SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(Amendment No. )
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[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-12
The Scotts Company
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
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[X] No fee required.
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(1) Title of each class of securities to which transaction applies:
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[THE SCOTTS COMPANY LOGO]
THE SCOTTS COMPANY
PROXY STATEMENT FOR 2002 ANNUAL MEETING OF SHAREHOLDERS
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[THE SCOTTS COMPANY LOGO]
THE SCOTTS COMPANY
14111 SCOTTSLAWN ROAD
MARYSVILLE, OHIO 43041
December 21, 2001
Dear Fellow Shareholders:
The Annual Meeting of Shareholders of The Scotts Company will be held at
10:00 a.m., local time, on Friday, January 25, 2002, at The Berger Learning
Center, 14111 Scottslawn Road, Marysville, Ohio. The enclosed Notice of Annual
Meeting of Shareholders and Proxy Statement contain detailed information about
the business to be transacted at the Annual Meeting.
The Board of Directors has nominated four directors, each for a term to
expire at the 2005 Annual Meeting. The Board of Directors recommends that you
vote FOR each of the nominees.
You are also being asked to consider and act upon the shareholder proposal
described in the Proxy Statement, if such proposal is presented at the Annual
Meeting. The Board of Directors recommends that you vote AGAINST the shareholder
proposal.
On behalf of the Board of Directors and management, we cordially invite you
to attend the Annual Meeting. Whether or not you plan to attend the Annual
Meeting, please record your vote on the enclosed proxy card and return it
promptly in the enclosed postage-paid envelope or, alternatively, vote your
common shares electronically via the Internet or telephonically in accordance
with the instructions on your proxy card.
Sincerely,
/s/ James Hagedorn
JAMES HAGEDORN
President and Chief Executive Officer
/s/ Charles M. Berger
CHARLES M. BERGER
Chairman of the Board
[THE SCOTTS COMPANY LOGO]
THE SCOTTS COMPANY
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD FRIDAY, JANUARY 25, 2002
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NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of The
Scotts Company will be held at The Berger Learning Center, 14111 Scottslawn
Road, Marysville, Ohio 43041, on Friday, January 25, 2002, at 10:00 a.m., local
time, for the following purposes:
1. To elect four directors, each for a term of three years to expire at
the 2005 Annual Meeting;
2. To consider and act upon the shareholder proposal described in the
Proxy Statement, if such proposal is presented at the Annual Meeting;
and
3. To transact such other business as may properly come before the
Annual Meeting or any adjournment.
The close of business on November 27, 2001, has been fixed by the Board of
Directors of the Company as the record date for determining the shareholders
entitled to receive notice of, and to vote at, the Annual Meeting.
You are cordially invited to attend the Annual Meeting. Whether or not you
plan to attend the Annual Meeting, you may ensure your representation by
completing, signing, dating and promptly returning the enclosed proxy card. A
return envelope, which requires no postage if mailed in the United States, has
been provided for your use. Alternatively, you may ensure your common shares are
voted at the Annual Meeting by submitting your instructions electronically via
the Internet or telephonically. Please see the Proxy Statement and proxy card
for details about electronic voting. Voting your common shares by the enclosed
proxy card, or electronically through the Internet or by telephone, does not
affect your right to vote in person if you attend the Annual Meeting.
By Order of the Board of Directors,
/s/ David M. Aronowitz
DAVID M. ARONOWITZ
Executive Vice President, General
Counsel and Corporate Secretary
14111 Scottslawn Road
Marysville, Ohio 43041
December 21, 2001
[THE SCOTTS COMPANY LOGO]
THE SCOTTS COMPANY
14111 SCOTTSLAWN ROAD
MARYSVILLE, OHIO 43041
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
FRIDAY, JANUARY 25, 2002
This Proxy Statement is furnished in connection with the solicitation on
behalf of the Board of Directors of The Scotts Company of proxies for use at the
Annual Meeting of Shareholders to be held at The Berger Learning Center, 14111
Scottslawn Road, Marysville, Ohio, on Friday, January 25, 2002, at 10:00 a.m.,
local time, or any adjournment. This Proxy Statement and the accompanying proxy
were first sent or given to shareholders on or about December 21, 2001. Only
holders of record of the Company's common shares on November 27, 2001 will be
entitled to vote at the Annual Meeting. As of November 27, 2001, there were
28,999,727 common shares outstanding. Each common share entitles the holder
thereof to one vote. There is no cumulative voting. A quorum for the Annual
Meeting is a majority of the outstanding common shares.
