================================================================================
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 29, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________TO____________
COMMISSION FILE NUMBER 1-13292
__________
THE SCOTTS COMPANY
(Exact name of registrant as specified in its charter)
OHIO 31-1414921
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
14111 SCOTTSLAWN ROAD, MARYSVILLE, OHIO 43041
(Address of principal executive offices) (Zip Code)
(937) 644-0011
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NO CHANGE
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
29,241,477 Outstanding at February 7, 2002
Common Shares, voting, no par value
================================================================================
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 29, 2001 and December 30, 2000.................................. 3
Condensed, Consolidated Statements of Cash Flows - Three month periods
ended December 29, 2001 and December 30, 2000.......................................... 4
Condensed, Consolidated Balance Sheets - December 29, 2001,
December 30, 2000 and September 30, 2001............................................... 5
Notes to Condensed, Consolidated Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 40
Item 4. Submission of Matters to a Vote of Security Holders.................................... 41
Item 6. Exhibits and Reports on Form 8-K....................................................... 42
Signatures ....................................................................................... 43
Exhibit Index ....................................................................................... 44
See Note 1 to Condensed, Consolidated Financial Statements for explanation and
impact of the restated item on the Condensed, Consolidated Financial Statements.
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 29, DECEMBER 30,
2001 2000
---- ----
(RESTATED)
Net sales................................................................... $ 163.0 $ 146.6
Cost of sales............................................................... 130.9 115.0
Restructuring and other charges............................................. 1.0 -.-
--------------- -------------
Gross profit ............................................................ 31.1 31.6
Gross commission earned from agency agreement .............................. -.- (0.1)
Costs associated with agency agreement ..................................... 5.9 4.6
--------------- --------------
Net commission earned from agency agreement ................................ (5.9) (4.7)
Operating expenses:
Advertising and promotion ............................................... 7.1 8.1
Selling, general and administrative ..................................... 75.3 77.1
Restructuring and other charges.......................................... 0.8 -.-
Amortization of goodwill and other intangibles........................... 1.8 6.8
Other income, net ....................................................... (2.0) (1.1)
--------------- --------------
Loss from operations ....................................................... (57.8) (64.0)
Interest expense ........................................................... 18.5 21.3
--------------- --------------
Loss before income taxes ................................................... (76.3) (85.3)
Income taxes ............................................................... (29.4) (34.1)
--------------- --------------
Loss before cumulative effect of accounting change.......................... (46.9) (51.2)
Cumulative effect of change in accounting for intangible assets, net of tax. (18.5) -.-
---------------- --------------
Net loss.................................................................... $ (65.4) $ (51.2)
=============== ==============
BASIC LOSS PER COMMON SHARE:
Weighted-average common shares outstanding during the period............... 28.8 28.0
Basic loss per common share:................................................
Before cumulative effect of accounting change ........................... $ (1.63) $ (1.83)
Cumulative effect of change in accounting for intangible assets, net of tax (0.64) -.-
--------------- --------------
After cumulative effect of accounting change ............................ $ (2.27) $ (1.83)
=============== ==============
DILUTED LOSS PER COMMON SHARE:
Weighted-average common shares outstanding during the period ............... 28.8 28.0
Diluted loss per common share:
Before cumulative effect of accounting change............................ $ (1.63) $ (1.83)
Cumulative effect of change in accounting for intangible assets, net of tax (0.64) -.-
--------------- --------------
After cumulative effect of accounting change............................. $ (2.27) $ (1.83)
=============== ==============
See notes to condensed, consolidated financial statements
3
THE SCOTTS COMPANY
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED
DECEMBER 29, DECEMBER 30,
2001 2000
---- ----
(RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................................... $ (65.4) $ (51.2)
Adjustments to reconcile net loss to net cash used in operating activities:
Cumulative effect of change in accounting for intangible assets.......... 29.8 -.-
Depreciation ............................................................ 7.9 8.3
Deferred taxes........................................................... (11.5) (3.8)
Amortization............................................................. 2.7 7.6
Changes in assets and liabilities, net of acquired businesses:
Accounts receivable................................................... 24.8 7.1
Inventories........................................................... (105.3) (142.8)
Prepaid and other current assets...................................... (5.2) 0.6
Accounts payable...................................................... 20.3 20.0
Accrued taxes and liabilities......................................... (37.5) (55.9)
Other assets.......................................................... 1.0 10.1
Other liabilities..................................................... (1.1) (8.5)
Other, net............................................................... (1.9) 6.1
--------------- --------------
Net cash used in operating activities................................. (141.4) (202.4)
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment.............................. (13.0) (12.9)
Investment in acquired businesses, net of cash acquired ................. (0.1) (8.1)
Payments on seller notes................................................. (15.8) (8.8)
--------------- --------------
Net cash used in investing activities................................. (28.9) (29.8)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving and bank lines of credit ................. 162.2 221.7
Gross borrowings under term loans........................................ -.- 260.0
Gross repayments under term loans........................................ (7.6) (264.5)
Cash received from the exercise of stock options......................... 5.6 3.3
--------------- --------------
Net cash provided by financing activities............................. 160.2 220.5
Effect of exchange rate changes on cash..................................... 1.0 0.7
--------------- --------------
Net decrease in cash........................................................ (9.1) (11.0)
Cash and cash equivalents at beginning of period ........................... 18.7 33.0
--------------- --------------
Cash and cash equivalents at end of period.................................. $ 9.6 $ 22.0
=============== ==============
See notes to condensed, consolidated financial statements
4
THE SCOTTS COMPANY
CONDENSED, CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
UNAUDITED
DECEMBER 29, DECEMBER 30, SEPTEMBER 30,
2001 2000 2001
---- ---- ----
(RESTATED)
ASSETS
Current assets:
Cash and cash equivalents............................ $ 9.6 $ 22.0 $ 18.7
Accounts receivable, less allowances of $24.4,
$11.9 and $23.9, respectively..................... 196.0 208.9 220.8
Inventories, net .................................... 473.7 450.3 368.4
Current deferred tax asset .......................... 52.3 28.7 52.2
Prepaid and other assets ............................ 39.4 58.1 34.1
------------- --------------- --------------
Total current assets ............................. 771.0 768.0 694.2
Property, plant and equipment, net ..................... 314.6 294.1 310.7
Intangible assets, net ................................. 736.8 746.6 771.1
Other assets ........................................... 77.2 84.8 67.0
------------- --------------- --------------
Total assets...................................... $ 1,899.6 $ 1,893.5 $ 1,843.0
============= =============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt...................................... $ 172.7 $ 164.1 $ 71.3
Accounts payable .................................... 171.3 173.0 150.9
Accrued liabilities ................................. 194.2 173.2 208.0
Accrued taxes........................................ (7.9) (21.6) 14.9
------------- --------------- --------------
Total current liabilities ........................ 530.3 488.7 445.1
Long-term debt ......................................... 848.8 918.7 816.5
Other liabilities ...................................... 74.2 51.8 75.2
------------- --------------- --------------
Total liabilities ................................ 1,453.3 1,459.2 1,336.8
============= =============== ==============
Commitments and contingencies
Shareholders' equity:
Preferred Shares, no par value, none issued ......... -.- -.- -.-
Common Shares, no par value per share, $.01
stated value per share, issued 31.3,
31.3 and 31.3, respectively ...................... 0.3 0.3 0.3
Capital in excess of par value ...................... 399.4 390.2 398.3
Retained earnings ................................... 146.9 145.6 212.3
Treasury stock, 2.3, 3.2, and 2.6 shares,
respectively, at cost ............................ (65.5) (80.8) (70.0)
Accumulated other comprehensive loss ................ (34.8) (21.0) (34.7)
------------- --------------- --------------
Total shareholders' equity ....................... 446.3 434.3 506.2
------------- --------------- --------------
Total liabilities and shareholders' equity.............. $ 1,899.6 $ 1,893.5 $ 1,843.0
============= =============== ==============
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 and sale of lawn care and
garden products. The Company's major customers include mass
merchandisers, home improvement centers, large hardware chains,
independent hardware stores, nurseries, garden centers, food and drug
stores, lawn and landscape service companies, commercial nurseries and
greenhouses, and specialty crop growers. The Company's products are
sold in the United States, Canada, the European Union, the Caribbean,
South America, Southeast Asia, the Middle East, Africa, Australia, New
Zealand, Mexico, Japan, and several Latin American countries. We also
are engaged in the Scotts Lawn Service(R) business which provides lawn
fertilization, insect control and other related services.
ORGANIZATION AND BASIS OF PRESENTATION
The condensed, consolidated financial statements include the accounts
of The Scotts Company and its subsidiaries. All material intercompany
transactions have been eliminated.
The condensed, consolidated balance sheets as of December 29, 2001 and
December 30, 2000, 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
Scotts' fiscal 2001 Annual Report on Form 10-K.
REVENUE RECOGNITION
Revenue is recognized when products are shipped and when title and risk
of loss transfer to the customer. Provisions for estimated returns and
allowances are recorded at the time of shipment based on historical
rates of return applied as a percentage of sales.
ADVERTISING AND PROMOTION
Scotts advertises its branded products through national and regional
media, and through cooperative advertising programs with retailers.
Retailers are also offered pre-season stocking and in-store promotional
allowances. Certain products are also promoted with direct consumer
rebate programs. Advertising and promotion costs (including allowances
and rebates) incurred during the year are expensed ratably to interim
periods in relation to revenues. All advertising and promotion costs,
except for production costs, are expensed within the fiscal year in
which such costs are incurred. Production costs for advertising
programs are deferred until the period in which the advertising is
first aired. All amounts paid or payable to customers or consumers in
connection with the purchase of our products are recorded as a
reduction of net sales.
DERIVATIVE INSTRUMENTS
In the normal course of business, Scotts is exposed to fluctuations in
interest rates and the value of foreign currencies. Scotts has
established policies and procedures that govern the management of these
exposures through the use of a variety of financial instruments. Scotts
employs various financial instruments, including forward exchange
contracts, and swap agreements, to manage certain of the exposures when
practical. By policy, Scotts does not enter into such contracts for the
purpose of speculation or use leveraged financial instruments. The
Company's derivative activities are managed by the chief financial
officer and other senior management of the Company in consultation with
the Finance Committee of the Board of Directors. These
6
activities include establishing a risk-management philosophy and
objectives, providing guidelines for derivative-instrument usage and
establishing procedures for control and valuation, counterparty credit
approval and the monitoring and reporting of derivative activity.
Scotts' objective in managing its exposure to fluctuations in interest
rates and foreign currency exchange rates is to decrease the volatility
of earnings and cash flows associated with changes in the applicable
rates and prices. To achieve this objective, Scotts primarily enters
into forward exchange contracts and swap agreements whose values change
in the opposite direction of the anticipated cash flows. Derivative
instruments related to forecasted transactions are considered to hedge
future cash flows, and the effective portion of any gains or losses are
included in other comprehensive income until earnings are affected by
the variability of cash flows. Any remaining gain or loss is recognized
currently in earnings. The cash flows of the derivative instruments are
expected to be highly effective in achieving offsetting cash flows
attributable to fluctuations in the cash flows of the hedged risk. If
it becomes probable that a forecasted transaction will no longer occur,
the derivative will continue to be carried on the balance sheet at fair
value, and gains and losses that were accumulated in other
comprehensive loss will be recognized immediately in earnings.
To manage certain of its cash flow exposures, Scotts has entered into
forward exchange contracts and interest rate swap agreements. The
forward exchange contracts are designated as hedges of the Company's
foreign currency exposure associated with future cash flows. Amounts
payable or receivable under forward exchange contracts are recorded as
adjustments to selling, general and administrative expense. The
interest rate swap agreements are designated as hedges of the Company's
interest rate risk associated with certain variable rate debt. Amounts
payable or receivable under the swap agreements are recorded as
adjustments to interest expense. Unrealized gains or losses resulting
from valuing these swaps at fair value are recorded in other
comprehensive income.
Scotts adopted FAS 133 as of October 2000. Since adoption, there were
no gains or losses recognized in earnings for hedge ineffectiveness or
due to excluding a portion of the value from measuring effectiveness.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying
disclosures. Although these estimates are based on management's best
knowledge of current events and actions the Company may undertake in
the future, actual results ultimately may differ from the estimates.
RECLASSIFICATIONS
Certain reclassifications have been made in prior periods' financial
statements to conform to fiscal 2002 classifications.
RESTATEMENT
Effective October 1, 2001, the Company elected to early adopt the
provisions of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 is effective
for fiscal years beginning after December 15, 2001.This Statement
addresses financial accounting and reporting for acquired goodwill and
other intangible assets as more fully described in Note 5 herein.
SFAS 142 requires companies to complete a transitional impairment test
in the year of adoption for goodwill and other intangible assets deemed
to have indefinite useful lives. Impairment charges for goodwill and
indefinite-lived intangible assets resulting from a transitional
impairment test are to be reported as resulting from a change in
accounting principle.
