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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________TO____________
COMMISSION FILE NUMBER 1-13292
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THE SCOTTS COMPANY
(Exact Name of Registrant as Specified in Its Charter)
OHIO 31-1414921
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
14111 SCOTTSLAWN ROAD, MARYSVILLE, OHIO 43041
(Address of Principal Executive Offices) (Zip Code)
(937) 644-0011
(Registrant's Telephone Number, Including Area Code)
NO CHANGE
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
30,868,007 OUTSTANDING AT FEBRUARY 7, 2003
Common Shares, voting, no par value
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THE SCOTTS COMPANY AND SUBSIDIARIES
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed, Consolidated Statements of Operations - Three month
periods ended December 28, 2002 and December 29, 2001.................................. 3
Condensed, Consolidated Statements of Cash Flows - Three month
periods ended December 28, 2002 and December 29, 2001.................................. 4
Condensed, Consolidated Balance Sheets - December 28, 2002,
December 29, 2001 and September 30, 2002............................................... 5
Notes to Condensed, Consolidated Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 28
Item 4. Controls and Procedures................................................................ 41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 42
Item 4. Submission of Matters to a Vote of Security Holders.... ............................... 44
Item 6. Exhibits and Reports on Form 8-K....................................................... 45
Signatures............................................................................................... 46
Certifications........................................................................................... 47
Exhibit Index............................................................................................ 49
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SCOTTS COMPANY
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
DECEMBER 28, DECEMBER 29,
2002 2001
------------ ------------
Net sales..................................................................... $ 180.8 $ 161.4
Cost of sales................................................................. 139.1 129.3
Restructuring and other charges............................................... 4.5 1.0
-------- --------
Gross profit ........................................................... 37.2 31.1
Gross commission earned from marketing agreement ............................. -.- -.-
Costs associated with marketing agreement .................................... 7.1 5.9
-------- --------
Net expense from marketing agreement ......................................... (7.1) (5.9)
Operating expenses:
Advertising ............................................................... 8.6 7.1
Selling, general and administrative ....................................... 67.8 69.5
Selling, general and administrative - lawn service business ............... 10.0 5.8
Restructuring and other charges............................................ 1.8 0.8
Amortization of intangibles................................................ 2.0 1.8
Other income, net ......................................................... (1.2) (2.0)
-------- --------
Loss from operations ................................................... (58.9) (57.8)
Interest expense ............................................................. 16.5 18.5
-------- --------
Loss before income taxes ............................................... (75.4) (76.3)
Income taxes ................................................................. (28.6) (29.4)
-------- --------
Loss before cumulative effect of accounting change...................... (46.8) (46.9)
Cumulative effect of change in accounting for intangible assets, net of tax... -.- (18.5)
-------- --------
Net loss................................................................. $ (46.8) $ (65.4)
======== ========
BASIC LOSS PER COMMON SHARE:
Weighted-average common shares outstanding during the period................... 30.2 28.8
Basic loss per common share:
Before cumulative effect of accounting change .............................. $ (1.55) $ (1.63)
Cumulative effect of change in accounting for intangible
assets, net of tax....................................................... -.- (0.64)
-------- --------
After cumulative effect of accounting change ............................... $ (1.55) $ (2.27)
======== ========
DILUTED LOSS PER COMMON SHARE:
Weighted-average common shares outstanding during the period .................. 30.2 28.8
Diluted loss per common share:
Before cumulative effect of accounting change............................... $ (1.55) $ (1.63)
Cumulative effect of change in accounting for intangible
assets, net of tax....................................................... -.- (0.64)
-------- --------
After cumulative effect of accounting change................................... $ (1.55) $ (2.27)
======== ========
See notes to condensed, consolidated financial statements
3
THE SCOTTS COMPANY
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED
DECEMBER 28, DECEMBER 29,
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................................ $ (46.8) $ (65.4)
Adjustments to reconcile net loss to net cash used in
operating activities:
Cumulative effect of change in accounting for intangible assets...... -.- 29.8
Stock option expense................................................. 0.4 -.-
Depreciation ........................................................ 8.8 7.9
Amortization......................................................... 2.8 2.7
Deferred taxes....................................................... 5.0 (11.5)
Changes in assets and liabilities, net of acquired businesses:
Accounts receivable............................................... 40.7 24.8
Inventories....................................................... (147.9) (105.3)
Prepaid and other current assets.................................. (2.7) (5.2)
Accounts payable.................................................. 50.7 20.3
Accrued taxes and liabilities..................................... (32.1) (24.5)
Restructuring reserves............................................ (2.3) (13.0)
Other assets...................................................... 1.6 0.7
Other liabilities................................................. 1.0 (1.1)
Other, net........................................................... (5.4) 1.4
-------- --------
Net cash used in operating activities............................. (126.2) (138.4)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment.......................... (18.6) (13.0)
Investment in acquired businesses, net of cash acquired ............. (1.4) (0.1)
Payments on seller notes............................................. (12.1) (15.8)
-------- --------
Net cash used in investing activities............................. (32.1) (28.9)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving and bank lines of credit ............. 95.0 162.2
Gross repayments under term loans.................................... (24.5) (7.6)
Financing and issuance fees.......................................... (0.5) (1.9)
Cash received from the exercise of stock options..................... 4.5 5.6
-------- --------
Net cash provided by financing activities......................... 74.5 158.3
Effect of exchange rate changes on cash................................. 0.5 (0.1)
-------- --------
Net decrease in cash.................................................... (83.3) (9.1)
Cash and cash equivalents at beginning of period ....................... 99.7 18.7
-------- --------
Cash and cash equivalents at end of period.............................. $ 16.4 $ 9.6
======== ========
See notes to condensed, consolidated financial statements
4
THE SCOTTS COMPANY
CONDENSED, CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
UNAUDITED
DECEMBER 29, DECEMBER 28, SEPTEMBER 30,
2002 2001 2002
---- ---- ----
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 16.4 $ 9.6 $ 99.7
Accounts receivable, less allowances of $21.1,
$24.4 and $33.2, respectively........................... 209.1 196.0 249.9
Inventories, net .......................................... 417.0 473.7 269.1
Current deferred tax asset ................................ 73.8 52.3 74.6
Prepaid and other assets .................................. 39.5 39.4 36.8
----------- ---------- ----------
Total current assets ................................... 755.8 771.0 730.1
Property, plant and equipment, net ........................ 338.4 314.6 329.2
Goodwill and intangible assets, net ....................... 802.5 736.8 791.7
Other assets .............................................. 48.6 77.2 50.4
----------- ---------- ----------
Total assets............................................ $ 1,945.3 $ 1,899.6 $ 1,901.4
=========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt.................................... $ 62.7 $ 172.7 $ 98.2
Accounts payable .......................................... 184.6 171.3 134.0
Accrued liabilities ....................................... 200.4 194.2 206.4
Accrued taxes.............................................. (15.0) (7.9) 13.2
----------- ---------- ----------
Total current liabilities .............................. 432.7 530.3 451.8
Long-term debt ............................................... 831.6 848.8 731.2
Other liabilities ............................................ 129.7 74.2 124.5
----------- ---------- ----------
Total liabilities ...................................... 1,394.0 1,453.3 1,307.5
=========== ========== ==========
Commitments and contingencies (note 9)
Shareholders' equity:
Common Shares, no par value per share, $.01 stated value
per share 31.3 shares issued for all periods .............. 0.3 0.3 0.3
Capital in excess of par value ............................ 399.4 399.4 398.6
Retained earnings ......................................... 248.0 146.9 294.8
Treasury stock, 1.0, 2.3, and 1.2 shares, respectively,
at cost.................................................. (37.7) (65.5) (41.8)
Accumulated other comprehensive loss ...................... (58.7) (34.8) (58.0)
----------- ---------- ----------
Total shareholders' equity.............................. 551.3 446.3 593.9
----------- ---------- ----------
Total liabilities and shareholders' equity.............. $ 1,945.3 $ 1,899.6 $ 1,901.4
=========== ========== ==========
See notes to condensed, consolidated financial statements
5
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Scotts Company and its subsidiaries (collectively "Scotts" or the
"Company") are engaged in the manufacture, marketing and sale of lawn
care and garden products. The Company's major customers include home
improvement centers, mass merchandisers, large hardware chains,
independent hardware stores, nurseries, garden centers, food and drug
stores, lawn and landscape service companies, commercial nurseries and
greenhouses, and specialty crop growers. The Company's products are
sold primarily in North America and the European Union. We also operate
the Scotts LawnService(R) business which provides lawn and tree and
shrub fertilization, insect control and other related services in the
United States.
ORGANIZATION
The condensed, consolidated financial statements include the accounts
of The Scotts Company and its subsidiaries. All material intercompany
transactions have been eliminated.
BASIS OF PRESENTATION
The condensed, consolidated balance sheets as of December 28, 2002 and
December 29, 2001, and the related condensed, consolidated statements
of operations and of cash flows for the three month periods then ended,
are unaudited; however, in the opinion of management, such financial
statements contain all adjustments necessary for the fair presentation
of the Company's financial position, results of operations and cash
flows. Interim results reflect all normal recurring adjustments and are
not necessarily indicative of results for a full year. The interim
financial statements and notes are presented as specified by Regulation
S-X of the Securities and Exchange Commission, and should be read in
conjunction with the financial statements and accompanying notes in The
Scotts Company's fiscal 2002 Annual Report on Form 10-K.
REVENUE RECOGNITION
Revenue is recognized when products are shipped and when title and risk
of loss transfer to the customer. Provisions for estimated returns and
allowances are recorded at the time of shipment based on historical
rates of returns applied as a percentage of sales. Scotts
LawnService(R) revenues are recognized at the time service is provided
to the customer.
PROMOTIONAL ALLOWANCES
The Company promotes its branded products through cooperative
advertising programs with retailers. Retailers are also offered
in-store promotional allowances and rebates based on sales volumes.
Certain products are also promoted with direct consumer rebate
programs. Promotion costs (including allowances and rebates) incurred
during the year are expensed to interim periods in relation to
revenues. All amounts paid or payable to customers or consumers in
connection with the purchase of our products are recorded as a
reduction of net sales.
ADVERTISING
The Company advertises its branded products through national and
regional media. Advertising costs incurred during the year are expensed
to interim periods in relation to revenues. All advertising costs,
except for external production costs, are expensed within the fiscal
year in which such costs are incurred. External production costs for
advertising programs are deferred until the period in which the
advertising is first aired.
6
Scotts LawnService(R) promotes its service offerings through direct
response mail campaigns. The external costs associated with these
campaigns are deferred and recognized ratably in proportion to revenues
as advertising costs over a period not in excess of one year.
STOCK OPTIONS
In July 2002, the Company announced that it would begin expensing
prospective grants of employee stock based compensation awards
beginning in fiscal 2003 in accordance with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". The fair value of future awards will be expensed ratably
over the vesting period, which has historically been three years.
On November 7, 2002, the Company granted 372,000 stock options to
officers and other key employees. The exercise price was determined by
the closing price of the Company's shares on the date of grant. The
related compensation expense recorded in the three months ended
December 28, 2002 was $369,000.
The Black-Scholes value of options granted in fiscal 2001 and fiscal
2002 was $10.0 million and $10.7 million, respectively. The value of
all stock-based compensation grants to be awarded in fiscal 2003 is
expected to be in the $10-12 million range. Under the Company's
prospective adoption of SFAS No. 123, the expensing of awards will
commence with awards granted in fiscal 2003. Assuming the company
continues to grant awards each year with a value in the $10-12 million
range into the future, compensation expense will increase over fiscal
2002 by $3.33 to $4.0 million in fiscal 2003, $6.66 to $8.0 million in
fiscal 2004 and $10.0 to $12.0 million in fiscal 2005 and beyond.
Had compensation expense been recognized for the periods ended December
28, 2002 and December 29, 2001 in accordance with the recognition
provisions of SFAS No. 123, the Company would have recorded net loss
and net loss per share as follows:
THREE MONTHS ENDED
DECEMBER 28, DECEMBER 29,
2002 2001
---- ----
($ MILLIONS EXCEPT PER SHARE DATA)
Net loss....................................... $ (46.8) $ (65.4)
Stock-based compensation, net of tax........... (1.0) (1.2)
-------- --------
Net loss as adjusted .......................... $ (47.8) $ (66.6)
======== ========
Adjusted net loss per share:
Basic...................................... $ (1.58) $ (2.31)
Diluted.................................... $ (1.58) $ (2.31)
The pro forma amounts shown above are not necessarily representative of
the impact on net income in future periods.
Prior to fiscal 2003, the Company accounted for stock options under APB
25, "Accounting for Stock Issued to Employees" and, as allowable,
adopted only the disclosure provisions of SFAS No. 123.
LONG-LIVED ASSETS
Property, plant and equipment, including significant improvements, are
stated at cost. Expenditures for maintenance and repairs are charged to
expense 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.
Interest is capitalized on capital projects with significant cost and
duration. The Company capitalized $639,000 and $319,000 of interest
costs during the quarters ending December 28, 2002 and December 29,
2001, respectively.
7
Management assesses the recoverability of property and equipment
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying
disclosures. Although these estimates are based on management's best
knowledge of current events and actions the Company may undertake in
the future, actual results ultimately may differ from the estimates.
RECLASSIFICATIONS
Certain reclassifications have been made in prior periods' financial
statements to conform to fiscal 2003 classifications.