A proxy card for use at the Annual Meeting is enclosed. You may ensure your
representation by completing, signing, dating and promptly returning the
enclosed proxy card. A return envelope, which requires no postage if mailed in
the United States, has been provided for your use. Alternatively, shareholders
holding common shares registered directly with the Company's transfer agent,
National City Bank, may transmit their voting instructions electronically via
the Internet or by using the toll-free telephone number stated on the proxy
card. The deadline for transmitting voting instructions electronically via the
Internet or telephonically is 11:59 p.m., local time in Columbus, Ohio, on
January 24, 2002. The Internet and telephone voting procedures are designed to
authenticate shareholders' identities, to allow shareholders to give their
voting instructions and to confirm that shareholders' instructions have been
properly recorded. Shareholders voting through the Internet should understand
that there may be costs associated with electronic access, such as usage charges
from Internet access providers and telephone companies, that will be borne by
such shareholders. Shareholders holding common shares in "street name" with a
broker, bank or other holder of record should review the information provided to
them by such holder of record. This information will set forth the procedures to
be followed in instructing the holder of record how to vote the "street name"
common shares and how to revoke previously given instructions.
Those common shares represented by properly executed proxies, or properly
authenticated votes recorded electronically through the Internet or by
telephone, that are received prior to the Annual Meeting and not revoked, will
be voted as directed by the shareholder. All valid proxies received prior to the
Annual Meeting which do not specify how common shares should be voted will be
voted FOR the election as directors of the nominees listed below under "PROPOSAL
NO. 1 -- ELECTION OF DIRECTORS" and AGAINST the shareholder proposal described
in this Proxy Statement if that proposal is presented for consideration at the
Annual Meeting.
You may revoke your proxy at any time before it is actually voted at the
Annual Meeting by giving written notice of revocation to the Secretary of the
Company, by executing and returning to the Company a later-dated proxy card, by
voting in person at the Annual Meeting (but only if you are the registered
shareholder), or by submitting a later-dated electronic vote through the
Internet or by telephone. Attending the Annual Meeting does not, in itself,
revoke a previously appointed proxy.
Solicitation of proxies may be made by mail, personal interview, telephone,
facsimile or telegraph by directors, officers and regular employees of the
Company, none of whom will receive additional compensation for such solicitation
activities. Other than the Internet access and telephone usage charges described
above, all proxy solicitation costs will be borne by the Company. The Company
will reimburse its transfer agent, banks, brokers and other custodians, nominees
and fiduciaries for their reasonable costs in sending proxy materials to
shareholders.
If a shareholder is a participant in The Scotts Company Retirement Savings
Plan (the "RSP") and common share units have been allocated to such individual's
account in the RSP, the shareholder is entitled to instruct the trustee of the
RSP how to vote the common shares represented by those units. These shareholders
may receive their proxy cards separately. If no instructions are given by a
participant to the trustee of the RSP, the trustee will not vote those common
shares.
The results of shareholder voting will be tabulated by the inspectors of
election appointed for the Annual Meeting. Common shares represented by properly
executed proxies returned to the Company prior to the Annual Meeting or
represented by properly authenticated electronic votes recorded through the
Internet or by telephone will be counted toward the establishment of a quorum
for the Annual Meeting even though they are marked "ABSTAIN" or "AGAINST" or to
withhold authority on one or more or all matters or are not marked at all.
Broker/dealers who hold common shares in street name may, under the applicable
rules of the exchange and other self-regulatory organizations of which the
broker/dealers are members, sign and submit proxies for such common shares and
may vote such common shares on routine matters, such as the election of
directors, but broker/dealers may not vote such common shares on non-routine
matters, such as the shareholder proposal, without specific instructions from
the customer who owns such common shares. Proxies that are signed and submitted
by broker/dealers that have not been voted on certain matters as described in
the previous sentence are referred to as broker non-votes. Broker non-votes
count toward the establishment of a quorum for the Annual Meeting.