SFAS 142 requires intangible assets deemed to have indefinite useful
lives in applying this Statement to be tested for impairment as of the
beginning of the fiscal year in which this Statement is initially
applied. This transitional impairment test for indefinite-lived
intangible assets must be completed in the first interim period of the
fiscal year of initial adoption.
For the transitional impairment test of goodwill, an entity has six
months from the date it initially applies this Statement to complete
the first step of the impairment test. In that test, if the carrying
amount of the net assets of a reporting unit exceeds the fair value of
that reporting unit, the second step of the transitional goodwill
impairment test must be completed as soon as possible, but no later
than the end of the year of the initial application. The second step
entails a revaluation of all of the assets ,except goodwill, and
liabilities of a reporting unit to their current fair value. The
residual value derived from this analysis is compared to the carrying
value of goodwill. An impairment charge results if the residual value
is less than the goodwill net book value. If an impairment charge
results from completion of step two of the transitional goodwill
impairment test, it is recorded as resulting from a change in
accounting principle retroactive to the first interim period of the
year of adoption.
The Company completed its transitional impairment testing in the second
interim period of fiscal 2002. Upon completion of the impairment tests,
the Company identified that indefinite-lived intangible assets,
primarily tradenames, in its International businesses in Germany,
France and the United Kingdom, were impaired. The value of all
tradenames as of October 1, 2001 was determined using a "royalty
savings" methodology incorporating current estimates of future sales
and profitability. This methodology had been used to allocate the
purchase price to these assets when the businesses associated with the
tradenames were acquired. In addition, the Company completed its
transitional impairment testing for tradenames consistent with the
asset grouping guidance in Emerging Issues Task Force Issue (EITF) No.
02-07, Unit of Measure for Evaluating Impairment of Intangible Assets
that Have Indefinite Lives. EITF Issue No. 02-07 was issued because
questions had arisen on defining the appropriate unit of accounting
when testing indefinite-lived intangible assets for impairment. At the
March 2002 meeting, the EITF reached a consensus that separately
recorded indefinite-lived intangible assets, whether acquired or
internally developed, should be combined into a single unit of
accounting for purposes of testing impairment if they are operated as a
single asset and, as such, are essentially inseparable from one
another.
After giving effect to the impairment of tradenames described above,
there was no goodwill impairment as of October 1, 2001.
As a result of the Company identifying that indefinite-lived intangible
assets (tradenames) and not goodwill, were impaired, and that such
charges related to indefinite-lived intangible assets are to be
recorded in the first interim period of the year of adoption of SFAS
142, the previously filed interim condensed, consolidated financial
statements as of December 29, 2001 and for the three months then ended
have been restated to reflect the impairment charge therein. The effect
of the restatement on the Company's interim condensed consolidated
financial statements as originally reported is summarized below:
7
THREE MONTHS ENDED
DECEMBER 29, 2001
AS REPORTED AS RESTATED
Net loss........................................................... $ (46.9) $ (65.4)
Basic loss per common share (1.63) (2.27)
Diluted loss per common share (1.63) (2.27)
Intangible assets, net ............................................ 766.6 736.8
Other assets....................................................... 65.9 77.2
Retained earnings, end of period................................... 165.4 146.9
2. MARKETING AGREEMENT
Effective September 30, 1998, the Company entered into an agreement
with Monsanto Company ("Monsanto", now known as Pharmacia Corporation)
for exclusive domestic and international marketing and agency rights to
Monsanto's consumer Roundup(R) herbicide products. Under the terms of
the agreement, the Company is entitled to receive an annual commission
from Monsanto in consideration for the performance of its duties as
agent. The annual commission is calculated as a percentage of the
actual earnings before interest and income taxes (EBIT), as defined in
the agreement, of the Roundup(R) business. Each year's percentage
varies in accordance with the terms of the agreement based on the
achievement of two earnings thresholds and on commission rates that
vary by threshold and program year.
The agreement also requires the Company to make fixed annual payments
to Monsanto as a contribution against the overall expenses of the
Roundup(R) business. The annual fixed payment is defined as $20
million. However, portions of the annual payments for the first three
years of the agreement are deferred. No payment was required for the
first year (fiscal 1999), a payment of $5 million was required for the
second year and a payment of $15 million was required for the third
year so that a total of $40 million of the contribution payments were
deferred. Beginning in the fifth year of the agreement, the annual
payments to Monsanto increase to at least $25 million, which include
per annum interest charges at 8%. The annual payments may be increased
above $25 million if certain significant earnings targets are exceeded.
If all of the deferred contribution amounts are paid prior to 2018, the
annual contribution payments revert to $20 million. Regardless of
whether the deferred contribution amounts are paid, all contribution
payments cease entirely in 2018.
The Company is recognizing a charge each year associated with the
annual contribution payments equal to the required payment for that
year. The Company is not recognizing a charge for the portions of the
contribution payments that are deferred until the time those deferred
amounts are paid. The Company considers this method of accounting for
the contribution payments to be appropriate after consideration of the
likely term of the agreement, the Company's ability to terminate the
agreement without paying the deferred amounts, and the fact that
approximately $18.6 million of the deferred amount is never paid, even
if the agreement is not terminated prior to 2018, unless significant
earnings targets are exceeded.
The express terms of the agreement permit the Company to terminate the
agreement only upon Material Breach, Material Fraud or Material Willful
Misconduct by Monsanto, as such terms are defined in the agreement, or
upon the sale of the Roundup business by Monsanto. In such instances,
the agreement permits the Company to avoid payment of any deferred
contribution and related per annum charge. The Company's basis for not
recording a financial liability to Monsanto for the deferred portions
of the annual contribution and
8
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 29,
2001, contribution payments and related per annum charges of
approximately $47.3 million had been deferred under the agreement. This
amount is considered a contingent obligation and has not been reflected
in the financial statements as of and for the 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 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.
3. RESTRUCTURING AND OTHER CHARGES
2002 CHARGES
Under accounting principles generally accepted in the United States of
America, certain restructuring costs related to relocation of
personnel, equipment and inventory are to be expensed in the period the
costs are actually incurred. During the first quarter of fiscal 2002,
inventory relocation costs of approximately $1.0 million were incurred
and paid and were recorded as restructuring and other charges in cost
of sales. Approximately $0.8 million of employee relocation costs were
also incurred and paid in the first quarter of fiscal 2002 and were
recorded as operating expenses. These charges related to restructuring
activities initiated in the third and fourth quarters of fiscal 2001.
9
2001 CHARGES
During the third and fourth quarters of fiscal 2001, the Company
recorded $75.7 million of restructuring and other charges, primarily
associated with the closure or relocation of certain manufacturing and
administrative facilities. The $75.7 million in charges is segregated
in the Statements of Operations in two components: (i) $7.3 million
included in cost of sales for the write-off of inventory that was
rendered unusable as a result of the restructuring activities and (ii)
$68.4 million included in selling, general and administrative costs.
Included in the $68.4 million charge in selling, general and
administrative costs is $20.4 million to write-down to fair value
certain property and equipment and other assets; $5.8 million of
facility exit costs; $27.0 million of severance costs; and $15.2
million in other restructuring and other costs. The severance costs
related to reduction in force initiatives and facility closures and
consolidations in North America and Europe covering approximately 340
administrative, production, selling and other employees. Remaining
severance costs are expected to be paid in fiscal 2002 with some
payments extending into 2003. All other fiscal 2001 restructuring
related activities and costs are expected to be completed by the end of
fiscal 2002.
The following is a rollforward of the cash portion of the restructuring
and other charges accrued in the third and fourth quarters of fiscal
2001:
BALANCE BALANCE
DESCRIPTION TYPE CLASSIFICATION SEPT. 30, 2001 PAYMENT DEC. 29, 2001
----------- ---- -------------- -------------- ------- -------------
($ MILLIONS)
Severance........................ Cash SG&A $ 25.1 $ (8.0) $ 17.1
Facility exit costs.............. Cash SG&A 5.2 (1.3) 3.9
Other related costs.............. Cash SG&A 7.0 (1.2) 5.8
------------ ----------- -----------
Total cash.................... $ 37.3 $ (10.5) $ 26.8
============ =========== ===========
4. INVENTORIES
Inventories, net of provisions for slow moving and obsolete inventory
of $25.7 million, $22.7 million, and $22.3 million, respectively,
consisted of:
DECEMBER 29, DECEMBER 30, SEPTEMBER 30,
2001 2000 2001
---- ---- ----
($ MILLIONS)
Finished goods......................................... $ 389.4 $ 359.8 $ 295.8
Raw materials.......................................... 84.3 90.5 72.6
------------- ------------- -------------
Total ............................................. $ 473.7 $ 450.3 $ 368.4
============= ============= =============
5. INTANGIBLE ASSETS, NET
Effective October 1, 2001, Scotts adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets".
In accordance with this standard, goodwill and certain other intangible
assets, primarily tradenames, have been determined to have
indefinite-lives and accordingly are no longer subject to amortization.
Indefinite-lived assets are subject to transition impairment testing
upon adoption of the standard, and to annual impairment testing
thereafter. The transitional impairment test has been completed, and an
impairment of $29.8 million ($18.5 million net of tax) has been
identified with respect to tradenames in our International Consumer
businesses in Germany, France and the United Kingdom.
The value of all of the indefinite-lived tradenames as of October 1,
2001 was determined using a "royalty savings" methodology
incorporating current estimates of future sales and profitability.
This methodology was also used to allocate the purchase price to
these assets when the businesses associated with the tradenames were
acquired. The impairment testing was performed based on asset grouping
guidance consistent with the consensus reached by the EITF with
respect to Issue No. 02-07, "Units of Measure for Testing Impairment
of Indefinite-Lived Intangible Assets".
10
The useful lives of intangible assets still subject to amortization
were not revised as a result of the adoption of Statement 142.
The following table presents goodwill and intangible assets as of the
end of each period presented.
DECEMBER 29, 2001 DECEMBER 30, 2000 SEPTEMBER 30, 2001
----------------- ----------------- ------------------
(RESTATED)
GROSS NET GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
------ ------------ ------ ------ ------------ ------ ------ ------------ ------
Amortized Intangible Assets:
Technology.................... $ 60.7 $(16.4) $ 44.3 $62.4 $(13.2) $ 49.2 $ 61.9 $(15.8) $ 46.1
Customer accounts............. 23.3 (2.6) 20.7 24.9 (1.9) 23.0 24.1 (2.5) 21.6
Tradenames.................... 11.3 (1.8) 9.5 11.3 (1.1) 10.2 11.3 (1.6) 9.7
Other......................... 48.5 (32.5) 16.0 42.1 (31.6) 10.5 47.2 (32.6) 14.6
------ ------ -------
Total amortized intangible
assets, net.............. 90.5 92.9 92.0
Unamortized Intangible Assets:
Tradenames.................... 316.9 335.0 349.0
Other......................... 3.2 3.3 3.2
------ ------ -------
Total intangible assets, net.. 410.6 431.2 444.2
Goodwill...................... 326.2 315.4 326.9
------ ------ -------
Total goodwill and
intangible assets, net $736.8 $746.6 $ 771.1
====== ====== =======
11
The following table presents a reconciliation of recorded net income to adjusted
net income and related earnings per share data as if the provision of Statement
142 relating to non-amortization of indefinite-lived intangible assets had been
adopted as of the earliest period presented.
FOR THE
THREE MONTHS ENDED
DECEMBER 30,
2000
----
($ MILLIONS, EXCEPT PER SHARE DATA)
Net Income
Reported net loss.................................................................. $ (51.2)
Goodwill amortization.............................................................. 2.9
Tradename amortization............................................................. 2.3
Taxes.............................................................................. (1.2)
-----------
Net loss as adjusted............................................................... $ (47.2)
===========
Basic EPS
Reported net loss.................................................................. (1.83)
Goodwill amortization.............................................................. 0.10
Tradename amortization............................................................. 0.08
Taxes.............................................................................. (0.04)
------------
Net loss as adjusted............................................................... $ (1.69)
============
Diluted EPS
Reported net....................................................................... (1.83)
Goodwill amortization.............................................................. 0.10
Tradename amortization............................................................. 0.08
Taxes.............................................................................. (0.04)
------------
Net loss as adjusted.................................................................. $ (1.69)
============
Estimated amortization expense is as follows:
YEAR ENDED
SEPTEMBER 30, $ MILLIONS
------------ ----------
2002........................................................ $ 4.6
2003........................................................ 4.2
2004........................................................ 3.1
2005........................................................ 2.7
2006........................................................ 2.7
During the three months ended December 29, 2001, goodwill increased by
approximately $1.0 million and other amortizable intangible assets by $1.5
million, primarily due to acquisitions. These additions were offset by
amortization expense for the three months ended December 29, 2001 of $1.8
million and decreases due to exchange rates, resulting in a net decrease in
total intangible assets of $4.5 million during the period.
