Exhibit 13
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
2001(1) 2000 1999(2) 1998(3) 1997(4)
--------- --------- --------- --------- ---------
OPERATING RESULTS:
Net sales(7) $ 1,696.6 $ 1,665.2 $ 1,576.6 $ 1,066.0 $ 857.8
Gross profit(8) 597.2 612.8 589.3 351.0 284.2
Income from operations(5) 116.4 210.2 196.1 94.1 94.8
Income before extraordinary items 15.5 73.1 69.1 37.0 39.5
Income applicable to common shareholders 15.5 66.7 53.5 26.5 29.7
Depreciation and amortization 63.6 61.0 56.2 34.5 26.8
FINANCIAL POSITION:
Working capital 249.1 234.1 274.8 135.3 146.5
Investments in property, plant and equipment 63.4 72.5 66.7 41.3 28.6
Property, plant and equipment, net 310.7 290.5 259.4 197.0 146.1
Total assets 1,843.0 1,761.4 1,769.6 1,035.2 787.6
Total debt 887.8 862.8 950.0 372.5 221.3
Total shareholders' equity 506.2 477.9 443.3 403.9 389.2
CASH FLOWS:
Cash flows from operating activities 65.7 171.5 78.2 71.0 121.1
Cash flows from investing activities (101.0) (89.5) (571.6) (192.1) (72.5)
Cash flows from financing activities 21.4 (78.2) 513.9 118.4 (46.2)
RATIOS:
Operating margin 6.9% 12.6% 12.4% 8.8% 11.1%
Current ratio 1.5 1.6 1.7 1.6 2.1
Total debt to total book capitalization 63.7% 64.3% 68.2% 48.0% 36.2%
Return on average shareholders' equity 3.1% 14.5% 12.6% 6.7% 7.9%
PER SHARE DATA:
Basic earnings per common share $ 0.55 $ 2.39 $ 2.93 $ 1.42 $ 1.60
Diluted earnings per common share 0.51 2.25 2.08 1.20 1.35
Price to diluted earnings per share,
end of period 66.9 14.9 16.6 25.5 19.4
Stock price at year-end 34.10 33.50 34.63 30.63 26.25
Stock price range--High 47.10 42.00 47.63 41.38 30.56
Stock price range--Low 28.88 29.44 26.63 26.25 17.75
OTHER:
EBITDA(6) 180.0 271.2 252.3 128.6 121.6
EBITDA margin(6) 10.6% 16.3% 16.0% 12.1% 14.2%
Interest coverage (EBITDA/interest expense)(6) 2.1 2.9 3.2 4.0 4.8
Average common shares outstanding 28.4 27.9 18.3 18.7 18.6
Common shares used in diluted earnings per common
share calculation 30.4 29.6 30.5 30.3 29.3
Dividends on Class A Convertible Preferred Stock $ 0.0 $ 6.4 $ 9.7 $ 9.8 $ 9.8
NOTE: Prior year presentations have been changed to conform to fiscal
2001 presentation; these changes did not impact net income.
(1) Includes Substral(R)brand acquired from Henkel KGaA from January 2001.
(2) Includes Rhone-Poulenc Jardin (nka Scotts France SAS) from October
1998, ASEF Holding BV from December 1998 and the
non-Roundup(R)("Ortho") business from January 1999.
(3) Includes Levington Group Limited (nka The Scotts Company (UK) Ltd.)
from December 1997 and EarthGro, Inc. from February 1998.
(4) Includes Miracle Holdings Limited (nka The Scotts Company (UK) Ltd.)
from January 1997.
(5) Income from operations for fiscal 2001 and 1998 includes $75.7 million
and $20.4 million of restructuring and other charges, respectively.
4
(6) EBITDA is defined as income from operations, plus depreciation and
amortization. We believe that EBITDA provides additional information
for determining our ability to meet debt service requirements. EBITDA
does not represent and should not be considered as an alternative to
net income or cash flow from operations as determined by generally
accepted accounting principles, and EBITDA does not necessarily
indicate whether cash flow will be sufficient to meet cash
requirements.
(7) The Company adopted the guidance of EITF 00-25, "Accounting for
Consideration from a Vendor to a Retailer in Connection with the
Purchase or Promotion of the Vendor's Products" in the first quarter
of 2002. The related decreases in Net Sales are as follows; $51.1
million for 2001, $43.8 million for 2000, $25.9 million for 1999,
$17.3 million for 1998 and $13.9 million for 1997.
(8) The related decreases in Gross Profit from the adoption of EITF 00-25
are as follow; $54.2 million for 2001, $45.7 million for 2000, $25.9
million for 1999, $17.3 million for 1998 and $13.9 million for 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Scotts is a leading manufacturer and marketer of consumer branded
products for lawn and garden care and professional horticulture in the United
States and Europe. During fiscal 2001, our operations were divided into Four
business segments: North American Consumer, Scotts LawnService(R), Global
Professional and International Consumer. The North American Consumer segment
includes the Lawns, Gardens, Growing Media, Ortho and Canada businesses.
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.
In fiscal 2001, we began two major initiatives that affect the way we
go to business with our customers in our North American consumer business
segment. One was the "one face to the customer" initiative whereby the separate
sales forces under our previous "Business Unit" structure were combined into a
single, centrally managed and coordinated sales force. The other major
initiative was the reduction in the number of, and amount of business we do
through distributors. The end objective of these initiatives was to improve the
service levels and relationships with our customers in North America. While we
generally believe that these initiatives were successful in fiscal 2001, and are
important to our future success, they did have the effect of increasing some
costs in 2001, such as selling expenses, and further complicated order
processing and fulfillment in an environment where we were also going live on
our new ERP system in two significant businesses--Lawns and Ortho.
Scotts' sales are seasonal in nature and are susceptible to global
weather conditions, primarily in North America and Europe. For instance, periods
of wet weather can slow fertilizer sales but can increase demand for pesticide
sales. Periods of dry, hot weather can have the opposite effect on fertilizer
and pesticide sales. We believe that the acquisitions we have made over the past
several years diversify both our product line risk and geographic risk to
weather conditions.
In fiscal 1999, we expanded our reach of product line offerings into
the controls segment with the acquisition of the Ortho(R) brand of control
products from Monsanto and the execution of the Roundup(R) marketing agreement.
In addition, over the past several years, we have made several acquisitions to
strengthen our international market position in the lawn and garden category
including Rhone-Poulenc Jardin, ASEF Holding BV and, most recently, Substral.
Each acquisition provided a significant addition to our then existing European
platform and strengthened our foothold in the continental European consumer lawn
and garden market. Through these acquisitions, we have established a strong
presence in France, Germany, Austria and the Benelux countries. These
acquisitions may also mitigate, to a certain extent, our susceptibility to
weather conditions by expanding the regions in which we operate.
The following discussion and analysis of our consolidated results of
operations and financial position should be read in conjunction with our
Consolidated Financial Statements included elsewhere in this report.
5
RESULTS OF OPERATIONS
The following table sets forth the components of income and expense as
a percentage of net sales for the three years ended September 30, 2001:
Fiscal Year Ended September 30,
-------------------------------
2001 2000 1999
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 64.8 63.2 62.6
---------- ---------- ----------
Gross profit 35.2 36.8 37.4
Commission earned from marketing agreement, net 1.2 1.7 1.8
Advertising 8.0 8.6 7.5
Selling, general and administrative 16.4 16.0 17.8
Amortization of goodwill and other intangibles 1.6 1.6 1.6
Restructuring and other charges 4.0 0.0 0.1
Other income, net (0.5) (0.3) (0.2)
---------- ---------- ----------
Income from operations 6.9 12.6 12.4
Interest expense 5.2 5.6 5.0
---------- ---------- ----------
Income before income taxes 1.7 7.0 7.4
Income taxes 0.8 2.6 3.0
---------- ---------- ----------
Income before extraordinary item 0.9 4.4 4.4
Extraordinary loss on extinguishment of debt 0.0 0.0 0.4
---------- ---------- ----------
Net income 0.9 4.4 4.0
Dividends on Class A Convertible Preferred Stock 0.0 0.4 0.6
---------- ---------- ----------
Income applicable to common shareholders 0.9% 4.0% 3.4%
The following table sets forth net sales by business segment for the
three years ended September 30, 2001:
2001 2000 1999
---- ---- ----
($ millions)
North American Consumer:
Lawns $ 495.8 $ 452.2 $ 412.1
Gardens 149.4 149.8 142.2
Growing Media 296.9 287.0 251.8
Ortho 216.5 236.1 210.8
Canada 26.5 28.2 11.9
Other 38.0 36.2 76.7
---------- ---------- ----------
Total 1,223.1 1,189.5 1,105.5
Scotts LawnService(R) 42.0 20.6 14.0
International Consumer 252.1 274.6 284.5
Global Professional 179.4 180.5 172.6
---------- ---------- ----------
Consolidated $ 1,696.6 $ 1,665.2 $ 1,576.6
FISCAL 2001 COMPARED TO FISCAL 2000
Net sales for fiscal 2001 were $1,696.6 million, an increase of 1.9%
over fiscal 2000 sales of $1,665.2 million. As discussed below, net sales
increased over 2.8% in the North American Consumer segment; whereas, net sales
declined by 8.2% in the International Consumer segment and Global Professional
net sales were flat. Net sales for the Scotts LawnService(R) segment increased
103.9% in fiscal 2001 over fiscal 2000.
North American Consumer net sales were $1,223.1 million in fiscal
2001, an increase of 2.8% over fiscal 2000 net sales of $1,189.5 million. Net
sales in the Lawns business within this segment were $495.8 million in fiscal
2001, a 9.6% increase over fiscal 2000 net sales of $452.2 million, primarily
due to the introduction of a new line of grass seed products. Net sales in the
Growing Media business increased 3.5% to $296.9 million in fiscal 2001 from
$287.0 million in fiscal 2000. 2001 saw the continuation of the successful roll
out of the value-added line of
6
Miracle-Gro(R) branded garden and potting soils in the Growing Media business.
Sales of branded soils increased from $74 million in fiscal 2000 to $101 million
in fiscal 2001. Net sales in the Ortho business decreased 8.3% to $216.5 million
in fiscal 2001 from $236.1 million in fiscal 2000 due primarily to the weather
and product availability issues due to ERP system data problems. The other sales
category consists of sales under a supply agreement to the purchaser of the
ProTurf(R) business in 2001 and actual sales of the ProTurf(R) business in
fiscal 2000 prior to the date of sale. Selling price changes were not material
to net sales in fiscal 2001 or fiscal 2000.
Net sales in the Scotts LawnService(R) business increased 103.9% to
$42.0 million in fiscal 2001 from $20.6 million in fiscal 2000. This growth
reflects continued expansion through acquisitions and new branch openings, as
well as the success of our direct marketing campaign utilizing the Scotts(R)
brand name.
International Consumer net sales decreased 8.2% to $252.1 million in
fiscal 2001 compared to $274.6 million in fiscal 2000. Excluding the adverse
impact of changes in exchange rates, net sales for International Consumer
increased over 3% compared to the prior year. The increase in sales is primarily
due to the successful sell-in of a new line of fertilizer products under the
Substral(R) brand name acquired January 1, 2001.
Net sales for Global Professional of $179.4 million for fiscal 2001
were flat with fiscal 2000 net sales of $180.5 million. Excluding the
unfavorable impact of changes in foreign exchange rates, Global Professional net
sales increased approximately 3.5% year over year.
Gross profit decreased to $597.2 million in fiscal 2001 compared to
$612.8 million in fiscal 2000. Gross profit, including restructuring charges, as
a percentage of net sales was 35.2% in fiscal 2001 compared to 36.8% in fiscal
2000. The decrease in gross profit as a percentage of net sales was driven by
unfavorable product mix in the Ortho and Gardens businesses and increased sales
of seed which has a lower margin than fertilizers and control products, offset
by lower distribution costs and the favorable margin impact from the value-added
Growing Media products.
The net commission earned from marketing agreement in fiscal 2001 was
$20.8 million, compared to $29.3 million in fiscal 2000. Despite worldwide
earnings for the consumer Roundup(R) business increasing by approximately $4.0
million from fiscal 2000 to fiscal 2001, the gross commission earned by Scotts
was flat due to the increased earnings targets and reduced commission rate
schedule in the commission calculation for 2001 as compared to 2000. In
addition, the net commission decreased due to the $10 million increase in
contribution expenses as specified in the agreement.
Advertising expense for fiscal 2001 were $136.5 million, a decrease of
$7.4 million from fiscal 2000 advertising expense of $143.9 million. This
decrease reflects the impact of improved media buying efficiencies and lower
advertising rates compared to the prior year.
Selling, general and administrative expenses for fiscal 2001 were
$277.5 million, an increase of $10.6 million, or 4.0%, over similar expenses in
fiscal 2000 of $266.9 million. As a percentage of sales, selling, general and
administrative expenses were 16.4% for fiscal 2001 compared to 16.0% for fiscal
2000. The increase in selling, general and administrative expenses from the
prior year is partially due to an increase in selling expenses as a result of
the change in the selling and distribution model for the North American Consumer
businesses. The increase in selling, general and administrative expenses is also
due to an increase in information technology expenses from the prior year as a
result of the cost of many information technology resources being capitalized
toward the cost of our enterprise resource planning system in fiscal 2000 and
the increased depreciation on the new ERP system in fiscal 2001. Most of these
information technology resources have assumed a system support function that is
now being expensed as incurred.
Selling, general and administrative expenses associated with
restructuring and other non-operating expenses were $68.4 million for fiscal
2001. These charges, along with the $7.3 million which is included in cost of
sales for the write-off of inventory, were primarily associated with the closure
or relocation of certain plants and administrative facilities. Included in the
$68.4 million charge in selling, general and administrative costs is $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
7
approximately 340 administrative, production, selling and other employees.
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 Company
expects these restructuring activities to result in expense savings of nearly
$15 million in fiscal 2002 after reinvesting some of the savings to grow our
brands in our International businesses.
In fiscal 2002, the Company expects to recognize additional
restructuring and other charges, primarily for relocation costs for equipment,
personnel and inventory which must be expensed when incurred. Additional
restructuring costs may be incurred in fiscal 2002 as our review and evaluation
of our facilities and processes is an ongoing exercise aimed at achieving
improved returns on invested capital. See Note 4 of the Notes to Consolidated
Financial Statements, which are included in Item 8.
Amortization of goodwill and other intangibles increased to $27.7
million in fiscal 2001 from $27.1 million in fiscal 2000 due to the additional
amortization related to the Substral acquisition in December 2000 and numerous
small acquisitions by Scotts LawnService(R) throughout fiscal 2001. In fiscal
2002, Scotts will adopt Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" which is expected to result in a
reduction in amortization expense in fiscal 2002 and future years. See Note 18
of the Notes to Consolidated Financial Statements, which are included in Item 8.
Other income for fiscal 2001 was $8.5 million compared to $6.0 million
for fiscal 2000. The increase in other income was primarily due to the favorable
settlement of certain legal matters in the current year and an insurance
settlement from a seed warehouse fire. The prior year results also included
losses on the sale of miscellaneous assets which did not recur in fiscal 2001.
Income from operations for fiscal 2001 was $116.4 million compared to
$210.2 million for fiscal 2000. The decrease was the result of the current year
restructuring and other charges and increased selling, general and
administrative costs, the decline in the marketing agreement net commission and
higher depreciation expense for the new ERP system which was fully in service
for all of fiscal 2001.
For segment reporting purposes, earnings before interest, taxes and
amortization is used as the measure for income from operations or operating
income. On that basis, operating income in the North American Consumer segment
increased from $243.3 million in fiscal 2000 to $245.3 million in fiscal 2001
due to the 2.8% increase in sales offset by lower margins due to mix and higher
expenses for selling and the new ERP system. Scotts LawnService(R) had increased
income from operations in fiscal 2001 of $4.7 million, compared to $0.9 million
in fiscal 2000. This increase resulted from continued expansion through
acquisitions and new branch openings. Operating income in the Global
Professional segment declined from $26.4 million in fiscal 2000 to $17.4 million
in fiscal 2001 due to lower sales due to weather and higher operating costs in
the international Professional business. The operating cost structure in the
international Professional business was addressed in the restructuring
initiatives undertaken in late fiscal 2001. International Consumer segment
operating income declined from income of $21.0 million in fiscal 2000 to a loss
of $3.3 million in fiscal 2001. Excluding restructuring charges, International
Consumer reported operating income of $6.7 million. The decline in income was
due to lower sales due to poor weather in Europe and higher operating costs. The
International Consumer cost structure was also addressed in 2001's restructuring
initiatives. The Corporate operating loss increased from $54.2 million in fiscal
2000 to $120.0 million in fiscal 2001 primarily due to restructuring charges
related to the domestic business.
Interest expense for fiscal 2001 was $87.7 million, a decrease of $6.2
million from fiscal 2000 interest expense of $93.9 million. The decrease in
interest expense was primarily due to favorable interest rates. The average rate
on our variable rate debt was 7.85% in fiscal 2001 compared to 8.78% in fiscal
2000.
Income tax expense was $13.2 million for fiscal 2001 compared to $43.2
million in fiscal 2000. The effective tax rate in fiscal 2001 was 46% compared
to 37.1% for fiscal 2000. The primary driver of the change in the effective tax
rate was the restructuring and other charges recorded in fiscal 2001, which
reduced pre-tax income thereby increasing the effect of non-deductible goodwill
amortization on the effective tax rate. Also, the prior year effective tax rate
benefited from the elimination of tax reserves due to the settlement of certain
tax contingencies.