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BENEFICIAL OWNERSHIP OF SECURITIES OF THE COMPANY
The common shares are the Company's only outstanding class of voting
securities. The following table furnishes, as of November 27, 2001 (except as
otherwise noted), certain information as to the common shares beneficially owned
by each of the directors of the Company, by each of the individuals named in the
Summary Compensation Table and by all current directors and executive officers
of the Company as a group, as well as by the only persons known to the Company
to beneficially own more than 5% of the outstanding common shares.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(1)
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COMMON SHARES WHICH
CAN BE ACQUIRED
UPON EXERCISE OF
OPTIONS OR WARRANTS
COMMON SHARES COMMON SHARE EXERCISABLE PERCENT OF
NAME OF BENEFICIAL OWNER PRESENTLY HELD EQUIVALENTS(2) WITHIN 60 DAYS TOTAL CLASS(2)(3)
------------------------ -------------- -------------- ------------------- ---------- -----------
Charles M. Berger(4)....... 13,980(5) 22,443 500,000 536,423 1.74%
Arnold W. Donald........... 1,000 378 7,000 8,378 (6)
Joseph P. Flannery......... 2,000 0 43,000 45,000 (6)
James Hagedorn(4).......... 9,891,171(7) 1,956 3,240,000(8) 13,133,127 40.73%
Albert E. Harris........... 2,000(9) 715 24,000 26,715 (6)
Michael P. Kelty,
Ph.D.(4)................. 42,209(10) 0 85,000 127,209 (6)
John Kenlon................ 145,000 0 188,142(11) 333,142 1.14%
Hadia Lefavre(4)........... 0 0 60,000 60,000 (6)
Katherine Hagedorn
Littlefield.............. 9,854,351(12) 0 3,005,500(13) 12,859,851 40.18%
G. Robert Lucas(4)......... 4,859(14) 0 108,000 112,859 (6)
Karen G. Mills............. 5,000 0 40,000 45,000 (6)
Patrick J. Norton(4)....... 5,100(15) 0 36,000 41,100 (6)
John M. Sullivan........... 1,500 0 41,000 42,500 (6)
L. Jack Van Fossen......... 1,200 715 43,000 44,915 (6)
John Walker, Ph.D.......... 1,100 0 19,500 20,600 (6)
All current directors and
executive officers as a
group (17 persons)....... 9,968,680(16) 29,336 4,372,500 14,370,516 42.97%
Hagedorn Partnership,
L.P...................... 9,854,351(17) 0 3,000,000(17) 12,854,351 40.17%
800 Port Washington Blvd.
Port Washington, NY 11050
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(1) Unless otherwise indicated, the beneficial owner has sole voting and
dispositive power as to all common shares reflected in the table. All
fractional common shares have been rounded to the nearest whole common
share. The mailing address of each of the current executive officers and
directors of the Company is 14111 Scottslawn Road, Marysville, Ohio 43041.
(2) "Common Share Equivalents" figures include common shares attributable to
the named executive officer's account relating to common share units under
The Scotts Company Executive Retirement Plan (the "Executive Retirement
Plan"), and to the named director's account holding common share units
received in lieu of the director's annual retainer under the Company's 1996
Stock Option Plan, although under the terms of those plans, the named
individual has no voting or dispositive power with respect to the portion
of his account attributed to common shares of the Company. For this reason,
these common share units are not included in the computation of the
"Percent of Class" figures in the table.
(3) The "Percent of Class" computation is based upon the sum of (i) 28,999,727
common shares outstanding on November 27, 2001, and (ii) the number of
common shares as to which the named person has the right to acquire
beneficial ownership upon the exercise of options or warrants exercisable
within 60 days after November 27, 2001.
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(4) Individual named in the Summary Compensation Table.
(5) Includes 2,680 common share units allocated to Mr. Berger's account and
held by the trustee under the RSP.
(6) Represents ownership of less than 1% of the outstanding common shares of
the Company.
(7) Mr. Hagedorn is a general partner of Hagedorn Partnership, L.P., a Delaware
limited partnership (the "Hagedorn Partnership"), and has shared voting and
dispositive power with respect to the common shares held by the Hagedorn
Partnership and those subject to the right to vote and right of first
refusal in favor of the Hagedorn Partnership. See note (17) below. He holds
27,700 common shares directly and 9,120 common share units are allocated to
his account and held by the trustee under the RSP.