12
6. LONG-TERM DEBT
DECEMBER 29, DECEMBER 30, SEPTEMBER 30,
2001 2000 2001
---- ---- ----
($ MILLIONS)
Revolving loans under credit facility..................... $ 255.4 $ 263.4 $ 94.7
Term loans under credit facility.......................... 387.8 454.9 398.6
Senior subordinated notes................................. 320.9 319.6 320.5
Notes due to sellers ..................................... 40.0 28.7 53.7
Foreign bank borrowings and term loans.................... 8.4 6.2 9.4
Capital lease obligations and other ...................... 9.0 10.0 10.9
------------- -------------- --------------
1,021.5 1,082.8 887.8
Less current portions..................................... 172.7 164.1 71.3
------------- -------------- --------------
$ 848.8 $ 918.7 $ 816.5
============= ============== ==============
On December 4, 1998, The Scotts Company and certain of its subsidiaries
entered into a credit facility (the "Original Credit Agreement") which
provided for borrowings in the aggregate principal amount of $1.025
billion and consisted of term loan facilities in the aggregate amount
of $525 million and a revolving credit facility in the amount of $500
million. Proceeds from borrowings under the Original Credit Agreement
of approximately $241.0 million were used to repay amounts outstanding
under the then existing credit facility.
On December 5, 2000, The Scotts Company and certain of its subsidiaries
entered into an Amended and Restated Credit Agreement (the "Amended
Credit Agreement"), amending and restating in its entirety the Original
Credit Agreement. Under the terms of the Amended Credit Agreement, the
revolving credit facility was increased from $500 million to $575
million and the net worth covenant was amended.
In December 2001, the Amended Credit Agreement was amended to redefine
earnings under the covenants, to eliminate the net worth covenant and
to modify the covenants pertaining to interest coverage and leverage
and amends how proceeds from future equity or subordinated debt
offerings, if any, will be used towards mandatory prepayments of
revolving credit facility borrowings.
The term loan facilities consist of two tranches. The Tranche A Term
Loan Facility consists of three sub-tranches of French Francs, German
Deutsche Marks and British Pounds Sterling in an aggregate principal
amount of $265 million which are to be repaid quarterly over a 6 1/2
year period. The Tranche B Term Loan Facility replaced the Tranche B
and Tranche C facilities from the Original Credit Agreement. Those
facilities were prepayable without penalty. The new Tranche B Term Loan
Facility has an aggregate principal amount of $260 million and is
repayable in installments as follows: quarterly installments of $0.25
million beginning June 30, 2001 through December 31, 2006, quarterly
installments of $63.5 million beginning March 31, 2007 through
September 30, 2007 and a final quarterly installment of $63.8 million
on December 31, 2007.
The revolving credit facility provides for borrowings of up to $575
million, which are available on a revolving basis over a term of 6 1/2
years. A portion of the revolving credit facility not to exceed $100
million is available for the issuance of letters of credit. A portion
of the facility not to exceed $258.8 million is available for
borrowings in optional currencies, including German Deutsche Marks,
British Pounds Sterling, French Francs, Belgian Francs, Italian Lira
and other specified currencies, provided that the outstanding revolving
loans in optional currencies other than British Pounds Sterling does
not exceed $138 million. The outstanding principal amount of all
revolving credit loans may not exceed $150 million for at least 30
consecutive days during any calendar year. The December 2001 amendment
increased the amount that may be borrowed in optional currencies to
$360 million from $258.8 million.
Interest rates and commitment fees under the Amended Credit Agreement
vary according to the Company's leverage ratios and interest rates also
vary within tranches. The weighted-average interest rate on the
Company's variable rate borrowings at December 29, 2001 was 7.88% and
at September 30, 2001 was 7.85%. In addition, the Amended Credit
Agreement requires that Scotts enter into hedge agreements to the
extent
13
necessary to provide that at least 50% of the aggregate principal
amount of the 8 5/8% Senior Subordinated Notes due 2009 and term loan
facilities is subject to a fixed interest rate or interest rate
protection for a period of not less than three years. Financial
covenants include interest coverage and net leverage ratios. Other
covenants include limitations on indebtedness, liens, mergers,
consolidations, liquidations and dissolutions, sale of assets, leases,
dividends, capital expenditures, and investments. The Scotts Company
and all of its domestic subsidiaries pledged substantially all of their
personal, real and intellectual property assets as collateral for the
borrowings under the Amended Credit Agreement. The Scotts Company and
its subsidiaries also pledged the stock in foreign subsidiaries that
borrow under the Amended Credit Agreement.
Approximately $16.9 million of financing costs associated with the
revolving credit facility have been deferred as of December 29, 2001
and are being amortized over a period of approximately 7 years,
beginning in fiscal year 1999.
In January 1999, The Scotts Company completed an offering of $330
million of 8 5/8% Senior Subordinated Notes due 2009. The net proceeds
from the offering, together with borrowings under the Original Credit
Agreement, were used to fund the Ortho acquisition and to repurchase
approximately $97 million of outstanding 9 7/8% Senior Subordinated
Notes due August 2004. The Company recorded an extraordinary loss
before tax on the extinguishment of the 9 7/8% Notes of approximately
$9.3 million, including a call premium of $7.2 million and the
write-off of unamortized issuance costs and discounts of $2.1 million.
In August 1999, Scotts repurchased the remaining $2.9 million of the
9 7/8% Notes, resulting in an extraordinary loss, net of tax, of $0.1
million.
Scotts entered into two interest rate locks in fiscal 1998 to hedge its
anticipated interest rate exposure on the 8 5/8% Notes offering. The
total amount paid under the interest rate locks of $12.9 million has
been recorded as a reduction of the 8 5/8% Notes' carrying value and is
being amortized over the life of the 8 5/8% Notes as interest expense.
Approximately $11.8 million of issuance costs associated with the 8
5/8% Notes were deferred and are being amortized over the term of the
Notes.
In conjunction with the acquisitions of Rhone-Poulenc Jardin and
Sanford Scientific, notes were issued for certain portions of the total
purchase price that are to be paid in annual installments over a
four-year period. The present value of the remaining note payments is
$7.8 million and $4.5 million, respectively. The Company is imputing
interest on the non-interest bearing notes using an interest rate
prevalent for similar instruments at the time of acquisition
(approximately 9% and 8%, respectively). In conjunction with other
acquisitions, notes were issued for certain portions of the total
purchase price that are to be paid in annual installments over periods
ranging from four to five years. The present value of remaining note
payments is $14.4 million. The Company is imputing interest on the
non-interest bearing notes using an interest rate prevalent for similar
instruments at the time of the acquisitions (approximately 8%).
In conjunction with the Substral(R) acquisition, notes were issued for
certain portions of the total purchase price that are to be paid in
semi-annual installments over a two-year period. The present value of
remaining note payments total $13.3 million. The interest rate on these
notes is 5.5%.
The foreign term loans of $2.7 million issued on December 12, 1997,
have an 8-year term and bear interest at 1% below LIBOR. The loans are
denominated in British Pounds Sterling and can be redeemed, on demand,
by the note holder. The foreign bank borrowings of $5.7 million at
December 29, 2001 and $3.0 million at December 30, 2000 represent lines
of credit for foreign operations and are primarily denominated in
French Francs.
14
7. EARNINGS PER COMMON SHARE
Basic and diluted EPS are the same because potential common shares
(stock options and warrants) outstanding for each period were
anti-dilutive and thus not considered in the diluted earnings per
common share calculations. The Company did not include 2.2 million and
1.4 million potentially dilutive shares in its diluted earnings per
share calculation for the three months ended December 29, 2001 and
December 30, 2000, respectively, because to do so would have been
anti-dilutive.
THREE MONTHS ENDED
DECEMBER 29, DECEMBER 30,
2001 2000
---- ----
($ MILLIONS, EXCEPT PER SHARE DATA)
(RESTATED)
NET LOSS:
Loss before cumulative effect of accounting change.......................... $ (46.9) $ (51.2)
Cumulative effect of change in accounting for intangible assets, net of tax. (18.5) -.-
---------- -------
Net loss.................................................................... $ (65.4) $ (51.2)
========= =======
BASIC LOSS PER COMMON SHARE:
Weighted-average common shares outstanding during the period............... 28.8 28.0
Basic loss per common share:................................................
Before cumulative effect of accounting change ........................... $ (1.63) $ (1.83)
Cumulative effect of change in accounting for intangible assets, net of tax (0.64) -.-
--------- -------
After cumulative effect of accounting change ............................ $ (2.27) $ (1.83)
========== =======
DILUTED LOSS PER COMMON SHARE:
Weighted-average common shares outstanding during the period ............... 28.8 28.0
Diluted loss per common share:
Before cumulative effect of accounting change............................ $ (1.63) $ (1.83)
Cumulative effect of change in accounting for intangible assets, net of tax (0.64) -.-
--------- -------
After cumulative effect of accounting change............................. $ (2.27) $ (1.83)
========== =======
8. STATEMENT OF COMPREHENSIVE INCOME
The components of other comprehensive loss and total comprehensive loss
for the three months ended December 29, 2001 and December 30, 2000 are
as follows:
THREE MONTHS ENDED
DECEMBER 29, DECEMBER 30,
2001 2000
---- ----
(RESTATED)
Net loss.................................................................. $ (65.4) $ (51.2)
Other comprehensive income (expense):
Foreign currency translation adjustments.................................. (0.5) 3.4
Change in valuation of derivative instruments............................. 0.4 0.5
------------ -----------
Comprehensive loss........................................................ $ (65.5) $ (47.3)
============ ===========
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.
15
ENVIRONMENTAL MATTERS
In June 1997, the Ohio Environmental Protection Agency ("Ohio EPA")
initiated an enforcement action against us with respect to alleged
surface water violations and inadequate treatment capabilities at our
Marysville facility and seeking corrective action under the federal
Resource Conservation Recovery Act. The action relates to several
discontinued on-site disposal areas which date back to the early
operations of the Marysville facility that we had already been
assessing under a voluntary action program of the state. Since
initiation of the action, we have continued to meet with the Ohio
Attorney General and the Ohio EPA in an effort to complete negotiations
of an amicable resolution of these issues. On December 3, 2001, an
agreed judicial Consent Order was submitted to the Union County Common
Pleas Court and was entered by the court on January 25, 2002.
Now that the Consent Order has been entered, we are required to pay a
$275,000 fine and satisfactorily remediate the Marysville site.
Although a final remediation plan has not yet been fully developed, we
have already initiated remediation activities with the knowledge and
oversight of the Ohio EPA. We estimate that the possible total cost
that could be incurred in connection with this matter is approximately
$10 million. We have accrued for the amount we consider to be the most
probable and believe the outcome will not differ materially from the
amount reserved.
In addition to the dispute with the Ohio EPA, we are negotiating with
the Philadelphia District of the U.S. Army Corps of Engineers regarding
the possible discontinuation of our 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 as of
December 29, 2001, but we do not believe that either issue is material.
Regulations and environmental concerns also exist surrounding peat
extraction in the United Kingdom and the European Union. In August
2000, the nature conservation advisory body to the U.K. government
notified us that three of our peat harvesting sites in the United
Kingdom were under consideration as possible "Special Areas of
Conservation" under European Union law. We are currently challenging
this consideration. If we are unsuccessful, local planning authorities
in the United Kingdom will be required to review the impact of
activities likely to affect these areas and it is possible that these
authorities could modify or revoke the applicable consents enabling
peat extraction, in which case we believe we should be entitled to
compensation and we believe we would have sufficient raw material
supplies available to replace the peat produced in such areas.
The Company has determined that quantities of cement containing
asbestos material at certain manufacturing facilities in the United
Kingdom should be removed.
During fiscal year 2001, we spent approximately $0.6 million in
environmental capital expenditures and $2.1 million in other
environmental expenses, compared with approximately $0.8 million in
environmental capital expenditures and $1.8 million in other
environmental expenses in fiscal year 2000. We anticipate that our
environmental capital expenditures and other environmental expenses for
fiscal year 2002 will not differ significantly from those incurred in
fiscal year 2001.
At December 29, 2001, $6.2 million is accrued for the environmental
matters described herein. The significant components of the accrual
are: (i) costs for site remediation of $3.9 million; (ii) costs for
asbestos abatement of $1.8 million; and (iii) fines and penalties of
$0.5 million. The significant portion of the costs accrued as of
December 29, 2001 are expected to be paid in fiscal 2002 and 2003;
however, payments could be made for a period thereafter.
16
We believe that the amounts accrued as of December 29, 2001 are
adequate to cover known environmental exposures based on current facts
and estimates of likely outcome. However, the adequacy of these
accruals is based on several significant assumptions:
(i) that we have identified all of the significant sites that must
be remediated;
(ii) that there are no significant conditions of potential
contamination that are unknown to the Company; and
(iii) that with respect to the agreed judicial Consent Order in
Ohio, that potentially contaminated soil can be remediated in
place rather than having to be removed and only specific
stream segments will require remediation as opposed to the
entire stream.