8
Net income was $15.5 million for fiscal 2001, or $.51 per common share
on a diluted basis, compared to net income of $73.1 million for fiscal 2000, or
$2.25 per common share on a diluted basis. Common shares and equivalents used in
the computation of fully diluted earnings per share in fiscal 2001 and fiscal
2000 were 30.4 million and 29.6 million, respectively. The increase reflects
more common share equivalents due to higher average stock prices and additional
option grants to associates in fiscal 2001.
FISCAL 2000 COMPARED TO FISCAL 1999
Net sales for fiscal 2000 were $1,665.2 million, an increase of 5.6%
over fiscal 1999 net sales of $1,576.6 million. On a pro forma basis, assuming
that the Ortho and Rhone-Poulenc Jardin acquisitions had occurred on October 1,
1998, net sales for fiscal 2000 were 4.5% higher than pro forma net sales for
fiscal 1999. The increase in net sales from year to year was driven by
significant increases in net sales across all businesses in the North American
Consumer segment, partially offset by decreases in net sales in the
International Consumer segment as discussed below.
North American Consumer net sales, excluding "Consumer Other" were
$1,153.3 million in fiscal 2000, an increase of $124.5 million, or 12.1%, over
net sales for fiscal 1999 of $1,028.8 million. Net sales in the Lawns business
increased $40.1 million, or 9.7%, from fiscal 1999 to fiscal 2000, primarily due
to a significant increase in sales to and consumer takeaway from national home
centers. Net sales in the Gardens business increased $7.6 million, or 5.3%,
primarily driven by strong net sales and market share performance in the
water-soluble and tree spikes product lines and the successful introduction of
new products such as the Miracle-Gro(R) Garden Weed PreventerTM line in fiscal
2000. Net sales in the Growing Media business increased $35.2 million, or 14.0%,
due to strong category and market share growth, particularly for value-added
products such as Miracle-Gro(R) Potting Soils. Sales in the Ortho business
increased $25.3 million, or 12.0%, on an actual basis and $10.0 million, or
4.1%, on a pro forma basis, reflecting significantly improved volume with home
center retailers and improved category and market share performance on the
selective weed control product lines. Net sales for the Ortho business were
negatively impacted by the voluntary product return program for the registered
pesticide Ortho(R) Home Defense(R) Indoor & Outdoor Insect Killer, sold with the
Pull `N Spray(R) pump dispenser, the phasing out of products containing the
active ingredient chlorpyrifos and reduced selling efforts by a primary
distributor prior to its termination on September 30, 2000. Consumer Other net
sales were the net sales of the ProTurf(R) business that was sold in May 2000.
Selling price changes did not have a significant impact on net sales in the
North American Consumer segment for fiscal 2000.
Scotts LawnService(R) segment net sales of $20.6 million in fiscal
2000 were $6.6 million above fiscal 1999 net sales of $14.0 million. This
increase reflects growth through acquisitions and new branch openings.
Global Professional segment net sales of $180.5 million in fiscal 2000
were $7.9 million, or 4.6% above fiscal 1999 net sales of $172.6 million.
International Consumer segment net sales of $274.6 million in fiscal
2000 were $9.9 million lower than net sales for fiscal 1999 of $284.5 million.
Excluding the adverse impact of changes in exchange rates, net sales for the
International Consumer segment increased nearly 4% compared to the prior year
period. The increase is primarily due to improved results in the segment's
continental European consumer businesses partially offset by decreases in the
segment's U.K. consumer business caused by significant product rationalization
and unusually poor weather.
Gross profit increased to $612.8 million for fiscal 2000, an increase
of 4.0% over fiscal 1999 gross profit of $589.3 million, driven by the 5.6%
increase in year-to-date net sales discussed above and a slight increase in
gross profit as a percentage of net sales. As a percentage of net sales, gross
profit was 36.8% for fiscal 2000 compared to 37.4% of net sales for fiscal 1999.
This increase in profitability on net sales was driven by a shift to direct
distribution to certain retail accounts, improved product mix toward higher
margin, value-added products and improved efficiencies in Scotts' production
plants, offset by increased urea, fuel and other raw material costs and a
significant erosion in the profitability of the ProTurf(R) business prior to its
sale.
The gross commission from marketing agreement in fiscal 2000 was $39.2
million, compared to $30.3 million in fiscal 1999. The increase in the gross
commission from year to year was driven by significantly higher sales of
consumer Roundup(R) worldwide year over year. Contribution expenses under
marketing agreement were $9.9 million for fiscal 2000, compared to $1.6 million
for fiscal 1999. The increase in contribution expenses was due to
9
an increase in the contribution payment to Monsanto and an increase of $3.2
million in the amortization of the $32 million marketing fee paid to Monsanto as
a result of correcting the amortization period from 20 to 10 years. The $3.2
million of additional amortization represents the additional amortization of
$1.6 million that was not recognized in fiscal 1999 and additional amortization
of $1.6 million for fiscal 2000.
Advertising expenses for fiscal 2000 were $143.9 million, an increase
of 22.7% over fiscal 1999 advertising expenses of $117.3 million. Promotion
expenses are presented as a reduction of net sales. Promotion expenses increased
from $71.7 million in fiscal 1999 to $99.1 million in fiscal 2000. As a
percentage of net sales before deduction for promotion expenses, combined
advertising and promotion spending increased to 13.7% in fiscal 2000 from 11.5%
in fiscal 1999. This increase was primarily due to continued emphasis on
increasing advertising and promotion expenses to drive revenue growth within the
North American Consumer segment and investments in advertising and promotion to
drive future sales growth in the International Consumer segment.
Selling, general and administrative expenses in fiscal 2000 were
$266.9 million, a decrease of 5.1% over fiscal 1999 expenses of $281.2 million.
As a percentage of net sales, selling, general and administrative expenses were
16.0% in fiscal 2000 and 17.8% in fiscal 1999. The decrease in the dollar amount
of selling, general and administrative expenses was primarily related to the
reduction in costs associated with the acquisition of the Ortho business in
January 1999.
Amortization of goodwill and other intangibles in fiscal 2000 was
$27.1 million, an increase of $1.5 million over fiscal 1999 amortization of
$25.6 million. This increase was primarily due to fiscal 1999 not reflecting a
full year of amortization related to the Ortho acquisition since the acquisition
occurred in January 1999.
Restructuring and other charges were $1.4 million in fiscal 1999.
These charges represent severance costs associated with the reorganization of
the North American Professional Business Group to strengthen distribution and
technical sales support, integrate brand management across market segments and
reduce annual operating expenses. Substantially all payments have been made as
of September 30, 2000. There were no restructuring charges incurred in fiscal
2000.
Other income in fiscal 2000 was $6.0 million compared to other income
of $3.6 million in the prior year. The increase in other income, on a net basis,
was primarily due to the $4.6 million gain resulting from the sale of the
ProTurf(R) business, partially offset by costs incurred in connection with
Scotts' voluntary return program for the registered pesticide Ortho(R) Home
Defense(R) Indoor & Outdoor Insect Killer, sold with the Pull `N Spray(R) pump
dispenser and additional losses on disposals of miscellaneous fixed assets.
Income from operations for fiscal 2000 was $210.2 million compared to
$196.1 million for fiscal 1999. The increase in income from operations was due
primarily to the increase in net sales across the North American Consumer
businesses as noted above, partially offset by the decrease in net sales due to
the sale of the ProTurf(R) business.
Interest expense for fiscal 2000 was $93.9 million, an increase of
$14.8 million over fiscal 1999 interest expense of $79.1 million. The increase
in interest expense was due to increased borrowings to fund the Ortho
acquisition and an increase in average borrowing rates under our credit
facility, partially offset by reduced working capital requirements.
Income tax expense was $43.2 million for fiscal 2000 compared to $47.9
million in the prior year. Scotts' effective tax rate decreased to 37.1% for
fiscal 2000 compared to 41.0% for the previous year. The decrease in the
effective tax rate for fiscal 2000 is due primarily to a reversal of $3.2
million of tax reserves upon resolution of certain outstanding tax matters
during the third quarter of fiscal 2000 and a reduction in the base tax rate for
the year, before reversal of reserves, to 40.0%.
In conjunction with the Ortho acquisition, in January 1999, Scotts
completed an offering of $330 million of 8 5/8% Senior Subordinated Notes due
2009. The net proceeds from this offering, together with borrowings under our
credit facility, were used to fund the Ortho acquisition and repurchase
approximately 97% of the then outstanding $100 million of 9 7/8% Senior
Subordinated Notes due August 2004. We recorded an extraordinary loss on the
10
extinguishment of the 9 7/8% Notes of $9.3 million, including a call premium of
$7.2 million and the write-off of unamortized issuance costs and discounts of
$2.1 million.
Scotts reported net income of $73.1 million for fiscal 2000, or $2.25
per common share on a diluted basis, compared to net income of $63.2 million for
fiscal 1999, or $2.08 per common share on a diluted basis. The diluted earnings
per share for fiscal 2000 is net of a one-time reduction of $0.22 per share
resulting from the early conversion of Class A Convertible Preferred Stock in
October 1999. The diluted earnings per share for fiscal 1999 is net of a $0.19
per share charge associated with the extraordinary loss on early extinguishment
of debt discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $65.7 million for fiscal
2001 compared to cash provided by operating activities of $171.5 million for
fiscal 2000. The seasonal nature of our operations generally requires cash to
fund significant increases in working capital (primarily inventory and accounts
receivable) during the first and second quarters. The third fiscal quarter is a
period for collecting accounts receivable and liquidating inventory levels. The
decrease in cash provided by operating activities for fiscal 2001 compared to
the prior year was due to higher levels of inventory at September 30, 2001
compared to September 30, 2000, due, in part, to the move by major retailers to
reduce inventory investments and lower than anticipated net sales in the fourth
quarter of fiscal 2001.
Cash used in investing activities was $101.0 million for fiscal 2001
compared to $89.5 million in the prior year. The additional cash used for
investing activities in fiscal 2001 was primarily due to the $13.3 million in
payments toward the purchase of the Substral(R) business discussed in Note 5 of
the Notes to Consolidated Financial Statements which are included in Item 8, and
other payments made toward several lawn service acquisitions during fiscal 2001
partially offset by reduced capital spending in fiscal 2001. Capital spending
was $63.4 million in fiscal 2001 compared to $72.5 million in fiscal 2000. In
line with our ongoing efforts to improve return on invested capital, capital
spending in fiscal 2002 is expected to be approximately $50.0 million.
Financing activities provided cash of $21.4 million for fiscal 2001
compared to using cash of $78.2 million in the prior year. The increase in cash
from financing activities was primarily due to an increase in borrowings under
our revolving credit facility to fund operating and investing activities during
fiscal 2001.
Total debt was $887.8 million as of September 30, 2001, an increase of
$25.0 million compared with debt at September 30, 2000 of $862.8 million. The
increase in debt compared to the prior year was primarily due to additional
borrowings to fund operating and investing activities as discussed above and
seller notes from the Substral(R) and Scotts LawnService(R) acquisitions in
fiscal 2001.
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. Borrowings outstanding under the
term loan facilities and revolving credit facility were $398.6 million and $94.7
million, respectively at September 30, 2001.
In July 1998, our Board of Directors authorized the repurchase of up
to $100 million of our common shares on the open market or in privately
negotiated transactions on or prior to September 30, 2001. As of September 30,
2001, we repurchased 1,106,295 common shares, at a cost of $40.6 million, under
this program.
In October 2000, the Board of Directors approved the cancellation of
the third year commitment of $50 million under the share repurchase program. The
Board did authorize repurchasing the amount still outstanding under the second
year repurchase commitment (approximately $9.0 million) through September 30,
2001. Share repurchases are subject to the covenants contained in our credit
facility or our other debt instruments. Repurchased shares are held in treasury
and will be used for the exercise of employee stock options and for other valid
corporate purposes.
We believe 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
businesses will generate sufficient cash flows from operations, that currently
anticipated cost savings and
11
operating improvements will be realized on schedule or at all, or that future
borrowings will be available under our credit facility 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.
At September 30, 2001, Scotts was not in compliance with debt
covenants pertaining to net worth, leverage and interest coverage. A waiver of
non-compliance for these covenant violations was received in October 2001. In
December 2001, Scotts amended the credit facility resulting in the elimination
or resetting of certain negative and affirmative covenants. See Note 8 and Note
22 of the Notes to Consolidated Financial Statements, which are included in Item
8.
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 actions 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 "ITEM 1.
BUSINESS--Environmental and Regulatory Considerations," "ITEM 1.
BUSINESS--Regulatory Actions" and "ITEM 3. LEGAL PROCEEDINGS".
ENTERPRISE RESOURCE PLANNING ("ERP")
In July 1998, we announced a project designed to bring our information
systems resources in line with our current strategic objectives. The project
included the redesign of certain key business processes in connection with the
installation of new software. SAP was selected as the primary software provider
for this project. As of October 1, 2000, all of the North American businesses
with the exception of Canada were operating under the new system. The
implementation of the Canadian system began during the third quarter of fiscal
2001 and was substantially complete by October 1, 2001. Through September 30,
2001, we spent approximately $55 million on the project, approximately 75% of
which has been capitalized and is being amortized over a period of four to eight
years. We are currently evaluating when, and to what extent, the new information
systems and applications will be implemented at our international locations.
EURO
A new currency called the "euro" has been introduced in certain
Economic and Monetary Union (EMU) countries. During 2002, all EMU countries are
expected to be operating with the euro as their single currency. Uncertainty
exists as to the effects the euro currency will have on the marketplace. We are
assessing the impact the EMU formation and euro implementation will have on our
internal systems and the sale of our products. Over $1.2 million of the costs
associated with this work was incurred during fiscal 2001. Some costs will
likely be incurred in the first quarter of fiscal 2002 and beyond as well but
are not expected to be material.
MANAGEMENT'S OUTLOOK
Results for fiscal 2001 were below management's expectations. Weather,
the economy, retailer initiatives to reduce their inventory investment and our
own product availability issues combined to make fiscal 2001 less profitable
than fiscal 2000. We believe we are aggressively addressing ways to improve
profitability of our business by the restructuring steps we took in late fiscal
2001 to reduce headcount and rationalize the supply chain, sales and
administrative organizations in North America and Europe. This process will
continue in fiscal 2002 and beyond. We also will continue to look for
opportunities to bring new products into the marketplace and profitably expand
our Scotts LawnService(R) business.
12
Looking forward, we maintain the following broad tenets to our
strategic plan:
(1) Promote and capitalize on the strengths of the Scotts(R),
Miracle-Gro(R), Hyponex(R) and Ortho(R) industry-leading
brands, as well as our portfolio of powerful brands in our
international markets. This involves a commitment to our
retail partners that we will support these brands through
advertising and promotion unequaled in the lawn and garden
consumables market. In the Professional categories, it
signifies a commitment to customers to provide value as an
integral element in their long-term success;
(2) Commit to continuously study and improve knowledge of the
market, the consumer and the competition;
(3) Simplify product lines and business processes, to focus on
those that deliver value, evaluate marginal ones and
eliminate those that lack future prospects; and
(4) Achieve world leadership in operations, leveraging technology
and know-how to deliver outstanding customer service and
quality.
We anticipate that we can deliver significant revenue and earnings
growth through emphasis on executing our strategic plan. We believe that we can
generate annual sales growth of 4% to 6% in our core businesses and annual
earnings growth of at least 10%. In addition, we have targeted improving our
return on invested capital. We believe that we can achieve our goal of realizing
a return on our invested capital commensurate with the average return on
invested capital for our consumer products peer group in the next three to four
years. We expect to achieve this goal by reducing overhead spending, tightening
capital spending controls, implementing return on capital measures into our
incentive compensation plans and accelerating operating performance and gross
margin improvements utilizing our new ERP capabilities in North America.
FORWARD-LOOKING STATEMENTS
We have made and will make "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 in our 2001 Summary Annual Report, our 2001
Financial Statements and Other Information booklet, in this Form 10-K and in
other contexts relating to future growth and profitability targets and
strategies designed to increase total shareholder value. Forward-looking
statements also include, but are not limited to, information regarding our
future economic and financial condition, the plans and objectives of our
management and our assumptions regarding our performance and these plans and
objectives.
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 2001 Summary Annual
Report, in our 2001 Financial Statements and Other Information booklet, in this
Form 10-K and in other contexts represent challenging goals for our company, and
the achievement of these goals is subject to a variety of risks and assumptions
and numerous factors beyond our control. Important factors that could cause
actual results to differ materially from the forward-looking statements we make
are described below. All forward-looking statements attributable to us or
persons working on our behalf are expressly qualified in their entirety by the
following cautionary statements.
- ADVERSE WEATHER CONDITIONS COULD ADVERSELY IMPACT FINANCIAL
RESULTS.
Weather conditions in North America and Europe have a
significant impact on the timing of sales in the spring
selling season and overall annual sales. Periods of wet
weather can slow fertilizer sales,
13
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 AND 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.
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.
- OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR
FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR
OBLIGATIONS.
Our substantial indebtedness could:
- make it more difficult for us to satisfy our
obligations;
- increase our vulnerability to general
adverse economic and industry conditions;
- limit our ability to fund future working
capital, capital expenditures, research and
development costs and other general
corporate requirements;
- require us to dedicate a substantial portion
of cash flows from operations to payments on
our indebtedness, which would reduce the
cash flows available to fund working
capital, capital expenditures, research and
development efforts and other general
corporate requirements;
- limit our flexibility in planning for, or
reacting to, changes in our business and the
industry in which we operate;
- place us at a competitive disadvantage
compared to our competitors that have less
debt; and
- limit our ability to borrow additional
funds.