(8) Mr. Hagedorn holds currently exercisable options to purchase 240,000 common
shares. As a general partner of the Hagedorn Partnership, he has shared
voting and dispositive power with respect to the warrants held by the
Hagedorn Partnership and those subject to the right to vote and right of
first refusal in favor of the Hagedorn Partnership. See note (17) below.
(9) Includes 1,000 common shares owned by Mr. Harris' spouse.
(10) Includes 7,727 common shares owned by Dr. Kelty's spouse.
(11) Mr. Kenlon owns warrants to purchase 6,642 common shares. Each of Mr.
Kenlon's four children beneficially owns warrants to purchase an additional
15,000 common shares, for which Mr. Kenlon disclaims beneficial ownership.
The Hagedorn Partnership has the right to vote, and a right of first
refusal with respect to, the Company's securities received by Mr. Kenlon
and his children pursuant to the Merger Agreement described in note (17)
below (145,000 common shares presently held by Mr. Kenlon and warrants to
purchase an aggregate of 66,642 common shares). Mr. Kenlon also holds
currently exercisable options to purchase 121,500 common shares.
(12) Ms. Littlefield is a general partner of the Hagedorn Partnership and has
shared voting and dispositive power with respect to the common shares held
by the Hagedorn Partnership and those subject to the right to vote and
right of first refusal in favor of the Hagedorn Partnership. See note (17)
below.
(13) Ms. Littlefield holds currently exercisable options to purchase 5,500
common shares. As a general partner of the Hagedorn Partnership, she has
shared voting and dispositive power with respect to the warrants held by
the Hagedorn Partnership and those subject to the right to vote and right
of first refusal in favor of the Hagedorn Partnership. See note (17) below.
(14) Includes 200 common shares owned by Mr. Lucas' spouse and 3,367 common
shares held in a broker retirement account on behalf of Mr. Lucas.
(15) Includes 100 common shares owned by Mr. Norton's spouse.
(16) See notes (5), (7) through (13) and (15) above and note (17) below. Also
includes common shares held by the current executive officers other than
the individuals named in the Summary Compensation Table; and common share
units allocated to their respective accounts and held by the trustee under
the RSP.
(17) The Hagedorn Partnership owns 9,709,351 common shares and warrants to
purchase 2,933,358 common shares, and has the right to vote, and a right of
first refusal with respect to, the Company's securities received by Mr.
Kenlon and his children pursuant to the Merger Agreement described below.
Also see note (11) above. Mr. James Hagedorn, Ms. Katherine Hagedorn
Littlefield, Mr. Paul Hagedorn, Mr. Peter Hagedorn, Mr. Robert Hagedorn and
Ms. Susan Hagedorn, are siblings, general partners of the Hagedorn
Partnership and former shareholders of Stern's Miracle-Gro Products, Inc.
("Miracle-Gro Products"). The general partners share voting and dispositive
power with respect to the securities held by the Hagedorn Partnership and
those subject to the right to vote and right of first refusal in favor of
the Hagedorn Partnership. Mr. James Hagedorn and Ms. Katherine Hagedorn
Littlefield are directors of the Company. Community Funds, Inc., a New York
not-for-profit corporation ("Community Funds"), is a limited partner of the
Hagedorn Partnership.
The Amended and Restated Agreement and Plan of Merger, dated as of May 19,
1995 (the "Merger Agreement"), among the Company, ZYX Corporation,
Miracle-Gro Products, Stern's Nurseries, Inc.,
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Miracle-Gro Lawn Products Inc., Miracle-Gro Products Limited, the Hagedorn
Partnership, the general partners of the Hagedorn Partnership, Horace
Hagedorn, Community Funds and John Kenlon, as amended by the First
Amendment to Amended and Restated Agreement and Plan of Merger, dated as of
October 1, 1999 (the "First Amendment"), limits the ability of the Hagedorn
Partnership, Community Funds, Horace Hagedorn and John Kenlon (the
"Miracle-Gro Shareholders") to acquire additional voting securities of the
Company. See "-- The Merger Agreement and the First Amendment" below.