If there is a significant change in the facts and circumstances
surrounding these assumptions, it could have a material impact on the
ultimate outcome of these matters and the Company's results of
operations, financial position and cash flows.
AGREVO ENVIRONMENTAL HEALTH, INC.
---------------------------------
On June 3, 1999, AgrEvo Environmental Health, Inc. ("AgrEvo") (which
subsequently changed its name to Aventis Environmental Health Science
USA LP) filed a complaint in the U.S. District Court for the Southern
District of New York (the "New York Action"), against the Company, a
subsidiary of the Company and Monsanto seeking damages and injunctive
relief for alleged antitrust violations and breach of contract by the
Company and its subsidiary and antitrust violations and tortious
interference with contract by Monsanto. Scotts purchased a consumer
herbicide business from AgrEvo in May 1998. AgrEvo claims in the suit
that Scotts' subsequent agreement to become Monsanto's exclusive sales
and marketing agent for Monsanto's consumer Roundup(R) business
violated the federal antitrust laws. AgrEvo contends that Monsanto
attempted to or did monopolize the market for non-selective herbicides
and conspired with Scotts to eliminate the herbicide Scotts previously
purchased from AgrEvo, which competed with Monsanto's Roundup(R), in
order to achieve or maintain a monopoly position in that market. AgrEvo
also contends that Scotts' execution of various agreements with
Monsanto, including the Roundup(R) marketing agreement, as well as
Scotts' subsequent actions, violated the purchase agreements between
AgrEvo and Scotts.
AgrEvo is requesting unspecified damages as well as affirmative
injunctive relief, and seeking to have the courts invalidate the
Roundup(R) marketing agreement as violative of the federal antitrust
laws. On September 20, 1999, Scotts filed an answer denying liability
and asserting counterclaims that it was fraudulently induced to enter
into the agreement for the purchase of the consumer herbicide business
and the related agreements, and that AgrEvo breached the
representations and warranties contained in these agreements. On
October 1, 1999, Scotts moved to dismiss the antitrust allegations
against it on the ground that the claims fail to state claims for which
relief may be granted. On October 12, 1999, AgrEvo moved to dismiss
Scotts' counterclaims. On May 5, 2000, AgrEvo amended its complaint to
add a claim for fraud and to incorporate the Delaware Action described
below. Thereafter, Scotts moved to dismiss the new claims, and the
defendants renewed their pending motions to dismiss. On June 2, 2000,
the court (i) granted Scotts' motion to dismiss the fraud claim AgrEvo
had added to its complaint; (ii) granted AgrEvo's motion to dismiss
Scotts' fraudulent-inducement counterclaim; (iii) denied AgrEvo's
motion to dismiss Scotts' counterclaims related to breach of
representations and warranties; and (iv) denied defendants' motion to
dismiss the antitrust claims. On July 14, 2000, Scotts served an answer
to AgrEvo's amended complaint and re-pleaded its fraud counterclaim.
Under the indemnification provisions of the Roundup(R) marketing
agreement, Monsanto and Scotts each have requested that the other
indemnify against any losses arising from this lawsuit. On September 5,
2001, the magistrate judge, over the objections of Scotts and Monsanto,
allowed AgrEvo to file another amended complaint to add claims
transferred to it by its German parent, AgrEvo GmbH, and its 100
percent commonly owned affiliate, AgrEvo USA Company. Scotts and
Monsanto have objected to the magistrate judge's order allowing the new
claims. The district court will resolve these objections; if sustained,
the newly-added claims will be stricken.
17
On June 29, 1999, AgrEvo also filed a complaint in the Superior Court
of the State of Delaware (the "Delaware Action") against two of the
Company's subsidiaries seeking damages for alleged breach of contract.
AgrEvo alleges that, under the contracts by which a subsidiary of the
Company purchased a herbicide business from AgrEvo in May 1998, two of
the Company's subsidiaries have failed to pay AgrEvo approximately $0.6
million. AgrEvo is requesting damages in this amount, as well as pre-
and post-judgment interest and attorneys' fees and costs. The Company's
subsidiaries have moved to dismiss or stay this action. On January 31,
2000, the Delaware court stayed AgrEvo's action pending the resolution
of a motion to amend the New York Action, and the resolution of the New
York Action. The Company's subsidiaries intend to vigorously defend the
asserted claims.
If the above actions are determined adversely to the Company, the
result could have a material adverse effect on the Company's results of
operations, financial position and cash flows. The Company believes
that it will prevail in the AgrEvo matter and that any potential
exposure that the Company may face cannot be reasonably estimated.
Therefore, no accrual has been established related to these matters.
CENTRAL GARDEN & PET COMPANY
----------------------------
SCOTTS V. CENTRAL GARDEN, SOUTHERN DISTRICT OF OHIO.
On June 30, 2000, the Company filed suit against Central Garden & Pet
Company in the U.S. District Court for the Southern District of Ohio to
recover approximately $17 million in outstanding accounts receivable
from Central Garden with respect to the Company's 2000 fiscal year. The
Company's complaint was later amended to seek approximately $24 million
in accounts receivable and additional damages for other breaches of
duty.
On April 13, 2001, Central Garden filed an answer and counterclaim in
the Ohio action. On April 24, 2001, Central Garden filed an amended
counterclaim. Central Garden's counterclaims include allegations that
the Company and Central Garden had entered into an oral agreement in
April 1998 whereby the Company would allegedly share with Central
Garden the benefits and liabilities of any future business integration
between the Company and Pharmacia Corporation (formerly Monsanto).
Based on these allegations, Central Garden has asserted several causes
of action, including fraudulent misrepresentation, and seeks damages in
excess of $900 million. The Company believes that the preliminary
discussions regarding any acquisition from Pharmacia that occurred are
not actionable under any legal theory. In addition, Central Garden
asserts various other causes of action, including breach of written
contract and quantum valebant, and seeks damages in excess of $76
million based on the allegations that Central Garden was entitled to
receive a cash payment rather than a credit for the value of inventory
Central Garden alleges was improperly seized by the Company. These
allegations are made without regard to the fact that the amounts sought
from Central Garden in litigation filed by the Company and Pharmacia
are net of any such alleged credit. The Company believes all of Central
Garden's counterclaims in Ohio are without merit and it intends to
vigorously defend against them. The trial date for the Ohio federal
action is set for March 25, 2002.
PHARMACIA CORPORATION V. CENTRAL GARDEN, CIRCUIT COURT OF ST. LOUIS,
MISSOURI.
On June 30, 2000 Pharmacia Corporation filed suit against Central
Garden in Missouri state court seeking unspecified damages allegedly
due Pharmacia under a series of agreements, generally referred to as
the four-year "Alliance Agreement" between Pharmacia and Central
Garden. Scotts was, for a short time, an assignee of the Alliance
Agreement, which Scotts has reassigned to Pharmacia. Pursuant to an
order granting Central Garden's motion, on January 18, 2001, Pharmacia
joined Scotts as a nominal defendant in the Missouri state court
action.
On January 29, 2001, Central Garden filed its answer and cross-claims
and counterclaims in the Missouri action. On June 23, 2001, Scotts
filed a cross-claim against Central Garden for an equitable accounting
to establish the parties' relative financial positions under the
Alliance Agreement at the conclusion of that that agreement. On August
10, 2001, the Missouri court granted Central Garden leave to file
amended counterclaims and cross-claims relating to the Alliance
Agreement and seeking an unspecified amount of damages. The claims then
pending in Missouri against Scotts were for declaratory relief and an
accounting,
18
various breaches of contract, breach of an indemnification agreement,
promissory estoppel, promissory fraud and unfair business practices
under Section 17200 of the California Business and Professions Code. By
order of the Missouri court, Central Garden's unfair business practices
claims were stayed pending resolution of the action pending between the
parties in the United States District Court for the Northern District
of California.
On October 1, 2001, Scotts moved for summary judgment on Central
Garden's claims of breach of an indemnification agreement, promissory
estoppel and promissory fraud. On November 15, 2001, the Missouri court
held a hearing on Scotts' summary judgment motion and took the motion
under submission.
On January 28, 2002, Central Garden and Pharmacia reported that they
reached a settlement in the Missouri action pursuant to which Pharmacia
dismissed its claims against Central Garden in the Missouri action, and
Central Garden dismissed its counterclaims against Pharmacia in the
Missouri action and its claims against Pharmacia in the California
federal and state actions described below. In connection with its
settlement with Pharmacia, Central Garden also dismissed all of its
legal claims against Scotts arising under the Alliance Agreements,
reserving only such equitable claims as it might have under the
Alliance Agreements. We are still reviewing the effect of this
settlement on Scotts, but we do not believe that it will have a
material adverse impact on our on-going litigation with Central Garden.
CENTRAL GARDEN V. SCOTTS & PHARMACIA, NORTHERN DISTRICT OF CALIFORNIA.
On July 7, 2000, Central Garden filed suit against the Company and
Pharmacia in the U.S. District Court for the Northern District of
California (San Francisco Division) alleging various claims, including
breach of contract and violations of federal antitrust laws, and
seeking an unspecified amount of damages and injunctive relief. On
October 26, 2000, the District Court granted the Company's motion to
dismiss Central Garden's breach of contract claims for lack of subject
matter jurisdiction. On November 17, 2000, Central Garden filed an
amended complaint in the District Court, re-alleging various claims for
violations of federal antitrust laws and also alleging state antitrust
claims under the Cartwright Act, Section 16726 of the California
Business and Professions Code. Fact discovery was set to conclude in
December 2001. The trial date for the California federal action is set
for July 15, 2002. As described above, Central Garden and Pharmacia
have settled some or all of their claims relating to this action.
CENTRAL GARDEN V. SCOTTS & PHARMACIA, CONTRA COSTA SUPERIOR COURT.
On October 31, 2000, Central Garden filed an additional complaint
against the Company and Pharmacia in the California Superior Court for
Contra Costa County. That complaint seeks to assert the breach of
contract claims previously dismissed by the District Court in the
California federal action described above, and additional claims under
Section 17200 of the California Business and Professions Code. On
December 4, 2000, the Company and Pharmacia jointly filed a motion to
stay this action based on the pendency of prior lawsuits (including the
three actions described above) that involve the same subject matter. By
order dated February 23, 2001, the Superior Court stayed the action
pending before it.
On April 6, 2001, Central Garden filed a motion to lift the stay of the
Contra Costa County action. Scotts and Pharmacia filed a joint
opposition to Central Garden's motion. On May 4, 2001, the Court issued
a tentative ruling denying Central Garden's motion to lift the stay of
the action. Central Garden did not challenge the tentative ruling,
which accordingly became the ruling of the court. Consequently, all
claims in the Contra Costa action remain stayed. As described above,
Central Garden and Pharmacia have settled some or all of their claims
relating to this action.
Scotts believes that all of Central Garden's federal and state claims
are entirely without merit and intend to vigorously defend against
them. If the above actions are determined adversely to Scotts, the
result could have a material adverse effect on Scotts' results of
operations, financial position and cash flows. Scotts believes that it
will prevail in the Central Garden matters and that any potential
exposure that Scotts may face cannot be reasonably estimated.
Therefore, no accrual has been established related to claims brought
against Scotts by Central Garden.
19
10. SUBSEQUENT EVENTS
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 Credit
Facility.
11. NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued Statement of Accounting Standard No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 142 eliminates the
requirement to amortize indefinite-lived assets such as goodwill. It
also requires an annual review for impairment of indefinite-lived
assets. The Company adopted the guidance in the first quarter of fiscal
2002. See Note 5 for disclosures about intangible assets and
amortization expense.
12. SEGMENT INFORMATION
For fiscal 2002, the Company is divided into four reportable segments -
North American Consumer, Scotts LawnService(R), Global Professional and
International Consumer. The North American Consumer segment consists of
the Lawns, Gardens, Growing Media, Ortho and Canadian business units.
These segments differ from those used in the prior year due to
segregating of the Scotts LawnService(R) business from the North
American Consumer business because of a change in reporting structure
whereby Scotts LawnService(R) no longer reports to senior management of
the North American Consumer segment.
The North American Consumer segment specializes in dry, granular
slow-release lawn fertilizers, lawn fertilizer combination and lawn
control products, grass seed, spreaders, water-soluble and
controlled-release garden and indoor plant foods, plant care products,
and potting soils, barks, mulches and other growing media products, and
pesticide products. Products are marketed to mass merchandisers, home
improvement centers, large hardware chains, nurseries and gardens
centers.
The Scotts LawnService(R) segment provides lawn fertilization, insect
control and other related services such as core aeration primarily to
residential consumers through company-owned branches and franchises. In
most company markets, Scotts LawnService(R) also offers tree and shrub
fertilization, disease and insect control treatments and, in our larger
branches, we also offer an exterior barrier pest control service.