If we fail to comply with any of the financial or other
restrictive covenants of our indebtedness, our indebtedness
could become due and payable in full prior to its stated due
date. We cannot be sure that our lenders would waive a
default or that we could pay the indebtedness in full if it
were accelerated.
- TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT
AMOUNT OF CASH, WHICH WE MAY NOT BE ABLE TO GENERATE.
Our ability to make payments on and to refinance our
indebtedness and to fund planned capital expenditures and
research and development efforts will depend on our ability
to generate cash in the future. This, to some extent, is
subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our
control. We cannot assure that our business will generate
sufficient cash flow from operations or that currently
anticipated cost savings and operating improvements will be
realized on schedule or at all. We also cannot assure that
future
14
borrowings will be available to us under our credit facility
in amounts sufficient to enable us to pay our indebtedness or
to fund other liquidity needs. We may need to refinance all
or a portion of our indebtedness, on or before maturity. We
cannot assure that we will be able to refinance any of our
indebtedness on commercially reasonable terms or at all.
- 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 one of 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 72% of our fiscal year 2001 net sales 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 39%, 21%, 13% and 12%,
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.
- 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
15
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. We anticipate that Lowe's will introduce a
one-quart glyphosate product, and that Ace Hardware
Corporation will introduce one-gallon and one-quart
glyphosate products, 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) with Plus 2(R)
with Weed Control and Scotts Turf Builder(R) with Halts(R)
Crabgrass Preventer, expired in July 2001 and could also
result in increased competition. Any decline in sales of Turf
Builder(R) products after the expiration of the
methylene-urea product composition patent could adversely
affect our financial results.
- THE HAGEDORN PARTNERSHIP, L.P., BENEFICIALLY OWNS
APPROXIMATELY 40% OF THE OUTSTANDING COMMON SHARES OF SCOTTS
ON A FULLY DILUTED BASIS.
The 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.
- 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
16
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 have met with the Ohio
EPA and the Ohio Attorney General's office to negotiate an
amicable resolution of these issues. On December 3, 2001, an
agreed judicial Consent Order was submitted to the Union
County Common Pleas Court. Although this Consent Order is
subject to public comment and both parties may withdraw their
consent to entry of the Order, we anticipate the Consent
Order will be entered by the court in January 2002. During
fiscal year 2001, we made approximately $1.3 million in
environmental capital expenditures and $2.1 million in other
environmental expenses, compared with approximately $1.2
million in environmental capital expenditures and $1.8
million in other environmental expenses in fiscal year 2000.
Management anticipates that environmental capital
expenditures and other environmental expenses for 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;
- 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.
- THE IMPLEMENTATION OF THE EURO CURRENCY IN SOME EUROPEAN
COUNTRIES BETWEEN 1999 AND 2002 COULD ADVERSELY AFFECT US.
In January 1999, the "euro" was introduced in some Economic
and Monetary Union countries and by 2002, all Economic and
Monetary Union countries are expected to be operating with
the euro as their single currency. Uncertainty exists as to
the effects the euro currency will have on the marketplace.
We are still assessing the impact the Economic and Monetary
Union formation and euro implementation may have on the sales
of our products and conduct of our business. We expect to
take appropriate actions based on the results of our
assessment. However, there can be no assurance that this
issue will not have a material adverse effect on us or our
future operating results and financial condition.
- OUR SIGNIFICANT INTERNATIONAL OPERATIONS MAKE US MORE
SUSCEPTIBLE TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES AND TO
THE COSTS OF INTERNATIONAL REGULATION.
17
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.
The costs related to our international operations could
adversely affect our operations and financial results in the
future.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and other information required by this Item
are contained in the financial statements, footnotes thereto and schedules
listed in the "Index to Consolidated Financial Statements and Financial
Statement Schedules" on page 41 herein.
19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
1 and 2. Financial Statements and Financial Statement Schedules:
The response to this portion of Item 14 is submitted as a
separate section of this Annual Report on Form 10-K. Reference is made
to the "Index to Consolidated Financial Statements and Financial
Statement Schedules" on page 41 herein.
3. Exhibits:
See the Company's Annual Report on Form 10-K for the year
ended September 30, 2001 for the list of exhibits.
20
EXECUTIVE COMPENSATORY PLANS AND ARRANGEMENTS
Exhibit
No. Description Location
--- ----------- --------
10(a)(1) The O.M. Scott & Sons Company Excess Benefit Plan, Incorporated herein by reference to the Annual
effective October 1, 1993 Report on Form 10-K for the fiscal year ended
September 30, 1993, of The Scotts Company, a
Delaware corporation (File No. 0-19768)
[Exhibit 10(h)]
10(a)(2) First Amendment to The O.M. Scott & Sons Company *
Excess Benefit Plan, effective as of January 1, 1998
10(a)(3) Second Amendment to The O.M. Scott & Sons Company *
Excess Benefit Plan, effective as of January 1, 1999
10(b) The Scotts Company 1992 Long Term Incentive Plan Incorporated herein by reference to the
(as amended through May 15, 2000) Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended April 1, 2000 (File
No. 1-13292) [Exhibit 10(b)]
10(c) The Scotts Company Executive Annual Incentive Plan *
10(d) The Scotts Company 1996 Stock Option Plan (as Incorporated herein by reference to the Registrant's
amended through May 15, 2000) Quarterly Report on Form 10-Q for the fiscal
quarter ended April 1, 2000 (File No. 1-13292)
[Exhibit 10(d)]
10(e) Specimen form of Stock Option Agreement (as *
amended through October 23, 2001) for Non-Qualified
Stock Options granted to employees under The
Scotts Company 1996 Stock Option Plan, U.S. specimen
10(f) Specimen form of Stock Option Agreement (as amended *
through October 23, 2001) for Non-Qualified Stock
Options granted to employees under The Scotts
Company 1996 Stock Option Plan, French specimen
10(g)(1) The Scotts Company Executive Retirement Plan Incorporated herein by reference to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 1998 (File
No. 1-11593) [Exhibit 10(j)]
10(g)(2) First Amendment to The Scotts Company Executive *
Retirement Plan, effective as of January 1, 1999
10(g)(3) Second Amendment to The Scotts Company Executive *
Retirement Plan, effective as of January 1, 2000
10(h) Employment Agreement, dated as of August 7, 1998, Incorporated herein by reference to the
between the Registrant and Charles M. Berger, Registrant's Annual Report on Form 10-K for
and three attached Stock Option Agreements with the fiscal year ended September 30, 1998
the following effective dates: September 23, 1998, (File No. 1-11593) [Exhibit 10(n)]
October 21, 1998 and September 24, 1999
10(i) Stock Option Agreement, dated as of August 7, 1996, Incorporated herein by reference to the
between the Registrant and Charles M. Berger Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996 (File
No. 1-11593) [Exhibit 10(m)]
21
Exhibit
No. Description Location
--- ----------- --------
10(j) Letter agreement, dated March 21, 2001, pertaining Incorporated herein by reference to the
to amendment of Employment Agreement, dated as of Registrant's Quarterly Report on Form 10-Q
August 7, 1998, between the Registrant and for the fiscal quarter ended March 31, 2001
Charles M. Berger; and employment of Mr. Berger (File No. 1-13292) [Exhibit 10(w)]
through January 16, 2003
10(k) Letter agreement, dated September 25, 2001, replacing *
and superceding the letter agreement, dated
March 21, 2001, pertaining to amendment of
Employment Agreement, dated as of August 7, 1998,
between the Registrant and Charles M. Berger
10(l) Employment Agreement, dated as of May 19, 1995, Incorporated herein by reference to the
between the Registrant and James Hagedorn Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 1995 (File
No. 1-11593) [Exhibit 10(p)]
10(m) Letter agreement, dated April 10, 1997, Incorporated herein by reference to the
between the Registrant and G. Robert Lucas Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 1997 (File
No. 1-11593) [Exhibit 10(r)]
10(n) Letter agreement, dated June 11, 2001, between Incorporated herein by reference to the
the Registrant and G. Robert Lucas, regarding Registrant's Quarterly Report on Form 10-Q
Mr. Lucas' retirement from employment by the Registrant for the fiscal quarter ended June 30, 2001
(File No. 1-13292) [Exhibit 10(x)]
10(o) Letter agreement, dated March 16, 1999, between Incorporated herein by reference to the
the Registrant and Hadia Lefavre Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 1999 (File
No. 1-11593) [Exhibit 10(p)]
10(p) Letter agreement, dated October 14, 2001, *
between the Registrant and Hadia Lefavre, pertaining
to terms of employment of Ms. Lefavre through
September 30, 2002, and superseding certain
provisions of letter agreement, dated March 16, 1999,
between the Registrant and Ms. Lefavre
10(q) Letter agreement, dated June 8, 2000, between the Incorporated herein by reference to the
Registrant and Patrick J. Norton Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 2000 (File
No. 1-13292) [Exhibit 10(q)]
10(r) Employment Agreement, dated August 1, 1995, between Incorporated herein by reference to the
Scotts Europe B.V. (now Scotts International B.V.) Registrant's Annual Report on Form 10-K for
and Laurens J.M. de Kort the fiscal year ended September 30, 1999 (File
No. 1-11593) [Exhibit 10(s)]
10(s) Settlement Agreement, dated November 27, 2001, *
between the Registrant and Laurens J.M. de Kort
22
Exhibit
No. Description Location
--- ----------- --------
10(t) Letter agreement, dated July 16, 2001, between the Incorporated herein by reference to the
Registrant and James Rogula, regarding Mr. Rogula's Registrant's Quarterly Report on Form 10-Q
retirement from employment by the Registrant for the fiscal quarter ended June 30, 2001
(File No. 1-13292) [Exhibit 10(y)]
10(u) Written description of employment agreement *
between the Registrant and Michael P. Kelty, Ph.D.
* Filed herewith.
(b) REPORTS ON FORM 8-K
The Registrant filed no Current Reports on Form 8-K during
the last quarter of the period covered by this Report.
23
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
PAGE
----
Consolidated Financial Statements of The Scotts Company and Subsidiaries:
Report of Management........................................................................................ 25
Report of Independent Accountants........................................................................... 26
Consolidated Statements of Operations for the fiscal years ended
September 30, 2001, 2000 and 1999........................................................................ 27
Consolidated Statements of Cash Flows for the fiscal years ended
September 30, 2001, 2000 and 1999........................................................................ 28
Consolidated Balance Sheets at September 30, 2001 and 2000.................................................. 29
Consolidated Statements of Changes in Shareholders' Equity
and Comprehensive Income for the fiscal years ended September 30, 2001, 2000 and 1999.................... 30
Notes to Consolidated Financial Statements...................................................................... 32
Schedules other than those listed above are omitted since they are not
required or are not applicable, or the required information is shown in the
Consolidated Financial Statements or Notes thereto.
24
REPORT OF MANAGEMENT
Management of The Scotts Company is responsible for the preparation,
integrity and objectivity of the financial information presented in this Form
10-K. The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
and, accordingly, include some amounts that are based on management's best
judgments and estimates.
Management is responsible for maintaining a system of accounting and
internal controls which it believes is adequate to provide reasonable assurance
that assets are safeguarded against loss from unauthorized use or disposition
and that the financial records are reliable for preparing financial statements.
The selection and training of qualified personnel, the establishment and
communication of accounting and administrative policies and procedures and a
program of internal audits are important objectives of these control systems.
The financial statements have been audited by PricewaterhouseCoopers
LLP, independent accountants selected by the Board of Directors. The independent
accountants conduct a review of internal accounting controls to the extent
required by generally accepted auditing standards and perform such tests and
related procedures as they deem necessary to arrive at an opinion on the
fairness of the financial statements in accordance with generally accepted
accounting principles.
The Board of Directors, through its Audit Committee consisting solely
of non-management directors, meets periodically with management, internal audit
personnel and the independent accountants to discuss internal accounting
controls and auditing and financial reporting matters. The Audit Committee
reviews with the independent accountants the scope and results of the audit
effort. Both internal audit personnel and the independent accountants have
access to the Audit Committee with or without the presence of management.
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
The Scotts Company:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity and
comprehensive income and cash flows present fairly, in all material respects,
the financial position of The Scotts Company at September 30, 2001, and
September 30, 2000, and the results of its operations and its cash flows for
each of the three years in the period ended September 30, 2001, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/S/ PRICEWATERHOUSECOOPERS LLP
Columbus, Ohio
October 29, 2001, except for Note 22, as to which the date is December 12,
2001, and paragraph 5 of Note 18, as to which the date is
June 5, 2002 and Note 20, as to which the date is June 18, 2002
26
THE SCOTTS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
(IN MILLIONS, EXCEPT PER SHARE DATA)
2001 2000 1999
---- ---- ----
Net sales $ 1,696.6 $ 1,665.2 $ 1,576.6
Cost of sales 1,092.1 1,052.4 987.3
Restructuring and other charges 7.3
--------- --------- ---------
Gross profit 597.2 612.8 589.3
Gross commission earned from marketing agreement 39.1 39.2 30.3
Contribution expenses under marketing agreement 18.3 9.9 1.6
--------- --------- ---------
Net commission earned from marketing agreement 20.8 29.3 28.7
Operating expenses:
Advertising 136.5 143.9 117.3
Selling, general and administrative 277.5 266.9 281.2
Restructuring and other charges 68.4 1.4
Amortization of goodwill and other intangibles 27.7 27.1 25.6
Other income, net (8.5) (6.0) (3.6)
--------- --------- ---------
Income from operations 116.4 210.2 196.1
Interest expense 87.7 93.9 79.1
--------- --------- ---------
Income before income taxes 28.7 116.3 117.0
Income taxes 13.2 43.2 47.9
--------- --------- ---------
Income before extraordinary item 15.5 73.1 69.1
Extraordinary loss on early extinguishment of debt,
net of income tax benefit 5.9
--------- --------- ---------
Net income 15.5 73.1 63.2
Dividends on Class A Convertible Preferred Stock 6.4 9.7
--------- --------- ---------
Income applicable to common shareholders $ 15.5 $ 66.7 $ 53.5
Basic earnings per share:
Before extraordinary loss $ 0.55 $ 2.39 $ 3.25
Extraordinary loss, net of tax (0.32)
--------- --------- ---------
$ 0.55 $ 2.39 $ 2.93
Diluted earnings per share:
Before extraordinary loss $ 0.51 $ 2.25 $ 2.27
Extraordinary loss, net of tax (0.19)
--------- --------- ---------
$ 0.51 $ 2.25 $ 2.08
Common shares used in basic earnings per
share calculation 28.4 27.9 18.3
Common shares and potential common shares used in
diluted earnings per share calculation 30.4 29.6 30.5
See Notes to Consolidated Financial Statements.
27
THE SCOTTS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
(IN MILLIONS)
2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 15.5 $ 73.1 $ 63.2
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 32.6 29.0 29.0
Amortization 31.0 32.0 27.2
Deferred taxes (19.9) 7.5 0.5
Extraordinary loss 5.9
Restructuring and other charges 27.7
Loss on sale of property 4.4 1.8
Gain on sale of business (4.6)
Changes in assets and liabilities, net of
acquired businesses:
Accounts receivable (14.2) 6.4 23.7
Inventories (68.5) 5.8 (21.6)
Prepaid and other current assets 31.4 (9.2) (25.2)
Accounts payable (2.8) 19.4 10.7
Accrued taxes and liabilities (22.7) 22.5 (10.7)
Restructuring reserves 37.3
Other assets 6.1 (4.7) (35.9)
Other liabilities 7.6 (6.4) 2.2
Other, net 4.6 (3.7) 7.4
------- ------- -------
Net cash provided by operating activities 65.7 171.5 78.2
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment (63.4) (72.5) (66.7)
Proceeds from sale of equipment 1.8 1.5
Investments in acquired businesses,
net of cash acquired (26.5) (18.3) (506.2)
Payments on sellers notes (11.1) (1.0)
Other, net 0.5 (0.2)
------- ------- -------
Net cash used in investing activities (101.0) (89.5) (571.6)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under revolving
and bank lines of credit 61.7 (26.0) 65.3
Gross borrowings under term loans 260.0 525.0
Gross repayments under term loans (315.7) (23.7) (3.0)
Repayment of outstanding balance on previous credit facility (241.0)
Issuance of 8 5/8% Senior Subordinated Notes 330.0
Extinguishment of 9 7/8% Senior Subordinated Notes (107.1)
Settlement of interest rate locks (12.9)
Financing and issuance fees (1.6) (1.0) (24.1)
Dividends on Class A Convertible Preferred Stock (6.4) (12.1)
Repurchase of treasury shares (23.9) (10.0)
Cash received from exercise of stock options 17.0 2.8 3.8
------- ------- -------
Net cash provided by (used in) financing activities 21.4 (78.2) 513.9
Effect of exchange rate changes on cash (0.4) (1.1) (0.8)
------- ------- -------
Net (decrease) increase in cash (14.3) 2.7 19.7
Cash and cash equivalents, beginning of period 33.0 30.3 10.6
------- ------- -------
Cash and cash equivalents, end of period $ 18.7 $ 33.0 $ 30.3
See Notes to Consolidated Financial Statements.
