and public health laws and regulations and several significant assumptions:
- that we have identified all of the significant sites that must
be remediated;
39
- that there are no significant conditions of potential
contamination that are unknown to us; and
- that with respect to the agreed judicial Consent Order in
Ohio, that potentially contaminated soil can be remediated in
place rather than having to be removed and only specific
stream segments will require remediation as opposed to the
entire stream.
If there is a significant change in the facts and circumstances
surrounding these assumptions or if we are found not to be in substantial
compliance with applicable environmental and public health laws and regulations,
it could have a material impact on future environmental capital expenditures and
other environmental expenses and our results of operations, financial position
and cash flows.
- - OUR SIGNIFICANT INTERNATIONAL OPERATIONS MAKE US MORE SUSCEPTIBLE TO
FLUCTUATIONS IN CURRENCY EXCHANGE RATES AND TO THE COSTS OF
INTERNATIONAL REGULATION.
We currently operate manufacturing, sales and service facilities
outside of North America, particularly in the United Kingdom, Germany and
France. Our international operations have increased with the acquisitions of
Levington, Miracle Garden Care Limited, Ortho and Rhone-Poulenc Jardin and with
the marketing agreement for consumer Roundup(R) products. In fiscal year 2001,
international sales accounted for approximately 20% 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.
In addition, our operations outside the United States are subject to
the risk of new and different legal and regulatory requirements in local
jurisdictions, potential difficulties in staffing and managing local operations
and potentially adverse tax consequences. The costs related to our international
operations could adversely affect our operations and financial results in the
future.
- - TERRORIST ATTACKS, SUCH AS THE ATTACKS THAT OCCURRED IN NEW YORK AND
WASHINGTON, D.C., ON SEPTEMBER 11, 2001, AND OTHER ACTS OF VIOLENCE OR
WAR MAY AFFECT THE MARKETS ON WHICH OUR COMMON SHARES AND REGISTERED
SENIOR SUBORDINATED NOTES TRADE, THE MARKETS IN WHICH WE OPERATE, OUR
OPERATIONS AND OUR PROFITABILITY.
Terrorist attacks may negatively affect our operations and your
investment. There can be no assurance that there will not be further terrorist
attacks against the United States or U.S. businesses. These attacks or armed
conflicts may directly impact our physical facilities or those of our suppliers
or customers. Furthermore, these attacks may make travel and the transportation
of our supplies and products more difficult and more expensive and ultimately
affect our sales. Also as a result of terrorism, the United States has entered
into an armed conflict which could have a further impact on our sales, our
supply chain and our ability to deliver product to our customers. Political and
economic instability in some regions of the world may also result and could
negatively impact our business. The consequences of any of these armed conflicts
are unpredictable, and we may not be able to foresee events that could have an
adverse effect on our business or your investment. More generally, any of these
events could cause consumer confidence and spending to decrease or result in
increased volatility in the United States and worldwide financial markets and
economy. They also could result in economic recession in the United States or
abroad. Any of these occurrences could have a significant impact on our
operating results, revenues and costs and may result in the volatility of the
market price for our securities and on the future price of our securities.
40
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As noted in Note 8 to the Company's unaudited Condensed, Consolidated
Financial Statements as of and for the period ended March 30, 2002, the Company
is involved in several pending legal and environmental matters. Pending other
material legal proceedings are as follows:
RHONE-POULENC, S.A., RHONE-POULENC AGRO S.A. AND HOECHST, A.G.
On October 15, 1999, the Company began arbitration proceedings before
the International Court of Arbitration of the International Chamber of Commerce
("ICA") against Rhone-Poulenc S.A. and Rhone-Poulenc Agro S.A. (collectively,
"Rhone-Poulenc") under arbitration provisions contained in contracts relating to
the purchase by the Company of Rhone-Poulenc's European lawn and garden
business, Rhone-Poulenc Jardin, in 1998. The Company alleged that the
combination of Rhone-Poulenc and Hoechst Schering AgrEvo GmbH ("AgrEvo") into a
new entity, Aventis S.A., would result in the violation of non-compete and other
provisions in the contracts mentioned above.
On October 9, 2000, the ICA issued a First Partial Award by the
Tribunal which, inter alia: (i) found that Rhone-Poulenc breached its duty of
good faith under the French law by not disclosing to the Company the
contemplated combination of Rhone-Poulenc and AgrEvo; (ii) directed that the
parties re-negotiate a non-compete provision; and (iii) ruled that a Research
and Development Agreement entered into ancillary to the purchase of
Rhone-Poulenc Jardin is binding upon both Rhone-Poulenc and its post-merger
successor. On February 12, 2001, because of the parties' failure to agree on
revisions to the non-compete provision, the ICA issued a Second Partial Award by
the Tribunal revising that provision.
On February 18, 2002, the ICA issued a Third Partial Award by the
Tribunal directing that Rhone-Poulenc pay to the Company the sum of
approximately 11.9 million Euros including interest from October 15, 1999. In
early March, 2002, Rhone-Poulenc paid the amounts awarded by the Tribunal to the
Company. The Tribunal stated that a Final Award as to Costs will be issued when
the quantification of legal fees and expenses has been agreed by the parties or
determined by the Tribunal. Efforts at such quantification are presently
on-going.
Also on October 15, 1999, the Company filed a complaint styled The
Scotts Company, et al. v. Rhone-Poulenc, S.A., Rhone-Poulenc Agro S.A. and
Hoechst, A.G. in the Court of Common Pleas for Union County, Ohio, seeking
injunctive relief maintaining the status quo in aid of the arbitration
proceedings as well as an award of damages against Hoechst for Hoechst's
tortious interference with the Company's contractual rights. On October 19,
1999, the defendants removed the Union County action to the United States
District Court for the Southern District of Ohio. On December 8, 1999, the
Company requested that this action be stayed pending the outcome of the
arbitration proceedings. Said stay was granted by the District Court on February
18, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits are included herewith.
(b) The Registrant filed a Current Report on Form 8-K dated January
25, 2002 reporting under "Item 5. Other Events" the Registrant's intention to
issue $70 million of its 8.625% Senior Subordinated Notes due 2009 through a
private placement to qualified institutional buyers pursuant to Rule 144A and in
offshore transactions pursuant to Regulation S under the Securities Act of 1933,
as amended.
41
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
/s/ CHRISTOPHER L. NAGEL
-------------------------------------
Christopher L. Nagel
Date: May 10, 2002 Chief Accounting Officer,
Senior Vice President of Finance,
Corporate North America
(Duly Authorized Officer)
42