The Global Professional segment is focused on a full line of
horticulture products including controlled-release and water-soluble
fertilizers and plant protection products, grass seed, spreaders,
custom application services and growing media. Products are sold to
lawn and landscape service companies, commercial nurseries and
greenhouses and specialty crop growers.
The International Consumer segment provides products similar to those
described above for the North American Consumer segment to consumers in
countries other than the United States and Canada.
20
The following table presents segment financial information in
accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". Pursuant to that statement, the
presentation of the segment financial information is consistent with
the basis used by management (i.e., certain costs not allocated to
business segments for internal management reporting purposes are not
allocated for purposes of this presentation). Prior period amounts have
been restated to conform to this basis of presentation.
NORTH AMERICAN SCOTTS GLOBAL INTERNATIONAL OTHER/
(IN MILLIONS) CONSUMER LAWNSERVICE(R) PROFESSIONAL CONSUMER CORPORATE TOTAL
------------ -------- -------------- ------------ ------- --------- ------
Net Sales:
Q1 2002............................... $ 77.8 $ 8.7 $ 36.3 $ 40.2 $ -.- $ 163.0
Q1 2001............................... $ 66.8 $ 4.9 $ 35.5 $ 39.4 $ -.- $ 146.6
Income (loss) from Operations:
Q1 2002............................... $ (29.4) $ (2.1) $ (0.2) $ (6.6) $ (16.8) $ (55.1)
Q1 2001............................... $ (34.1) $ 0.1 $ (0.8) $ (8.7) $ (12.9) $ (56.4)
Operating Margin:
Q1 2002............................... (37.8%) (24.1%) (0.6%) (16.4%) nm (33.8%)
Q1 2001............................... (51.0%) 2.0% (2.3%) (22.1%) nm (38.5%)
Goodwill:
Q1 2002............................... $ 163.8 $ 26.7 $ 56.1 $ 79.6 $ -.- $ 326.2
Q1 2001............................... $ 171.4 $ 9.5 $ 57.6 $ 76.9 $ -.- $ 315.4
Total Assets:
Q1 2002 (restated).................... $ 1,208.8 $ 36.1 $ 144.1 $ 398.5 $ 112.1 $ 1,899.6
Q1 2001............................... $ 1,199.2 $ 14.1 $ 151.8 $ 443.7 $ 84.7 $ 1,893.5
nm Not meaningful.
Income (loss) from Operations reported for Scotts' four operating
segments represents earnings before amortization, interest and taxes,
since this is the measure of profitability used by management.
Accordingly, Corporate operating loss for the three months ended
December 29, 2001 and December 30, 2000 includes amortization of
certain assets, corporate general and administrative expenses, and
certain "other" income/expense not allocated to the business segments
and North America restructuring charges.
Total assets reported for Scotts' operating segments include the
intangible assets for the acquired business within those segments.
Corporate assets primarily include deferred financing and debt issuance
costs, corporate intangible assets as well as deferred tax assets.
13. 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.
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 29, 2001 and December 30, 2000.
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 29, 2001 (IN MILLIONS)
(UNAUDITED AND RESTATED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
Net sales............................................ $ 51.7 $ 48.3 $ 63.0 $ $ 163.0
Cost of sales ....................................... 36.2 51.0 43.7 130.9
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 goodwill and other 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)
========= ========= ========== ======= ==========
22
THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED DECEMBER 29, 2001 (IN MILLIONS)
(UNAUDITED AND RESTATED)
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
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................. (3.7) 6.4 (4.7) (2.0)
--------- --------- ---------- --------- ---------
Net cash used in operating activities................ (74.0) (31.2) (36.2) -.- (141.4)
--------- --------- ---------- --------- ---------
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 borrowings under term loans.................... -.- -.- -.- -.-
Gross repayments under term loans.................... (0.2) -.- (7.4) (7.6)
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............ 71.5 44.1 44.6 -.- 160.2
--------- --------- ---------- --------- ---------
Effect of exchange rate changes on cash.............. -.- -.- 1.0 1.0
--------- --------- ---------- --------- ---------
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
========= ========= ========== ========= =========
23
THE SCOTTS COMPANY
BALANCE SHEET
AS OF DECEMBER 29, 2001 (IN MILLIONS)
(UNAUDITED AND RESTATED)
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
Preferred Shares, no par value.................... -.- -.- -.- -.-
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
========= ========= ========== ========= ==========
24
THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 30, 2000 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
Net sales............................................ $ 39.0 $ 48.4 $ 59.2 $ 146.6
Cost of sales........................................ 25.0 52.4 37.6 115.0
--------- --------- ---------- --------- ----------
Gross profit......................................... 14.0 (4.0) 21.6 31.6
Gross commission earned from agency agreement........ (0.1) -.- -.- (0.1)
Costs associated with agency agreement............... 4.6 -.- -.- 4.6
--------- --------- ---------- --------- ----------
Net commission earned from agency agreement....... (4.7) -.- -.- (4.7)
Operating expenses:
Advertising and promotion......................... 3.1 1.7 3.3 8.1
Selling, general and administrative............... 39.0 11.0 27.1 77.1
Amortization of goodwill and other intangibles.... 2.9 1.6 2.3 6.8
Equity loss in subsidiaries.......................... 22.6 -.- -.- (22.6) -.-
Intracompany allocations............................. (6.8) 4.8 2.0 -.-
Other expense (income), net ......................... (1.0) 0.1 (0.2) (1.1)
--------- --------- ---------- -------- ----------
Income (loss) from operations........................ (50.5) (23.2) (12.9) 22.6 (64.0)
Interest (income) expense............................ 19.7 (3.8) 5.4 21.3
--------- --------- ---------- -------- ----------
Income (loss) before income taxes.................... (70.2) (19.4) (18.3) 22.6 (85.3)
Income taxes......................................... (19.0) (7.8) (7.3) (34.1)
--------- --------- ---------- -------- ----------
Income (loss) before cumulative effect of accounting
change............................................ (51.2) (11.6) (11.0) 22.6 (51.2)
Cumulative effect of change in accounting for
intangible assets, net of tax..................... -.- -.- -.- -.- -.-
--------- --------- ---------- -------- ----------
Net income (loss) ................................... $ (51.2) $ (11.6) $ (11.0) $ 22.6 $ (51.2)
========= ========= ========== ======== ==========
25
THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED DECEMBER 30, 2000 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................... $ (51.2) $ (11.6) $ (11.0) $ 22.6 $ (51.2)
Adjustments to reconcile net loss to net cash used
in operating activities:
Cumulative effect of change in accounting for
intangible assets.............................. -.-
Depreciation...................................... 3.7 3.2 1.4 8.3
Amortization...................................... 2.8 2.5 2.3 7.6
Deferred taxes.................................... (3.8) (3.8)
Equity (income) loss in subsidiaries.............. 22.6 -.- -.- (22.6) -.-
Net change in certain components of
working capital................................ (73.2) (81.9) (15.9) (171.0)
Net changes in other assets and
liabilities and other adjustments.............. 0.2 6.8 0.7 7.7
--------- --------- ---------- --------- ----------
Net cash used in operating activities................ (98.9) (81.0) (22.5) -.- (202.4)
--------- --------- ---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment.......... (1.5) (9.1) (2.3) (12.9)
Investments in acquired businesses,
net of cash acquired.............................. -.- (6.9) (1.2) (8.1)
Payments on seller notes............................. -.- (1.1) (7.7) (8.8)
--------- --------- ---------- -------- ---------
Net cash used in investing activities................ (1.5) (17.1) (11.2) -.- (29.8)
--------- --------- ---------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving
and bank lines of credit.......................... 166.3 55.4 221.7
Gross borrowings under term loans.................... 260.0 260.0
Gross repayments under term loans.................... (257.5) (7.0) (264.5)
Cash received from exercise of stock options......... 3.3 3.3
Intracompany financing............................... (82.2) 98.2 (16.0) -.-
--------- --------- ---------- -------- ---------
Net cash provided by financing activities............ 89.9 98.2 32.4 -.- 220.5
Effect of exchange rate changes on cash.............. 0.7 0.7
------- ------- ---------- -------- ---------
Net increase (decrease) in cash ..................... (10.5) 0.1 (0.6) -.- (11.0)
Cash and cash equivalents, beginning of period....... 16.0 (0.6) 17.6 33.0
--------- --------- ---------- -------- ---------
Cash and cash equivalents, end of period............. $ 5.5 $ (0.5) $ 17.0 -.- $ 22.0
========= ========= ========== ======== =========
26
THE SCOTTS COMPANY
BALANCE SHEET
AS OF DECEMBER 30, 2000 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents......................... $ 5.5 $ (0.5) $ 17.0 $ $ 22.0
Accounts receivable, net.......................... 75.4 43.7 89.8 208.9
Inventories, net.................................. 286.0 82.1 82.2 450.3
Current deferred tax asset ....................... 28.1 0.5 0.1 28.7
Prepaid and other assets ......................... 38.0 0.9 19.2 58.1
--------- --------- ---------- -------- ----------
Total current assets .......................... 433.0 126.7 208.3 768.0
Property, plant and equipment, net .................. 179.5 74.6 40.0 294.1
Intangible assets, net .............................. 270.5 233.7 242.4 746.6
Other assets......................................... 74.5 10.3 84.8
Investment in affiliates............................. 908.5 -.- -.- (908.5) -.-
Intracompany assets.................................. -.- 434.3 15.2 (449.5) -.-
--------- --------- ---------- --------- ----------
Total assets................................... $ 1,866.0 $ 869.3 $ 516.2 $(1,358.0) $ 1,893.5
========= ========= ========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt................................... $ 147.6 $ 1.0 $ 15.5 $ $ 164.1
Accounts payable.................................. 88.9 25.5 58.6 173.0
Accrued liabilities .............................. 114.2 16.4 42.6 173.2
Accrued taxes..................................... (18.7) 2.9 (5.8) (21.6)
--------- --------- ---------- -------- ----------
Total current liabilities ..................... 332.0 45.8 110.9 488.7
Long-term debt....................................... 615.6 -.- 303.1 918.7
Other liabilities ................................... 34.0 -.- 17.8 51.8
Intracompany liabilities............................. 449.5 -.- -.- (449.5) -.-
--------- --------- ---------- --------- ----------
Total liabilities.............................. 1,431.1 45.8 431.8 (449.5) 1,459.2
--------- --------- ---------- --------- ----------
Commitments and contingencies
Shareholders' equity:
Investment from parent............................ -.- 590.6 52.5 (643.1) -.-
Common shares, no par value per share,
$.01 stated value per share.................... 0.3 0.3
Capital in excess of par value.................... 390.2 390.2
Preferred shares, no par value.................... -.- -.- -.- -.- -.-
Retained earnings................................. 145.6 235.7 29.7 (265.4) 145.6
Treasury stock, 3.2 shares at cost................ (80.8) -.- -.- -.- (80.8)
Accumulated other comprehensive expense........... (20.4) (2.8) 2.2 (21.0)
--------- --------- ---------- --------- ----------
Total shareholders' equity........................... 434.9 823.5 84.4 (908.5) 434.3
--------- --------- ---------- --------- ----------
Total liabilities and shareholders' equity........... $ 1,866.0 $ 869.3 $ 516.2 $(1,358.0) $ 1,893.5
========= ========= ========== ========= ==========
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Scotts is a leading manufacturer and marketer of consumer branded
products for lawn and garden care and professional horticulture in the United
States and Europe. Our operations are divided into four business segments: North
American Consumer, Scotts LawnService(R), Global Professional and International
Consumer. The North American Consumer segment includes the Lawns, Gardens,
Growing Media, Ortho and Canadian business groups.
As a leading consumer branded lawn and garden company, we focus on our
consumer marketing efforts, including advertising and consumer research, to
create demand to pull products through the retail distribution channels. In the
past three years, we have spent approximately 5% of our gross sales annually on
media advertising to support and promote our products and brands. We have
applied this consumer marketing focus over the past several years, and we
believe that Scotts continues to receive a significant return on these marketing
expenditures. We expect that we will continue to focus our marketing efforts
toward the consumer and to make a significant investment in consumer marketing
expenditures in the future to drive market share and sales growth.
Our sales are susceptible to global weather conditions, primarily in
North America and Europe. For instance, periods of wet weather can slow
fertilizer sales but can create increased demand for pesticide sales. Periods of
dry, hot weather can have the opposite effect on fertilizer and pesticide sales.
We believe that our acquisitions diversify 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 and earnings trend in fiscal 2002 is expected to follow a
similar pattern.
Scotts entered into a long-term marketing agreement with Monsanto for
its consumer Roundup(R) herbicide products. Under the marketing agreement,
Scotts and Monsanto are jointly developing global consumer and trade marketing
programs for Roundup(R), while Scotts is responsible for sales support,
merchandising, distribution, logistics and certain administrative functions. See
Note 2 of Notes to Condensed, Consolidated Financial Statements (unaudited)
regarding revenue and expense recognition related to the Roundup(R) marketing
agreement activities.