2. DETAIL OF CERTAIN FINANCIAL STATEMENT ACCOUNTS
Inventories, net of provisions for slow moving and obsolete inventory
of $27.7 million, $25.7 million, and $25.9 million, respectively,
consisted of:
DECEMBER 28, DECEMBER 29, SEPTEMBER 30,
2002 2001 2002
---- ---- ----
($ MILLIONS)
INVENTORIES
Finished goods................................... $ 326.1 $ 389.4 $ 196.6
Raw materials.................................... 90.9 84.3 72.5
-------- -------- -------
Total............................................ 417.0 473.7 269.1
======== ======== =======
DECEMBER 28, DECEMBER 29, SEPTEMBER 30,
2002 2001 2002
---- ---- ----
($ MILLIONS)
PROPERTY, PLANT AND EQUIPMENT, NET:
Land and improvements ........................... $ 37.3 $ 38.1 $ 38.0
Buildings........................................ 121.8 101.9 120.9
Machinery and equipment.......................... 288.9 238.3 289.9
Furniture and fixtures........................... 32.8 31.3 33.1
Software......................................... 47.1 42.5 47.6
Construction in progress......................... 60.6 86.9 45.7
Less: accumulated depreciation................... (250.1) (224.4) (246.0)
-------- -------- -------
Total............................................ $ 338.4 $ 314.6 $ 329.2
======== ======== =======
3. MARKETING AGREEMENT
Effective September 30, 1998, the Company entered into an agreement
with Monsanto Company ("Monsanto") for exclusive domestic and
international marketing and agency rights to Monsanto's consumer
Roundup(R) herbicide products. Under the terms of the agreement, the
Company is entitled to receive an annual commission from Monsanto in
consideration for the performance of its duties as agent. The annual
commission is calculated as a percentage of the actual earnings before
interest and income taxes (EBIT), as defined in the agreement, of the
Roundup(R) business. Each year's percentage varies in accordance with
the terms of the agreement based on the achievement of two earnings
thresholds and on commission rates that vary by threshold and program
year.
8
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 fiscal 2003, 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(R) 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 December 28,
2002, contribution payments and related per annum charges of
approximately $50.0 million had been deferred under the agreement. This
amount is considered a contingent obligation and has not been reflected
in the financial statements as of and for the year then ended.
Monsanto has disclosed that it is accruing the $20 million fixed
contribution fee per year beginning in the fourth quarter of Monsanto's
fiscal year 1998, plus interest on the deferred portion.
The agreement has a term of seven years for all countries within the
European Union (at the option of both parties, the agreement can be
renewed for up to 20 years for the European Union countries). For
countries outside of the European Union, the agreement continues
indefinitely unless terminated by either party. The
9
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 the
expense relating to this amount on the basis that the payment will
provide a future benefit through commissions that will be earned under
the agreement and is amortizing the balance over ten years, which is
the estimated likely term of the agreement.
4. RESTRUCTURING AND OTHER CHARGES
FISCAL 2003 CHARGES
During the first quarter of fiscal 2003, the Company recorded $6.3
million of restructuring and other charges.
Costs of $4.3 million associated with exiting certain warehouses in
North America, as part of improvements to the North American supply
chain and $0.2 million of accelerated depreciation for the Bramford,
England facility, were included in cost of sales. Costs of $1.8 million
were charged to selling, general and administrative costs for the
continued European integration efforts that began in the fourth quarter
of fiscal 2002.
FISCAL 2002 CHARGES
During fiscal 2002, the Company recorded $8.1 million of restructuring
and other charges.
During the fourth quarter of fiscal 2002, the Company recorded $4.0
million of restructuring and other charges associated with reductions
of headcount from the closure of a manufacturing facility in Bramford,
England. All fiscal 2002 restructuring related activities and costs are
expected to be completed by the end of fiscal 2003.
The remaining $4.1 million expensed as restructuring and other costs in
fiscal 2002 pertained to personnel and inventory relocation. These
relocation charges related to a plan to optimize the North American
supply chain that was initiated in the third and fourth quarters of
fiscal 2001.
Under accounting principles generally accepted in the United States of
America, certain restructuring costs related to relocation of
personnel, equipment and inventory are to be expensed in the period the
costs are actually incurred.
2001 CHARGES
During the third and fourth quarters of fiscal 2001, the Company
recorded $75.7 million of restructuring and other charges, primarily
associated with reductions in headcount and the closure or relocation
of certain manufacturing and administrative facilities.
The following is a rollforward of the cash portion of the restructuring
and other charges accrued in fiscal 2001, 2002 and thus far in fiscal
2003. The balances remaining at December 28, 2002 are included in
accrued liabilities and other liabilities in the condensed,
consolidated balance sheets. The portion classified as other long-term
liabilities is future lease obligations that extend beyond one year.
10
BALANCE BALANCE
DESCRIPTION TYPE CLASSIFICATION SEPT. 30, 2002 PAYMENT OTHER DEC. 28, 2002
- ----------- ---- -------------- -------------- ------- ----- -------------
($ MILLIONS)
Severance................. Cash SG&A $ 6.8 $ (1.5) $ 0.1 $ 5.4
Facility exit costs....... Cash SG&A 3.5 (0.7) 2.8
Other related costs....... Cash SG&A 1.7 (0.3) 1.4
--------- ------- ------- --------
Total cash............ $ 12.0 $ (2.5) $ 0.1 $ 9.6
========= ======= ======= ========
5. INTANGIBLE ASSETS, NET
Effective October 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets".
In accordance with this standard, goodwill and certain other intangible
assets, primarily tradenames, have been classified as indefinite-lived
assets no longer subject to amortization. Indefinite-lived assets are
subject to impairment testing upon adoption of SFAS No. 142 and at
least annually thereafter. The initial impairment analysis was
completed in the second quarter of fiscal 2002, taking into account
additional guidance provided by EITF 02-07, "Unit of Measure for
Testing Impairment of Indefinite-Lived Intangible Assets". The value of
all indefinite-lived tradenames as of October 1, 2001 was determined
using a "royalty savings" methodology that was employed when the
businesses associated with these tradenames were acquired but using
updated estimates of sales and profitability. As a result, a pre-tax
impairment loss of $29.8 million was recorded for the writedown of the
value of the tradenames in our International Consumer businesses in
Germany, France and the United Kingdom. This transitional impairment
charge was recorded as a cumulative effect of accounting change, net of
tax, as of October 1, 2001. After completing this initial valuation and
impairment of tradenames, an initial assessment for goodwill impairment
was performed. It was determined that a goodwill impairment charge was
not required.
Intangible assets include patents, tradenames and other intangible
assets which are valued at acquisition through independent appraisals
where material, or through other valuation techniques. Patents,
trademarks and other intangible assets are being amortized on a
straight-line basis over periods varying from 7 to 40 years. The useful
lives of intangible assets still subject to amortization were not
revised as a result of the adoption of SFAS No. 142.
Management assesses the recoverability of goodwill, tradenames and
other intangible assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable
from its discounted future cash flows. Goodwill and unamortizable
intangible assets are reviewed for impairment at least annually. If it
is determined that an impairment has occurred, an impairment loss is
recognized for the amount by which the carrying of the asset exceeds
its estimated fair value. In the first quarter of fiscal 2003, the
Company updated its impairment analysis and determined that a charge
for impairment was not necessary at this time.
11
The following table presents goodwill and intangible assets as of the
end of each period presented.
DECEMBER 28, 2002 DECEMBER 29, 2001
----------------- -----------------
WEIGHTED GROSS NET GROSS NET
AVERAGE CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
LIFE AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
-------- -------- ------------ -------- -------- ------------ ---------
($ MILLIONS)
Amortized Intangible Assets:
Technology.................... 21 $ 63.5 $ (19.6) $ 43.9 $ 60.7 $ (16.4) $ 44.3
Customer accounts............. 7 35.4 (3.9) 31.5 23.3 (2.6) 20.7
Tradenames.................... 16 11.3 (2.5) 8.8 11.3 (1.8) 9.5
Other......................... 36 51.7 (34.9) 16.8 48.5 (32.5) 16.0
-------- --------
Total amortized
intangible assets, net.... 101.0 90.5
Unamortized Intangible Assets:
Tradenames.................... 314.0 316.9
Other......................... 3.1 3.2
-------- --------
Total intangible assets, net.. 418.1 410.6
Goodwill.................... 384.4 326.2
Total goodwill and -------- --------
intangible assets, net.... $ 802.5 $ 736.8
======== ========
SEPTEMBER 30, 2002
------------------
GROSS NET
CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT
-------- ------------ --------
Amortized Intangible Assets:
Technology.................... $ 61.9 $ (18.8) $ 43.1
Customer accounts............. 33.2 (3.5) 29.7
Tradenames.................... 11.3 (2.3) 9.0
Other......................... 50.6 (34.0) 16.6
-------
Total amortized
intangible assets, net.... 98.4
Unamortized Intangible Assets:
Tradenames.................... 312.7
Other......................... 3.1
-------
Total intangible assets, net.. 414.2
Goodwill.................... 377.5
Total goodwill and -------
intangible assets, net.... $ 791.7
=======
The changes to the net carrying value of goodwill by segment for the
quarter ended December 28, 2002 are as follows (in millions):
N.A. SCOTTS GLOBAL INTERNATIONAL
CONSUMER LAWNSERVICE(R) PROFESSIONAL CONSUMER TOTAL
-------- -------------- ------------ ------------- --------
Balance as of September 30, 2002 $ 178.3 $ 68.5 $ 52.5 $ 78.2 $ 377.5
Increases due to acquisitions 3.9 3.9
Decreases -.-
Other (reclassifications and cumulative
translation) (0.2) 0.4 2.8 3.0
-------- ------- ------ ------- --------
Balance as of December 28, 2002 $ 178.1 $ 72.4 $ 52.9 $ 81.0 $ 384.4
======== ======= ====== ======= ========
Amortization expense for the intangible assets existing as of December
28, 2002 for the remainder of fiscal year ending September 30, 2003 is
$6.2 million.
Estimated future amortization expense for the intangible assets
existing as of December 28, 2002 is as follows:
YEAR ENDING
SEPTEMBER 30, $ MILLIONS
- -------------- ----------
2004 ............................... $ 7.5
2005 ............................... 7.4
2006 ............................... 7.4
2007 ............................... 7.4
2008 ............................... 7.4
12
6. LONG-TERM DEBT
DECEMBER 28, DECEMBER 29, SEPTEMBER 30,
2002 2001 2002
---- ---- ----
($ millions)
Revolving loans under credit facility......... $ 94.6 $ 255.4 $ -.-
Term loans under credit facility.............. 355.3 387.8 375.5
Senior subordinated notes..................... 392.2 320.9 391.8
Notes due to sellers ......................... 35.2 37.2 43.4
Foreign bank borrowings and term loans........ 5.7 8.4 7.0
Capital lease obligations and other .......... 11.3 11.8 11.7
---------- ---------- ----------
894.3 1,021.5 829.4
Less current portions......................... 62.7 172.7 98.2
---------- ---------- ----------
$ 831.6 $ 848.8 $ 731.2
========== ========== ==========
The revolving credit facility under the Credit Agreement ("Credit
Agreement") provides for borrowings of up to $575 million, which are
available on a revolving basis over a term of 6 1/2 years ending June
30, 2005. 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 $360 million is available for borrowings
in optional currencies, provided that the outstanding revolving loans
in other currencies do not exceed $200 million except for British
Pounds Sterling, which cannot exceed $360 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.
Spreads on rates and commitment fees under the 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
borrowings under the revolving credit facility for the quarters ended
December 28, 2002 and December 29, 2001 was 7.30% and 8.22%,
respectively. Financial covenants include interest coverage and net
leverage ratios. Other covenants include limitations on indebtedness,
liens, mergers, consolidations, liquidations and dissolutions, sale of
assets, leases, dividends, capital expenditures, and investments. The
Scotts Company and all of its domestic subsidiaries pledged
substantially all of their personal, real and intellectual property
assets as collateral for the borrowings under the Credit Agreement. The
Scotts Company and its subsidiaries also pledged the stock in foreign
subsidiaries that borrow under the Credit Agreement. At December 28,
2002, the Company is in compliance with all applicable affirmative and
negative covenants.
Approximately $17.3 million of financing costs associated with the
Credit Agreement have been deferred as of December 28, 2002 and are
being amortized over a period which ends June 30, 2005. Through
December 28, 2002, approximately $9.4 million of the total had been
amortized to expense.
The term loan facilities under the Credit Agreement consist of two
tranches. The Tranche A Term Loan Facility consists of three
sub-tranches of Euros and British Pounds Sterling in the aggregate
principal amount of $265 million which are to be repaid quarterly over
a 6 1/2 year period ending June 30, 2005. The Tranche B Term Loan
Facility has an aggregate principal amount of $260 million and is to be
repaid quarterly over a 6 1/2 year period ending December 31, 2007. At
December 28, 2002, the outstanding balances of the Tranche A and
Tranche B Term Loan Facilities are $113.9 and $241.4, respectively.
Repayments by fiscal years are as follows:
13
FOR THE REMAINDER FOR THE FISCAL YEARS ENDING
OF FISCAL YEAR SEPTEMBER 30,
ENDING SEPTEMBER 30, 2003 2004 2005 2006 2007 2008
------------------------- ---- ---- ---- ---- ----
($ MILLIONS)
Tranche A $ 34.8 $ 34.8 $ 44.3 $ - $ - $ -
Tranche B 0.9 0.9 0.9 0.9 178.4 59.4
These future payments are presented at December 28, 2002 foreign
exchange rates.