28
THE SCOTTS COMPANY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 AND 2000
(IN MILLIONS EXCEPT PER SHARE DATA)
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 18.7 $ 33.0
Accounts receivable, less allowance for uncollectible
accounts of $23.9 in 2001 and $11.7 in 2000 220.8 216.0
Inventories, net 368.4 307.5
Current deferred tax asset 52.2 25.1
Prepaid and other assets 34.1 62.3
-------- --------
Total current assets 694.2 643.9
Property, plant and equipment, net 310.7 290.5
Intangible assets, net 771.1 743.1
Other assets 67.0 83.9
-------- --------
Total assets $1,843.0 $1,761.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 71.3 $ 49.4
Accounts payable 150.9 153.0
Accrued liabilities 208.0 174.3
Accrued taxes 14.9 33.1
-------- --------
Total current liabilities 445.1 409.8
Long-term debt 816.5 813.4
Other liabilities 75.2 60.3
-------- --------
Total liabilities 1,336.8 1,283.5
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred shares, no par value, none issued
Common shares, no par value per share, $.01 stated value
per share, 31.3 shares issued in 2001 and 2000 0.3 0.3
Capital in excess of stated value 398.3 389.3
Retained earnings 212.3 196.8
Treasury stock at cost, 2.6 shares in 2001, 3.4 shares in 2000 (70.0) (83.5)
Accumulated other comprehensive income (34.7) (25.0)
-------- --------
Total shareholders' equity 506.2 477.9
-------- --------
Total liabilities and shareholders' equity $1,843.0 $1,761.4
See Notes to Consolidated Financial Statements.
29
THE SCOTTS COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
(IN MILLIONS)
Preferred Shares Common Shares Capital in Treasury Stock
---------------- ------------- Excess of Retained --------------
Shares Amount Shares Amount Stated Value Earnings Shares Amount
------ ------ ------ ------ ------------ -------- ------ ------
Balance, September 30, 1998 0.2 $ 177.3 21.1 $ 0.2 $ 208.9 $ 76.6 (2.8) $ (55.9)
Net income 63.2
Foreign currency translation
Minimum pension liability
Comprehensive income
Issuance of common shares
held in treasury 1.6 0.2 4.0
Purchase of common shares (0.3) (10.0)
Dividends on Class A Convertible
Preferred Stock (9.7)
Conversion of Class A Convertible
Preferred Stock (0.2) (3.4) 0.2 3.4
------- ------- ------- ------ ------- --------- --------- --------
Balance, September 30, 1999 0.0 173.9 21.3 0.2 213.9 130.1 (2.9) (61.9)
Net income 73.1
Foreign currency translation
Minimum pension liability
Comprehensive income
Issuance of common shares
held in treasury 0.1 1.5 0.1 2.3
Purchase of common shares (0.6) (23.9)
Dividends on Class A Convertible
Preferred Stock (6.4)
Conversion of Class A Convertible
Preferred Stock (173.9) 10.0 173.9
------- ------- ------- ------ ------- --------- --------- --------
Balance, September 30, 2000 0.0 0.0 31.3 0.3 389.3 196.8 (3.4) (83.5)
Net income 15.5
Foreign currency translation
Unrecognized loss on derivatives
Minimum pension liability
Comprehensive income
Issuance of common shares
held in treasury 9.0 0.8 13.5
------- ------- ------- ------ ------- --------- --------- --------
Balance, September 30, 2001 0.0 $ 0.0 31.3 $ 0.3 $ 398.3 $ 212.3 (2.6) $ (70.0)
30
Accumulated Other
Comprehensive Income
--------------------
Minimum Pension Foreign
Liability Currency
Derivatives Adjustment Translation Total
----------- ---------- ----------- -----
Balance, September 30, 1998 $ $ (0.2) $ (3.0) $ 403.9
------- ------- --------- ----------
Net income 63.2
Foreign currency translation (5.7) (5.7)
Minimum pension liability (4.0)(a) (4.0)
------- ------- --------- ----------
Comprehensive income (4.0) (5.7) 53.5
Issuance of common shares held in treasury 5.6
Purchase of common shares (10.0)
Dividends on Class A Convertible Preferred Stock (9.7)
Conversion of Class A Convertible Preferred Stock
------- ------- --------- ----------
Balance, September 30, 1999 $ (4.2) $ (8.7) $ 443.3
------- ------- --------- ----------
Net income 73.1
Foreign currency translation (11.2) (11.2)
Minimum pension liability (0.9)(a) (0.9)
------- ------- --------- ----------
Comprehensive income (0.9) (11.2) 61.0
Issuance of common shares held in treasury 3.9
Purchase of common shares (23.9)
Dividends on Class A Convertible Preferred Stock (6.4)
Conversion of Class A Convertible Preferred Stock
------- ------- --------- ----------
Balance September 30, 2000 $ (5.1) $ (19.9) $ 477.9
------- ------- --------- ----------
Net income 15.5
Foreign currency translation
Unrecognized loss on derivatives (1.5)(b) (1.5)
Minimum pension liability (8.2)(a) (8.2)
------- ------- --------- ----------
Comprehensive income 5.8
Issuance of common shares held in treasury 22.5
------- ------- --------- ----------
Balance September 30, 2001 $ (1.5) $ (13.3) $ (19.9) $ 506.2
- ------------------
(a) Net of tax benefits of $5.5, $0.5, and $2.7 for fiscal 2001, 2000 and
1999, respectively.
(b) Net of tax benefits of $1.1 for fiscal 2001.
See Notes to Consolidated Financial Statements.
31
THE SCOTTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 mass merchandisers, home
improvement centers, large hardware chains, independent hardware stores,
nurseries, garden centers, food and drug stores, lawn and landscape service
companies, commercial nurseries and greenhouses, and specialty crop growers. The
Company's products are sold in the United States, Canada, the European Union,
the Caribbean, Southeast Asia, the Middle East, Africa, Australia, New Zealand,
Japan and Latin America.
ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The
Scotts Company and its subsidiaries. All material intercompany transactions have
been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying disclosures. 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.
REVENUE RECOGNITION
Revenue is recognized when products are shipped and when title and risk
of loss transfer to the customer. For certain large multi-location customers,
products may be shipped to third-party warehousing locations. Revenue is not
recognized until the customer places orders against that inventory and
acknowledges ownership of the goods in writing. Provisions for estimated returns
and allowances are recorded at the time of shipment based on historical rates of
returns as a percentage of sales.
ADVERTISING AND PROMOTION
The Company advertises its branded products through national and
regional media, and through cooperative advertising programs with retailers.
Retailers are also offered in-store promotional allowances and 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. Amounts paid or payable to customers or
consumers in connection with the purchase of our products are recorded as a
reduction of net sales.
RESEARCH AND DEVELOPMENT
All costs associated with research and development are charged to
expense as incurred. Expense for fiscal 2001, 2000, and 1999 was $24.7 million,
$24.1 million, and $21.7 million, respectively.
32
EARNINGS PER COMMON SHARE
Basic earnings per common share is based on the weighted-average number
of common shares outstanding each period. Diluted earnings per common share is
based on the weighted-average number of common shares and dilutive potential
common shares (stock options, convertible preferred stock and warrants)
outstanding each period.
INVENTORIES
Inventories are stated at the lower of cost or market, principally
determined by the FIFO method; however, certain growing media inventories are
accounted for by the LIFO method. At September 30, 2001 and 2000, approximately
9% and 13% of inventories, respectively, are valued at the lower of LIFO cost or
market. Inventories include the cost of raw materials, labor and manufacturing
overhead. The Company makes provisions for obsolete or slow-moving inventories
as necessary to properly reflect inventory value. Reserves for excess and
obsolete inventories were $22.3 million and $20.1 million at September 30, 2001
and 2000, respectively.
LONG-LIVED ASSETS
Property, plant and equipment, including significant improvements, are
stated at cost. Expenditures for maintenance and repairs are charged to
operating expenses as incurred. When properties are retired or otherwise
disposed of, the cost of the asset and the related accumulated depreciation are
removed from the accounts with the resulting gain or loss being reflected in
results of operations.
Depletion of applicable land is computed on the units-of-production
method. Depreciation of other property, plant and equipment is provided on the
straight-line method and is based on the estimated useful economic lives of the
assets as follows:
Land improvements 10-25 years
Buildings 10-40 years
Machinery and equipment 3-15 years
Furniture and fixtures 6-10 years
Software 3-8 years
Interest is capitalized on all significant capital projects. The
Company capitalized $3.1 million and $2.4 million of interest costs during
fiscal 2001 and 2000, respectively.
Goodwill arising from business acquisitions is amortized over its
useful life, which is generally 20 to 40 years, on a straight-line basis.
Intangible assets include patents, trademarks and other intangible assets which
are valued at acquisition through independent appraisals. Patents, trademarks
and other intangible assets are being amortized on a straight-line basis over
periods varying from 7 to 40 years. Accumulated amortization at September 30,
2001 and 2000 was $150.2 million and $120.6 million, respectively.
Management assesses the recoverability of property and equipment,
goodwill, trademarks and other intangible assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable from its future undiscounted cash flows. If it is determined that an
impairment has occurred, an impairment loss is recognized for the amount by
which the carrying amount of the asset exceeds its estimated fair value.
INTERNAL USE SOFTWARE
The Company accounts for the costs of internal use software in
accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". Accordingly, costs
other than reengineering costs are expensed or capitalized depending on whether
they are incurred in the preliminary project stage, application development
stage, or the post-implementation/operation stage. As of September 30, 2001 and
2000, the Company had $36.7 million and $37.3 million, respectively, in
unamortized capitalized internal use computer software costs. Amortization of
these costs was $4.3 million during fiscal 2001 and $0.9 million during fiscal
2000.
33
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid financial instruments with
original maturities of three months or less to be cash equivalents.
ENVIRONMENTAL COSTS
The Company recognizes environmental liabilities when conditions
requiring remediation are identified. The Company determines its liability on a
site by site basis and records a liability at the time when it is probable and
can be reasonably estimated. Expenditures which extend the life of the related
property or mitigate or prevent future environmental contamination are
capitalized. Environmental liabilities are not discounted or reduced for
possible recoveries from insurance carriers.
FOREIGN EXCHANGE INSTRUMENTS
Gains and losses on foreign currency transaction hedges are recognized
in income and offset the foreign exchange gains and losses on the underlying
transactions. Gains and losses on foreign currency firm commitment hedges are
deferred and included in the basis of the transactions underlying the
commitments.
All assets and liabilities in the balance sheets of foreign
subsidiaries whose functional currency is other than the U.S. dollar are
translated into U.S. dollar equivalents at year-end exchange rates. Translation
gains and losses are accumulated as a separate component of other comprehensive
income and included in shareholders' equity. Income and expense items are
translated at average monthly exchange rates. Foreign currency transaction gains
and losses are included in the determination of net income.
DERIVATIVE INSTRUMENTS
In the normal course of business, the Company is exposed to
fluctuations in interest rates and the value of foreign currencies. The Company
has established policies and procedures that govern the management of these
exposures through the use of a variety of financial instruments. The Company
employs various financial instruments, including forward exchange contracts and
swap agreements, to manage certain of the exposures when practical. By policy,
the Company does not enter into such contracts for the purpose of speculation or
use leveraged financial instruments. The Company's derivatives 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 the Company's 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. The Company's 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, the Company 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 is
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 income will be recognized immediately in earnings.
To manage certain of its cash flow exposures, the Company 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.
34
Unrealized gains or losses resulting from valuing these swaps at fair value are
recorded in other comprehensive income.
The Company adopted Statement of Financial Accounting Standards No. 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.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to fiscal 2001 classifications.
NOTE 2. DETAIL OF CERTAIN FINANCIAL STATEMENT ACCOUNTS
2001 2000
---- ----
(in millions)
INVENTORIES, NET:
Finished goods $ 295.8 $ 232.9
Raw materials 72.6 74.6
----------- ---------
$ 368.4 $ 307.5
2001 2000
---- ----
(in millions)
PROPERTY, PLANT AND EQUIPMENT, NET:
Land and improvements $ 38.9 $ 38.5
Buildings 119.5 109.0
Machinery and equipment 203.4 201.4
Furniture and fixtures 31.9 30.0
Software 42.0 39.5
Construction in progress 79.6 54.4
Less: accumulated depreciation (204.6) (182.3)
---------- --------
Total $ 310.7 $ 290.5
2001 2000
---- ----
(in millions)
INTANGIBLE ASSETS, NET:
Goodwill $ 352.3 $ 330.1
Trademarks 385.7 358.0
Other 183.3 175.6
Less: accumulated amortization (150.2) (120.6)
---------- --------
Total $ 771.1 $ 743.1
2001 2000
---- ----
(in millions)
ACCRUED LIABILITIES:
Payroll and other compensation accruals $ 35.2 $ 40.5
Advertising and promotional accruals 63.5 62.3
Restructuring accruals 30.1 0.0
Other 79.2 71.5
---------- --------
Total $ 208.0 $ 174.3
2001 2000
---- ----
(in millions)
OTHER NON-CURRENT LIABILITIES:
Accrued pension and postretirement liabilities $ 62.0 $ 49.8
Legal and environmental reserves 7.0 10.5
Restructuring accruals 4.2 0.0
Other 2.0 0.0
---------- --------
Total $ 75.2 $ 60.3
35
NOTE 3. MARKETING AGREEMENT
Effective September 30, 1998, the Company entered into an agreement
with Monsanto Company ("Monsanto", now known as Pharmacia Corporation) for
exclusive domestic and international marketing and agency rights to Monsanto's
consumer Roundup(R) herbicide products. Under the terms of the agreement, the
Company is entitled to receive an annual commission from Monsanto in
consideration for the performance of its duties as agent. The annual commission
is calculated as a percentage of the actual earnings before interest and income
taxes (EBIT), as defined in the agreement, of the Roundup(R) business. Each
year's percentage varies in accordance with the terms of the agreement based on
the achievement of two earnings thresholds and on commission rates that vary by
threshold and program year.
The agreement also requires the Company to make fixed annual payments
to Monsanto as a contribution against the overall expenses of the Roundup(R)
business. The annual fixed payment is defined as $20 million. However, portions
of the annual payments for the first three years of the agreement are deferred.
No payment was required for the first year (fiscal 1999), a payment of $5
million was required for the second year and a payment of $15 million 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 September 30, 2001, contribution payments and related per
annum charges of approximately $46.4 million had been deferred under the
agreement. This amount is considered a contingent obligation and has not been
reflected in the financial statements as of and for the year then ended.
36
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.
In consideration for the rights granted to the Company under the
agreement for North America, the Company was required to pay a marketing fee of
$32 million to Monsanto. The Company has deferred this amount on the basis that
the payment will provide a future benefit through commissions that will be
earned under the agreement and is amortizing the balance over ten years, which
is the estimated likely term of the agreement.
NOTE 4. RESTRUCTURING AND OTHER CHARGES
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 is 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 is $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.
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 restructuring and related charges
recorded in the third and fourth quarters of fiscal 2001:
Description Type Classification Charge Payment Balance
----------- ---- -------------- ------ ------- -------
Severance Cash SG&A $ 27.0 $ (1.9) $ 25.1
Facility exit costs Cash SG&A 5.8 (0.6) 5.2
Other related costs Cash SG&A 15.2 (8.2) 7.0
-------- ------ ------
Total cash 48.0 $(10.7) $ 37.3
--------
Property and equipment writedowns Non-Cash SG&A 7.9
Obsolete inventory writeoffs Non-Cash Cost of sales 7.3
Other asset writedowns Non-Cash SG&A 12.5
--------
Total non-cash 27.7
--------
Total $ 75.7
1999 CHARGES
During fiscal 1999, the Company recorded $1.4 million of restructuring
charges associated with management's decision to reorganize the North American
Professional Business Group to strengthen distribution and technical sales
support, integrate brand management across market segments and reduce annual
operating expenses. These charges represent costs to sever approximately 60
in-house sales associates who were terminated
37
in fiscal 1999. Approximately $1.1 million of severance payments were made to
these former associates during fiscal 1999. Of the remaining $0.3 million, $0.2
million was paid in fiscal 2000, and the remainder was paid in fiscal 2001.
NOTE 5. ACQUISITIONS AND DIVESTITURES
On January 1, 2001, the Company acquired the Substral(R) brand and
consumer plant care business from Henkel KGaA. Substral(R) is a leading consumer
fertilizer brand in many European countries including Germany, Austria, Belgium,
France and the Nordics. Under the terms of the asset purchase agreement, the
Company acquired specified working capital and intangible assets associated with
the Substral(R) business. The purchase price will be determined based on the
value of the working capital assets acquired and the performance of the business
for the period from June 15, 2000 to December 31, 2000. The parties to the
transaction are still in the process of determining a final purchase price;
however, the Company's management estimates that the final purchase price will
be approximately $40 million. On June 29, 2001 and December 29, 2000, the
Company advanced $6.4 million and $6.9 million, respectively, to Henkel KGaA
toward the Substral(R) purchase price.
The Substral(R) acquisition was made in exchange for cash and notes due
to seller and was accounted for under the purchase method of accounting.
Accordingly, Substral's results have been included from the date of its
acquisition and the purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. Intangible assets associated with the purchase were $33.7 million.
Statement of Financial Accounting Standards No. 141, "Business
Combinations" was issued in June 2001. This new standard mandates the purchase
method of accounting for all business combinations entered into after June 30,
2001. The standard also requires the valuation of intangible assets apart from
goodwill for assets that arise as a result of contractual or legal rights or if
the right is separable (able to be sold, transferred, leased, licensed, etc.).
Goodwill is the residual amount after all tangible and other intangible assets
have been valued. All acquisitions in fiscal 2001 were in process or completed
prior to the effective date of SFAS No. 141.
The following unaudited pro forma results of operations give effect to
the Substral(R) brand acquisition as if it had occurred on October 1, 1999.
Fiscal Year Ended
September 30,
-------------
2001 2000
---- ----
(in millions)
Net sales $ 1,701.2 $ 1,683.4
Income before extraordinary loss 16.2 69.5
Net income 16.2 69.5
Basic earnings per share:
Before extraordinary loss $ .57 $ 2.49
After extraordinary loss .57 2.49
Diluted earnings per share:
Before extraordinary loss $ .53 $ 2.34
After extraordinary loss .53 2.34
In May 2000, the Company sold its ProTurf(R) business to two buyers.