In the third and fourth quarter of fiscal 2001, restructuring and other
charges of $75.7 million were recorded for reductions in force, facility
closures, asset writedowns, etc. Costs related to the relocation of equipment,
personnel and inventory were not recorded as part of the restructuring costs in
2001. These costs are being recorded as they are incurred in fiscal 2002 as
required under generally accepted accounting principles.
In fiscal 2001, Scotts adopted accounting policies that required
certain amounts payable to customers or consumers related to the purchase of our
products to be recorded as a reduction in net sales rather than as advertising
and promotions expense (e.g., volume rebates). In fiscal 2002, Scotts adopted
EITF-00-25 "Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products". This
standard requires Scotts to record certain of its cooperative advertising
expenditures as reductions of net sales rather than as advertising and promotion
expense. Results for fiscal 2001 have been reclassified to conform to this new
presentation method for these expenses.
In addition, in fiscal 2002 we adopted Statement of Accounting
Standards No. 142, "Goodwill and Other Intangible Assets". This statement
eliminates the requirement to amortize indefinite-lived intangible assets and
goodwill. It also requires an initial impairment test on all indefinite-lived
assets as of the date of adoption of this standard and impairment tests done at
least annually thereafter. As a result of adopting the standard as of October 1,
2001, amortization expense for the first quarter of fiscal 2002 was reduced by
approximately $5.4 million. The full year effect in fiscal 2002 is expected to
exceed $21.0 million.
28
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 taxes, the net charge was $18.5 million. There is no
goodwill impairment as of the date of adoption. See Note 5 to the Condensed,
Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following discussion and analysis of the consolidated results of
operations and financial position should be read in conjunction with our
Condensed, Consolidated Financial Statements included elsewhere in this report.
Scotts' Annual Report on Form 10-K for the fiscal year ended September 30, 2001
includes additional information about the Company, our operations, and our
financial position, and should be read in conjunction with this Quarterly Report
on Form 10-Q.
Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to customer programs and incentives, product returns, bad debts,
inventories, intangible assets, income taxes, restructuring, environmental
matters, contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. The estimates that we believe are most
critical to our reporting of results of operation and financial position are as
follows:
- We continually assess the adequacy of our reserves for
uncollectible accounts due from customers. However, future
changes in our customers' operating performance and cash flows
or in general economic conditions could have an impact on
their ability to fully pay these amounts which could have a
material impact on our operating results.
- Reserves for product returns are based upon historical data
and current program terms and conditions with our customers.
Changes in economic conditions, regulatory actions or
defective products could result in actual returns being
materially different than the amounts provided for in our
interim or annual results of operations.
- Reserves for excess and obsolete inventory are based on a
variety of factors, including product changes and
improvements, changes in ingredient availability and
regulatory acceptance, new product introductions and estimated
future demand. The adequacy of our reserves could be
materially affected by changes in the demand for our products
or by regulatory or competitive actions.
- As described more fully in the notes to the unaudited,
condensed, consolidated financial statements, we are involved
in significant 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 outcome will not differ materially from our
assessment of them. There can also be no assurance that all
matters that may be brought against us or that we may bring
against other parties are known to us at any point in time.
Also, as described more fully in the notes to the unaudited, condensed
financial statements, we have not accrued the deferred contribution under the
Roundup(R) marketing agreement with Monsanto or the interest thereon. The
Company considers this method of accounting for the contribution payments to be
appropriate after consideration of the likely term of the agreement, the
Company's ability to terminate the agreement without paying the deferred
amounts, and the fact that approximately $18.6 million of the deferred amount is
never paid, even if the agreement is not terminated prior to 2018, unless
significant earnings targets are exceeded. At December 29, 2001, contribution
payments and related per annum charges of approximately $47.3 million had been
deferred under the agreement.
29
RESULTS OF OPERATIONS
The following table sets forth sales by business segment for the three
months ended December 29, 2001 and December 30, 2000:
FOR THE
THREE MONTHS ENDED
DECEMBER 29, DECEMBER 30,
2001 2000
---- ----
North American Consumer:
Lawns .......................................................................... $ 26.9 $ 16.7
Gardens......................................................................... 8.6 7.8
Growing Media................................................................... 23.1 19.7
Ortho .......................................................................... 16.8 15.6
Canada.......................................................................... 0.8 1.0
Other .......................................................................... 1.6 6.0
------------ ------------
Total....................................................................... 77.8 66.8
Scotts LawnService(R)............................................................. 8.7 4.9
International Consumer.......................................................... 40.2 39.4
Global Professional............................................................. 36.3 35.5
------------ ------------
Consolidated.................................................................... $ 163.0 $ 146.6
============ ============
The following table sets forth the components of income and expense as
a percentage of sales for the three months ended December 29, 2001 and December
30, 2000:
FOR THE
THREE MONTHS ENDED
DECEMBER 29, DECEMBER 30,
2001 2000
---- ----
(RESTATED)
Net sales....................................................................... 100.0% 100.0%
Cost of sales................................................................... 80.3 78.4
Restructuring and other charges................................................. 0.6 -.-
---------- ----------
Gross profit.................................................................... 19.1 21.6
Commission earned from agency agreement, net ................................... (3.6) (3.2)
Operating expenses:
Advertising and promotion................................................... 4.4 5.6
Selling, general and administrative......................................... 46.2 52.5
Restructuring and other charges............................................. 0.5 -.-
Amortization of goodwill and other intangibles.................................. 1.1 4.6
Other expense (income), net..................................................... (1.2) (0.8)
---------- -----------
Loss from operations............................................................ (35.5) (43.6)
Interest expense................................................................ 11.3 14.6
---------- -----------
Loss before income taxes........................................................ (46.8) (58.2)
Income taxes.................................................................... (18.0) (23.3)
---------- -----------
Loss before cumulative effect of accounting change.............................. (28.8) (34.9)
Cumulative effect of change in accounting for intangible assets, net of tax..... (11.3) -.-
----------- -----------
Net loss........................................................................ (40.1)% (34.9)%
========== ===========
30
THREE MONTHS ENDED DECEMBER 29, 2001 VERSUS THREE MONTHS ENDED DECEMBER 30, 2000
Net sales for the three months ended December 29, 2001 were $163.0
million, an increase of 11.2% from net sales for the three months ended December
30, 2000 of $146.6 million. As mentioned previously, net sales in the first
quarter of the fiscal year represent less than 10% of the expected net sales for
the full year.
North American Consumer segment net sales were $77.8 million in the
first quarter of fiscal 2002, an increase of $11.0 million, or 16.5%, over net
sales for the first quarter of fiscal 2001 of $66.8 million. The four primary
groups in North America Consumer; Lawns, Ortho, Gardens and Growing Media, saw a
combined 26% increase in net sales from the first quarter of fiscal 2001 to the
first quarter of fiscal 2002. Lawns lead the way with a 61% increase over the
prior year reflecting strong sales of its Fall product offerings, primarily
Winterizer(TM) lawn fertilizers and Turf Builder(TM) grass seed.
Net sales in the "Other" category under North America Consumer segment
are sales under a supply agreement. These sales fluctuate based on the
customer's needs but are not material to our results.
Scotts LawnService(R) revenues increased 77.6% from $4.9 million in the
first quarter of fiscal 2001 to $8.7 million in the first quarter of fiscal
2002. The growth in revenue reflects the growth in the business from the
acquisitions completed in late winter and early spring of fiscal 2001, new
branch openings in late winter of fiscal 2001 and the growth in customers from
our spring and fall 2001 marketing campaigns.
Net sales for the Global Professional segment were $36.3 million in the
first quarter of fiscal 2002, which were $0.8 million, or 2.3%, higher than
sales for the first quarter of fiscal 2001. Revenue growth was moderated as
growers in the United States increased their focus on reducing inventory and
delayed orders from growers in certain portions of Europe due to adverse weather
conditions.
Sales for the International Consumer segment were $40.2 million in the
first quarter of fiscal 2002, which were $0.8 million, or 2.0%, higher than
sales for the first quarter of fiscal 2001. Sales growth for this segment was
moderated due to our customers waiting until closer to the season to place
orders for delivery in an effort to control inventory levels.
Gross profit was $31.1 million in the first quarter of fiscal 2002, a
decrease of $0.5 million from gross profit of $31.6 million in the first quarter
of fiscal 2001. As a percentage of net sales, gross profit was 19.1% of sales in
the first quarter of fiscal 2002 compared to 21.6% in the first quarter of
fiscal 2001. The decline in gross profit as a percentage of sales resulted from
a shift in product mix toward lower margin growing media sales and away from
higher margin fertilizer sales in our Global Professional segment and certain
countries in our International Consumer segment. We also experienced lower
margins in Scotts LawnService(R) due to fixed operating expenses for recently
acquired and newly opened branches incurred during the low revenue winter
months.
The net commission earned from agency agreement in the first quarter of
fiscal 2002 represents net costs of $5.9 million compared to net costs of $4.7
million in the first quarter of fiscal 2001. The increase in costs from the
prior year is primarily due to the increase in the contribution payment due to
Monsanto to $20 million in fiscal 2002 compared to $15 million in fiscal 2001.
We do not recognize commission income under the agency agreement until minimum
earnings thresholds in the agreement are achieved, which is usually in our
second fiscal quarter.
Advertising and promotion expenses in the first quarter of fiscal 2002
were $7.1 million, a decrease of $1.0 million from advertising and promotion
expenses in the first quarter of fiscal 2001 of $8.1 million. The decrease in
advertising and promotion expenses from the prior year is primarily due to lower
rates and more targeted programs affecting the overall expected spending in
fiscal 2002.
Selling, general and administrative expenses in the first quarter of
fiscal 2002 were $75.3 million compared to $77.1 million for the first quarter
of fiscal 2001. The decrease from the first quarter of fiscal 2001 to the first
quarter of
31
fiscal 2002 is due to lower costs resulting from the cost cutting and
restructuring activities that occurred in fiscal 2002, offset in part by higher
spending on information services and legal matters. The first quarter of fiscal
2002 includes $1.0 million of restructuring costs in costs of goods sold related
to the redeployment of inventory from closed plants and warehouses and $0.8
million in selling, general and administrative expenses related to the
relocation of personnel. Under generally accepted accounting principles in the
United States, these costs have been expensed in the period incurred.
Amortization of goodwill and intangibles in the first quarter of fiscal 2002 was
$1.8 million compared to $6.8 million in the first quarter of fiscal 2001,
primarily due to the adoption of the new accounting standard. See Note 5 of
Notes to Condensed, Consolidated Financial Statements (Unaudited).
Other income was $2.0 million for the first quarter of fiscal 2002,
compared to other income of $1.1 million in the first quarter of fiscal 2001.
The increase is due to the gain on sale of an idled growing media plant in
Florida in the first quarter of fiscal 2002.
The loss from operations for the first quarter of fiscal 2002 was $57.8
million, compared with $64.0 million for the first quarter of fiscal 2001. The
reduction in the loss from operations from the prior year is the result of the
increase in sales, lower selling expenses, and the effect of the change in
accounting for amortization of indefinite-lived assets, partially offset by the
decrease in gross profit as a percentage of sales, the $1.8 million of
restructuring charges and higher legal expenses in the current quarter.
Interest expense for the first quarter of fiscal 2002 was $18.5
million, a decrease of $2.8 million from interest expense for the first quarter
of fiscal 2001 of $21.3 million. The decrease in interest expense was primarily
due to a reduction in average borrowings for the quarter as compared to the
prior year, and lower interest rates on our variable rate debt.
Income tax benefit for the first quarter of fiscal 2002 was $29.4
million, compared with an income tax benefit for the first quarter of fiscal
2001 of $34.1 million. The decrease in the tax benefit from the prior year is
the result of the lower pre-tax loss for the first quarter of fiscal 2002 for
the reasons noted above and the lower estimated income tax rate for the first
quarter of fiscal 2002 of 38.5% compared to 40.0% for the first quarter of
fiscal 2001 due to the elimination of amortization expense for book purposes
that was not deductible for tax purposes.
The Company reported a loss before cumulative effect of accounting
changes of $46.9 million for the first three months of fiscal 2002, compared to
$51.2 million for the first three months of fiscal 2001. After the charge of
$29.8 million ($18.5 million, net of tax), for the impairment of tradenames in
our German, French and United Kingdom businesses, net loss for the first three
months of fiscal 2002 was $65.4 million, or $2.27 per share, compared to a net
loss of $51.2 million or $1.83 per basic and dilutive shares.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $141.4 million for the three
months ended December 29, 2001 compared to a use of cash of $202.4 million for
the three months ended December 30, 2000. 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 2002 due to lower inventory production in
the period and lower income tax payments due to lower net income in the fiscal
year ended September 30, 2001 compared to the fiscal year ended September 30,
2000.
Cash used in investing activities was $28.9 million for the first three
months of fiscal 2002 compared to $29.8 million in the prior year period.