The term loan facilities have a variable interest rate, which was 4.9%
at December 28, 2002
In January 2002, The Scotts Company completed an offering of $70
million of 8 5/8% Senior Subordinated Notes due 2009. The net proceeds
from the offering were used to pay down borrowings on our revolving
credit facility. The effective interest rate for the notes is 8 3/8%.
The notes were issued at a premium of $1.8 million. The issuance costs
associated with the offering totaled $1.6 million. Both the premium and
the issuance costs are being amortized over the remaining life of the
notes.
In January 1999, the Company completed an offering of $330 million of 8
5/8% Senior Subordinated Notes due 2009. The Company entered into two
interest rate locks in fiscal 1998 to hedge its anticipated interest
rate exposure on the 8 5/8% Notes offering. The total amount paid under
the interest rate locks of $12.9 million has been recorded as a
reduction of the 8 5/8% Notes' carrying value and is being amortized
over the life of the 8 5/8% Notes as interest expense. 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. The
effective interest rate for the Notes including the cost of the
interest rate locks is 9.24%.
In conjunction with past acquisitions, notes were issued for certain
portions of the total purchase price that are to be paid in future
periods. The present value of the remaining note payments is $35.2
million of which $21.9 million pertains to lawn service business
acquisitions and $9.7 million pertains to the December 2000 acquisition
of the Substral business in Europe. The Company is imputing interest on
the notes using the stated interest rate or an interest rate prevalent
for similar instruments at the time of acquisition for non-interest
bearing notes.
Foreign notes 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 December 28, 2002 and December 29, 2001 was $0.6 million
and $2.7 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 $5.1 million at December 28, 2002 and $5.7
million at December 29, 2001 represent lines of credit for foreign
operations and are primarily denominated in Euros.
7. LOSS PER COMMON SHARE
The Company did not include 1.7 million and 2.2 million potentially
dilutive shares in the diluted loss per share calculation for the three
months ended December 28, 2002 and December 29, 2001, respectively,
because to do so would have been anti-dilutive.
14
THREE MONTHS ENDED
DECEMBER 28, DECEMBER 29,
2002 2001
---- ----
($ MILLIONS, EXCEPT PER
SHARE DATA)
NET LOSS:
Loss before cumulative effect of accounting change............................. $ (46.8) $ (46.9)
Cumulative effect of change in accounting for intangible assets, net of tax.... -.- (18.5)
-------- --------
Net loss....................................................................... $ (46.8) $ (65.4)
======== ========
BASIC LOSS PER COMMON SHARE:
Weighted-average common shares outstanding during the period................... 30.2 28.8
Basic loss per common share:
Before cumulative effect of accounting change .............................. $ (1.55) $ (1.63)
Cumulative effect of change in accounting for intangible assets,
net of tax............................................................... -.- (0.64)
-------- --------
After cumulative effect of accounting change ............................... $ (1.55) $ (2.27)
======== ========
DILUTED LOSS PER COMMON SHARE:
Weighted-average common shares outstanding during the period .................. 30.2 28.8
Diluted loss per common share:
Before cumulative effect of accounting change............................... $ (1.55) $ (1.63)
Cumulative effect of change in accounting for intangible assets,
net of tax............................................................... -.- (0.64)
-------- --------
After cumulative effect of accounting change................................ $ (1.55) $ (2.27)
======== ========
8. STATEMENT OF COMPREHENSIVE INCOME
The components of other comprehensive loss and total comprehensive loss
for the three months ended December 28, 2002 and December 29, 2001 are
as follows:
THREE MONTHS ENDED
DECEMBER 28, DECEMBER 29
2002 2001
---- ----
Net loss...................................................................... $ (46.8) $ (65.4)
Other comprehensive income (expense):
Foreign currency translation adjustments...................................... (0.6) (0.5)
Change in valuation of derivative instruments................................. -.- 0.4
-------- --------
Comprehensive loss............................................................ $ (47.4) $ (65.5)
======== ========
9. CONTINGENCIES
Management continually evaluates the Company's contingencies, including
various lawsuits and claims which arise in the normal course of
business, product and general liabilities, property losses and other
fiduciary liabilities for which the Company is self-insured. In the
opinion of management, its assessment of contingencies is reasonable
and related reserves, in the aggregate, are adequate; however, there
can be no assurance that future quarterly or annual operating results
will not be materially affected by final resolution of these matters.
The following matters are the more significant of the Company's
identified contingencies.
ENVIRONMENTAL MATTERS
In June 1997, the Ohio Environmental Protection Agency ("Ohio EPA")
initiated an enforcement action against us with respect to alleged
surface water violations and inadequate treatment capabilities at our
Marysville facility and sought 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
15
Marysville facility that we had already been assessing voluntarily.
Since initiation of the action, the Company met with the Ohio Attorney
General and the Ohio EPA, and was ultimately able 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 and was entered by the court on January 25, 2002. We are
continuing our remediation activities with the knowledge and oversight
of the Ohio EPA.
We are negotiating with the Philadelphia District of the U.S. Army
Corps of Engineers ("Corps") regarding the terms of site remediation
and the resolution of the Corps' civil penalty demand in connection
with our prior peat harvesting operations at our Lafayette, New Jersey
facility. We are also addressing remediation concerns raised by the
Environment Agency of the United Kingdom with respect to emissions to
air and groundwater at our Bramford (Suffolk), United Kingdom facility.
We have reserved for our estimates of probable losses to be incurred in
connection with each of these matters.
Regulations and environmental concerns also exist surrounding peat
extraction in the United Kingdom and the European Union. In August
2000, English Nature, the nature conservation advisory body to the U.K.
government, notified us that three of our peat harvesting sites in the
United Kingdom were under consideration as possible "Special Areas of
Conservation" under European Union Law. In April 2002, working in
conjunction with Friends of the Earth (U.K.), we reached agreement with
English Nature to transfer our interests in the properties and for the
immediate cessation of all but a limited amount of peat extraction on
one of the three sites in exchange for $18.1 million received in April
2002 and an additional approximately $3 million which will be received
when we cease extraction at the third site. A gain of approximately $5
million was included in "Other Income" in fiscal 2002. Proceeds of
approximately $13 million have been recorded as deferred income and
will be recognized into income over the 29 month period beginning May,
2002 which coincides with the expected peat extraction period at the
third site. As a result of this transaction we have withdrawn our
objection to the proposed European designations as Special Areas of
Conservation and will undertake restoration work on the sites for which
we will receive additional compensation from English Nature. We
consider that we have sufficient raw material supplies available to
replace the peat extracted from such sites.
The Company has determined that building materials at certain
manufacturing facilities in the United Kingdom contain asbestos and may
require removal in the future.
At December 28, 2002, $7.2 million is accrued for the environmental
matters described herein. The accrual is for future costs for site
remediation. The significant portion of the costs accrued as of
December 28, 2002 are expected to be paid in fiscal 2003 and 2004;
however, payments could be made for a period thereafter.
We believe that the amounts accrued as of December 28, 2002 are
adequate to cover known environmental exposures based on current facts
and estimates of likely outcome. However, the adequacy of these
accruals is based on several significant assumptions:
(i) that we have identified all of the significant sites that must
be remediated;
(ii) that there are no significant conditions of potential
contamination that are unknown to the Company; and
(iii) that with respect to the agreed judicial Consent Order in
Ohio, that potentially contaminated soil can be remediated in
place rather than having to be removed and only specific
stream segments will require remediation as opposed to the
entire stream.
If there is a significant change in the facts and circumstances
surrounding these assumptions, it could have a material impact on the
ultimate outcome of these matters and the Company's results of
operations, financial position and cash flows.
16
LEGAL PROCEEDINGS
As noted in the discussion above under "Environmental Matters" we are
involved in several pending environmental matters. We believe that our
assessment of contingencies is reasonable and that related reserves, in
the aggregate, are adequate; however, there can be no assurance that
the final resolution of these matters will not have a material adverse
affect on our results of operations, financial position and cash flows.
Pending material legal proceedings are as follows:
AGREVO ENVIRONMENTAL HEALTH, INC.
On June 3, 1999, AgrEvo Environmental Health, Inc. ("AgrEvo") (which
subsequently changed its name to Aventis Environmental Health Science
USA LP) filed a complaint in the U.S. District Court for the Southern
District of New York ("the New York Action"), against Scotts, a
subsidiary of Scotts and Monsanto seeking damages and injunctive relief
for alleged antitrust violations and breach of contract by Scotts and
its subsidiary and antitrust violations and tortious interference with
contract by Monsanto. Scotts purchased a consumer herbicide business
from AgrEvo in May 1998. AgrEvo claims in the suit that Scotts'
subsequent agreement to become Monsanto's exclusive sales and marketing
agent for Monsanto's consumer Roundup(R) business violated the federal
antitrust laws. AgrEvo contends that Monsanto attempted to or did
monopolize the market for non-selective herbicides and conspired with
Scotts to eliminate the herbicide Scotts previously purchased from
AgrEvo, which competed with Monsanto's Roundup(R). AgrEvo also contends
that Scotts' execution of various agreements with Monsanto, including
the Roundup(R) marketing agreement, as well as Scotts' subsequent
actions, violated the purchase agreements between AgrEvo and Scotts.
AgrEvo is requesting unspecified damages as well as affirmative
injunctive relief, and seeking to have the court invalidate the
Roundup(R) marketing agreement as violative of the federal antitrust
laws. Under the indemnification provisions of the Roundup(R) marketing
agreement, Monsanto and Scotts each have requested that the other
indemnify against any losses arising from this lawsuit.
On June 29, 1999, AgrEvo also filed a complaint in the Superior Court
of the State of Delaware against two of Scotts' subsidiaries seeking
damages for alleged breach of contract. AgrEvo alleges that, under the
contracts by which a subsidiary of Scotts purchased a herbicide
business from AgrEvo in May 1998, two of Scotts' subsidiaries have
failed to pay AgrEvo approximately $0.6 million. AgrEvo is requesting
damages in this amount, as well as pre- and post-judgment interest and
attorneys' fees and costs. Scotts' subsidiaries have moved to dismiss
or stay this action. On January 31, 2000, the Delaware court stayed
AgrEvo's action pending the resolution of a motion to amend the New
York action, and the resolution of the New York action.
On May 15, 2002, AgrEvo filed an additional, duplicative complaint that
makes the same claims that are made in the amended complaint in the New
York Action, described above. On June 6, 2002, Scotts moved to dismiss
this duplicative complaint as procedurally improper. There has been no
ruling by the court on Scotts' motion.
On January 10, 2003, Scotts filed a supplemental counterclaim against
Agrevo for breach of contract, claiming that Agrevo owes Scotts
approximately $1.4 million that Scotts overpaid to Agrevo. Scotts'
counterclaim is now part of the underlying litigation.
Scotts believes that AgrEvo's claims in these matters are without merit
and intends to vigorously defend against them. If the above actions are
determined adversely to Scotts, the result could have a material
adverse effect on Scotts' results of operations, financial position and
cash flows. Any potential exposure that Scotts may face cannot be
reasonably estimated. Therefore, no accrual has been established
related to these matters.
17
CENTRAL GARDEN & PET COMPANY
SCOTTS V. CENTRAL GARDEN, SOUTHERN DISTRICT OF OHIO
On June 30, 2000, Scotts filed suit against Central Garden & Pet
Company in the U.S. District Court for the Southern District of Ohio
("the Ohio Action") to recover approximately $24 million in accounts
receivable and additional damages for other breaches of duty.
Central Garden filed counterclaims including allegations that Scotts
and Central Garden had entered into an oral agreement in April 1998
whereby Scotts would allegedly share with Central Garden the benefits
and liabilities of any future business integration between Scotts and
Pharmacia Corporation (formerly Monsanto). The court dismissed a number
of Central Garden's counterclaims as well as Scotts' claims that
Central Garden breached other duties owed to Scotts. On April 22, 2002,
a jury returned a verdict in favor of Scotts of $22.5 million and for
Central Garden on its remaining counterclaims in an amount of
approximately $12.1 million. Various post-trial motions have been filed
in the Ohio Action, but so far Central Garden has not challenged the
propriety of the $22.5 million award to Scotts and Scotts has
challenged only $750,000 of the $12.1 million awarded to Central Garden
on its counterclaim. Central Garden has challenged, however, the
dismissal during trial of several other counterclaims.
Two counterclaims that the court permitted Central Garden to add on the
eve of trial also remain pending. In these counterclaims, Central
Garden seeks damages in an unspecified amount for Scotts' alleged
breach of contract and conversion with respect to certain inventory
held by Central Garden's subagents and subdistributors. A trial date of
October 6, 2003 has been set on these remaining claims, and discovery
has recently commenced.
CENTRAL GARDEN V. SCOTTS & PHARMACIA, NORTHERN DISTRICT OF CALIFORNIA
On July 7, 2000, Central Garden filed suit against Scotts and Pharmacia
in the U.S. District Court for the Northern District of California (San
Francisco Division) alleging various claims, including breach of
contract and violations of federal antitrust laws, and seeking an
unspecified amount of damages and injunctive relief. On April 15, 2002,
Scotts and Central Garden each filed summary judgment motions in this
action. On June 26, 2002, the court granted summary judgment in favor
of Scotts and dismissed all of Central Garden's then remaining claims.
On July 28, 2002, Central Garden filed a notice of appeal. The case is
now pending on appeal in the Ninth Circuit Court of Appeals.
CENTRAL GARDEN V. SCOTTS & PHARMACIA, CONTRA COSTA SUPERIOR COURT
On October 31, 2000, Central Garden filed a complaint against Scotts
and Pharmacia in the California Superior Court for Contra Costa County.