The terms of the agreement included the sale of certain inventory for
approximately $16.3 million and an arrangement for the use and eventual purchase
of related trademarks by the buyers. A gain of approximately $4.6 million for
the sale of this business is reflected in the Company's fiscal 2000 results of
operations.
NOTE 6. RETIREMENT PLANS.
The Company offers a defined contribution profit sharing and 401(k)
plan for substantially all U.S. employees. Full-time employees may participate
in the plan on the first day of the month after being hired. Temporary employees
may participate after working at least 1,000 hours in their first twelve months
of employment and after reaching the age of 21. The plan allows participants to
contribute up to 15% of their compensation in the form of pre-tax or post-tax
contributions. The Company provides a matching contribution equivalent to 100%
of participants' initial 3%
38
contribution and 50% of the participants' remaining contribution up to 5%.
Participants are immediately vested in employee contributions, the Company's
matching contributions and the investment return on those monies. The Company
also provides a base contribution to employees' accounts regardless of whether
employees are active in the plan. The base contribution is 2% of compensation up
to 50% of the Social Security taxable wage base plus 4% of compensation in
excess of 50% of the Social Security wage base. Participants become vested in
the Company's base contribution after three years of service. The Company
recorded charges of $10.3 million, $7.4 million and $8.4 million under the plan
in fiscal 2001, 2000 and 1999, respectively.
In conjunction with the decision to offer the expanded defined
contribution profit sharing and 401(k) plan to domestic Company associates,
management decided to freeze benefits under certain defined benefit pension
plans. These pension plans covered substantially all full-time U.S. associates
who had completed one year of eligible service and reached the age of 21. The
benefits under these plans are based on years of service and the associates'
average final compensation or stated amounts. The Company's funding policy,
consistent with statutory requirements and tax considerations, is based on
actuarial computations using the Projected Unit Credit method. The Company also
curtailed its non-qualified supplemental pension plan which provides for
incremental pension payments from the Company so that total pension payments
equal amounts that would have been payable from the Company's pension plans if
it were not for limitations imposed by income tax regulations.
The Company also sponsors the following pension plans associated with
the international businesses it has acquired: Scotts Europe BV, ASEF Europe BV
(Netherlands), The Scotts Company (UK) Ltd., Miracle Garden Care, Scotts France
SAS, Scotts Celaflor GmbH (Germany) and Scotts Celaflor HG (Austria). These
plans generally cover all associates of the respective businesses and retirement
benefits are generally based on years of service and compensation levels. The
pension plans for Scotts Europe BV, ASEF Europe BV (Netherlands), The Scotts
Company (UK) Ltd., and Miracle Garden Care are funded plans. The remaining
international pension plans are not funded by separately held plan assets.
In connection with reduction in force initiatives implemented in fiscal
2001, curtailment (gains) or losses of ($0.2) million and $2.7 million were
recorded as components of restructuring expense for the international and
domestic defined benefit pension plans, respectively.
39
The following tables present information about benefit obligations,
plan assets, annual expense and other assumptions about the Company's defined
benefit pension plans ($ millions):
Curtailed
Defined International Curtailed
Benefit Plans Benefit Plans Excess Plan
------------- ------------- -----------
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 59.5 $ 59.0 $ 72.1 $ 73.2 $ 1.9 $ 1.9
Service cost 3.6 2.9
Interest cost 4.6 4.1 4.0 3.7 0.1 0.1
Plan participants' contributions 0.7 0.8
Curtailment loss (gain) 2.7 (0.2)
Actuarial (gain) loss 4.3 (2.7) (0.4) (0.1) (0.1)
Benefits paid (3.9) (3.6) (1.7) (1.6)
Foreign currency translation 0.3 (6.5)
------- ------- --------- ------- --------
Benefit obligation at end of year $ 67.2 $ 59.5 $ 76.1 $ 72.1 $ 1.9 $ 1.9
======= ======= ========= ======= ======= ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 56.2 56.8 64.3 59.9
Actual return on plan assets 4.5 3.0 (13.7) 7.6
Employer contribution 0.1 2.8 1.2
Plan participants' contributions 0.7 0.9
Benefits paid (3.9) (3.6) (1.7) (0.6)
Foreign currency translation (0.6) (4.7)
------- ------- --------- -------
Fair value of plan assets at end of year $ 56.9 $ 56.2 $ 51.8 $ 64.3
======= ======= ========= =======
AMOUNTS RECOGNIZED IN THE STATEMENT OF
FINANCIAL POSITION CONSIST OF:
Funded status (10.3) (3.3) (24.3) (7.8) (1.9) (1.9)
Unrecognized losses 12.1 8.3 15.8 0.7 0.3 0.3
------- ------- --------- ------- ------- --------
Net amount recognized $ 1.8 $ 5.0 $ (8.5) $ (7.1) $ (1.6) $ (1.6)
======= ======= ========= ======= ======= ========
2001 2000 1999 2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ---- ---- ---- ----
COMPONENTS OF NET PERIODIC
BENEFIT COST
Service cost $ $ $ $ 3.6 $ 3.5 $ 3.2 $ $ $
Interest cost 4.6 4.1 4.2 4.0 4.0 3.6 0.1 0.1 0.1
Expected return on plan assets (4.3) (4.4) (4.5) (4.8) (5.5) (3.7)
Net amortization and deferral 0.3 0.4 0.6 0.3
Curtailment loss (gain) 2.7 (0.2)
------ ------ ------ ------ ------- ------- ----- ------ ------
Net periodic benefit cost $ 3.3 $ (0.3) $ 0.1 $ 2.6 $ 2.6 $ 3.4 $ 0.1 $ 0.1 $ 0.1
====== ======= ====== ====== ======= ======= ===== ====== ======
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
Weighted average assumptions:
Discount rate 7.5% 7.75% 5.5-6.5% 5.4-6.5% 7.5% 7.75%
Expected return on plan assets 8.0% 8.0% 4.0-8.0% 4.0-8.0% 8.0% 8.0%
Rate of compensation increase n/a n/a 2.5-4.0% 1.5-4.0% n/a n/a
40
At September 30, 2001, the status of the international plans was as
follows:
2001 2000
---- ----
Plans with benefit obligations in excess of plan assets:
Aggregate projected benefit obligations $ 73.9 $ 17.2
Aggregate fair value of plan assets 49.7 4.7
Plans with plan assets in excess of benefit obligations:
Aggregate projected benefit obligations 2.1 54.9
Aggregate fair value of plan assets 2.1 59.6
NOTE 7. ASSOCIATE BENEFITS
The Company provides comprehensive major medical benefits to certain of
its retired associates and their dependents. Substantially all of the Company's
domestic associates become eligible for these benefits if they retire at age 55
or older with more than ten years of service. The plan requires certain minimum
contributions from retired associates and includes provisions to limit the
overall cost increases the Company is required to cover. The Company funds its
portion of retiree medical benefits on a pay-as-you-go basis.
Prior to October 1, 1993, the Company effected several changes in plan
provisions, primarily related to current and ultimate levels of retiree and
dependent contributions. Retirees as of October 1, 1993 are entitled to benefits
existing prior to these plan changes. These plan changes resulted in a reduction
in unrecognized prior service cost, which is being amortized over future years.
In connection with the reduction in force in fiscal 2001, the plan
incurred a curtailment expense of $3.7 million which was included in
restructuring expense.
The following table set for the information about the retiree medical
plan:
2001 2000
---- ----
(in millions)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 18.0 $ 15.8
Service cost 0.3 0.4
Interest cost 1.4 1.3
Plan participants' contributions 0.3 0.3
Curtailment loss 3.7
Actuarial loss 1.2
Benefits paid (1.2) (1.0)
---------- ----------
Benefit obligation at end of year $ 22.5 $ 18.0
========== ==========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ $
Employer contribution 0.9 0.7
Plan participants' contributions 0.3 0.3
Benefits paid (1.2) (1.0)
---------- ----------
Fair value of plan assets at end of year $ -- $ --
========== =========
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL
POSITION CONSIST OF:
Funded status $ (22.5) $ (18.0)
Unrecognized prior service costs (1.7) (3.0)
Unrecognized prior gain (0.3) (4.0)
---------- ----------
Net amount recognized $ (24.5) $ (25.0)
========== ==========
41
The discount rates used in determining the accumulated postretirement
benefit obligation were 7.5% and 7.75% in fiscal 2001 and 2000, respectively.
For measurement purposes, annual rates of increase in per capita cost of covered
retiree medical benefits assumed for fiscal 2001 and 2000 were 9.50% and 8.50%,
respectively. The rate was assumed to decrease gradually to 5.5% through the
year 2010 and remain at that level thereafter. A 1% increase in health cost
trend rate assumptions would increase the accumulated postretirement benefit
obligation (APBO) as of September 30, 2001 and 2000 by $0.5 million and $0.7
million, respectively. A 1% increase or decrease in the same rate would not have
a material effect on service or interest costs.
The Company is self-insured for certain health benefits up to $0.2
million per occurrence per individual. The cost of such benefits is recognized
as expense in the period the claim is incurred. This cost was $14.7 million,
$9.9 million and $11.0 million in fiscal 2001, 2000 and 1999, respectively. The
Company is self-insured for State of Ohio workers compensation up to $0.5
million per claim. Claims in excess of stated limits of liability and claims for
workers compensation outside of the State of Ohio are insured with commercial
carriers.
NOTE 8. DEBT
September 30,
-------------
2001 2000
---- ----
(in millions)
Revolving loans under credit facility $ 94.7 $ 37.3
Term loans under credit facility 398.6 452.2
Senior subordinated notes 320.5 319.2
Notes due to sellers 53.7 36.4
Foreign bank borrowings and term loans 9.4 7.1
Capital lease obligations and other 10.9 10.6
----------- -------------
887.8 862.8
Less current portions 71.3 49.4
----------- -------------
$ 816.5 $ 813.4
=========== =============
Maturities of short- and long-term debt, including capital leases for
the next five fiscal years and thereafter are as follows:
Capital Leases Other
and Other Debt
--------- ----
(in millions)
2002 $ 2.3 $ 70.7
2003 1.0 54.8
2004 0.8 36.8
2005 0.5 139.7
2006 0.3 1.1
Thereafter 6.3 585.0
---------- ----------
$ 11.2 $ 888.1
Less: amounts representing future interest (0.3) (11.2)
---------- ----------
$ 10.9 $ 876.9
========== ==========
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. The Company
recorded a $0.4 million extraordinary loss, net of tax, in connection with the
retirement of the previous 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.
42
The term loan facilities consist of two tranches. The Tranche A Term
Loan Facility consists of three sub-tranches of French Francs, German Deutsche
Marks and British Pounds Sterling in an aggregate principal amount of $265
million which are to be repaid quarterly over a 6 1/2 year period. The Tranche B
Term Loan Facility 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
German Deutsche Marks, British Pounds Sterling, French Francs, Belgian Francs,
Italian Lira and other specified currencies, provided that the outstanding
revolving loans in optional currencies other than British Pounds Sterling does
not exceed $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.
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 September 30, 2001 was 7.85% and at September 30, 2000 was
8.78%. 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 fixed interest rate or interest rate
protection for a period of not less than three years. Financial covenants
include minimum net worth, interest coverage and net leverage ratios. Other
covenants include limitations on indebtedness, liens, mergers, consolidations,
liquidations and dissolutions, sale of assets, leases, dividends, capital
expenditures, and investments. 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.
At September 30, 2001, primarily due to the restructuring charges
recorded in fiscal 2001, Scotts was in default of the covenants in the Amended
Credit Agreement pertaining to net worth, leverage and interest coverage. The
defaults were waived to and including December 31, 2001 and the Company is now
in compliance at September 30, 2001 with the covenants as modified by the
December 2001 amendment. See Note 22 regarding the December 2001 amendment to
the Amended Credit Agreement.
Approximately $15.1 million of financing costs associated with the
revolving credit facility have been deferred as of September 30, 2001 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.
Scotts entered into two interest rate locks in fiscal 1998 to hedge its
anticipated interest rate exposure on the 8 5/8% Notes offering. The total
amount paid under the interest rate locks of $12.9 million has been recorded as
a reduction of the 8 5/8% Notes' carrying value and is being amortized over the
life of the 8 5/8% Notes as interest expense. 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.
43
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 $16.0 million and $4.4 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 $14.4 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 remaining note payments total $21.5
million. The interest rate on these notes is of 5.5%.
The foreign term loans of $6.0 million issued on December 12, 1997,
have an 8-year term and bear interest at 1% below LIBOR. The present value of
these loans at September 30, 2001 and 2000 was $2.8 million and $3.2 million,
respectively. The loans are denominated in British Pounds Sterling and can be
redeemed, on demand, by the note holder. The foreign bank borrowings of $6.6
million at September 30, 2001 and $3.9 million at September 30, 2000 represent
lines of credit for foreign operations and are primarily denominated in French
Francs.
NOTE 9. SHAREHOLDERS' EQUITY
2001 2000
---- ----
(in millions)
STOCK
Preferred shares, no par value:
Authorized 0.2 shares 0.2 shares
Issued 0.0 shares 0.0 shares
Common shares, no par value
Authorized 100.0 shares 100.0 shares
Issued 31.3 shares 31.3 shares
Class A Convertible Preferred Stock ("Preferred Shares") with a
liquidation preference of $195.0 million was issued in conjunction with the 1995
Miracle-Gro merger transactions. These Preferred Shares had a 5% dividend yield
and were convertible upon shareholder demand into common shares at any time and
at The Scotts Company's option after May 2000 at $19.00 per common share. The
conversion feature associated with the Preferred Shares issued in connection
with the Miracle-Gro merger transactions was negotiated as an integral part of
the overall transaction. The conversion price exceeded the fair market value of
The Scotts Company's common shares on the date the two companies reached
agreement and, therefore, the Preferred Shares did not provide for a beneficial
conversion feature. Additionally, warrants to purchase 3.0 million common shares
of The Scotts Company were issued as part of the purchase price. The warrants
are exercisable upon shareholder demand for 1.0 million common shares at $21.00
per share, 1.0 million common shares at $25.00 per share and 1.0 million common
shares at $29.00 per share. The exercise term for the warrants expires November
2003. The fair value of the warrants at issuance has been included in capital in
excess of par value in the Company's Consolidated Balance Sheets.
In fiscal 1999, certain of the Preferred Shares were converted into 0.2
million common shares at the holder's option. In October 1999, all of the then
outstanding Preferred Shares were converted into 10.0 million common shares. In
exchange for the early conversion, The Scotts Company paid the holders of the
Preferred Shares $6.4 million. That amount represents the dividends on the
Preferred Shares that otherwise would have been payable from the conversion date
through May 2000, the month during which the Preferred Shares could first be
redeemed by The Scotts Company. In addition, The Scotts Company agreed to
accelerate the termination of many of the standstill provisions in the
Miracle-Gro merger agreement that would otherwise have terminated in May 2000.
These standstill provisions include the provisions related to the Board of
Directors and voting restrictions, as well as restrictions on transfer.
Therefore, the former shareholders of Stern's Miracle-Gro Products, Inc.,
including Hagedorn Partnership, L.P., may vote their common shares freely in the
election of directors and generally on all matters brought before The Scotts
Company's shareholders. Following the conversion and the termination of the
standstill provisions described
44
above, the former shareholders of Miracle-Gro own approximately 40% of The
Scotts Company's outstanding common shares and have the ability to significantly
influence the election of directors and approval of other actions requiring the
approval of The Scotts Company's shareholders.
In January 2001, the Amended Articles of Incorporation of The Scotts
Company were amended to change the authorized preferred stock from 195,000
shares of Class A Convertible Preferred Stock to 195,000 preferred shares, each
without par value.
The limitations on the ability of the former shareholders of
Miracle-Gro to acquire additional voting securities of The Scotts Company
contained in the merger agreement terminated as of October 1, 1999, except for
the restriction under which the former shareholders of Miracle-Gro may not
acquire, directly or indirectly, beneficial ownership of Voting Stock (as that
term is defined in the Miracle-Gro merger agreement) representing more than 49%
of the total voting power of the outstanding Voting Stock, except pursuant to a
tender offer for 100% of that total voting power, which tender offer is made at
a price per share which is not less than the market price per share on the last
trading day before the announcement of the tender offer and is conditioned upon
the receipt of at least 50% of the Voting Stock beneficially owned by
shareholders of The Scotts Company other than the former shareholders of
Miracle-Gro and their affiliates and associates.
Under The Scotts Company 1992 Long Term Incentive Plan (the "1992
Plan"), stock options and performance share awards were granted to officers and
other key employees of the Company. The 1992 Plan also provided for the grant of
stock options to non-employee directors of Scotts. The maximum number of common
shares that may be issued under the 1992 Plan is 1.7 million, plus the number of
common shares surrendered to exercise options (other than non-employee director
options) granted under the 1992 Plan, up to a maximum of 1.0 million surrendered
common shares. Vesting periods under the 1992 Plan vary and were determined by
the Compensation and Organization Committee of the Board of Directors.
Under The Scotts Company 1996 Stock Option Plan (the "1996 Plan"),
stock options may be granted to officers and other key employees of the Company
and non-employee directors of The Scotts Company. The maximum number of common
shares that may be issued under the 1996 Plan is 5.5 million. Vesting periods
under the 1996 Plan vary. Generally, a 3-year cliff vesting schedule is used
unless decided otherwise by the Compensation and Organization Committee of the
Board of Directors.