THE MERGER AGREEMENT AND THE FIRST AMENDMENT
Under the terms of the First Amendment, the Miracle-Gro Shareholders may
not collectively acquire, directly or indirectly, beneficial ownership of Voting
Stock (defined in the Merger Agreement as amended by the First Amendment to mean
the common shares and any other securities issued by the Company which are
entitled to vote generally for the election of directors of the Company)
representing more than 49% of the total voting power of the outstanding Voting
Stock, except pursuant to a tender offer for 100% of that total voting power,
which tender offer is made at a price per share which is not less than the
market price per share on the last trading day before the announcement of the
tender offer and is conditioned upon the receipt of at least 50% of the Voting
Stock beneficially owned by shareholders of the Company other than the Miracle-
Gro Shareholders and their affiliates and associates.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
In his Form 5 for the fiscal year ended September 30, 2001 (the "2001
fiscal year"), Thomas A. Feusse, a former executive officer of the Company,
reported an option held on the date he became an executive officer of the
Company which had been inadvertently omitted from his Form 3.
During the 2001 fiscal year, the Company was notified that the Hagedorn
Partnership and certain of its general partners inadvertently made a number of
late filings, as follows:
1. The Hagedorn Partnership was late in filing a Form 4, in which it
reported three transactions.
2. Paul Hagedorn made late filings of a Form 3 and of four Form 4's on
which he reported an aggregate of 13 transactions.
3. Peter Hagedorn made late filings of a Form 3 and of four Form 4's on
which he reported an aggregate of 14 transactions.
4. Robert Hagedorn and Susan Hagedorn each made a late filing of a Form
3 and of three Form 4's in which they each reported an aggregate of
10 transactions.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
Pursuant to the Code of Regulations of the Company, the Board of Directors
has set the authorized number of directors at 12, divided into three classes
with regular three-year staggered terms. The election of each class of directors
is a separate election. The four Class I directors hold office for terms
expiring at the Annual Meeting, the four Class II directors hold office for
terms expiring in 2003, and the four Class III directors hold office for terms
expiring in 2004.
The Board of Directors proposes that the four nominees identified below be
elected to Class I for a new term to expire at the Annual Meeting of
Shareholders to be held in 2005 and until their successors are duly elected and
qualified, or until their earlier death, resignation or removal. The Board of
Directors has no reason to believe that the nominees will not serve if elected.
If a nominee who would otherwise receive the
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required number of votes becomes unavailable or unable to serve as a director,
the individuals designated as proxy holders reserve full discretion to vote the
common shares represented by the proxies they hold for the election of the
remaining nominees and for the election of any substitute nominee designated by
the Board of Directors.
The following information, as of November 27, 2001, with respect to the
principal occupation or employment, other affiliations and business experience
of each director during the last five years, has been furnished to the Company
by each director. Except where indicated, each director has had the same
principal occupation for the last five years.
NOMINEES STANDING FOR RE-ELECTION TO THE BOARD OF DIRECTORS
CLASS I -- TERMS TO EXPIRE AT THE 2005 ANNUAL MEETING
[CHARLES M. BERGER Charles M. Berger, age 65, Chairman of the Board of the
PHOTO] Company since 1996
Mr. Berger was elected Chairman of the Board of the Company
in August 1996. From August 1996 to May 2001, he was also
Chief Executive Officer of the Company, and from August
1996 until April 2000, he was also President of the
Company. Mr. Berger came to the Company from H.J. Heinz
Company. During his 32-year career at Heinz, he held
the positions of Chairman and Chief Executive Officer
of Heinz India Pvt. Ltd. (Bombay); Chairman, President
and Chief Executive Officer of Weight Watchers
International, a Heinz affiliate; Managing Director and
Chief Executive Officer of Heinz-Italy (Milan), the
largest Heinz profit center in Europe; General Manager,
Marketing, for all Heinz U.S. grocery products;
Marketing Director for Heinz U.K. (London); and
Director of Corporate Planning at Heinz World
Headquarters. He is also a former director of
Miracle-Gro Products.