That complaint seeks to assert breach of contract claims and claims
under Section 17200 of the California Business and Professions Code. On
December 4, 2000, Scotts and Pharmacia jointly filed a motion to stay
this action based on the pendency of prior lawsuits that involve the
same subject matter. By order dated February 23, 2001, the Superior
Court stayed the action pending before it.
All claims in the Contra Costa action currently remain stayed. A
further status conference is set for May 29, 2003. Central Garden and
Pharmacia have settled their claims relating to this action.
Scotts believes that Central Garden's remaining claims are without
merit and intends to vigorously defend against them. Although Scotts
has prevailed consistently and extensively in the litigation with
Central Garden, the decisions in Scotts' favor are subject to appeal.
If, upon appeal or otherwise, the above actions are determined
adversely to Scotts, the result could have a material adverse affect on
Scotts' results of operations, financial position and cash flows.
Scotts believes that it will continue to prevail in the Central Garden
matters and that any potential exposure that Scotts may face cannot be
reasonably estimated.
18
Therefore, no accrual has been established related to the claims
brought against Scotts by Central Garden, except for amounts ordered
paid to Central Garden in the Ohio action. Scotts believes it has
adequate reserves recorded for the amounts it may ultimately be
required to pay.
OTHER
We are involved in other lawsuits and claims which arise in the normal
course of our business. In our opinion, these claims individually and
in the aggregate are not expected to result in a material adverse
effect on our results of operations, financial position or cash flows.
GUARANTEES
In November 2002, the Financial Accounting Standards Board (FASB)
issued Interpretation 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others ("FIN45"). FIN45 elaborates on the existing
disclosure requirements for most guarantees, including loan guarantees.
For new guarantees provided after December 31, 2002, it requires that
at the time a company issues a guarantee, the company must recognize an
initial liability for the fair value, or market value, of the
obligations it assumes under the guarantee and must disclose that
information in its interim and annual financial statements.
The Company guarantees the lease on equipment for a supplier. The value
of the guarantee at December 28, 2002 is $1.6 million. The final
payment on the lease obligation is due in May, 2007.
The Company also guarantees on behalf of a supplier to acquire a
certain level of inventory, based on a production forecast, in the
event we terminate our relationship with the supplier. The amount of
the guarantee at December 28, 2002 is $1.6 million. The guarantee is
ongoing until such time as the relationship with the supplier
terminates.
10. NEW ACCOUNTING STANDARDS
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 "Accounting for Stock-Based Compensation - Transition
and Disclosure - an amendment of FAS 123". This statement amends SFAS
No. 123, "Accounting for Stock-Based Compensation", to provide
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation
for companies that elect to change to the fair value method after
December 15, 2003. In addition, this statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used
on reported results. Because the Company has adopted the recognition
provisions of SFAS No. 123, effective October 1, 2002, SFAS No.148 is
not applicable. The Company has voluntarily disclosed the effects of
award grants as would be required under SFAS No. 148. See Note 1 to
Condensed, Consolidated Financial Statements for disclosure of pro
forma net loss and pro forma loss per share as if the fair value based
accounting method in statement No. 123 had been used for all
transactions entered into after December 15, 1995.
11. SEGMENT INFORMATION
For fiscal 2003, the Company is divided into four reportable segments -
North American Consumer, Scotts LawnService(R), International Consumer
and Global Professional. The North American Consumer segment consists
of the Lawns, Gardening Products, Ortho and Canadian business units.
The North American Consumer segment specializes in dry, granular
slow-release lawn fertilizers, combination lawn fertilizer and control
products, grass seed, spreaders, water-soluble and controlled-release
garden and indoor plant foods, plant care products, potting soils,
barks, mulches and other growing media products, and
19
pesticide products. Products are marketed to mass merchandisers, home
improvement centers, large hardware chains, nurseries and gardens
centers.
The Scotts LawnService(R) segment provides lawn fertilization, insect
control and other related services such as core aeration primarily to
residential consumers through company-owned branches and franchises. In
most company markets, Scotts LawnService(R) also offers tree and shrub
fertilization, disease and insect control treatments and, in our larger
branches, we also offer an exterior barrier pest control service.
The 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 Global Professional segment is focused on a full line of
horticulture products including controlled-release and water-soluble
fertilizers and plant protection products, grass seed, spreaders,
custom application services and growing media. Products are sold to
lawn and landscape service companies, commercial nurseries and
greenhouses and specialty crop growers.
The following table presents segment financial information in
accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". Pursuant to that statement, the
presentation of the segment financial information is consistent with
the basis used by management (i.e., certain costs not allocated to
business segments for internal management reporting purposes are not
allocated for purposes of this presentation).
NORTH AMERICAN SCOTTS INTERNATIONAL GLOBAL OTHER/
CONSUMER LAWNSERVICE(R) CONSUMER PROFESSIONAL CORPORATE TOTAL
-------------- -------------- ------------- ------------ --------- -----
(IN MILLIONS)
Net sales:
Q1 2003......................... $ 84.8 $ 15.3 $ 43.2 $ 37.5 $ -.- $ 180.8
Q1 2002......................... $ 76.2 $ 8.7 $ 40.1 $ 36.4 $ -.- $ 161.4
Operating income (loss):
Q1 2003......................... $ (27.6) $ (4.8) $ (1.6) $ 0.4 $ (22.5) $ (56.1)
Q1 2002......................... $ (29.4) $ (2.1) $ (6.6) $ (0.2) $ (16.8) $ (55.1)
Operating margin:
Q1 2003......................... (32.6%) (31.4%) (3.7%) 1.1% nm (31.0%)
Q1 2002......................... (38.6%) (24.1%) (16.4%) (0.6%) nm (34.1%)
Goodwill:
Q1 2003......................... $ 178.1 $ 72.4 $ 81.0 $ 52.9 $ -.- $ 384.4
Q1 2002......................... $ 163.8 $ 26.7 $ 79.6 $ 56.1 $ -.- $ 326.2
Total assets:
Q1 2003......................... $ 1,157.1 $ 93.1 $ 424.4 $ 147.4 $ 123.3 $ 1,945.3
Q1 2002......................... $ 1,208.8 $ 36.1 $ 398.5 $ 144.1 $ 112.1 $ 1,899.6
nm Not meaningful.
Operating 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, Corporate operating loss
for the three months ended December 28, 2002 and December 29, 2001
includes amortization of certain intangible assets, unallocated
corporate general and administrative expenses, and certain "other"
income/expense not allocated to the business segments and North America
restructuring charges.
Total assets reported for Scotts' operating segments include the
intangible assets for the acquired business within those segments.
Corporate assets primarily include deferred financing and debt issuance
costs, corporate intangible assets as well as deferred tax assets.
20
12. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTORS
In January 1999, the Company issued $330 million of 8 5/8% Senior
Subordinated Notes due 2009 to qualified institutional buyers under the
provisions of Rule 144A of the Securities Act of 1933. These Notes were
subsequently registered in December 2000. In January 2002, the Company
issued an additional $70 million of 8 5/8% Senior Subordinated Notes
due 2009 to qualified institutional buyers under the provisions of Rule
144A of the Securities Act of 1933. These notes were subsequently
registered in October 2002.
The Notes are general obligations of The Scotts Company and are
guaranteed by all of the existing wholly-owned, domestic subsidiaries
and all future wholly-owned, significant (as defined in Regulation S-X
of the Securities and Exchange Commission) domestic subsidiaries of The
Scotts Company. These subsidiary guarantors jointly and severally
guarantee The Scotts Company's obligations under the Notes. The
guarantees represent full and unconditional general obligations of each
subsidiary that are subordinated in right of payment to all existing
and future senior debt of that subsidiary but are senior in right of
payment to any future junior subordinated debt of that subsidiary.
The following unaudited information presents consolidating Statements
of Operations, Statements of Cash Flows and Balance Sheets for the
three-month periods ended December 28, 2002 and December 29, 2001.
Separate unaudited financial statements of the individual guarantor
subsidiaries have not been provided because management does not believe
they would be meaningful to investors.
21
THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 28, 2002 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ -------------
Net sales....................................... $ 87.2 $ 17.3 $ 76.3 $ $ 180.8
Cost of sales .................................. 66.2 24.3 48.6 139.1
Restructuring and other charges................. 4.3 0.2 4.5
---------- --------- --------- -------- ---------
Gross profit ................................... 16.7 (7.0) 27.5 -.- 37.2
Gross commission earned from agency agreement .. (0.2) 0.2 -.-
Costs associated with agency agreement ......... 7.1 7.1
---------- --------- --------- -------- ---------
Net commission earned from agency agreement... (7.3) -.- 0.2 -.- (7.1)
Operating expenses:
Advertising and promotion .................... 4.8 3.8 8.6
Selling, general and administrative........... 47.3 (0.2) 30.7 77.8
Restructuring and other charges............... 0.3 0.2 1.3 1.8
Amortization of intangibles .................. 0.1 0.4 1.5 2.0
Equity income in subsidiaries................... 15.2 (15.2) -.-
Intracompany allocations........................ (9.5) 6.5 3.0 -.-
Other (income) expenses, net ................... -.- (0.2) (1.0) (1.2)
---------- --------- --------- -------- ---------
Income (loss) from operations .................. (48.8) (13.7) (11.6) 15.2 (58.9)
Interest expense ............................... 17.3 (3.9) 3.1 16.5
---------- --------- --------- -------- ---------
Income (loss) before income taxes............... (66.1) (9.8) (14.7) 15.2 (75.4)
Income taxes ................................... (19.3) (3.7) (5.6) (28.6)
---------- --------- --------- -------- ---------
Income (loss) before cumulative effect of
accounting change............................. (46.8) (6.1) (9.1) 15.2 (46.8)
Cumulative effect of change in accounting
for intangible assets, net of tax............. -.-
---------- --------- --------- -------- ---------
Net income (loss)............................... $ (46.8) $ (6.1) $ (9.1) $ 15.2 $ (46.8)
========== ========= ========= ======== =========
22
THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED DECEMBER 28, 2002 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss). ............................... $ (46.8) $ (6.1) $ (9.1) $ 15.2 $ (46.8)
Adjustments to reconcile net loss to
net cash used in operating activities:
Cumulative effect of change in accounting
for intangible assets......................... -.-
Stock option expense............................ 0.4 0.4
Depreciation ................................... 5.3 2.2 1.3 8.8
Amortization ................................... 0.9 0.3 1.6 2.8
Deferred Taxes.................................. 5.0 5.0
Equity (income) loss in non-guarantors.......... 15.2 (15.2) -.-
Net change in certain components
of working capital.............................. (46.5) (12.3) (34.8) (93.6)
Net changes in other assets and
liabilities and other adjustments............... 6.5 0.1 (9.4) (2.8)
---------- --------- --------- -------- ---------
Net cash used in operating activities............. (60.0) (15.8) (50.4) -.- (126.2)
---------- --------- --------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment....... (5.2) (10.3) (3.1) (18.6)
Investment in acquired businesses,
net of cash acquired............................ (1.4) (1.4)
Payments on seller notes.......................... (1.3) (10.8) (12.1)
---------- --------- --------- -------- ---------
Net cash used in investing activities............. (5.2) (11.6) (15.3) -.- (32.1)
---------- --------- --------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving
and bank lines of credit........................ 5.5 89.5 95.0
Gross repayments under term loans................. (17.1) (7.4) (24.5)
Financing and issuance fees....................... (0.5) (0.5)
Cash received from the exercise of stock options.. 4.5 4.5
Intracompany financing............................ 22.9 27.9 (50.8) -.-
---------- --------- --------- -------- ---------
Net cash provided by financing activities......... 15.3 27.9 31.3 -.- 74.5
---------- --------- --------- -------- ---------
Effect of exchange rate changes on cash........... -.- -.- 0.5 -.- 0.5
---------- --------- --------- -------- ---------
Net increase (decrease) in cash................... (49.9) 0.5 (33.9) (83.3)
Cash and cash equivalents, beginning of period.... 54.7 0.2 44.8 99.7
---------- --------- --------- -------- ---------
Cash and cash equivalents, end of period.......... $ 4.8 $ 0.7 $ 10.9 $ -.- $ 16.4
========== ========= ========= ======== =========
23
THE SCOTTS COMPANY
BALANCE SHEET
AS OF DECEMBER 28, 2002 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents..................... $ 4.8 $ 0.7 $ 10.9 $ 16.4
Accounts receivable, net ..................... 40.4 69.6 99.1 209.1
Inventories, net ............................. 242.7 74.8 99.5 417.0
Current deferred tax asset.................... 73.4 0.4 73.8
Prepaid and other assets...................... 17.3 0.8 21.4 39.5
---------- --------- --------- ---------- ----------
Total current assets..................... 378.6 146.3 230.9 755.8
Property, plant and equipment, net ............. 212.4 88.5 37.5 338.4
Goodwill and intangible assets, net ............ 26.2 474.3 302.0 802.5
Other assets ................................... 48.6 2.2 (2.2) 48.6
Investment in affiliates........................ 981.1 (981.1) -.-
Intracompany assets ............................ 258.0 (258.0) -.-
---------- --------- --------- ---------- ----------
Total assets............................. $ 1,646.9 $ 969.3 $ 568.2 $ (1,239.1) $ 1,945.3
========== ========= ========= ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt....................... $ 47.1 $ 3.3 $ 12.3 $ $ 62.7
Accounts payable.............................. 91.0 25.8 67.8 184.6
Accrued liabilities........................... 104.5 20.0 75.9 200.4
Accrued taxes................................. (14.2) 1.8 (2.6) (15.0)
----------- --------- ---------- ---------- ----------
Total current liabilities................ 228.4 50.9 153.4 432.7