Aggregate stock option activity consists of the following (shares in
millions):
Fiscal Year Ended September 30,
-------------------------------
2001 2000 1999
---- ---- ----
Number of Number of Number of
Common WTD. Avg. Common WTD. Avg. Common WTD. Avg.
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Beginning balance 4.9 $ 26.67 4.9 $ 26.33 3.8 $ 20.70
Options granted 0.9 28.66 0.3 37.39 1.4 35.70
Options exercised (0.8) 21.24 (0.1) 19.46 (0.2) 16.51
Options canceled (0.4) 27.96 (0.2) 36.87 (0.1) 30.94
-------- ------- -------
Ending balance 4.6 27.94 4.9 26.67 4.9 26.33
-------- ------- -------
Exercisable at September 30 3.0 $ 24.96 2.7 $ 21.45 1.9 $ 19.77
45
The following summarizes certain information pertaining to stock
options outstanding and exercisable at September 30, 2001 (shares in millions):
Options Outstanding Options Exercisable
------------------- -------------------
WTD. Avg. WTD. Avg. WTD. Avg.
Range of No. of Remaining Exercise No. of Exercise
Exercise Price Options Life Price Options Price
- -------------- ------- ---- ----- ------- -----
$15.00-$20.00 1.2 4.18 $ 17.84 1.2 $ 17.84
$20.00-$25.00 0.2 4.48 21.51 0.2 21.51
$25.00-$30.00 0.5 6.23 27.25 0.5 27.12
$30.00-$35.00 1.6 8.02 31.03 0.8 31.09
$35.00-$40.00 1.0 7.98 36.36 0.3 36.80
$40.00-$46.38 0.1 8.02 40.75 0.0 40.13
------- -------- -------- --------
4.6 $ 27.94 3.0 $ 24.96
======= ======== ======== ========
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which changes the
measurement, recognition and disclosure standards for stock-based compensation.
The Company, as allowable, has adopted SFAS No. 123 for disclosure purposes
only.
The fair value of each option granted has been estimated on the grant
date using the Black-Scholes option-pricing model based on the following
assumptions for those granted in fiscal 2001, 2000 and 1999: (1) expected
market-price volatility of 29.5%, 27.05% and 24.44%, respectively; (2) risk-free
interest rates of 4.4%, 6.0% and 6.0%, respectively; and (3) expected life of
options of 6 years. Options are generally granted with a ten-year term. The
estimated weighted-average fair value per share of options granted during fiscal
2001, 2000 and 1999 was $11.74, $14.94 and $13.64, respectively.
Had compensation expense been recognized for fiscal 2001, 2000 and 1999
in accordance with provisions of SFAS No. 123, the Company would have recorded
net income and earnings per share as follows:
2001 2000 1999
---- ---- ----
(in millions, except per share data)
Net income used in basic earnings per
share calculation $ 10.8 $ 59.4 $ 55.3
Net income used in diluted earnings per
share calculation $ 10.8 $ 59.4 $ 45.3
Earnings per share:
Basic $ 0.38 $ 2.12 $ 2.50
Diluted $ 0.35 $ 2.00 $ 1.82
The pro forma amounts shown above are not necessarily representative of
the impact on net income in future years as additional option grants may be made
each year.
46
NOTE 10. EARNINGS PER COMMON SHARE
The following table presents information necessary to calculate basic
and diluted earnings per common share.
Year Ended September 30,
------------------------
2001 2000 1999
---- ---- ----
(in millions, except per share data)
BASIC EARNINGS PER COMMON SHARE:
Net income before extraordinary loss $ 15.5 $ 73.1 $ 69.1
Net income 15.5 73.1 63.2
Class A Convertible Preferred Stock dividend 0.0 (6.4) (9.7)
-------- --------- ---------
Income available to common shareholders 15.5 66.7 53.5
Weighted-average common shares outstanding during the period 28.4 27.9 18.3
Basic earnings per common share
Before extraordinary item $ 0.55 $ 2.39 $ 3.25
After extraordinary item $ 0.55 $ 2.39 $ 2.93
DILUTED EARNINGS PER COMMON SHARE:
Net income used in diluted earnings per common
share calculation $ 15.5 $ 66.7 $ 63.2
Weighted-average common shares outstanding during
the period 28.4 27.9 18.3
Potential common shares:
Assuming conversion of Class A Convertible Preferred Stock 0.0 0.0 10.2
Assuming exercise of options 0.9 0.8 1.0
Assuming exercise of warrants 1.1 0.9 1.0
-------- --------- ---------
Weighted-average number of common shares outstanding and
dilutive potential common shares 30.4 29.6 30.5
Diluted earnings per common share
Before extraordinary item $ 0.51 $ 2.25 $ 2.27
After extraordinary item $ 0.51 $ 2.25 $ 2.08
NOTE 11. INCOME TAXES
The provision for income taxes, net of tax benefits associated with
the 1999 extraordinary losses of $4.1 million consists of the following:
Year Ended September 30,
------------------------
2001 2000 1999
---- ---- ----
(in millions)
Currently payable:
Federal $ 29.9 $ 27.8 $ 34.5
State 2.9 3.6 4.4
Foreign 0.3 4.3 4.4
Deferred:
Federal (18.1) 6.9 0.5
State (1.8) 0.6 0.0
-------- --------- ---------
Income tax expense $ 13.2 $ 43.2 $ 43.8
======== ========= =========
47
The domestic and foreign components of income before taxes are as
follows:
Year Ended September 30,
------------------------
2001 2000 1999
---- ---- ----
(in millions)
Domestic $ 30.3 $ 107.1 $ 100.0
Foreign (1.6) 9.2 6.9
-------- --------- ---------
Income before taxes $ 28.7 $ 116.3 $ 106.9
======== ========= =========
A reconciliation of the federal corporate income tax rate and the
effective tax rate on income before income taxes is summarized below:
Year Ended September 30,
------------------------
2001 2000 1999
---- ---- ----
Statutory income tax rate 35.0% 35.0% 35.0%
Effect of foreign operations 2.6 (0.3) (0.7)
Goodwill amortization and other effects resulting
from purchase accounting 7.5 2.7 3.0
State taxes, net of federal benefit 2.5 2.4 2.6
Resolution of previous contingencies -- (2.8) --
Other (1.6) 0.1 1.1
-------- --------- ---------
Effective income tax rate 46.0% 37.1% 41.0%
======== ========= =========
The net current and non-current components of deferred income taxes
recognized in the Consolidated Balance Sheets at September 30 are:
September 30,
-------------
2001 2000
---- ----
(in millions,
except per share data)
Net current assets $ 52.2 $ 25.1
Net non-current assets 15.4 16.2
---------- --------
Net assets $ 67.6 $ 41.3
========== ========
The components of the net deferred tax asset are as follows:
September 30,
-------------
2001 2000
---- ----
(in millions)
ASSETS
Inventories $ 14.7 $ 11.5
Accrued liabilities 56.1 33.3
Postretirement benefits 20.5 14.3
Foreign net operating losses 1.6 1.9
Other 11.8 12.9
------------ ----------
Gross deferred tax assets 104.7 73.9
Valuation allowance (1.0) (1.1)
------------ ----------
Net deferred tax assets 103.7 72.8
LIABILITIES
Property, plant and equipment (21.8) (18.2)
Other (14.3) (13.3)
------------ ----------
Net assets $ 67.6 $ 41.3
============ ==========
48
Net operating loss carryforwards in foreign jurisdictions were $5.2
million and $6.2 million at September 30, 2001 and 2000, respectively. The use
of these acquired carryforwards is subject to limitations imposed by the tax
laws of each applicable country.
The valuation allowance of $1.0 million at September 30, 2001 and
September 30, 2000 is to provide for operating losses for which the benefits are
not expected to be realized. Foreign net operating losses of $1.9 million can be
carried forward indefinitely.
Deferred taxes have not been provided on unremitted earnings of
certain foreign subsidiaries and foreign corporate joint ventures that arose in
fiscal years beginning on or before September 2001 as such earnings have been
permanently reinvested.
NOTE 12. FINANCIAL INSTRUMENTS
A description of the Company's financial instruments and the methods
and assumptions used to estimate their fair values is as follows:
LONG-TERM DEBT
At September 30, 2001 and 2000, Scotts had $330 million outstanding of
8 5/8% Senior Subordinated Notes due 2009. The fair value of these notes was
estimated based on recent trading information. Variable rate debt outstanding at
September 30, 2001 and 2000 consisted of revolving borrowings and term loans
under the Company's credit facility and local bank borrowings for certain of the
Company's foreign operations. The carrying amounts of these borrowings are
considered to approximate their fair values.
INTEREST RATE SWAP AGREEMENTS
At September 30, 2001 and 2000, Scotts had outstanding five interest
rate swaps with major financial institutions that effectively convert
variable-rate debt to a fixed rate. One swap has a notional amount of 20.0
million British Pounds Sterling under a five-year term expiring in April 2002
whereby Scotts pays 7.6% and receives three-month LIBOR. The remaining four
swaps have notional amounts between $20 million and $35 million ($105 million in
total) with three, four or five year terms commencing in January 1999. Under the
terms of these swaps, the Company pays rates ranging from 5.05% to 5.18% and
receives three-month LIBOR.
Scotts enters into interest rate swap agreements as a means to hedge
its interest rate exposure on debt instruments. In addition, the Company's
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
subject to a fixed interest rate or interest rate protection for a period of not
less than three years. Since the interest rate swaps have been designated as
hedging instruments, their fair values are reflected in the Company's
Consolidated Balance Sheets. Net amounts to be received or paid under the swap
agreements are reflected as adjustments to interest expense. The fair value of
the swap agreements was determined based on the present value of the estimated
future net cash flows using implied rates in the applicable yield curve as of
the valuation date.
INTEREST RATE LOCKS
In fiscal 1998, Scotts entered into two contracts, each with notional
amounts of $100.0 million, to lock the treasury rate component of Scotts'
anticipated offering of debt securities in the first quarter of fiscal 1999. One
of the interest rate locks expired in October 1998 and was rolled over into a
new rate lock that expired in February 1999. The other rate lock expired in
February 1999.
Scotts entered into the interest rate locks to hedge its interest rate
exposure on the offering of the 8 5/8% Senior Subordinated Notes due 2009. The
net amount paid under the interest rate locks is reflected as an adjustment to
the carrying amount of the 8 5/8% Senior Subordinated Notes.
49
The estimated fair values of the Company's financial instruments are
as follows for the fiscal years ended September 30:
2001 2000
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(in millions)
Revolving and term loans under credit facility $ 493.3 $ 493.3 $ 489.5 $ 489.5
Senior subordinated notes 330.0 320.5 330.0 319.2
Foreign bank borrowings and term loans 9.4 9.4 7.1 7.1
Interest rate swap agreements (2.7) (2.7) -- 2.6
Excluded from the fair value table above are the following items that
are included in the Company's total debt balances at September 30, 2001 and
2000:
2001 2000
---- ----
(in millions)
Amounts paid to settle treasury locks $ (9.5) $ (10.8)
Non-interest bearing notes 53.7 36.4
Capital lease obligations and other 10.9 10.6
The fair value of the non-interest bearing notes is not considered
determinable since there is no established market for notes with similar
characteristics and since they represent notes that were negotiated between the
Company and the seller as part of transactions to acquire businesses.
NOTE 13. OPERATING LEASES
The Company leases buildings, land and equipment under various
noncancellable lease agreements for periods of two to six years. The lease
agreements generally provide that the Company pay taxes, insurance and
maintenance expenses related to the leased assets. Certain lease agreements
contain purchase options. At September 30, 2001, future minimum lease payments
were as follows:
(in millions)
2002 $ 15.6
2003 10.0
2004 6.4
2005 4.2
2006 3.1
Thereafter 26.5
----------
Total minimum lease payments $ 65.8
==========
The Company also leases transportation and production equipment under
various one-year operating leases, which provide for the extension of the
initial term on a monthly or annual basis. Total rental expenses for operating
leases were $22.0 million, $17.8 million and $18.5 million for fiscal 2001, 2000
and 1999, respectively. The total to be received from sublease rentals in place
at September 30, 2001 is $0.6 million. The future minimum lease payments of $1.2
million related to the prior World Headquarters office lease are included in
restructuring expense.
50
NOTE 14. COMMITMENTS
The Company has entered into the following purchase commitments:
SEED: The Company is obligated to make future purchases based on
estimated yields and other market purchase commitments. At September 30, 2001,
estimated annual seed purchase commitments were as follows:
(in millions)
2002 $ 56.7
2003 $ 38.2
2004 $ 21.0
2005 $ 7.6
2006 $ 0.7
The Company made purchases of $53.9 million and $31.2 million under
this obligation in fiscal 2001 and 2000, respectively.
PEAT: In March 2000, the Company entered in a contract to purchase
peat over the next ten years. There is an option to extend the term of this
agreement for a further period of ten years, on or before the eighth anniversary
of this agreement. The minimum volume purchase obligations under the March 2000
contract are as follows:
Approximate Value
Cubic Meters Based on Average Prices
------------ -----------------------
(in millions)
2002 1,046,000 $ 11.1
2003 1,067,000 11.3
2004 1,088,000 11.5
2005 1,110,000 11.7
2006 1,132,000 12.0
Thereafter 2,830,000 30.0
In the event that in any one contract year, the Company does not
purchase the minimum required volume, the Company will be required to pay a cash
penalty based upon the marginal contribution to the supplier of all those
products which the Company has failed to purchase.
In the event that the volume purchases in a contract year are less
than 97% of the contract requirements, the Company shall pay 80% of the
supplier's marginal contribution multiplied by the number of cubic meters by
which the volume equivalent to 97% of the contract requirements was not reached.
An amount of 50% of the supplier's marginal contribution multiplied by the
number of cubic meters would also be paid based on the remaining 3% contract
purchase obligation shortfall. A reverse approach applies for purchases made by
the Company that are in excess of the minimum volume purchase obligation in any
contract year. The Company purchased 974,000 cubic meters of peat under this
arrangement in fiscal 2001.
MEDIA ADVERTISING: As of September 30, 2001 the Company has committed
to purchase $7.8 million of airtime for both national and regional television
advertising in fiscal 2002.
NOTE 15. CONTINGENCIES
Management continually evaluates the Company's contingencies,
including various lawsuits and claims which arise in the normal course of
business, product and general liabilities, property losses and other fiduciary
liabilities for which the Company is self-insured. In the opinion of management,
its assessment of contingencies is reasonable and related reserves, in the
aggregate, are adequate; however, there can be no assurance that future
quarterly or annual operating results will not be materially affected by final
resolution of these matters. The following matters are the more significant of
the Company's identified contingencies.
51
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. Although this Consent Order is subject to
public comment and both parties may withdraw their consent to entry of the
Order, we anticipate the Consent Order will be entered by the court in January
2002.
Since receiving notice of the enforcement action in June 1997, we have
continually assessed the potential costs to satisfactorily remediate the
Marysville site and to pay any penalties sought by the state. Although the terms
of the Consent Order have now been agreed to, the extent of any possible
contamination and an appropriate remediation plan have yet to be determined. As
of September 30, 2001, we estimate that the possible total cost that could be
incurred in connection with this matter is approximately $10 million. We have
accrued for the amount we consider to be the most probable and believe the
outcome will not differ materially from the amount reserved.
In addition to the dispute with the Ohio EPA, we are negotiating with
the Philadelphia District of the U.S. Army Corps of Engineers regarding possible
discontinuation of our peat harvesting operations in at our Lafayette, New
Jersey facility. We are also addressing remediation concerns raised by the
Environmental 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 as of September 30, 2001, but we do not believe that either issue
is material.
Regulations and environmental concerns also exist surrounding peat
extraction in the United Kingdom and the European Union. In August 2000, 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. We are
currently challenging this consideration. If we are unsuccessful, local planning
authorities in the United Kingdom will be required to review the impact of
activities likely to affect these areas and it is possible that these
authorities could modify or revoke the applicable consents, in which case we
believe we should be entitled to compensation and we believe we would have
sufficient raw material supplies available to replace the peat produced in such
areas.
The Company has determined that quantities of cement containing
asbestos material at certain manufacturing facilities in the United Kingdom
should be removed.
At September 30, 2001, $7.0 million is accrued for the environmental
matters described herein. The significant components of the accrual are: (i)
costs for site remediation of $4.7 million; (ii) costs for asbestos abatement of
$1.8 million; and (iii) fines and penalties of $0.5 million. The significant
portion of the costs accrued as of September 30, 2001 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 September 30, 2001 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
52
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.
AGREVO ENVIRONMENTAL HEALTH, INC.
On June 3, 1999, AgrEvo Environmental Health, Inc. ("AgrEvo") (which
is reported to have 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 (now Pharmacia) seeking damages and
injunctive relief for alleged antitrust violations and breach of contract by the
Company and its subsidiary and antitrust violations and tortious interference
with contact by Monsanto. AgrEvo also contends that the Company's execution of
various agreements with Monsanto, including the Roundup(R) marketing agreement,
as well as the Company's subsequent actions, violated the purchase agreements
between AgrEvo and the Company. AgrEvo is requesting unspecified damages as well
as affirmative injunctive relief, and is seeking to have the court invalidate
the Roundup(R) marketing agreement as violative of the federal antitrust laws.
On June 29, 1999, AgrEvo also filed a complaint in the Superior Court
of the State of Delaware (the "Delaware Action") against two of the Company's
subsidiaries seeking damages for alleged breach of contract. AgrEvo alleges
that, under the contracts by which a subsidiary of the Company purchased a
herbicide business from AgrEvo in May 1998, two of the Company's subsidiaries
have failed to pay AgrEvo approximately $0.6 million. AgrEvo is requesting
damages in this amount, as well as pre- and post-judgment interest and
attorneys' fees and costs. The Company's subsidiaries have moved to dismiss or
stay this action. On January 31, 2000, the Delaware court stayed AgrEvo's action
pending the resolution of a motion to amend the New York Action, and the
resolution of the New York Action. The Company's subsidiaries intend to
vigorously defend the asserted claims.