Committee Membership: Nominating and Board Governance
[JAMES HAGEDORN PHOTO] James Hagedorn, age 46, Chief Executive Officer of the
Company since May 2001, President of the Company since
April 2000, and Director of the Company since 1995
Mr. Hagedorn was named President and Chief Executive Officer
of the Company in May 2001. He served as President and Chief
Operating Officer of the Company from April 2000 to May
2001, and as President, Scotts North America, of the
Company from December 1998 to April 2000. He was
previously Executive Vice President, U.S. Business
Groups, of the Company from October 1996 to December
1998. Mr. Hagedorn is the son of Horace Hagedorn,
Director Emeritus of the Company, and the brother of
Katherine Hagedorn Littlefield, a director of the
Company.
Committee Membership: None at this time
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[KAREN G. MILLS PHOTO] Karen G. Mills, age 48, Director of the Company since 1994
Since June 1999, Ms. Mills has been Managing Director and
Founder of Solera Capital, a private equity firm based in
New York. Prior to that, beginning in January 1993, she
was President of MMP Group, Inc., an advisory company
serving leveraged buy-out firms, company owners and
chief executive officers. Ms. Mills is currently a
director of Arrow Electronics, Inc., The Guardian Life
Insurance Company and Dry Bulk Shipping Inc., a
privately-held company.
Committee Memberships: Finance; Nominating and Board
Governance (Chairman)
[JOHN WALKER PHOTO] John Walker, Ph.D., age 61, Director of the Company since
1998
Since September 1994, Dr. Walker has been Chairman of Advent
International plc, a private equity management company based
in Boston, Massachusetts which manages over $3 billion
on a global basis.
Committee Memberships: Finance (Chairman); Nominating
and Board Governance
DIRECTORS CONTINUING IN OFFICE
CLASS II -- TERMS TO EXPIRE AT THE 2003 ANNUAL MEETING
[ARNOLD W. DONALD PHOTO] Arnold W. Donald, age 46, Director of the Company since 2000
Mr. Donald was elected by the Board in October 2000 to fill
the vacancy created by the retirement of Dr. James B. Beard.
Since March 2000, Mr. Donald has been Chairman and
Chief Executive Officer of Merisant Company, whose
products include leading global tabletop sweetener
brands Equal(R) and Canderel(R). From January 1998 to
March 2000, he was Senior Vice President of Monsanto
Company (n/k/a Pharmacia Corporation), with
responsibility for growth, globalization and technology
initiatives. From February 1997 to January 1998, he was
Co-President, Agriculture Sector, of Monsanto. From
January 1995 to February 1997, he was President, Crop
Protection Unit, of Monsanto. He serves as a director
of Crown Cork & Seal Company, Belden, Inc., Oil-Dri
Corporation of America, GenAmerica Financial, and
Carnival Corporation. In 1998, he was appointed by
President Clinton to serve on the President's Export
Council for international trade. He is also a member of
the Executive Leadership Council.
Committee Membership: Compensation and Organization
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[JOHN KENLON PHOTO] John Kenlon, age 70, Director of the Company since 1995
Mr. Kenlon retired as an officer of the Company effective
December 31, 1999. He was Senior Vice President, Consumer
Gardens Group, of the Company from May 1999 to December
1999, and President, Consumer Gardens Group, of the
Company from December 1996 until May 1999. He was
previously President and Chief Operating Officer of
Scotts Miracle-Gro Products, Inc. from May 1995 to
December 1999. Mr. Kenlon began his association with
the Miracle-Gro companies in 1960.
Committee Membership: None at this time
[JOHN M. SULLIVAN PHOTO] John M. Sullivan, age 66, Director of the Company since 1994
Mr. Sullivan served as Chairman, President and Chief
Executive Officer of Prince Holdings, Inc., a corporation
which, through its subsidiaries, manufactures sporting
goods, from 1987 until his retirement in 1994. He is
currently on the board of directors of Atlas Copco
N.A., a company traded on the Stockholm Stock Exchange.
Committee Memberships: Audit; Compensation and
Organization
[L. JACK VAN FOSSEN L. Jack Van Fossen, age 64, Director of the Company since
PHOTO] 1993
Mr. Van Fossen was Chief Executive Officer and President of
Red Roof Inns, Inc., an owner and operator of motels, from
1991 until 1995. Since July 1988, Mr. Van Fossen has
served as President of Nessoff Corporation, a
privately-held investment company.