Long-term debt.................................. 612.8 2.2 216.6 831.6
Other liabilities............................... 109.4 1.9 18.4 129.7
Intracompany liabilities........................ 119.4 138.6 (258.0) -.-
---------- --------- --------- ---------- ----------
Total liabilities.......................... 1,070.0 55.0 527.0 (258.0) 1,394.0
---------- --------- --------- ---------- ----------
Commitments and contingencies
Shareholders' equity:
Investment from parent........................ 486.8 61.6 (548.4) -.-
Common shares, no par value per share,
$.01 stated value per share................. 0.3 0.3
Capital in excess of par value................ 399.4 399.4
Retained earnings............................. 248.0 429.9 2.8 (432.7) 248.0
Treasury stock, 1.0 shares at cost............ (37.7) (37.7)
Accumulated other comprehensive expense....... (33.1) (2.4) (23.2) (58.7)
---------- --------- --------- ---------- ----------
Total shareholders' equity...................... 576.9 914.3 41.2 (981.1) 551.3
---------- --------- --------- ---------- ----------
Total liabilities and shareholders' equity...... $ 1,646.9 $ 969.3 $ 568.2 $ (1,239.1) $ 1,945.3
========== ========= ========= ========== ==========
24
THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 29, 2001 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
Net sales........................................ $ 50.1 $ 48.3 $ 63.0 $ $ 161.4
Cost of sales ................................... 34.6 51.0 43.7 129.3
Restructuring and other charges.................. 1.0 -.- -.- 1.0
---------- --------- --------- -------- ---------
Gross profit .................................... 14.5 (2.7) 19.3 31.1
Gross commission earned from agency agreement ... -.- -.- -.- -.-
Costs associated with agency agreement .......... 5.9 -.- -.- 5.9
---------- --------- --------- -------- ---------
Net commission earned from agency agreement.... (5.9) -.- -.- (5.9)
Operating expenses:
Advertising and promotion ..................... 3.4 0.7 3.0 7.1
Selling, general and administrative............ 44.0 3.6 27.7 75.3
Restructuring and other charges................ 0.7 0.1 -.- 0.8
Amortization of intangibles ................... 0.1 0.7 1.0 1.8
Equity income in subsidiaries.................... 43.9 -.- -.- (43.9) -.-
Intracompany allocations......................... (3.5) 1.9 1.6 -.-
Other (income) expenses, net .................... (0.3) (1.0) (0.7) (2.0)
---------- --------- --------- -------- ---------
Income (loss) from operations ................... (79.7) (8.7) (13.3) 43.9 (57.8)
Interest expense ................................ 17.5 (3.6) 4.6 18.5
---------- --------- --------- -------- ---------
Income (loss) before income taxes................ (97.2) (5.1) (17.9) 43.9 (76.3)
Income taxes .................................... (20.5) (2.0) (6.9) (29.4)
---------- --------- --------- -------- ---------
Income (loss) before cumulative effect of
accounting change.............................. (76.7) (3.1) (11.0) 43.9 (46.9)
Cumulative effect of change in accounting
for intangible assets, net of tax.............. 11.3 (3.8) (26.0) (18.5)
---------- --------- --------- -------- ---------
Net income (loss)................................ $ (65.4) $ (6.9) $ (37.0) $ 43.9 $ (65.4)
========== ========= ========= ======== =========
25
THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED DECEMBER 29, 2001 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss). ............................... $ (65.4) $ (6.9) $ (37.0) $ 43.9 $ (65.4)
Adjustments to reconcile net loss to
net cash used in operating activities:
Cumulative effect of change in accounting
for intangible assets......................... 3.8 26.0 29.8
Stock option expense............................ -.-
Depreciation ................................... 4.2 2.4 1.3 7.9
Amortization ................................... 1.0 0.7 1.0 2.7
Deferred Taxes.................................. (11.5) (11.5)
Equity (income) loss in non-guarantors.......... 43.9 -.- -.- (43.9) -.-
Net change in certain components
of working capital.............................. (42.5) (37.6) (22.8) (102.9)
Net changes in other assets and
liabilities and other adjustments............... (1.8) 6.4 (3.6) 1.0
---------- --------- --------- -------- ---------
Net cash used in operating activities............. (72.1) (31.2) (35.1) -.- (138.4)
---------- --------- --------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment....... (6.6) (5.2) (1.2) (13.0)
Investment in acquired businesses,
net of cash acquired............................ -.- -.- (0.1) (0.1)
Payments on seller notes.......................... -.- (7.4) (8.4) (15.8)
---------- --------- --------- -------- ---------
Net cash used in investing activities............. (6.6) (12.6) (9.7) -.- (28.9)
----------- --------- --------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving
and bank lines of credit........................ 86.5 -.- 75.7 162.2
Gross repayments under term loans................. (0.2) -.- (7.4) (7.6)
Financing and issuance fees....................... (1.9) (1.9)
Cash received from the exercise of stock options.. 5.6 -.- -.- 5.6
Intracompany financing............................ (20.4) 44.1 (23.7) -.-
---------- --------- --------- -------- ---------
Net cash provided by financing activities......... 69.6 44.1 44.6 -.- 158.3
---------- --------- --------- -------- ---------
Effect of exchange rate changes on cash........... -.- -.- (0.1) (0.1)
---------- --------- --------- -------- ---------
Net increase (decrease) in cash................... (9.1) 0.3 (0.3) -.- (9.1)
Cash and cash equivalents, beginning of period.... 3.4 0.6 14.7 18.7
---------- --------- --------- -------- ---------
Cash and cash equivalents, end of period.......... $ (5.7) $ 0.9 $ 14.4 $ -.- $ 9.6
========== ========= ========= ======== =========
26
THE SCOTTS COMPANY
BALANCE SHEET
AS OF DECEMBER 29, 2001 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents..................... $ (5.7) $ 0.9 $ 14.4 $ 9.6
Accounts receivable, net ..................... 44.6 62.5 88.9 196.0
Inventories, net ............................. 304.4 81.4 87.9 473.7
Current deferred tax asset.................... 52.3 0.4 (0.4) 52.3
Prepaid and other assets...................... 22.0 2.7 14.7 39.4
---------- --------- --------- ---------- ----------
Total current assets...................... 417.6 147.9 205.5 771.0
Property, plant and equipment, net .............. 199.3 76.8 38.5 314.6
Goodwill and intangible assets, net ............. 30.2 474.1 232.5 736.8
Other assets .................................... 63.4 2.6 11.2 77.2
Investment in affiliates......................... 890.3 -.- -.- (890.3) -.-
Intracompany assets ............................. -.- 166.8 7.2 (174.0) -.-
---------- --------- --------- ---------- ----------
Total assets.............................. $ 1,600.8 $ 868.2 $ 494.9 $ (1,064.3) $ 1,899.6
========== ========= ========= ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt............................... $ 136.9 $ 7.3 $ 28.5 $ $ 172.7
Accounts payable.............................. 84.1 25.6 61.6 171.3
Accrued liabilities........................... 124.0 19.1 51.1 194.2
Accrued taxes................................. (8.4) 2.8 (2.3) (7.9)
---------- --------- --------- ---------- ----------
Total current liabilities................. 336.6 54.8 138.9 -.- 530.3
Long-term debt................................... 540.5 5.1 303.2 848.8
Other liabilities................................ 47.1 1.8 25.3 74.2
Intracompany liabilities......................... 174.0 -.- -.- (174.0) -.-
---------- --------- --------- ---------- ----------
Total liabilities........................... 1,098.2 61.7 467.4 (174.0) 1,453.3
---------- --------- --------- ---------- ----------
Commitments and contingencies
Shareholders' equity:
Investment from parent........................ -.- 486.6 68.1 (554.7) -.-
Common shares, no par value per share,
$.01 stated value per share................. 0.3 -.- -.- 0.3
Capital in excess of par value................ 399.4 -.- -.- 399.4
Retained earnings............................. 176.7 322.4 (16.6) (335.6) 146.9
Treasury stock, 2.3 shares at cost............ (65.5) -.- -.- (65.5)
Accumulated other comprehensive expense....... (8.3) (2.5) (24.0) (34.8)
---------- --------- --------- ---------- ----------
Total shareholders' equity....................... 502.6 806.5 27.5 (890.3) 446.3
---------- --------- --------- ---------- ----------
Total liabilities and shareholders' equity....... $ 1,600.8 $ 868.2 $ 494.9 $ (1,064.3) $ 1,899.6
========== ========= ========= ========== ==========
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Scotts is a leading manufacturer and marketer of consumer branded
products for lawn and garden care and professional horticulture in the United
States and Europe. We also have a presence in Australia, the Far East, Latin
America and South America. Our operations are divided into four business
segments: North American Consumer, Scotts LawnService(R), International
Consumer, and Global Professional. The North American Consumer segment includes
the Lawns, Gardening Products, Ortho and Canadian business groups. Gardening
Products is the combined operations of our Gardens (Miracle-Gro(R)) and Growing
Media businesses.
In the United States, we operate the second largest residential lawn
service business, Scotts LawnService(R). In fiscal 2002, we continued the rapid
expansion of this business. Through acquisitions and internal growth, revenues
increased from nearly $42 million in fiscal 2001 to over $75 million in fiscal
2002. We expect to make at least $30 million of lawn service acquisitions
annually for fiscal 2003 and the foreseeable future.
As a leading consumer branded lawn and garden company, we focus our
consumer marketing efforts, including advertising and consumer research, on
creating consumer 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 branded products,
which provides us with what we believe to be the largest share of advertising
voice in the lawn and garden category in North America. We have applied this
consumer marketing focus for the past several years, and we believe that Scotts
receives a significant return on these marketing expenditures. We expect that we
will continue to focus our marketing efforts toward the consumer and make
additional significant investments in consumer marketing expenditures in the
future to continue to drive market share and sales growth. In fiscal 2003, we
expect to increase significantly our advertising spending and our advertising to
net sales ratio as we deliver a new media message for the Ortho line invest in
our other North American brands and increase our advertising reach in Europe.
Our sales are susceptible to global weather conditions, primarily in
North America and Europe. We believe that our past acquisitions have diversified
both our product line risk and geographic risk to weather conditions.
Our operations are also seasonal in nature. In fiscal 2001, net sales
by quarter were 8.7%, 42.1%, 35.2% and 14.0% of total year net sales,
respectively. Operating losses were reported in the first and fourth quarters of
fiscal 2001 while significant profits were recorded for the second and third
quarters. The sales trend in fiscal 2002 followed a somewhat different pattern
than our historical experience due to retailer initiatives to reduce their
investment in inventory and improve their inventory turns. This caused a sales
shift from the second quarter to the third and fourth quarters that coincided
more closely to when consumers buy our products. Net sales by quarter were 9.3%,
34.2%, 39.3% and 17.2% in fiscal 2002. The trend of operating losses in the
first and fourth quarters and significant operating profits in the second and
third quarters continued in fiscal 2002. There was also a slight shift in
profitability between the second and third quarters with the third quarter now
more profitable than the second. The trend towards more of our sales occurring
in the latter half of the fiscal year is expected to continue in fiscal 2003 as
retailers maintain emphasis on inventory investment more closely timed to
consumer takeaway, and Scotts LawnService's(R) expansion and growth adds revenue
in the second half. Also, as Scotts LawnService(R) grows in revenues and
profitability, the second half of the fiscal year will show further growth in
profitability compared to past trends because our third and fourth fiscal
quarters are historically highly profitable periods for the lawn service
business.
In fiscal 2001, restructuring and other charges of $75.7 million were
recorded for reductions in work force, facility closures, asset writedowns, and
other related costs. Certain costs associated with this restructuring
initiative, including costs related to the relocation of equipment, personnel
and inventory, were not recorded as part of the restructuring costs in fiscal
2001. These costs, which totaled $4.1 million, were recorded as they were
incurred in fiscal 2002 as required under generally accepted accounting
principles in the United States of America.
28
Late in fiscal 2002, we announced a major initiative to improve the
operations and profitability of our European-based consumer and professional
businesses. Over the next three years we anticipate spending $50 to $60 million
on various projects, approximately 25% of which will be capital expenditures.
Certain projects will result in the recognition of restructuring and other
charges over the duration of this initiative. In the fourth quarter of fiscal
2002, as part of this initiative, we announced the closure of a manufacturing
plant in Bramford, England. The closure will occur in late fiscal 2003. The
depreciation of fixed assets at the facility will be accelerated so that they
are fully depreciated by the closure date. In the fourth quarter of fiscal 2002,
approximately $4.0 million of severance and additional pension costs related to
the closure were recorded and reported as restructuring and other charges.
Additional restructuring and other charges will be incurred in fiscal 2003, 2004
and 2005 as various aspects of the plan are implemented.
In fiscal 2002, we adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets." This statement eliminates the
requirement to amortize indefinite-lived assets and goodwill. It also requires
an initial impairment test on all indefinite-lived assets as of the date of
adoption of this standard and impairment tests done at least annually
thereafter. We completed our impairment analysis in the second quarter of 2002,
taking into account additional guidance provided by EITF 02-07, "Unit of Measure
for Testing Impairment of Indefinite-Lived Intangible Assets." As a result, a
pre-tax impairment charge related to the value of tradenames in our German,
French and United Kingdom consumer businesses of $29.8 million was recorded as
of October 1, 2001. After income taxes, the net charge was $18.5 million which
was recorded as a cumulative effect of a change in accounting principle. There
was no goodwill impairment as of the date of adoption.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following discussion and analysis of the consolidated results of
operations and financial position should be read in conjunction with our
Condensed, Consolidated Financial Statements included elsewhere in this report.