If the above actions are determined adversely to the Company, the
result could have a material adverse effect on our results of operations,
financial position and cash flows. 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
On June 30, 2000, the Company filed suit against Central Garden & Pet
Company in the U.S. District Court for the Southern District of Ohio to recover
approximately $17 million in 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 include
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). Central Garden has
asserted several causes of action, including breach of oral contract and
fraudulent misrepresentation, and seeks damages in excess of $900 million. In
addition, Central Garden asserts various other causes of action including breach
of written contract and quantum valebant and seeks damages 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 alleges was
improperly seized by the Company. These allegations are made without regard to
the fact that the amounts sought from Central in litigation filed by the Company
and Pharmacia are net of any such alleged credit. The Company believes all of
Central Garden's counterclaims in Ohio are without merit and it intends to
vigorously defend against them. Pharmacia (formerly Monsanto) also filed suit
against Central Garden in Missouri state court, seeking unspecified damages
allegedly due Pharmacia under a four-year alliance agreement between Pharmacia
and Central Garden.
53
On July 7, 2000, Central Garden filed suit against the Company and
Pharmacia in the U.S. District Court for the Northern District of California
(San Francisco Division) alleging various claims, including breach of contract
and violations of federal antitrust laws, and seeking an unspecified amount of
damages and injunctive relief. On October 26, 2000, 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. Fact discovery is set to conclude in December 2001. The trial
date for the California federal action is set for July 15, 2002.
On October 31, 2000, Central Garden filed an additional complaint
against the Company and Pharmacia in the California Superior Court of Contra
Costa County. That complaint seeks to assert the breach of contract claims
previously dismissed by the District Court 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.
The Company believes that all of Central Garden's federal and state
claims are entirely without merit and it intends to vigorously defend against
them. 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 Central Garden matters and that any potential exposure that the Company may
face cannot be reasonably estimated. Therefore, no accrual has been established
related to these matters.
NOTE 16. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of trade accounts receivable.
The Company sells its consumer products to a wide variety of retailers,
including mass merchandisers, home centers, independent hardware stores,
nurseries, garden outlets, warehouse clubs and local and regional chains.
Professional products are sold to commercial nurseries, greenhouses, landscape
services, and growers of specialty agriculture crops.
At September 30, 2001, 70% of the Company's accounts receivable was
due from customers in North America. Approximately 82% of these receivables were
generated from the Company's North American Consumer segment. The most
significant concentration of receivables within this segment was from home
centers, which accounted for 20%, followed by mass merchandisers at 12% of the
Company's receivables balance at September 30, 2001. No other retail
concentrations (e.g., independent hardware stores, nurseries, etc. in similar
markets) accounted for more than 10% of the Company's accounts receivable
balance at September 30, 2001.
The remaining 15% of North American accounts receivable was generated
from customers of the Global Professional segment located in North America. As a
result of the changes in distribution methods made in fiscal 2000 for the Global
Professional segment customers in North America, nearly all products are sold
through distributors. Accordingly, nearly all of the Global Professional
segment's North American accounts receivable at September 30, 2001 is due from
distributors.
The 30% of accounts receivable generated outside of North America is
due from retailers, distributors, nurseries and growers. No concentrations of
customers or individual customers within this group account for more than 10% of
the Company's accounts receivable balance at September 30, 2001.
At September 30, 2001, the Company's concentrations of credit risk
were similar to those existing at September 30, 2000.
54
The Company's two largest customers accounted for the following
percentage of net sales in each respective period:
Largest 2nd Largest
Customer Customer
-------- --------
2001 27.8% 14.6%
2000 22.9% 8.9%
1999 17.4% 11.6%
Sales to the Company's two largest customers are reported within
Scotts' North American Consumer segment. No other customers accounted for more
than 10% of fiscal 2001, 2000 or 1999 net sales.
NOTE 17. OTHER EXPENSE (INCOME)
Other expense (income) consisted of the following for the fiscal years
ended September 30:
2001 2000 1999
---- ---- ----
(in millions)
Royalty income................................................ $ (4.9) $ (5.1) $ (4.0)
Legal and insurance settlements............................... (3.6)
Gain on sale of ProTurf@ business............................. (4.6)
Asset valuation and write-off charges......................... 0.1 1.8 1.2
Foreign currency losses....................................... 0.5 0.9 0.1
Other, net.................................................... (0.6) 1.0 (0.9)
----------- ---------- ----------
Total......................................................... $ (8.5) $ (6.0) $ (3.6)
=========== ========== ==========
NOTE 18. NEW ACCOUNTING STANDARDS
In May 2000, the Emerging Issues Task Force (EITF) reached consensus
on Issue 00-14, "Accounting for Certain Sales Incentives". This Issue requires
certain sales incentives (e.g., discounts, rebates, coupons) offered by the
Company to distributors, retail customers and consumers to be classified as a
reduction of sales revenue. Like many other consumer products companies, the
Company has historically classified these costs as advertising, promotion, or
selling expenses. The Company adopted the guidance in fiscal 2001 with no impact
on fiscal 2001 results of operations.
In January 2001, the EITF reached consensus on Issue 00-22,
"Accounting for Points and Certain Other Time or Volume-Based Sales Incentive
Offers". This Issue requires certain allowances and discounts (e.g., volume
discounts) paid to distributors and retail customers to be classified as a
reduction of sales revenue. Like many other consumer products companies, the
Company has historically classified these cost as advertising, promotion, or
selling expenses. The Company adopted the guidance in fiscal 2001 with no impact
on fiscal 2001 results of operations.
In April 2001, the EITF reached consensus on Issue 00-25, "Accounting
for Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products". This Issue requires that certain
consideration from a vendor to a retailer be classified as a reduction of sales
revenue. Like many other consumer products companies, the Company has
historically classified these costs as advertising, promotion, or selling
expenses. The Company adopted the guidance in fiscal 2002 and has amended the
consolidated financial statements as of September 30, 2001, 2000 and 1999 to
reclassify promotional costs, in accordance with the consensus reached by the
EITF on Issue 00-25. There was no impact on results of operations for these
three fiscal periods.
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standard No. 141, "Business Combinations". SFAS No. 141
requires that all business combinations initiated after June 30, 2001, be
accounted for using the purchase accounting method and also established specific
criteria for recognition of
55
intangible assets separately from goodwill. The acquisitions discussed in Note 5
herein were accounted for using the purchase method of accounting.
In June 2001, the FASB issued Statement of Accounting Standard No.
142, "Goodwill and Other Intangible Assets". SFAS No. 142 eliminates the
requirement to amortize indefinite-lived assets such as goodwill. It also
requires an annual review for impairment of indefinite-lived assets. Scotts
adopted SFAS No. 142 beginning with the first quarter of fiscal 2002 and has
amended its consolidated financial statements as of and for the fiscal years
ended September 30, 2001, 2000 and 1999 to incorporate the transitional
disclosures required for SFAS No. 142. In connection with the Company's
transitional impairment testing of goodwill and indefinite-lived intangible
assets, an impairment of $29.8 million ($18.5 million net of tax) was identified
with respect to tradenames in our International Consumer businesses in Germany,
France and the United Kingdom. This change was reflected as a cumulative effect
of a change in accounting in the Company's first quarter 2002. The Company
expects that the elimination of amortization of indefinite-lived assets will
increase earnings per share in fiscal 2002 by $.50 to $.55.
Also 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 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.
NOTE 19. SUPPLEMENTAL CASH FLOW INFORMATION
2001 2000 1999
---- ---- ----
(in millions)
Interest paid (net of amount capitalized) $ 86.5 $ 88.3 $ 63.6
Income taxes paid 47.2 10.0 50.3
Dividends declared not paid 0.0 0.0 2.5
Businesses acquired:
Fair value of assets acquired, net of cash 53.5 4.8 691.2
Liabilities assumed 0.0 0.0 (149.3)
----------- ---------- ----------
Net assets acquired 53.5 4.8 541.9
Cash paid 26.5 2.7 4.8
Notes issued to seller 27.0 2.1 35.7
Debt issued $ 0.0 $ 0.0 $ 501.4
NOTE 20. SEGMENT INFORMATION
For fiscal 2001, the Company was divided into three reportable
segments--North American Consumer, Global Professional and International
Consumer. The North American Consumer segment consists of the Lawns, Gardens,
Growing Media, Ortho, Scotts LawnService(R) and Canada businesses. These
segments differ from those used in the prior year due to the sale of the
Company's professional turfgrass business in May 2000 and the resulting change
in management reporting structure. For fiscal 2002 Scotts LawnService(R) is
reported as a separate reportable segment. These financial statements have been
amended to present financial information for the segments as they are in fiscal
2002 for all periods presented.
The North American Consumer segment specializes in dry, granular
slow-release lawn fertilizers, lawn fertilizer combination and lawn control
products, grass seed, spreaders, water-soluble and controlled-release garden and
indoor plant foods, plant care products and potting soils, barks, mulches and
other growing media products and pesticides products. Products are marketed to
mass merchandisers, home improvement centers, large hardware chains, nurseries
and gardens centers.
56
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 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, customer application
services and growing media. Products are sold to lawn and landscape service
companies, commercial nurseries and greenhouses and specialty crop growers.
Prior to June 2000, this segment also included the Company's ProTurf(R)
business, which was sold in May 2000.
The International 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 SFAS No. 131, 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
periods have been restated to conform to this basis of presentation.
N.A. Scotts Global International
Consumer Lawnservice(R) Professional Consumer Corporate Total
-------- -------------- ------------ -------- --------- -----
(in millions)
Net Sales:
2001 $ 1,223.1 $ 42.0 $ 179.4 $ 252.1 $ -- $ 1,696.6
2000 1,189.5 20.6 180.5 274.6 -- 1,665.2
1999 1,105.5 14.0 172.6 284.5 -- 1,576.6
Income (loss) from Operations:
2001 $ 245.3 $ 4.7 $ 17.4 $ (3.3) $(120.0) $ 144.1
2000 243.3 0.9 26.4 21.0 (54.2) 237.4
1999 232.9 (0.1) 35.2 29.2 (75.4) 221.8
Operating Margin:
2001 20.1% 11.2% 9.7% (1.3)% nm 8.5%
2000 20.5% 4.4% 14.6% 7.6% nm 14.3%
1999 21.1% (0.7)% 20.4% 10.3% nm 14.1%
Depreciation and Amortization:
2001 $ 38.0 $ 1.9 $ 5.1 $ 14.0 $ 4.6 $ 63.6
2000 34.8 1.2 4.9 12.7 7.4 61.0
1999 32.9 0.7 2.1 12.6 7.9 56.2
Capital Expenditures:
2001 $ 55.3 $ 1.1 $ 1.9 $ 5.1 $ -- $ 63.4
2000 31.3 0.8 9.8 9.5 21.1 72.5
1999 22.1 0.4 5.7 10.6 27.9 66.7
Long-Lived Assets:
2001 $ 722.8 $ 29.2 $ 65.4 $ 264.3 $ -- $ 1,081.7
2000 687.3 10.2 72.7 263.4 -- 1,033.6
Total Assets:
2001 $ 1,172.1 $ 28.0 $ 141.0 $ 397.9 $ 104.0 $ 1,843.0
2000 1,116.1 4.7 173.8 384.3 82.5 1,761.4
- ----------
nm--Not meaningful
Income (loss) from operations reported for Scotts' four operating
segments represents earnings before amortization of intangible assets, interest
and taxes, since this is the measure of profitability used by management.
Accordingly, the Corporate operating loss for the fiscal years ended September
30, 2001, 2000 and 1999 includes amortization of certain intangible assets,
corporate general and administrative expenses, certain other income/expense not
allocated to the business segments and North America restructuring charges in
fiscal 2001. International restructuring charges of approximately $10.4 million
are included in International Consumer's operating loss in fiscal 2001. Global
Professional operating income in fiscal 2001 is net of restructuring charges of
$2.9 million.
57
Total assets reported for Scotts' operating segments include the
intangible assets for the acquired businesses within those segments. Corporate
assets primarily include deferred financing and debt issuance costs, corporate
intangible assets as well as deferred tax assets.
NOTE 21. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations for fiscal 2001 and 2000.
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Full Year
------- ------- ------- ------- ---------
(in millions, except per share data)
FISCAL 2001
Net sales $ 147.0 $ 713.5 $ 598.6 $ 237.5 $ 1,696.6
Gross profit 31.3 292.0 218.3 55.6 597.2
Net income (loss) (51.2) 84.8 45.4 (63.5) 15.5
Basic earnings (loss) per common share $ (1.83) $ 3.01 $ 1.60 $ (2.24) $ 0.55
Common shares used in basic EPS calculation 28.0 28.2 28.3 28.4 28.4
Diluted earnings (loss) per common share $ (1.83) $ 2.80 $ 1.49 $ (2.24) $ 0.51
Common shares and dilutive potential common
shares used in diluted EPS calculation 28.0 30.3 30.6 28.4 30.4
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Full Year
------- ------- ------- ------- ---------
(in millions, except per share data)
FISCAL 2000
Net sales $ 182.9 $ 676.2 $ 565.5 $ 240.6 $ 1,665.2
Gross profit 65.3 268.6 209.3 69.6 612.8
Net income (loss) (30.8) 63.4 52.8 (12.3) 73.1
Basic earnings (loss) per common share $ (1.32) $ 2.27 $ 1.89 $ (0.44) $ 2.39
Common shares used in basic EPS calculation 28.2 27.9 27.9 28.0 27.9
Diluted earnings (loss) per common share $ (1.32) $ 2.15 $ 1.77 $ (0.44) $ 2.25
Common shares and dilutive potential common
shares used in diluted EPS calculation 28.2 29.5 29.7 28.0 29.6
Certain reclassifications have been made within interim periods.
Common stock equivalents, such as stock options, are excluded from the
diluted loss per share calculation in periods where there is a net loss because
their effect is anti-dilutive.
Scotts' business is highly seasonal with approximately 75% of sales
occurring in the second and third fiscal quarters combined.
NOTE 22. SUBSEQUENT EVENT
In December 2001, the Amended Credit Agreement was amended to redefine
EBITDA, to eliminate the net worth covenant and to modify the covenants
pertaining to interest coverage and leverage. The amendment also increases the
amount that may be borrowed in optional currencies to $360 million from $258.8
million and amends how proceeds from future equity or subordinated debt
offerings, if any, will be used towards mandatory prepayments of revolving
credit facility borrowings.
58
NOTE 23. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND
NON-GUARANTORS
In January 1999, The Scotts Company issued $330 million of 8 5/8%
Senior Subordinated Notes due 2009 to qualified institutional buyers under the
provisions of Rule 144A of the Securities Act of 1933.
The 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 information presents consolidating Statements of
Operations and Statements of Cash Flows for the three years ended September 30,
2001 and consolidated Balance Sheets as of September 30, 2001 and 2000. Separate
audited financial statements of the individual guarantor subsidiaries have not
been provided because management does not believe they would be meaningful to
investors.