Committee Memberships: Audit (Chairman); Finance
CLASS III -- TERMS TO EXPIRE AT THE 2004 ANNUAL MEETING
[JOSEPH P. FLANNERY Joseph P. Flannery, age 69, Director of the Company since
PHOTO] 1987
Mr. Flannery has been President, Chief Executive Officer and
Chairman of the Board of Directors of Uniroyal Holding,
Inc., a manufacturer of tires, since 1986. Mr. Flannery
is also a director of Ingersoll-Rand Company, Kmart
Corporation, Newmont Mining Corporation and
ArvinMeritor Industries, Inc.
Committee Membership: Compensation and Organization
(Chairman)
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[ALBERT E. HARRIS PHOTO] Albert E. Harris, age 69, Director of the Company since 1997
Mr. Harris is co-founder and, effective July 1997, the
retired President of EDBH, Inc., a privately-held company
which develops international optical businesses. From
1988 until July 1997, he served as either Chairman or
President of that company, which established a chain of
approximately 200 superoptical stores, operating under
the "Vision Express" name and located primarily in the
United Kingdom. From 1992 until September 2001, Mr.
Harris was also a trustee of Fifth Third Funds
(previously named Fountain Square Funds), a mutual fund
family established by The Fifth Third Bank, and also
served as the Chairman of that group of funds. Fifth
Third Funds is registered as an investment company
under the Investment Company Act of 1940.
Committee Memberships: Audit; Compensation and
Organization
[KATHERINE HAGEDORN Katherine Hagedorn Littlefield, age 46, Director of the
LITTLEFIELD PHOTO] Company since 2000
Ms. Littlefield was elected by the Board in July 2000 to
fill the vacancy created by the retirement of her father
Horace Hagedorn, who founded Miracle-Gro Products in
1950 and had served as a director of the Company since
1995. Ms. Littlefield is the sister of James Hagedorn.
She is also the Chairman of the Hagedorn Partnership.
Committee Membership: Finance
[PATRICK J. NORTON Patrick J. Norton, age 51, Executive Vice President and
PHOTO] Chief Financial Officer of the Company since 2000, and
Director of the Company since 1998
Mr. Norton was named Executive Vice President and Chief
Financial Officer of the Company in May 2000, having served
as interim Chief Financial Officer since February 2000.
From 1983 until February 1997, Mr. Norton was the
President, Chief Executive Officer and a director of
Barefoot Inc., the second largest lawn care company in
the United States prior to its acquisition in February
1997 by ServiceMaster. Mr. Norton serves as an
independent director for various privately-held
companies and partnerships, including Svoboda Collins
LLC, In The Swim, Inc. and Baird Capital Partners.
Committee Membership: Finance
RECOMMENDATION AND VOTE
Under Ohio law and the Company's Code of Regulations, the four nominees for
election in Class I receiving the greatest number of votes will be elected.
Common shares represented by properly executed and returned proxies will be
voted FOR the election of the above-named nominees unless authority to vote for
one or more nominees is withheld. Common shares as to which the authority to
vote is withheld will be counted for quorum purposes but will not be counted
toward the election of directors or toward the election of the individual
nominees specified on the form of proxy.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE
ABOVE-NAMED CLASS I DIRECTOR NOMINEES.
9
COMMITTEES AND MEETINGS OF THE BOARD
The Board of Directors held nine regularly scheduled or special meetings
during the 2001 fiscal year. The Board of Directors has four significant
standing committees: the Audit Committee; the Compensation and Organization
Committee; the Finance Committee; and the Nominating and Board Governance
Committee. Each current member of the Board attended at least 75% of the
aggregate of the total number of meetings of the Board of Directors and of the
committees on which he or she served during the 2001 fiscal year.
Audit Committee. The Audit Committee is organized and conducts its
business pursuant to a written charter adopted by the Board of Directors. The
Audit Committee is responsible for assisting the Board of Directors in
fulfilling its financial and accounting oversight functions. Specifically, the
Audit Committee, on behalf of the Board, monitors and evaluates the Company's
consolidated financial statements and the financial reporting process, the
system of internal accounting and financial controls, the internal audit
function and the annual independent audit of the Company's consolidated
financial statements. The Audit Committee also provides an avenue for
communication among internal auditors, the independent auditors and the Board of
Directors. The Audit Committee makes recommendations to the Board of Directors
or management concerning auditing and accounting matters and the selection of
independent auditors. Each member of the Audit Committee qualifies as
independent under the corporate governance standards of the New York Stock
Exchange (the "NYSE"). The Audit Committee met eight times during the 2001
fiscal year. The Audit Committee's report relating to the Company's 2001 fiscal
year appears on pages 21 and 22.