Our Annual Report on Form 10-K for the fiscal year ended September 30, 2002
includes additional information about the Company, our operations, and our
financial position, and should be read in conjunction with this Quarterly Report
on Form 10-Q.
Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to customer programs and incentives, product returns, bad debts,
inventories, intangible assets, income taxes, restructuring, environmental
matters, contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. The estimates that we believe are most
critical to our reporting of results of operations and financial position are as
follows:
- We have significant investments in property and equipment,
intangible assets and goodwill. Whenever changing conditions
warrant, we review the realizability of the assets that may be
impacted. At least annually we review indefinite-lived
intangible assets for impairment. The review for impairment of
long-lived assets, intangibles and goodwill takes into account
estimates of future cash flows. Our estimates of future cash
flows are based upon budgets and longer-range plans. These
budgets and plans are used for internal purposes and are also
the basis for communication with outside parties (lenders,
analysts, etc.) about future business trends. While we believe
the assumptions we use to estimate future cash flows are
reasonable, there can be no assurance that the expected future
cash flows will be realized. As a result, impairment charges
that possibly should have been recognized in earlier periods
may not be recognized until later periods if actual results
deviate unfavorably from earlier estimates.
29
- We continually assess the adequacy of our reserves for
uncollectible accounts due from customers. However, future
changes in our customers' operating performance and cash flows
or in general economic conditions could have an impact on
their ability to fully pay these amounts which could have a
material impact on our operating results.
- Reserves for product returns are based upon historical data
and current program terms and conditions with our customers.
Changes in economic conditions, regulatory actions or
defective products could result in actual returns being
materially different than the amounts provided for in our
interim or annual results of operations.
- Reserves for excess and obsolete inventory are based on a
variety of factors, including product changes and
improvements, changes in active ingredient availability and
regulatory acceptance, new product introductions and estimated
future demand. The adequacy of our reserves could be
materially affected by changes in the demand for our products
or by regulatory or competitive actions.
- As described more fully in the notes to the consolidated
financial statements for the year ended September 30, 2002,
and in the notes to the unaudited, condensed consolidated
financial statements included in this Quarterly Report on Form
10-Q, we are involved in significant environmental and legal
matters which have a high degree of uncertainty associated
with them. We continually assess the likely outcomes of these
matters and the adequacy of amounts, if any, provided for
these matters. There can be no assurance that the ultimate
outcomes will not differ materially from our assessment of
them. There can also be no assurance that all matters that may
be brought against us or that we may bring against other
parties are known to us at any point in time.
- We accrue for the estimated costs of customer volume rebates,
cooperative advertising, consumer coupons and other trade
programs as the related sales occur during the year. These
accruals involve the use of estimates as to the total expected
program costs and the expected sales levels. Historical
results are also used to evaluate the accuracy and adequacy of
amounts provided at interim dates and year end. There can be
no assurance that actual amounts paid for these trade programs
will not differ from estimated amounts accrued. However, we
believe any such differences would not be material to our
financial position or results of operations.
- We record income tax liabilities utilizing known obligations
and estimates of potential obligations. A deferred tax asset
or liability is recognized whenever there are future tax
effects from existing temporary differences and operating loss
and tax credit carryforwards. Valuation allowances are used to
reduce deferred tax assets to the balance that is more likely
than not to be realized. We must make estimates and judgments
on future taxable income, considering feasible tax planning
strategies and taking into account existing facts and
circumstances, to determine the proper valuation allowance.
When we determine that deferred tax assets could be realized
in greater or lesser amounts than recorded, the asset balance
and income statement reflects the change in the period such
determination is made. Due to changes in facts and
circumstances and the estimates and judgments that are
involved in determining the proper valuation allowance,
differences between actual future events and prior estimates
and judgments could result in adjustments to this valuation
allowance. The Company uses an estimate of its annual
effective tax rate at each interim period based on the facts
and circumstances available at that time, while the actual
effective tax rate is calculated at year-end.
30
RESULTS OF OPERATIONS
The following table sets forth net sales by business segment for the
three months ended December 28, 2002 and December 29, 2001:
FOR THE
THREE MONTHS ENDED
DECEMBER 28, DECEMBER 29,
2002 2001
---- ----
($ MILLIONS)
North American Consumer:
Lawns ................................. $ 28.3 $ 26.9
Gardening Products ..................... 37.8 31.7
Ortho .................................. 17.9 16.8
Canada ................................. 0.8 0.8
-------- -------
Total ........................... 84.8 76.2
Scotts LawnService(R) .................. 15.3 8.7
International Consumer ................. 43.2 40.1
Global Professional .................... 37.5 36.4
-------- -------
Consolidated .................... $ 180.8 $ 161.4
======== =======
The following table sets forth the components of income and expense as
a percentage of net sales for the three months ended December 28, 2002 and
December 29, 2001:
FOR THE
THREE MONTHS ENDED
DECEMBER 28, DECEMBER 29,
2002 2001
---- ----
Net sales............................................ 100.0% 100.0%
Cost of sales........................................ 76.9 80.1
Restructuring and other charges...................... 2.5 0.6
------- -------
Gross profit......................................... 20.6 19.3
Commission earned from agency agreement, net ........ (3.9) (3.6)
Operating expenses:
Advertising ..................................... 4.8 4.4
Selling, general and administrative.............. 43.0 46.7
Restructuring and other charges.................. 1.0 0.5
Amortization of intangibles.......................... 1.1 1.1
Other expense (income), net.......................... (0.6) (1.2)
------- -------
Loss from operations................................. (32.6) (35.8)
Interest expense..................................... 9.1 11.5
------- -------
Loss before income taxes............................. (41.7) (47.3)
Income taxes......................................... (15.8) (18.2)
------- -------
Loss before cumulative effect of accounting change... (25.9) (29.1)
Cumulative effect of change in accounting for
intangible assets, net of tax.................... -.- (11.4)
------- -------
Net loss............................................. (25.9)% (40.5)%
======= =======
31
THREE MONTHS ENDED DECEMBER 28, 2002 COMPARED TO THREE MONTHS ENDED DECEMBER 29,
2001
Net sales for the three months ended December 28, 2002 were $180.8
million, an increase of 12.0% from net sales for the three months ended December
29, 2001 of $161.4 million. The U.S. dollar has weakened against the Euro and
the British Pound over the latter half of calendar 2002. The average exchange
rates for both currencies for the first quarter of fiscal 2003 changed over 10%
from the first quarter of fiscal 2002. Excluding the effect of exchange rates,
sales for the first quarter of fiscal 2003 were $174.2 million or 7.9% above the
first quarter of fiscal 2002. As mentioned previously, net sales in the first
quarter of the fiscal year represent about 10% of the expected net sales for the
full year and thus may not be representative of results for the full year. Price
increases are not material to the discussion of net sales in total or by
business segment for either fiscal period presented.
North American Consumer segment net sales were $84.8 million in the
first quarter of fiscal 2003, an increase of 11.3% over net sales for the first
quarter of fiscal 2002 of $76.2 million. Our major business groups in the United
States each showed a net sales increase in the quarter, led by our Gardening
Products group with strong sales growth in valued added potting soils and water
soluble fertilizers. The Lawns group also had a strong finish to the fall season
with increased sales of its Winterizer(R) Turfbuilder(R) product and grass seed.
Scotts LawnService(R) revenues increased 75.9% from $8.7 million in the
first quarter of fiscal 2002 to $15.3 million in the first quarter of fiscal
2003. The growth in revenue reflects the growth in the business from
acquisitions completed in fiscal 2002, new branch openings in fiscal 2002 and
the growth in customers from our spring and fall 2002 marketing campaigns.
Net sales for the International Consumer segment were $43.2 million in
the first quarter of fiscal 2003, which were $3.1 million, or 7.7%, higher than
net sales for the first quarter of fiscal 2002. Excluding the effect of exchange
rates, net sales declined by $1.6 million. The decline in net sales reflects
customer initiatives to take delivery of products closer to seasonal consumer
takeaway.
Net sales for the Global Professional segment were $37.5 million in the
first quarter of fiscal 2003, which were $1.1 million, or 3.0%, higher than net
sales for the first quarter of fiscal 2002. Excluding the effect of exchange
rates, net sales declined $0.7 million.
Gross profit was $37.2 million in the first quarter of fiscal 2003, an
increase of $6.1 million from gross profit of $31.1 million in the first quarter
of fiscal 2002. As a percentage of net sales, gross profit was 20.6% of sales in
the first quarter of fiscal 2003 compared to 19.3% in the first quarter of
fiscal 2002. Excluding the effect of favorable exchange rates and excluding
restructuring and other charges, gross profit was 22.5% of sales in the first
quarter of fiscal 2003 compared to 19.9% in the first quarter of fiscal 2002 led
by supply chain improvements.
The net commission earned from agency agreement in the first quarter of
fiscal 2003 represents net expense of $7.1 million compared to net expense of
$5.9 million in the first quarter of fiscal 2002. The increase in expense is due
to the increase in the contribution payment due to Monsanto to $25 million in
fiscal 2003 from $20 million in fiscal 2003. We do not recognize commission
income under the agency agreement until minimum earnings thresholds in the
agreement are achieved, which is usually late in our second fiscal quarter or
early in the third fiscal quarter.
Advertising expenses in the first quarter of fiscal 2003 were $8.6
million, an increase of 21.1% over the $7.1 million in the first quarter of
fiscal 2002. As a percentage of net sales, advertising expense was 4.8% in the
first quarter of fiscal 2003 compared to 4.4% in the first quarter of fiscal
2002. The increase in spending as a percent of net sales reflects the Company's
intention to spend more aggressively on advertising in fiscal 2003.
Selling, general and administrative expenses ("S, G&A") in the first
quarter of fiscal 2003 were $79.6 million compared to $76.1 million for the
first quarter of fiscal 2002. S, G&A in the Scotts LawnService(R) business
increased from $5.8 million in the first quarter of fiscal 2002 to $10.0 million
in the first quarter of fiscal 2003 reflecting the increased number of locations
added over the past year from acquisitions and branch openings and expansions.
S, G&A related to restructuring activities increased from $0.8 million in fiscal
2002's first quarter to $1.8 million in fiscal 2003's first quarter due to the
costs associated with the ongoing European integration initiatives which kicked
off late in the
32
fourth quarter of fiscal 2002. S, G&A for the other segments declined to $67.8
million in the first quarter of fiscal 2003 from $69.5 million in the first
quarter of fiscal 2002.
Other income was $1.2 million for the first quarter of fiscal 2003,
compared to other income of $2.0 million in the first quarter of fiscal 2002.
The decrease is due to the gain on sale of an idled growing media plant in
Florida which occurred in the first quarter of fiscal 2002.
For segment reporting purposes, earnings before interest, taxes and
amortization ("EBITA") is used by management as the measure for income from
operations in assessing performance. Segment performance for the first quarter
of fiscal 2003 compared to the first quarter of fiscal 2002 was as follows:
- North American Consumer loss from operations declined from
$29.4 million in fiscal 2002 to $27.6 million in fiscal 2003
due to higher sales in the fiscal 2003 period ($84.8 million
compared to $76.2 million) and lower spending on S, G&A and
lower bad debt costs;
- Scotts LawnService(R) reported higher net sales ($15.3 million
compared to $8.7 million) but a larger loss from operations.
As this highly seasonal business grows it will have larger
losses in the first and second quarters of the fiscal year due
to seasonally low revenues and high fixed overhead costs.
Conversely, the second half of the fiscal year will provide
higher revenues, margins and operating income;
- International Consumer's operating loss declined to $1.6
million from $6.6 million on improved supply chain results;
- The Global Professional business showed a profit of $0.4
million in fiscal 2003 compared to a loss of $0.2 million in
fiscal 2002 due to improved supply chain results.
Interest expense for the first quarter of fiscal 2003 was $16.5
million, a decrease of $2.0 million from interest expense for the first quarter
of fiscal 2002 of $18.5 million. The decrease in interest expense was primarily
due to a reduction in average borrowings for the quarter as compared to the
prior year as a result of fiscal 2002's record cash flows and an ending cash
balance at September 30, 2002 of nearly $100 million. The weighted average
interest rate on our variable rate debt outstanding for the three months ended
December 28, 2002 was 7.30% compared to 8.22% for the three months ended
December 29, 2001.
Income tax benefit for the first quarter of fiscal 2003 was $28.6
million, compared with an income tax benefit for the first quarter of fiscal
2002 of $29.4 million. The decrease in the tax benefit from the prior year is
primarily the result of the lower estimated income tax rate for the first
quarter of fiscal 2003 of 38.0% compared to 38.5% for the first quarter of
fiscal 2002.
The Company reported a loss before cumulative effect of accounting
changes of $46.8 million for the first three months of fiscal 2003, compared to
$46.9 million for the first three months of fiscal 2002. After the charge of
$29.8 million ($18.5 million, net of tax) for the impairment of tradenames in
our German, French and United Kingdom businesses, net loss for the first three
months of fiscal 2002 was $65.4 million, or $2.27 per share, compared to a net
loss of $46.8 million or $1.55 per share for the first three months of fiscal
2003. Average shares outstanding increased from 28.8 million at December 29,
2001 to 30.2 million at December 28, 2002 due to shares issued for option and
warrant exercises. Common stock equivalents are not included in the shares used
for earnings per share calculations due to their anti-dilutive effect in periods
with net losses.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $126.2 million for the three
months ended December 28, 2002 compared to a use of cash of $138.4 million for
the three months ended December 29, 2001. The seasonal nature of our operations
generally requires cash to fund significant increases in working capital
(primarily inventory) during the first quarter. Cash used in operations was
lower in the first quarter of fiscal 2003 due to continued improvement in
accounts receivable management and lower restructuring payments.