Investments in acquired businesses declined due to the acquisition of Substral
at the end of the first quarter of fiscal 2001 while payments on seller notes
increased because of payments made on the Substral deferred purchase obligation
in the first quarter of fiscal 2002.
Financing activities provided cash of $160.2 million for the first
three months of fiscal 2002 compared to providing $220.5 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.
32
Total debt was $1,021.5 million as of December 29, 2001, a decrease of
$61.3 million compared with total debt at December 30, 2000 of $1,082.8. The
decrease in debt compared to the prior year was primarily due to scheduled debt
repayments on our term loans during fiscal 2001.
On January 25, 2002, we issued an additional $70 million of 8 5/8%
Senior Subordinated Notes. The net proceeds were used to paydown borrowings on
our revolving credit facility.
Our primary sources of liquidity are funds generated by operations and
borrowings under our credit facility. The credit facility provides for
borrowings in the aggregate principal amount of $1.1 billion and consists of
term loan facilities in the aggregate amount of $525 million and a revolving
credit facility in the amount of $575 million.
We did not repurchase any treasury shares in fiscal 2001 or in the
first quarter of fiscal 2002.
Scotts does not have any off balance sheet financing except for
operating leases which are disclosed in the Notes to Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K or any financial
arrangements with any related parties. All related party transactions are with
and between our subsidiaries or management. All material intercompany
transactions are eliminated in our consolidated financial statements. All
transactions with management are fully described and disclosed in our proxy
statement. Such transactions pertain primarily to office space provided to and
administrative services provided by Hagedorn Partnership, L.P. and do not exceed
$150,000 per annum.
In our opinion, cash flows from operations and capital resources will
be sufficient to meet debt service and working capital needs during fiscal 2002,
and thereafter for the foreseeable future. However, we cannot ensure that our
business groups will generate sufficient cash flow from operations, that
currently anticipated cost savings and operating improvements will be realized
on schedule or at all, or that future borrowings will be available under our
credit facilities in amounts sufficient to pay indebtedness or fund other
liquidity needs. Actual results of operations will depend on numerous factors,
many of which are beyond our control. We cannot ensure that we will be able to
refinance any indebtedness, including our credit facility, on commercially
reasonable terms, or at all.
ENVIRONMENTAL MATTERS
We are subject to local, state, federal and foreign environmental
protection laws and regulations with respect to our business operations and
believe we are operating in substantial compliance with, or taking action aimed
at ensuring compliance with, such laws and regulations. We are involved in
several 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 29, 2001 and in the fiscal 2001 Annual Report on
Form 10-K under the "ITEM 1. BUSINESS -- ENVIRONMENTAL AND REGULATORY
CONSIDERATIONS" and "ITEM 3. LEGAL PROCEEDINGS" sections.
RELATIONSHIPS WITH CUSTOMERS
We do not have long-term sales agreements or other contractual
assurances as to future sales to any of our major retail customers. In addition,
continued consolidation in the retail industry has resulted in an increasingly
concentrated retail base in North America. To the extent such concentration
continues to occur, our net sales and operating income may be increasingly
sensitive to a deterioration in the financial condition of, or other adverse
developments involving our relationship with, one or more customers. As a result
of consolidation in the retail industry, our customers are able to exert
increasing pressure on us with respect to pricing and new product introductions.
33
KMART
Kmart, one of our largest customers, filed for bankruptcy relief under
Chapter 11 of the bankruptcy code on January 22, 2002. Following such filing, we
recommenced shipping products to Kmart, and we intend to continue shipping
products to Kmart for the foreseeable future. If Kmart does not successfully
emerge from its bankruptcy reorganization, our business could be adversely
affected. We believe the reserves we have recorded related to business conducted
with Kmart prior to its bankruptcy filing are adequate.
EURO
Effective January 1, 2002, the "euro" has been introduced in certain
Economic and Monetary Union (EMU) countries as their single currency.
Uncertainty still exists as to the effects the euro currency may have on the
marketplace. However, thus far there has been minimal disruption to our European
businesses due to the conversion to the euro. We estimate that the cost related
to addressing systems and other issues related to the euro conversion were in
the $1.5-$2.0 million range, most of which was expensed in fiscal 2001. However,
there can be no assurance that the ultimate costs related to this issue will not
exceed this range.
FORWARD-LOOKING STATEMENTS
We have made and will make "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 in our Annual Report, Forms 10-K and 10-Q and in
other contexts relating to future growth and profitability targets, and
strategies designed to increase total shareholder value. Forward-looking
statements include, but are not limited to, information regarding our future
economic performance and financial condition, the plans and objectives of our
management and our assumptions regarding our performance and these plans and
objectives.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information, so long as those statements are identified as
forward-looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those discussed in the forward-looking statements. We desire to
take advantage of the "safe harbor" provisions of that Act.
The forward-looking statements that we make in our Annual Report, Forms
10-K and 10-Q and in other contexts represent challenging goals for our company,
and the achievement of these goals is subject to a variety of risks and
assumptions and numerous factors beyond our control. Important factors that
could cause actual results to differ materially from the forward-looking
statements we make are described below. All forward-looking statements
attributable to us or persons working on our behalf are expressly qualified in
their entirety by the following cautionary statements:
- ADVERSE WEATHER CONDITIONS COULD ADVERSLY IMPACT FINANCIAL RESULTS.
Weather conditions in North America and Europe have a significant
impact on the timing of sales in the spring selling season and overall annual
sales. Periods of wet weather can slow fertilizer sales, while periods of dry,
hot weather can decrease pesticide sales. In addition, an abnormally cold spring
throughout North America and/or Europe could adversely affect both fertilizer
and pesticide sales and therefore our financial results.
- OUR HISTORICAL SEASONALITY COULD IMPAIR OUR ABILITY TO PAY OBLIGATIONS
AS THEY COME DUE IN ADDITION TO OUR OPERATING EXPENSES.
Because our products are used primarily in the spring and summer, our
business is highly seasonal. For the past two fiscal years, approximately 75% to
77% of our net sales have occurred in the second and third fiscal quarters
combined. 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
34
is insufficient to pay our obligations as they come due, including interest
payments on our indebtedness, or our operating expenses, at a time when we are
unable to draw on our credit facility, this seasonality could have a material
adverse affect on our ability to conduct our business. Adverse weather
conditions could heighten this risk.
- PUBLIC PERCEPTIONS THAT THE PRODUCTS WE PRODUCE AND MARKET ARE NOT SAFE
COULD ADVERSELY AFFECT US.
We manufacture and market a number of complex chemical products, such
as fertilizers, growing media, herbicides and pesticides, bearing one of our
brands. On occasion, customers and some current or former employees have alleged
that some products failed to perform up to expectations or have caused damage or
injury to individuals or property. Public perception that our products are not
safe, whether justified or not, could impair our reputation, damage our brand
names and materially adversely affect our business.
- BECAUSE OF THE CONCENTRATION OF OUR SALES TO A SMALL NUMBER OF RETAIL
CUSTOMERS, THE LOSS OF ONE OR MORE OF OUR TOP CUSTOMERS COULD ADVERSELY
AFFECT OUR FINANCIAL RESULTS.
Our top 10 North American retail customers together accounted for
approximately 70% of our fiscal year 2001 net sales and 37% of our outstanding
accounts receivable as of September 30, 2001. Our top four customers, Home
Depot, Wal*Mart, Kmart and Lowe's represented approximately 28%, 15%, 9% and 8%,
respectively, of our fiscal year 2001 net sales. These customers hold
significant positions in the retail lawn and garden market. The loss of, or
reduction in orders from, Home Depot, Wal*Mart, Kmart, Lowe's or any other
significant customer could have a material adverse effect on our business and
our financial results, as could customer disputes regarding shipments, fees,
merchandise condition or related matters. Our inability to collect accounts
receivable from any of these customers could also have a material adverse
affect.
We do not have long-term sales agreements or other contractual
assurances as to future sales to any of our major retail customers. In addition,
continued consolidation in the retail industry has resulted in an increasingly
concentrated retail base. To the extent such concentration continues to occur,
our net sales and operating income may be increasingly sensitive to
deterioration in the financial condition of, or other adverse developments
involving our relationship with, one or more customers. As a result of
consolidation in the retail industry, our customers are able to exert increasing
pressure on us with respect to pricing and new product introductions.
Kmart, one of our top customers, filed for bankruptcy relief under
Chapter 11 of the bankruptcy code on January 22, 2002. Following such filing, we
recommenced shipping products to Kmart, and we intend to continue shipping
products to Kmart for the foreseeable future. If Kmart does not successfully
emerge from its bankruptcy reorganization, our business could be adversely
affected.
- OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL
HEALTH AND PREVENT US FROM FULFILLING OUR OBLIGATIONS.
We have a significant amount of debt. Our substantial indebtedness
could have important consequences for you. For example, it could:
- make it more difficult for us to satisfy our obligations;
- increase our vulnerability to general adverse economic and
industry conditions;
- require us to dedicate a substantial portion of cash flows
from operations to payments on our indebtedness, which would
reduce the cash flows available to fund working capital,
capital expenditures, research and development efforts and
other general corporate requirements;
- limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate;
- place us at a competitive disadvantage compared to our
competitors that have less debt;
35
- limit our ability to borrow additional funds; and
- expose us to risks inherent in interest rate fluctuations
because some of our borrowings are at variable rates of
interest, which could result in higher interest expense in the
event of increases in interest rates.
Our ability to make payments on and to refinance our indebtedness and
to fund planned capital expenditures and research and development efforts will
depend on our ability to generate cash in the future. This, to some extent, is
subject to general economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control.
We cannot assure 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 that
future borrowings will be available to us under our credit facility in amounts
sufficient to enable us to pay our indebtedness or to fund our other liquidity
needs. We may need to refinance all or a portion of our indebtedness, on or
before maturity. We cannot assure that we will be 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 the senior subordinated notes. Upon the occurrence of an event
of default under our credit facility and/or the senior subordinated notes, the
lenders and/or noteholders could elect to declare all of our outstanding
indebtedness to be immediately due and payable and terminate all commitments to
extend further credit. We cannot be sure that our lenders or the noteholders
would waive a default or that we could pay the indebtedness in full if it were
accelerated.
- IF MONSANTO WERE TO TERMINATE THE MARKETING AGREEMENT FOR CONSUMER
ROUNDUP(R) PRODUCTS, WE WOULD LOSE A SUBSTANTIAL SOURCE OF FUTURE
EARNINGS.
If we were to commit a serious default under the marketing agreement
with Monsanto for consumer Roundup(R) products, Monsanto may have the right to
terminate the agreement. If Monsanto were to terminate the marketing agreement
rightfully, we would not be entitled to any termination fee, and we would lose
all, or a significant portion, of the significant source of earnings we believe
the marketing agreement provides. Monsanto may also be able to terminate the
marketing agreement within a given region, including North America, without
paying us a termination fee if sales to consumers in that region decline:
- Over a cumulative three fiscal year period; or
- By more than 5% for each of two consecutive fiscal years.
- THE EXPIRATION OF PATENTS RELATING TO ROUNDUP(R) AND THE SCOTTS TURF
BUILDER(R) LINE OF PRODUCTS COULD SUBSTANTIALLY INCREASE OUR
COMPETITION IN THE UNITED STATES.
Glyphosate, the active ingredient in Roundup(R), was subject to a
patent in the United States that expireD in September 2000. We cannot predict
the success of Roundup(R) now that glyphosate is no longer patented. Substantial
new competition in the United States could adversely affect us. Glyphosate is no
longer subject to patent in Europe and is not subject to patent in Canada. While
sales of Roundup(R) in such countries have continueD to increase despite the
lack of patent protection, sales in the United States may decline as a result of
increased competition. Any such decline in sales would adversely affect our
financial results through the reduction of commissions as calculated under the
Roundup(R) marketing agreement. We are aware that Spectrum BrandS produced
glyphosate one-gallon products for Home Depot and Lowe's to be sold under the
Real-Kill(R) and No-Pest(R) brand names, respectively, in fiscal year 2001. We
anticipate that Lowe's will introduce a one-quart glyphosate product, and that
Ace Hardware Corporation will
36
introduce one-gallon and one-quart glyphosate products, in fiscal year 2002. It
is too early to determine whether these product introductions will have a
material adverse effect on our sales of Roundup(R).
Our methylene-urea product composition patent, which covered Scotts
Turf Builder(R), Scotts Turf Builder(R) Plus 2(R) with Weed Control and Scotts
Turf Builder(R) with Halts(R) Crabgrass Preventer, expired in July 2001. THis
could also result in increased competition. Any decline in sales of Turf
Builder(R) products after the expiratioN of the methylene-urea product
composition patent could adversely affect our financial results.
- HAGEDORN PARTNERSHIP, L.P. BENEFICIALLY OWNS APPROXIMATELY 40% OF THE
OUTSTANDING COMMON SHARES OF SCOTTS ON A FULLY DILUTED BASIS.