59
THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
(IN MILLIONS)
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
------ ---------- ---------- ------------ ------------
Net sales $ 919.6 $ 380.2 $ 396.8 $ $1,696.6
Cost of sales 633.8 216.4 241.9 1,092.1
Restructuring and other charges 2.5 1.4 3.4 7.3
--------- --------- ------- ------- --------
Gross profit 283.3 162.4 151.5 597.2
Gross commission earned from marketing agreement 34.6 4.5 39.1
Contribution expenses under marketing agreement 16.9 1.4 18.3
--------- -------- ------- ------- --------
Net commission earned from marketing agreement 17.7 3.1 20.8
Advertising 89.4 7.5 39.6 136.5
Selling, general and administrative 165.0 14.4 98.1 277.5
Restructuring and other charges 47.5 11.0 9.9 68.4
Amortization of goodwill and other intangibles 1.7 15.8 10.2 27.7
Equity income in non-guarantors (61.7) 61.7
Intracompany allocations 1.0 (9.1) 8.1
Other (income) expense, net (3.5) (5.4) 0.4 (8.5)
--------- --------- ------- --------- --------
Income (loss) from operations 61.6 128.2 (11.7) (61.7) 116.4
Interest (income) expense 78.4 (14.3) 23.6 87.7
--------- --------- ------- --------- --------
Income (loss) before income taxes (16.8) 142.5 (35.3) (61.7) 28.7
Income taxes (benefit) (32.3) 60.5 (15.0) 13.2
--------- --------- ------- --------- --------
Net income (loss) $ 15.5 $ 82.0 $ (20.3) $ (61.7) $ 15.5
========= ========= ======= ========= ========
60
THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
(IN MILLIONS)
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
------ ---------- ---------- -------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 15.5 $ 82.0 $ (20.3) $ (61.7) $ 15.5
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 15.5 10.2 6.9 32.6
Amortization 1.9 15.7 13.4 31.0
Deferred taxes (19.9) (19.9)
Equity income in non-guarantors (61.7) 61.7
Restructuring and other charges 13.2 14.5 27.7
Loss on sale of property
Changes in assets and liabilities, net of
acquired businesses:
Accounts receivable 0.4 (10.3) (4.3) (14.2)
Inventories (48.9) (5.2) (14.4) (68.5)
Prepaid and other current assets 28.7 (1.5) 4.2 31.4
Accounts payable (6.5) (2.9) 6.6 (2.8)
Accrued taxes and liabilities 32.6 (72.1) 16.8 (22.7)
Restructuring reserves 13.3 11.4 12.6 37.3
Other assets (3.9) 13.3 (3.3) 6.1
Other liabilities 1.6 (10.8) 16.8 7.6
Other, net 10.4 0.4 (6.2) 4.6
--------- --------- ------- ---------- --------
Net cash (used in) provided by operating activities (7.8) 44.7 28.8 65.7
--------- --------- ------- ---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment (41.8) (13.9) (7.7) (63.4)
Proceeds from sale of equipment
Investments in acquired businesses,
net of cash acquired (13.5) (13.0) (26.5)
Repayment of seller notes (1.2) (9.9) (11.1)
--------- --------- ------- ---------- --------
Net cash used in investing activities (41.8) (28.6) (30.6) (101.0)
--------- --------- ------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under revolving and
bank lines of credit 2.2 2.2 4.4
Cash received from exercise of stock options 17.0 17.0
Intercompany financing 17.8 (14.9) (2.9)
--------- --------- ------- ---------- --------
Net cash provided by (used in) financing activities 37.0 (14.9) (0.7) 21.4
Effect of exchange rate changes on cash (0.4) (0.4)
--------- --------- ------- ---------- --------
Net increase (decrease) in cash (12.6) 1.2 (2.9) (14.3)
Cash and cash equivalents, beginning of period 16.0 (0.6) 17.6 33.0
--------- --------- ------- ---------- --------
Cash and cash equivalents, end of period $ 3.4 $ 0.6 $ 14.7 $ 0.0 $ 18.7
========= ========= ======= ========== ========
61
THE SCOTTS COMPANY
BALANCE SHEET
AS OF SEPTEMBER 30, 2001
(IN MILLIONS, EXCEPT PER SHARE INFORMATION)
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
------ ---------- ---------- ------------ ------------
ASSETS
Current Assets:
Cash $ 3.4 $ 0.6 $ 14.7 $ $ 18.7
Accounts receivable, net 93.3 53.1 74.4 220.8
Inventories, net 236.8 54.0 77.6 368.4
Current deferred tax asset 52.2 0.5 (0.5) 52.2
Prepaid and other assets 16.7 2.6 14.8 34.1
--------- --------- ------- ------- --------
Total current assets 402.4 110.8 181.0 694.2
Property, plant and equipment, net 196.5 75.0 39.2 310.7
Intangible assets, net 28.8 478.6 263.7 771.1
Other assets 49.7 6.1 11.2 67.0
Investment in affiliates 898.2 (898.2)
Intracompany assets 215.6 (215.6)
------- --------- ----- --------- ------
Total assets 1,575.6 886.1 495.1 (1,113.8) 1,843.0
========= ========= ======= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt 31.5 15.0 24.8 71.3
Accounts payable 75.1 20.5 55.3 150.9
Accrued liabilities 124.0 26.6 57.4 208.0
Accrued taxes 16.4 2.8 (4.3) 14.9
--------- --------- ------- --------- --------
Total current liabilities 247.0 64.9 133.2 445.1
Long-term debt 559.1 5.8 251.6 816.5
Other liabilities 48.8 0.4 26.0 75.2
Intracompany liabilities 188.3 27.3 (215.6)
--------- ------- ------- --------- ------
Total liabilities 1,043.2 71.1 438.1 (215.6) 1,336.8
Commitments and Contingencies
Shareholders' Equity:
Preferred shares, no par value, none issued
Investment from parent 488.1 60.4 (548.5)
Common shares, no par value per share,
$.01 stated value per share, issued 31.3
shares in 2001 0.3 0.3
Capital in excess of stated value 398.3 398.3
Retained earnings 212.3 329.3 20.4 (349.7) 212.3
Treasury stock at cost, 2.6 shares issued (70.0) (70.0)
Accumulated other comprehensive income (8.5) (2.4) (23.8) (34.7)
--------- --------- ------- --------- --------
Total shareholders' equity 532.4 815.0 57.0 (898.2) 506.2
--------- --------- ------- --------- --------
Total liabilities and shareholders' equity $ 1,575.6 $ 886.1 $ 495.1 $(1,113.8) $1,843.0
========= ========= ======= ========= ========
62
THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
(IN MILLIONS)
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
------ ---------- ---------- -------------------------
Net sales $ 862.7 $ 398.8 $ 403.7 $ $1,665.2
Cost of sales 559.2 260.2 233.0 1,052.4
--------- --------- ---------- ---------- --------
Gross profit 303.5 138.6 170.7 612.8
Gross commission earned from marketing agreement 34.9 4.3 39.2
Contribution expenses under marketing agreement 9.2 0.7 9.9
--------- -------- ---------- ---------- --------
Net commission earned from marketing agreement 25.7 3.6 29.3
Advertising 77.6 24.3 42.0 143.9
Selling, general and administrative 154.4 20.1 92.4 266.9
Amortization of goodwill and other intangibles 2.0 15.5 9.6 27.1
Equity income in non-guarantors (52.4) 52.4
Intracompany allocations (19.7) 9.8 9.9
Other (income) expenses, net 1.8 (8.7) 0.9 (6.0)
--------- --------- ---------- ---------- --------
Income (loss) from operations 165.5 77.6 19.5 (52.4) 210.2
Interest (income) expense 81.5 (11.3) 23.7 93.9
--------- --------- ---------- ---------- --------
Income (loss) before income taxes 84.0 88.9 (4.2) (52.4) 116.3
Income taxes (benefit) 10.9 33.9 (1.6) 43.2
--------- --------- ---------- ---------- --------
Net income (loss) $ 73.1 $ 55.0 $ (2.6) $ (52.4) $ 73.1
========= ========= ========== ========= ========
63
THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
(IN MILLIONS)
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
------ ---------- ---------- -------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 73.1 $ 55.0 $ (2.6) $ (52.4) $ 73.1
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 16.0 8.0 5.0 29.0
Amortization 5.6 16.5 9.9 32.0
Deferred taxes 7.5 7.5
Equity income in non-guarantors (52.4) 52.4
Loss on sale of fixed assets 0.6 1.8 2.0 4.4
Gain on sale of business (4.6) (4.6)
Changes in assets and liabilities,
net of acquired businesses:
Accounts receivable 48.3 (43.5) 1.6 6.4
Inventories (18.2) 12.5 11.5 5.8
Prepaid and other current assets (13.0) 1.2 2.6 (9.2)
Accounts payable (5.0) 17.9 6.5 19.4
Accrued taxes and other liabilities 51.5 (12.7) (16.3) 22.5
Other assets (1.8) (6.5) 3.6 (4.7)
Other liabilities 3.1 (1.0) (8.5) (6.4)
Other, net (4.9) 1.5 (0.3) (3.7)
--------- --------- ------- ---------- --------
Net cash provided by operating activities 105.8 50.7 15.0 171.5
--------- --------- ------- ---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment (53.2) (9.0) (10.3) (72.5)
Proceeds from sale of equipment 1.8 1.8
Investments in non-guarantors (11.8) (4.1) (2.4) (18.3)
Repayments of seller notes 7.0 (8.0) (1.0)
Other net 0.5 0.5
--------- --------- ------- ---------- --------
Net cash used in investing activities (57.5) (13.1) (18.9) (89.5)
--------- --------- ------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings under revolving and
bank lines of credit (48.2) 4.5 (7.0) (50.7)
Dividends on Class A
Convertible Preferred Stock (6.4) (6.4)
Repurchase of treasury shares (23.9) (23.9)
Cash received from exercise of stock options 2.8 2.8
Intercompany financing 34.9 (45.8) 10.9
--------- --------- ------- ---------- ------
Net cash used in financing activities (40.8) (41.3) 3.9 (78.2)
Effect of exchange rate changes on cash (1.1) (1.1)
--------- --------- ------- ---------- --------
Net increase (decrease) in cash 7.5 (3.7) (1.1) 2.7
Cash and cash equivalents, beginning of period 8.5 3.1 18.7 30.3
--------- --------- ------- ---------- --------
Cash and cash equivalents, end of period $ 16.0 $ (0.6) $ 17.6 $ 0.0 $ 33.0
========= ========= ======= ========== ========
64
THE SCOTTS COMPANY
BALANCE SHEET
AS OF SEPTEMBER 30, 2000
(IN MILLIONS, EXCEPT PER SHARE INFORMATION)
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
------ ---------- ---------- ------------ ------------
ASSETS
Current Assets:
Cash $ 16.0 $ (0.6) $ 17.6 $ $ 33.0
Accounts receivable, net 103.2 42.7 70.1 216.0
Inventories, net 189.6 54.7 63.2 307.5
Current deferred tax asset 26.1 0.5 (1.5) 25.1
Prepaid and other assets 42.2 1.1 19.0 62.3
--------- --------- ------- ---------- --------
Total current assets 377.1 98.4 168.4 643.9
Property, plant and equipment, net 191.8 60.0 38.7 290.5
Intangible assets, net 81.1 417.9 244.1 743.1
Other assets 66.2 6.5 11.2 83.9
Investment in affiliates 836.5 (836.5)
Intracompany assets 246.5 (246.5)
--------- --------- ------- ---------- --------
Total assets 1,552.7 829.3 462.4 (1,083.0) 1,761.4
========= ========= ======= ========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt 29.6 2.6 17.2 49.4
Accounts payable 81.6 22.7 48.7 153.0
Accrued liabilities 119.1 16.9 38.3 174.3
Accrued taxes (12.4) 48.5 (3.0) 33.1
--------- --------- ------- ---------- --------
Total current liabilities 217.9 90.7 101.2 409.8
Long-term debt 555.2 4.7 253.5 813.4
Other liabilities 43.8 16.5 60.3
Intracompany liabilities 238.3 8.2 (246.5)
--------- --------- ------- ---------- --------
Total liabilities 1,055.2 95.4 379.4 (246.5) 1,283.5
Commitments and Contingencies
Shareholders' Equity:
Preferred shares, no par value, none issued
Investment from parent 488.7 59.8 (548.5)
Common shares, no par value share, $.01
stated value per share, 31.3 shares issued in 2000 0.3 0.3
Capital in excess of stated value 389.3 389.3
Retained earnings 196.8 247.3 40.7 (288.0) 196.8
Treasury stock at cost, 3.4 shares issued (83.5) (83.5)
Accumulated other comprehensive income (5.4) (2.1) (17.5) (25.0)
--------- --------- ------- ---------- --------
Total shareholders' equity 497.5 733.9 83.0 (836.5) 477.9
--------- --------- ------- ---------- --------
Total liabilities and shareholders' equity $ 1,552.7 $ 829.3 $ 462.4 $ (1,083.0) $1,761.4
========= ========= ======= ========== ========
65
THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
(IN MILLIONS)
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
------ ---------- ---------- ------------ ------------
Net sales $ 715.9 $ 460.9 $ 399.8 $ $1,576.6
Cost of sales 465.2 296.8 225.3 987.3
--------- --------- ------- ---------- --------
Gross profit 250.7 164.1 174.5 589.3
Gross commission earned from marketing agreement 28.6 1.7 30.3
Contribution expenses under marketing agreement 1.6 1.6
--------- --------- ------- ---------- --------
Net commission earned from marketing agreement 27.0 1.7 28.7
Advertising 39.8 34.1 43.4 117.3
Selling, general and administrative 156.7 39.6 84.9 281.2
Restructuring and other charges 1.4 1.4
Amortization of goodwill and other intangibles 12.8 4.2 8.6 25.6
Equity income in non-guarantors (55.7) 55.7
Intracompany allocations (12.8) 2.8 10.0
Other income, net (3.1) (0.1) (0.4) (3.6)
--------- --------- ------- ---------- --------
Income (loss) from operations 138.6 83.5 29.7 (55.7) 196.1
Interest (income) expense 55.9 23.2 79.1
--------- --------- ------- ---------- --------
Income (loss) before income taxes 82.7 83.5 6.5 (55.7) 117.0
Income taxes (benefit) 13.6 31.8 2.5 47.9
--------- --------- ------- ---------- --------
Income (loss) before extraordinary item 69.1 51.7 4.0 (55.7) 69.1
Extraordinary loss on early extinguishment of debt,
net of income tax benefit 5.9 5.9
--------- --------- ------- ---------- --------
Net income (loss) $ 63.2 $ 51.7 $ 4.0 $ (55.7) $ 63.2
========= ========= ======= ========= ========
66
THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
(IN MILLIONS)
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
------ ---------- ---------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 63.2 $ 51.7 $ 4.0 $ (55.7) $ 63.2
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 12.9 9.6 6.5 29.0
Amortization 8.8 8.5 9.9 27.2
Deferred taxes 0.5 0.5
Equity income in non-guarantors (55.7) 55.7
Extraordinary loss 5.9 5.9
Loss on sale of property 2.7 (1.0) 0.1 1.8
Changes in assets and liabilities, net of acquired
businesses:
Accounts receivable 4.1 19.6 23.7
Inventories (27.9) 6.3 (21.6)
Prepaid and other current assets (16.5) 1.9 (10.6) (25.2)
Accounts payable 14.8 (0.2) (3.9) 10.7
Accrued taxes and other liabilities (11.0) 25.7 (25.4) (10.7)
Other assets (35.4) 0.7 (1.2) (35.9)
Other liabilities 9.8 (3.0) (4.6) 2.2
Other, net 2.6 0.4 4.4 7.4
--------- --------- ------- ---------- --------
Net cash provided by (used in) operating activities (21.2) 120.2 (20.8) 78.2
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment (48.1) (7.9) (10.7) (66.7)
Proceeds from sale of equipment 1.0 0.5 1.5
Investments in acquired businesses,
net of cash acquired (350.1) (156.1) (506.2)
Other (1.0) 1.5 (0.7) (0.2)
--------- --------- ------- ---------- --------
Net cash used in investing activities (398.2) (5.9) (167.5) (571.6)
--------- --------- ------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving and bank lines of credit 419.7 167.6 587.3
Repayment of outstanding balance on old credit facility (241.0) (241.0)
Issuance of 8 5/8% Senior Subordinated Notes 330.0 330.0
Extinguishment of 9 7/8%
Senior Subordinated Notes (107.1) (107.1)
Settlement of interest rate locks (12.9) (12.9)
Financing and issuance fees (24.1) (24.1)
Dividends on Class A Convertible Preferred Stock (12.1) (12.1)
Repurchase of treasury shares (10.0) (10.0)
Cash received from exercise of stock options 3.8 3.8
Investment from parent 76.7 (109.1) 32.4
--------- --------- ------- ---------- --------
Net cash provided by (used in) financing activities 423.0 (109.1) 200.0 513.9
Effect of exchange rate changes on cash 0.0 (0.8) (0.8)
--------- --------- ------- ---------- --------
Net increase in cash 3.6 5.2 10.9 19.7
Cash and cash equivalents, beginning of period 4.9 (2.1) 7.8 10.6
--------- --------- ------- ---------- --------
Cash and cash equivalents, end of period $ 8.5 $ 3.1 $ 18.7 $ 0.0 $ 30.3
========= ========= ======= ========== ========
67
NOTE 24. INTANGIBLE ASSETS, NET
In June 2001, the FASB issued Statement of Accounting Standard No. 142,
"Goodwill and Other Intangible Assets". Scotts adopted SFAS No. 142 effective
October 1, 2001. In accordance with this standard, goodwill and certain other
intangible assets, primarily trademarks, have been classified as
indefinite-lived assets no longer subject to amortization. Indefinite-lived
assets are subject to impairment testing at least annually.
The following table presents a reconciliation of income available to
common shareholders as reported to adjusted income available to common
shareholders and related earnings per share data as if the provision of
Statement 142 related to the non-amortization of indefinite-lived intangible
assets had been adopted as of the beginning of the earliest period presented.
Year Ended September 30,
2001 2000 1999
---- ---- ----
(in millions, except per share data)
INCOME AVAILABLE TO COMMON SHAREHOLDERS:
Income before extraordinary loss $ 15.5 $ 73.1 $ 69.1
Class A Convertible Preferred Stock dividend 0.0 (6.4) (9.7)
----------- ----------- -----------
Income available to common shareholders before
extraordinary loss as reported 15.5 66.7 59.4
Goodwill amortization 11.2 11.2 10.2
Tradename amortization 10.1 9.6 8.5
Taxes (4.7) (4.1) (3.7)
------------ ----------- -----------
Income before extraordinary loss as adjusted 32.1 83.4 74.4
Extraordinary loss, net of tax -- -- (5.9)
------------ ----------- -----------
Income available to common shareholders as adjusted 32.1 83.4 68.5
BASIC EARNINGS PER COMMON SHARE:
Reported before extraordinary item 0.55 2.39 3.25
Goodwill amortization 0.39 0.40 0.56
Tradename amortization 0.36 0.34 0.47
Taxes (0.17) (0.15) (0.20)
------------- ----------- ------------
Adjusted before extraordinary item $ 1.13 $ 2.98 $ 4.08
Extraordinary loss, net of tax -- -- (0.32)
------------ ----------- -----------
Adjusted after extraordinary item $ 1.13 $ 2.98 $ 3.76
DILUTED EARNINGS PER COMMON SHARE:
Reported before extraordinary item 0.51 2.25 2.27
Goodwill amortization 0.37 0.38 0.33
Tradename amortization 0.33 0.32 0.28
Taxes (0.16) (0.14) (0.12)
------------- ----------- ------------
Adjusted before extraordinary item $ 1.05 $ 2.81 $ 2.76
Extraordinary loss, net of tax -- -- (0.19)
------------ ----------- -----------
Adjusted after extraordinary item $ 1.05 $ 2.81 $ 2.57
68