33
Cash used in investing activities was $32.1 million for the first three
months of fiscal 2003 compared to $28.9 million in the prior year period.
Capital expenditures increased from $13.0 million in fiscal 2002 to $18.6
million in fiscal 2003 in line with higher projected spending on plant equipment
and technology systems in fiscal 2003. Scotts LawnService(R) completed 4
acquisitions costing $4.6 million in the first quarter of fiscal 2003 compared
to 2 acquisitions costing $0.9 million in the first quarter of fiscal 2002. The
timing of actual payments for acquisitions and on seller notes reflect the terms
and conditions of the various acquisition agreements.
Financing activities provided cash of $74.5 million for the first three
months of fiscal 2003 compared to providing $158.3 million in the prior year.
The decrease in cash from financing activities was primarily due to a decrease
in borrowings under our revolving credit facility to fund operations due to
improved cash flows from operations as noted above and the nearly $100.0 million
cash balance at the start of fiscal 2003 compared to nearly $19.0 million at the
start of fiscal 2002. In the first quarter of fiscal 2003, a mandatory
prepayment of $24.4 million was made on the term loans under our revolving
credit facility as required by the level of excess cash flow, as defined in the
credit agreement, we achieved in fiscal 2002.
Our primary sources of liquidity are funds generated by operations and
borrowings under our Credit Agreement. The Credit Agreement provided for
borrowings in the aggregate principal amount of $1.1 billion consisting of term
loan facilities in the aggregate amount of $525 million and a revolving credit
facility in the amount of $575 million. Due to paydowns on our term loans, the
amount available under the term loan facilities has been reduced to
approximately $355 million as of December 28, 2002. Also, as of December 28,
2002, approximately $16 million of the $575 million revolving credit facility is
committed for letters of credit; the balance of approximately $559 million is
available for use against which $94.6 million was outstanding at December 28,
2002.
Total debt was $894.3 million as of December 28, 2002, a decrease of
$127.2 million compared with total debt at December 29, 2001 of $1,021.5
million. The decrease in debt compared to the prior year was primarily due to
scheduled debt repayments on our term loans during fiscal 2002 and lower
borrowings on our revolving credit facility as of December 28, 2002 due to
improved cash flow from operations in fiscal 2002 and thus far in fiscal 2003.
At December 28, 2002, we were in compliance with all debt covenants.
The Credit Agreement contains covenants on interest coverage and leverage. The
Credit Agreement and the Subordinated Note indenture also contain numerous
negative covenants which we are also in compliance with thus far in fiscal 2003.
There are no rating triggers in our Credit Agreement or the Subordinated Note
indenture.
Total cash was $16.4 million at December 28, 2002, an increase of $6.8
million from December 29, 2001 and a decline of $83.3 million from September 30,
2002 reflecting seasonal needs.
We did not repurchase any common shares for treasury in fiscal 2001 or
fiscal 2002, or thus far in fiscal 2003. We have not paid dividends on the
common shares in the past and do not presently plan to pay dividends on the
common shares. It is presently anticipated that earnings will be retained and
reinvested to support the growth of our business or to pay down indebtedness.
The payment of future dividends, if any, on common shares will be determined by
the Board of Directors of Scotts in light of conditions then existing, including
our earnings, financial condition and capital requirements, restrictions in
financing agreements, business conditions and other factors.
All of our off-balance sheet financing is in the form of operating
leases which are disclosed in the notes to consolidated financial statements
included in our Annual Report of Form 10-K for the year ended September 30,
2002. We have no financial guarantees or other arrangements with any related
parties other than our subsidiaries. All material intercompany transactions are
eliminated in our consolidated financial statements. Certain transactions with
executive officers are fully described and disclosed in our proxy statements.
Such transactions do not exceed $150,000 per annum.
In July 2002, the Company's Board of Directors approved a plan designed
to significantly improve the profitability of the International Consumer and
Professional businesses. The plan includes implementation of an SAP platform
throughout Europe, as well as efforts to optimize operations in the United
Kingdom, France and Germany,
34
including the creation of a global supply chain. We estimate that there will be
a cash outlay of $50-$60 million, of which approximately 25% will be capital
expenditures, to implement this plan fully by the end of fiscal 2005.
We are party to various pending judicial and administrative proceedings
arising in the ordinary course of business. These include, among others,
proceedings based on accidents or product liability claims and alleged
violations of environmental laws. We have reviewed our pending environmental and
legal proceedings, including the probable outcomes, reasonably anticipated costs
and expenses, availability and limits of our insurance coverage and have
established what we believe to be appropriate reserves. We do not believe that
any liabilities that may result from these proceedings are reasonably likely to
have a material adverse effect on our liquidity, financial condition or results
of operations.
In our opinion, cash flows from operations and capital resources will
be sufficient to meet debt service and working capital needs during fiscal 2003,
and thereafter for the foreseeable future. However, we cannot ensure that our
business groups will generate sufficient cash flow from operations or that
future borrowings will be available under our credit facilities in amounts
sufficient to pay indebtedness or fund other liquidity needs. Actual results of
operations will depend on numerous factors, many of which are beyond our
control.
ENVIRONMENTAL MATTERS
We are subject to local, state, federal and foreign environmental
protection laws and regulations with respect to our business operations and
believe we are operating in substantial compliance with, or taking action aimed
at ensuring compliance with, such laws and regulations. We are involved in
several legal actions with various governmental agencies related to
environmental matters. While it is difficult to quantify the potential financial
impact of actions involving environmental matters, particularly remediation
costs at waste disposal sites and future capital expenditures for environmental
control equipment, in the opinion of management, the ultimate liability arising
from such environmental matters, taking into account established reserves,
should not have a material adverse effect on our financial position; however,
there can be no assurance that the resolution of these matters will not
materially affect future quarterly or annual operating results. Additional
information on environmental matters affecting us is provided in Note 9 of the
Notes to Condensed, Consolidated Financial Statements (unaudited) as of and for
the three months ended December 28, 2002 and in the fiscal 2002 Annual Report on
Form 10-K under the "ITEM 1. BUSINESS - ENVIRONMENTAL AND REGULATORY
CONSIDERATIONS" and "ITEM 3. LEGAL PROCEEDINGS" sections.
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 this Form 10-Q 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.
Some forward-looking statements that we make in this Form 10-Q and in
other contexts represent challenging goals for our company, and the achievement
of these goals is subject to a variety of risks and assumptions and numerous
factors beyond our control. Important factors that could cause actual results to
differ materially from the forward-looking statements we make are described
below. All forward-looking statements attributable to us or persons working on
our behalf are expressly qualified in their entirety by the following cautionary
statements.
35
- - OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL
HEALTH AND PREVENT US FROM FULFILLING OUR OBLIGATIONS.
We have a significant amount of debt. Our substantial indebtedness
could have important consequences. For example, it could:
- make it more difficult for us to satisfy our obligations under
outstanding indebtedness and otherwise;
- increase our vulnerability to general adverse economic and
industry conditions;
- require us to dedicate a substantial portion of cash flows
from operations to payments on our indebtedness, which would
reduce the cash flows available to fund working capital,
capital expenditures, advertising, research and development
efforts and other general corporate requirements;
- limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate;
- place us at a competitive disadvantage compared to our
competitors that have less debt;
- limit our ability to borrow additional funds; and
- expose us to risks inherent in interest rate fluctuations
because some of our borrowings are at variable rates of
interest, which could result in higher interest expense in the
event of increases in interest rates.
Our ability to make payments on and to refinance our indebtedness and
to fund planned capital expenditures and acquisitions 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 you 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 you
that future borrowings will be available to us under our credit facility in
amounts sufficient to enable us to pay our indebtedness or to fund our other
liquidity needs. We may need to refinance all or a portion of our indebtedness,
on or before maturity. We cannot assure you that we will be able to refinance
any of our indebtedness on commercially reasonable terms or at all.
- - RESTRICTIVE COVENANTS MAY ADVERSELY AFFECT US.
Our credit facility and the indenture governing our outstanding senior
subordinated notes contain restrictive covenants that require us to maintain
specified financial ratios and satisfy other financial condition tests. Our
ability to meet those financial ratios and tests can be affected by events
beyond our control, and we cannot assure you that we will meet those tests. A
breach of any of these covenants could result in a default under our credit
facility and/or our outstanding senior subordinated notes. Upon the occurrence
of an event of default under our credit facility and/or the senior subordinated
notes, the lenders and/or noteholders could elect to declare the applicable
outstanding indebtedness to be immediately due and payable and terminate all
commitments to extend further credit. We cannot be sure that our lenders or the
noteholders would waive a default or that we could pay the indebtedness in full
if it were accelerated.
- - 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. An abnormally cold spring throughout North America and/or Europe
36
could adversely affect both fertilizer and pesticide sales and therefore our
financial results.
- - OUR HISTORICAL SEASONALITY COULD IMPAIR OUR ABILITY TO PAY OBLIGATIONS
AS THEY COME DUE IN ADDITION TO OUR OPERATING EXPENSES.
Because our products are used primarily in the spring and summer, our
business is highly seasonal. For the past two fiscal years, more than 70% 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 effect on our ability to conduct our business. Adverse weather
conditions could heighten this risk.
- - 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
brand names. On occasion, allegations are made that some of our products have
failed to perform up to expectations or have caused damage or injury to
individuals or property. Based on reports of contamination at a third party
supplier's vermiculite mine, the public may perceive that some of our products
manufactured in the past using vermiculite are or may also be contaminated.
Public perception that our products are not safe, whether justified or not,
could impair reputation, involve us in litigation, damage our brand names and
have a material adverse affect our business.
- - THE NATURE OF CERTAIN OF OUR PRODUCTS AND OUR BUSINESS SUCCESS
CONTRIBUTE TO THE RISK THAT THE COMPANY WILL BE SUBJECTED TO LAWSUITS.
The nature of certain of our products and our business success
contribute to the risk that the Company will be subjected to lawsuits. The
following are among the factors that contribute to this litigation risk:
o We manufacture and market a number of complex chemical
products bearing our brand names, including fertilizers,
growing media, herbicides and pesticides. There is a portion
of the population that perceives all chemical products as
potentially hazardous. This perception, regardless of its
merits, enhances the risk that the Company will be subjected
to product liability claims that allege harm from exposure to
our products. Product liability claims are brought against the
Company from time to time. The Company believes that none of
the product liability claims of which it is aware are material
either individually or in aggregate.
o A third party vendor supplied contaminated vermiculite ore to
the Company. Although our use of vermiculite ore from the
contaminated source ended over twenty years ago, our
relationship with this supplier enhances the risk that the
Company will be subjected to personal injury and product
liability claims relating to the use of vermiculite in some of
our products. The Company believes that its finished products
were contamination-free and that consumers were not exposed to
contaminated products. Workers compensation claims and third
party invitee claims (such as claims by contractors and
railroad workers) alleging injury from historical exposure on
the Company's premises to this contaminated vermiculite are
brought against the Company from time to time. The Company
believes that none of the vermiculite related claims of which
it is aware are material either individually or in aggregate.
o We are a significant competitor in many of the markets in
which we compete. Our success in our markets enhances the risk
that the Company will be targeted by plaintiffs' lawyers,
consumer groups, competitors and others asserting antitrust
claims. Antitrust claims are brought against the Company from
time to time. The Company believes that the antitrust claims
of which it is aware are without merit.
Based on the facts, claims and circumstances known to the Company, the
Company believes that current claims of the types discussed above are without
merit, immaterial or both. However, there can be no assurance that current or
future claims of the types described above, or other types of claims, will not
be decided adversely to the Company, or that our involvement in such claims or
the cost of defending the Company against such claims will not impair our
reputation, damage our brand names or materially adversely affect our business,
results of operations, financial position and cash flows.
Please see Note 9 of the Notes to Condensed, Consolidated Financial
Statements (unaudited) of the Company as of and for the three months ended
December 28, 2002 and Part II, Item 1 "Legal Proceedings" of this Form 10-Q for
information concerning certain significant lawsuits and claims involving the
Company.
- - BECAUSE OF THE CONCENTRATION OF OUR SALES TO A SMALL NUMBER OF RETAIL
CUSTOMERS, THE LOSS OF ONE OR MORE OF, OR SIGNIFICANT DECLINE IN ORDERS
FROM, OUR TOP CUSTOMERS COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS.
North American Consumer net sales represent approximately 70% of our
worldwide net sales. Our top four North American retail customers together
accounted for over 75% of our North American Consumer fiscal 2002 net sales and
42% of our outstanding accounts receivable as of September 30, 2002. Home Depot,
Wal-Mart, Lowe's and Kmart represented approximately 37%, 18%, 11% and 10%,
respectively, of our fiscal 2002 North American Consumer net sales. The loss of,
or reduction in orders from, Home Depot, Wal-Mart, Lowe's, Kmart or any other
significant customer could have a material adverse effect on our business and
our financial results, as could customer disputes regarding shipments, fees,
merchandise condition or related matters. Our inability to collect accounts
receivable from any of these customers could also have a material adverse
affect.
We do not have long-term sales agreements or other contractual
assurances as to future sales to any of our major retail customers. In addition,
continued consolidation in the retail industry has resulted in an increasingly
concentrated retail base. To the extent such concentration continues to occur,
our net sales and operating income may be increasingly sensitive to a
deterioration in the financial condition of, or other adverse developments
involving our relationship with, one or more customers.