Hagedorn Partnership, L.P. beneficially owns approximately 40% of the
outstanding common shares of Scotts on a fully diluted basis and has sufficient
voting power to significantly influence the election of directors and the
approval of other actions requiring the approval of our shareholders.
- COMPLIANCE WITH ENVIRONMENTAL AND OTHER PUBLIC HEALTH REGULATIONS COULD
INCREASE OUR COST OF DOING BUSINESS.
Local, state, federal and foreign laws and regulations relating to
environmental matters affect us in several ways. In the United States, all
products containing pesticides must be registered with the United States
Environmental Protection Agency ("U.S. EPA") and, in many cases, similar state
agencies before they can be sold. The inability to obtain or the cancellation of
any registration could have an adverse effect on our business. The severity of
the effect would depend on which products were involved, whether another product
could be substituted and whether our competitors were similarly affected. We
attempt to anticipate regulatory developments and maintain registrations of, and
access to, substitute chemicals. We may not always be able to avoid or minimize
these risks.
The Food Quality Protection Act, enacted by the U.S. Congress in August
1996, establishes a standard for food-use pesticides, which is that a reasonable
certainty of no harm will result from the cumulative effect of pesticide
exposures. Under this act, the U.S. EPA is evaluating the cumulative risks from
dietary and non-dietary exposures to pesticides. The pesticides in our products,
certain of which may be used on crops processed into various food products,
continue to be evaluated by the U.S. EPA as part of this exposure risk
assessment. It is possible that the U.S. EPA or a third party active ingredient
registrant may decide that a pesticide we use in our products will be limited or
made unavailable to us. For example, in June 2000, DowAgroSciences, an active
ingredient registrant, voluntarily agreed to a gradual phase-out of residential
uses of chlorpyrifos, an active ingredient used by us in our lawn and garden
products. In December 2000, the U.S. EPA reached agreement with various parties,
including manufacturers of the active ingredient diazinon, regarding a phased
withdrawal of residential uses of products containing diazinon, used also by us
in our lawn and garden products. We cannot predict the outcome or the severity
of the effect of the U.S. EPA's continuing evaluations of active ingredients
used in our products.
The use of certain pesticide and fertilizer products is regulated by
various local, state, federal and foreign environmental and public health
agencies. Regulations regarding the use of some pesticide and fertilizer
products may include requirements that only certified or professional users
apply the product, that the products be used only in specified locations or that
certain ingredients not be used. Users may be required to post notices on
properties to which products have been or will be applied and may be required to
notify individuals in the vicinity that products will be applied in the future.
Even if we are able to comply with all such regulations and obtain all necessary
registrations, we cannot assure that our products, particularly pesticide
products, will not cause injury to the environment or to people under all
circumstances. The costs of compliance, remediation or products liability have
adversely affected operating results in the past and could materially affect
future quarterly or annual operating results.
The harvesting of peat for our growing media business has come under
increasing regulatory and environmental scrutiny. In the United States, state
regulations frequently require us to limit our harvesting and to restore the
property to an agreed-upon condition. In some locations, we have been required
to create water retention ponds to control the sediment content of discharged
water. In the United Kingdom, our peat extraction efforts are also the subject
of legislation.
37
In addition to the regulations already described, local, state, federal
and foreign agencies regulate the disposal, handling and storage of waste, air
and water discharges from our facilities. In June 1997, the Ohio Environmental
Protection Agency ("Ohio EPA") initiated an enforcement action against us with
respect to alleged surface water violations and inadequate treatment
capabilities at our Marysville facility and seeking corrective action under the
Resource Conservation Recovery Act. We have met with the Ohio EPA and the Ohio
Attorney General's office to negotiate an amicable resolution of these issues.
On December 3, 2001, an agreed judicial Consent Order was submitted to the Union
County Common Pleas Court and was entered by the court on January 25, 2002.
During fiscal year 2001, we made approximately $0.6 million in
environmental capital expenditures and $2.1 million in other environmental
expenses, compared with approximately $0.8 million in environmental capital
expenditures and $1.8 million in other environmental expenses in fiscal year
2000. Management anticipates that environmental capital expenditures and other
environmental expenses for fiscal year 2002 will not differ significantly from
those incurred in fiscal year 2001. The adequacy of these anticipated future
expenditures is based on our operating in substantial compliance with applicable
environmental and public health laws and regulations and several significant
assumptions:
- that we have identified all of the significant sites that must
be remediated;
- that there are no significant conditions of potential
contamination that are unknown to us; and
- that with respect to the agreed judicial Consent Order in
Ohio, that potentially contaminated soil can be remediated in
place rather than having to be removed and only specific
stream segments will require remediation as opposed to the
entire stream.
If there is a significant change in the facts and circumstances
surrounding these assumptions or if we are found not to be in substantial
compliance with applicable environmental and public health laws and regulations,
it could have a material impact on future environmental capital expenditures and
other environmental expenses and our results of operations, financial position
and cash flows.
- THE IMPLEMENTATION OF THE EURO CURRENCY IN SOME EUROPEAN COUNTRIES IN
2002 COULD ADVERSELY AFFECT US.
In January 2002, most Economic and Monetary Union countries began
operating with the euro as their single currency. Uncertainty exists as to the
effects the euro currency will have on the marketplace. We are still assessing
the impact the Economic and Monetary Union formation and euro implementation may
have on the sales of our products and conduct of our business. We expect to take
appropriate actions based on the results of our assessment. However, there can
be no assurance that this issue will not have a material adverse effect on us or
our future operating results and financial condition.
- OUR SIGNIFICANT INTERNATIONAL OPERATIONS MAKE US MORE SUSCEPTIBLE TO
FLUCTUATIONS IN CURRENCY EXCHANGE RATES AND TO THE COSTS OF
INTERNATIONAL REGULATION.
We currently operate manufacturing, sales and service facilities
outside of North America, particularly in the United Kingdom, Germany and
France. Our international operations have increased with the acquisitions of
Levington, Miracle Garden Care Limited, Ortho and Rhone-Poulenc Jardin and with
the marketing agreement for consumer Roundup(R) products. In fiscal year 2001,
international sales accounted for approximately 20% of our totaL sales.
Accordingly, we are subject to risks associated with operations in foreign
countries, including:
- fluctuations in currency exchange rates;
- limitations on the conversion of foreign currencies into U.S.
dollars;
- limitations on the remittance of dividends and other payments
by foreign subsidiaries;
38
- additional costs of compliance with local regulations; and
- historically, higher rates of inflation than in the United
States.
In addition, our operations outside the United States are subject to
the risk of new and different legal and regulatory requirements in local
jurisdictions, potential difficulties in staffing and managing local operations
and potentially adverse tax consequences. The costs related to our international
operations could adversely affect our operations and financial results in the
future.
- TERRORIST ATTACKS, SUCH AS THE ATTACKS THAT OCCURRED IN NEW YORK AND
WASHINGTON, DC, ON SEPTEMBER 11, 2001, AND OTHER ACTS OF VIOLENCE OR
WAR MAY AFFECT THE MARKETS ON WHICH OUR COMMON STOCK AND REGISTERED
SENIOR SUBORDINATED NOTES TRADE, THE MARKETS IN WHICH WE OPERATE, OUR
OPERATIONS AND OUR PROFITABILITY.
Terrorist attacks may negatively affect our operations and your
investment. There can be no assurance that there will not be further terrorist
attacks against the United States or U.S. businesses. These attacks or armed
conflicts may directly impact our physical facilities or those of our suppliers
or customers. Furthermore, these attacks may make travel and the transportation
of our supplies and products more difficult and more expensive and ultimately
affect our sales. Also as a result of terrorism, the United States has entered
into an armed conflict which could have a further impact on our sales, our
supply chain and our ability to deliver product to our customers. Political and
economic instability in some regions of the world may also result and could
negatively impact our business. The consequences of any of these armed conflicts
are unpredictable, and we may not be able to foresee events that could have an
adverse effect on our business or your investment. More generally, any of these
events could cause consumer confidence and spending to decrease or result in
increased volatility in the United States and worldwide financial markets and
economy. They also could result in economic recession in the United States or
abroad. Any of these occurrences could have a significant impact on our
operating results, revenues and costs and may result in the volatility of the
market price for our securities and on the future price of our securities.
39
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As noted in Note 9 to the Company's unaudited Condensed, Consolidated
Financial Statements as of and for the period ended December 29, 2001, the
Company is involved in several pending legal and environmental matters. Pending
other material legal proceedings are as follows:
RHONE-POULENC, S.A., RHONE-POULENC AGRO S.A. AND HOECHST, A.G.
On October 15, 1999, the Company began arbitration proceedings before
the International Court of Arbitration of the International Chamber of Commerce
("ICA") against Rhone-Poulenc S.A. and Rhone-Poulenc Agro S.A. (collectively,
"Rhone-Poulenc") under arbitration provisions contained in contracts relating to
the purchase by the Company of Rhone-Poulenc's European lawn and garden
business, Rhone-Poulenc Jardin, in 1998. The Company alleged that the
combination of Rhone-Poulenc and Hoechst Schering AgrEvo GmbH ("AgrEvo") into a
new entity, Aventis S.A., would result in the violation of non-compete and other
provisions in the contracts mentioned above.
On October 9, 2000, the ICA issued a First Partial Award by the
Tribunal which, inter alia: (i) found that Rhone-Poulenc breached its duty of
good faith under the French law by not disclosing to the Company the
contemplated combination of Rhone-Poulenc and AgrEvo; (ii) directed that the
parties re-negotiate a non-compete provision; and (iii) ruled that a Research
and Development Agreement entered into ancillary to the purchase of
Rhone-Poulenc Jardin is binding upon both Rhone-Poulenc and its post-merger
successor. On February 12, 2001, because of the parties' failure to agree on
revisions to the non-compete provision, the ICA issued a Second Partial Award by
the Tribunal revising that provision. A damages hearing was held from July 2 to
5, 2001. The Tribunal heard closing arguments regarding the Company's claim to
damages and restitution in January 2002.
Also on October 15, 1999, the Company filed a complaint styled The
Scotts Company, et al. v. Rhone-Poulenc, S.A., Rhone-Poulenc Agro S.A. and
Hoechst, A.G. in the Court of Common Pleas for Union County, Ohio, seeking
injunctive relief maintaining the status quo in aid of the arbitration
proceedings as well as an award of damages against Hoechst for Hoechst's
tortious interference with the Company's contractual rights. On October 19,
1999, the defendants removed the Union County action to the United States
District Court for the Southern District of Ohio. On December 8, 1999, the
Company requested that this action be stayed pending the outcome of the
arbitration proceedings. Said stay was granted by the District Court on February
18, 2000.
SCOTTS V. AGREVO USA COMPANY
The Company filed suit against AgrEvo USA Company on August 8, 2000 in
the Court of Common Pleas for Union County, Ohio, alleging breach of contract
relating to an Agreement dated June 22, 1998 entitled "Exclusive Distributor
Agreement - Horticulture". The action seeks an unspecified amount of damages
resulting from AgrEvo's breaches of the Agreement, an order of specific
performance directing AgrEvo to comply with its obligations under the Agreement,
a declaratory judgment that the Company's future performance under the Agreement
is waived as a result of AgrEvo's failure to perform, and such other relief to
which the Company might be entitled. This action was dismissed without prejudice
on February 6, 2001, pending the outcome of settlement discussions.
The Company is involved in other lawsuits and claims which arise in the
normal course of its business. In the opinion of management, these claims
individually and in the aggregate are not expected to result in a material
adverse effect on the Company's results of operations, financial position or
cash flows.
40
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 25, 2002.
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
------- --------- ---------
Charles M. Berger.................................................... 25,415,396 276,873
James Hagedorn....................................................... 25,506,002 186,267
Karen G. Mills....................................................... 25,456,422 235,847
John Walker, Ph.D.................................................... 25,456,723 235,546
Each of the nominees was elected. The other directors whose terms of
office continue after the Annual Meeting are Arnold W. Donald, John Kenlon, John
M. Sullivan, L. Jack Van Fossen, Joseph P. Flannery, Albert E. Harris, Katherine
Hagedorn Littlefield and Patrick J. Norton.
The shareholder resolution regarding genetic engineering was not
adopted. The result of the vote was:
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
--------- ------------- ----------- ----------------
813,311 22,193,434 554,451 2,131,073
41
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Index to Exhibits at page 43 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.
42
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 12, 2002 Principal Accounting Officer,
Senior Vice President of Finance,
Corporate North America
(Duly Authorized Officer)
43
THE SCOTTS COMPANY
ANNUAL REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED DECEMBER 29, 2001
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
10(x) Letter agreement, dated October 10, 2001, between the Registrant *
and M. Michel Farkouh
10(y) Letter agreement, dated as of December 20, 2001, between the *
Registrant and L. Robert Stohler
* Filed herewith.
44