Kmart, one of our top customers, filed for bankruptcy relief under
Chapter 11 of the bankruptcy code on January 22, 2002. Following such filing,
and their successful obtaining of debtor-in-possession financing, we recommenced
shipping products to Kmart, and we intend to continue shipping products to Kmart
for the foreseeable future. If Kmart does not successfully emerge from its
bankruptcy reorganization, our business could be adversely affected.
- - THE HIGHLY COMPETITIVE NATURE OF THE COMPANY'S MARKETS COULD ADVERSELY
AFFECT THE ABILITY OF THE COMPANY TO GROW OR MAINTAIN REVENUES.
Each of our segments participates in markets that are highly
competitive. Many of our competitors sell their
37
products at prices lower than ours, and we compete primarily on the basis of
product quality, product performance, value, brand strength, supply chain
competency and advertising. Some of our competitors have significant financial
resources and research departments. The strong competition that we face in all
of our markets may prevent us from achieving our revenue goals, which may have a
material adverse affect on our financial condition and results of operations.
- - IF MONSANTO WERE TO TERMINATE THE MARKETING AGREEMENT FOR CONSUMER
ROUNDUP(R) PRODUCTS WITHOUT BEING REQUIRED TO PAY ANY TERMINATION FEE,
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
for cause, we would not be entitled to any termination fee, and we would lose
all, or a significant portion, of this significant source of earnings and
overhead expense absorption 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 HAGEDORN PARTNERSHIP, L.P. BENEFICIALLY OWNS APPROXIMATELY 34% OF
OUR OUTSTANDING COMMON SHARES ON A FULLY DILUTED BASIS.
The Hagedorn Partnership, L.P. beneficially owns approximately 34% of
our outstanding common shares 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: 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 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
from retailers by December 2004 of residential uses of products containing
diazinon, used also 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
38
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 you that
our products, particularly pesticide products, will not cause injury to the
environment or to people under all circumstances. The costs of compliance,
remediation or products liability have adversely affected operating results in
the past and could materially affect future quarterly or annual operating
results.
The harvesting of peat for our growing media business has come under
increasing regulatory and environmental scrutiny. In the United States, state
regulations frequently require us to limit our harvesting and to restore the
property to an agreed-upon condition. In some locations, we have been required
to create water retention ponds to control the sediment content of discharged
water. In the United Kingdom, our peat extraction efforts are also the subject
of legislation.
In addition to the regulations already described, local, state, federal
and foreign agencies regulate the disposal, handling and storage of waste, air
and water discharges from our facilities. In June 1997, the Ohio Environmental
Protection Agency ("Ohio EPA") initiated an enforcement action against us with
respect to alleged surface water violations and inadequate treatment
capabilities at our Marysville facility and is 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 and was entered by the court on January 25,
2002.
In fiscal 2002, we made $0.3 in environmental capital expenditures and
incurred approximately $5.4 million in other environmental expenses, compared
with approximately $0.6 million in environmental capital expenditures and $2.1
million in other environmental expenses in fiscal 2001. We expect spending on
environmental matters in fiscal 2003 will not vary materially from the amounts
spent in the past two fiscal years.
The adequacy of these estimated 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.
- - OUR SIGNIFICANT INTERNATIONAL OPERATIONS MAKE US SUSCEPTIBLE TO
FLUCTUATIONS IN CURRENCY EXCHANGE RATES AND TO THE COSTS OF
INTERNATIONAL REGULATION.
We currently operate manufacturing, sales and service facilities
outside of North America, particularly in the United Kingdom, Germany, France
and the Netherlands. In fiscal 2002, international sales accounted for
approximately 24% of our total sales. Accordingly, we are subject to risks
associated with operations in foreign countries, including:
39
- fluctuations in currency exchange rates;
- limitations on the conversion of foreign currencies into U.S.
dollars;
- limitations on the remittance of dividends and other payments
by foreign subsidiaries;
- additional costs of compliance with local regulations; and
- historically, higher rates of inflation than in the United
States.
In addition, our operations outside the United States are subject to
the risk of new and different legal and regulatory requirements in local
jurisdictions, potential difficulties in staffing and managing local operations
and potentially adverse tax consequences. The costs related to our international
operations could adversely affect our operations and financial results in the
future.
40
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days of the date of filing of this Quarterly Report on Form
10-Q, an evaluation ("Evaluation") was performed under the supervision of, and
with the participation of, the Registrant's principal executive officer and
principal financial officer of the Registrant's disclosure controls and
procedures. Based upon the Evaluation, the principal executive officer and
principal financial officer concluded that:
(A) information required to be disclosed by the Registrant in this
Quarterly Report on Form 10-Q would be accumulated and
communicated to the Registrant's management, including its
principal executive and financial officers, as appropriate, to
allow timely decisions regarding required disclosure; and
(B) information required to be disclosed by the Registrant in this
Quarterly Report on Form 10-Q would be recorded, processed and
summarized, and would be reported within the time period
specified in the SEC's rules and forms.
No significant changes were made to the Registrant's internal controls
or in other factors that could significantly affect these internal controls
subsequent to the date of the Evaluation.
41
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SCOTTS V. UNITED INDUSTRIES AND PURSELL INDUSTRIES, SOUTHERN DISTRICT
OF FLORIDA
On April 15, 2002, Scotts and OMS Investments, Inc., a subsidiary of
Scotts that holds various Scotts intellectual property assets, filed a six count
complaint against United Industries Corp. and Pursell Industries, Inc. for acts
of (1) federal trademark and trade dress infringement; (2) federal unfair
competition; (3) federal dilution; (4) common law trademark and trade dress
infringement in violation of Florida law and other applicable law; (5) common
law unfair competition in violation of Florida law and other applicable law; and
(6) dilution in violation of Florida law and other applicable law. Scotts also
filed its motion for preliminary injunction, which motion seeks an injunction
enjoining United Industries, pending trial, from manufacturing, producing,
shipping, distributing, advertising, promoting, displaying, selling or offering
for sale products in the current packaging for its Spectracide(R) No Odor Fire
Ant Killer Ready-to-Use Dust product and from otherwise using any trademarks,
trade dress, packaging, promotional materials or other items which incorporate
or are confusingly similar to the trademarks and trade dress featured in Scotts'
Ortho(R) Orthene(R) Fire Ant Killer product packaging.
The claims in the complaint center upon United Industries' and
Pursell's use of trade dress on the packaging of their lawn care, garden care
and insecticide/herbicide products that closely mimic Scotts' unique,
proprietary and famous trademarks and trade dress. The complaint seeks an
injunction enjoining United Industries and Pursell from using any trademarks,
trade dress, packaging, promotional materials or other items which incorporate,
which are confusingly similar to or which dilute the trademarks and trade dress
encompassed in and featured in Scotts' Miracle-Gro(R) line, Ortho(R) line or
Turf Builder(R) line. The complaint also seeks compensatory damages, treble
damages, costs and attorney's fees.
United Industries subsequently filed its answer and counterclaim. Its
counterclaim seeks to cancel Scotts' Miracle-Gro(R) and Design trademark
registration and Scotts' pending Ortho(R) Orthene(R) Fire Ant Killer And Design
trademark application. We believe that this counterclaim is completely without
merit.
The court held a hearing on July 24 and 25, 2002, on Scotts' motion for
preliminary injunction and denied the motion on August 23, 2002. We have
appealed this court's denial of our motion for preliminary injunction. Scotts
filed an amended complaint on December 13, 2002 alleging additional facts to
support the existing claims.
We do not anticipate incurring any damages relating to this action.
SCOTTS V. AVENTIS S.A. AND STARLINK LOGISTICS, INC.
On August 9, 2002, Scotts filed suit against Aventis S.A. and its
wholly-owned subsidiary Starlink Logistics, Inc. in the U.S. District Court for
the Southern District of Ohio. In the complaint, Scotts alleges it is entitled
to injunctive and monetary relief arising from Aventis' and Starlink's
interference with Scotts' contractual right to purchase a company called
TechPac, L.L.C. from one of Aventis' former subsidiaries, Aventis CropScience.
The complaint alleges that pursuant to a contract between Scotts and a
predecessor-in-interest to Aventis CropScience, Aventis CropScience was
obligated to make a bona fide offer to sell its interest in TechPac to Scotts.
The complaint further alleges that Aventis directed Aventis CropScience to make
a belated sham offer to Scotts and that later, upon the sale of Aventis
CropScience to Bayer AG, Aventis transferred ownership of TechPac to Starlink,
an act which has made it impossible for Aventis CropScience's
successor-in-interest to make a bona fide offer to sell TechPac to Scotts.
In this suit, Scotts seeks to ensure that it is able to exercise its
right to receive a bona fide offer to acquire TechPac, and Scotts seeks to
recover compensatory and punitive damages in an amount as yet undetermined for
Aventis' and Starlink's interference with Scotts' right to receive such an
offer. On October 4, 2002, Starlink filed a motion to dismiss the complaint on
jurisdictional grounds. On December 17, 2002, Aventis filed a similar motion.
42
Scotts intends to vigorously oppose these motions and to vigorously prosecute
its claims against Aventis and Starlink. Discovery on jurisdictional issues is
underway. A trial date has not been set.
OTHER
During the first quarter of fiscal 2003, a fork lift accident occurred
at Scotts' plant in Chino, California. The accident resulted in the death of a
Scotts' associate. Scotts believes that workers' compensation insurance coverage
is the family's exclusive remedy against Scotts and therefore does not currently
anticipate any action by the family against Scotts. There is some risk, however,
that claims will be made by the employee's family against third parties, in
which case Scotts may become involved in the litigation. Scotts believes it has
defenses to any attempt to add Scotts as a defendant, but there can be no
guarantees at this point that the defense would be successful. As of January 31,
2003, we are not aware of any complaint that has been filed relating to the
accident or any other action by the employee's family.
We are involved in other lawsuits and claims which arise in the normal
course of our business. In our opinion, these claims individually and in the
aggregate are not expected to result in a material adverse effect on our results
of operations, financial position or cash flows.
FOR ADDITIONAL INFORMATION ON MATERIAL LITIGATION, PLEASE SEE NOTE 9 OF THE
NOTES TO THE COMPANY'S CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE THREE MONTHS ENDED DECEMBER 28, 2002.
43
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company (the "Annual
Meeting") was held in Marysville, Ohio on January 30, 2003.
The result of the vote of the shareholders for the matter of the
election of four directors, for terms of three years each, is as follows:
VOTES
NOMINEE VOTES FOR WITHHELD
------- --------- --------
Arnold W. Donald.............. 26,864,791 272,877
Lynn J. Beasley............... 26,881,302 256,366
John M. Sullivan.............. 26,850,613 287,055
L. Jack Van Fossen............ 26,912,922 224,746
Each of the nominees was elected. The other directors whose terms of
office continue after the Annual Meeting are Joseph P. Flannery, Albert E.
Harris, Katherine Hagedorn Littlefield, Patrick J. Norton, Stephanie M. Shern
(who was appointed by the Company's Board of Directors to fill the vacancy
created by the retirement of Charles M. Berger on January 30, 2003), James
Hagedorn, Karen G. Mills and John Walker, Ph.D.
The Scotts Company 2003 Stock Option and Incentive Equity Plan was
approved.
The result of the vote was:
VOTES FOR VOTES AGAINST ABSTENTIONS
- ---------- ------------- -----------
21,852,397 3,162,723 39,341
Amendments to The Scotts Company 1996 Stock Option Plan were ratified
and approved. The result of the vote was:
VOTES FOR VOTES AGAINST ABSTENTIONS
- ---------- ------------- -----------
25,393,225 1,699,070 45,373
Amendments to The Scotts Company 1992 Long Term Incentive Plan were
ratified and approved. The result of the vote was:
VOTES FOR VOTES AGAINST ABSTENTIONS
- ---------- ------------- -----------
25,413,419 1,683,488 40,761
The shareholder resolution regarding genetic engineering was not
adopted. The result of the vote was:
BROKER
VOTES FOR VOTES AGAINST ABSTENTIONS NON-VOTES
- ---------- ------------- ----------- ---------
649,058 23,199,752 1,207,651 2,081,207
44
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Index to Exhibits at page 49 for a list of the exhibits
included herewith.
(b) The Registrant filed no Current Reports on Form 8-K during the
quarter covered by this Report.
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE SCOTTS COMPANY
/s/ CHRISTOPHER L. NAGEL
---------------------------------
Christopher L. Nagel
Date: February 11, 2003 Chief Financial Officer,
Executive Vice President of Finance,
(Duly Authorized Officer)
(Principal Financial Officer)
46
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, James Hagedorn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Scotts
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this quarterly report (the "Evaluation Date");
and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 11, 2003 /s/ James Hagedorn
-------------------- ------------------------------------
James Hagedorn, President/
Chief Executive Officer/Chairman of
the Board
47
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Christopher L. Nagel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Scotts
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this quarterly report (the "Evaluation Date");
and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 11, 2003 /s/ Christopher L. Nagel
-------------------- ------------------------------------
Christopher L. Nagel, Executive Vice
President and Chief Financial Officer
48
THE SCOTTS COMPANY
ANNUAL REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED DECEMBER 28, 2002
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION LOCATION
- -----------
10(b)(i) The Scotts Company 1992 Long Term Incentive Plan (2002 *
Amendment)
10(d)(i) The Scotts Company 1996 Stock Option Plan (2002 Amendment) *
10(w) The Scotts Company 2003 Stock Option and Incentive Equity Plan *
99.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted *
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Filed herewith.
49