Compensation and Organization Committee. The Compensation and Organization
Committee reviews, considers and acts upon matters concerning salary and other
compensation and benefits of all executive officers and certain other employees
of the Company. In addition, this Committee acts upon all matters concerning,
and exercises such authority as is delegated to it under the provisions of, any
benefit, retirement or pension plan maintained by the Company. This Committee
also advises the Board of Directors regarding executive officer organizational
issues and succession plans and serves as the administrator for the Company's
1992 Long Term Incentive Plan and 1996 Stock Option Plan. The Compensation and
Organization Committee met six times during the 2001 fiscal year. The
Compensation and Organization Committee's report on executive compensation
appears on pages 17 through 20.
Finance Committee. The Finance Committee provides oversight of the
financial plans and policies of the Company and its subsidiaries by reviewing
annual business plans; operating performance goals; investment, dividend payment
and stock repurchase programs; financial forecasts; and general corporate
financing matters. The Finance Committee met three times during the 2001 fiscal
year.
Nominating and Board Governance Committee. The Nominating and Board
Governance Committee recommends policies on the composition of the Board of
Directors and nominees for membership on the Board. This Committee has not
established a procedure for shareholders to recommend nominees to the Board for
consideration at the Annual Meeting. Rather, it conducts its own search for
available, qualified nominees. The Nominating and Board Governance Committee met
five times during the 2001 fiscal year.
COMPENSATION OF DIRECTORS
Each director of the Company who is not an employee of the Company (the
"Non-Employee Directors") receives a $30,000 annual retainer for Board and
committee meetings plus reimbursement of all reasonable travel and other
expenses of attending such meetings. Non-Employee Directors may elect to receive
all or a portion, in 25% increments, of their annual retainer in cash or in
common share units. If common share units are elected, the Non-Employee Director
receives a number of common share units determined by dividing the chosen dollar
amount by the fair market value of the Company's common shares on the first
business day following the date of the Annual Meeting of Shareholders. Final
distributions are made in cash or common shares upon the date that the
Non-Employee Director ceases to be a member of the Board, or upon a "Change in
Control" (as defined in the Company's 1996 Stock Option Plan), whichever is
earlier. Distributions may be made either in a lump sum or in installments over
a period of up to ten years, as elected by the Non-Employee Director.
10
Non-Employee Directors also receive an annual grant, on the first business
day following the date of each Annual Meeting of Shareholders, of options to
purchase 5,000 common shares at an exercise price equal to the fair market value
of the common shares on the grant date. Non-Employee Directors who are members
of one or more Board committees receive options to purchase an additional 500
common shares for each committee on which they serve (with committee chairs
receiving options to purchase a total of an additional 1,500 common shares for
each committee they chair). Options granted to a Non-Employee Director become
exercisable six months after the grant date and remain exercisable until the
earlier to occur of (i) the tenth anniversary of the grant date, or (ii) the
first anniversary of the date the Non-Employee Director ceases to be a member of
the Company's Board of Directors. However, if the Non-Employee Director ceases
to be a member of the Board after (a) having been convicted of, or pled guilty
or nolo contendere to, a felony, his or her options will be canceled on the date
he or she ceases to be a director, or (b) having retired, any outstanding
options (whether or not then exercisable) may be exercised in full at any time
prior to the expiration of the term of the options or within five years
following retirement, whichever period is shorter.
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND OTHER COMPENSATION
The following table shows, for the fiscal years ended September 30, 2001,
2000 and 1999, the cash compensation and other benefits paid or provided by the
Company to each individual who served as Chief Executive Officer during the 2001
fiscal year, and the four other most highly compensated executive officers of
the Company, listed by title.
11
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
-------------------------------
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES PAYOUTS
NAME AND PRINCIPAL POSITION FISCAL -------------------------- UNDERLYING --------------- ALL OTHER
DURING 2001 FISCAL YEAR YEAR SALARY($)(1) BONUS($)(1) OPTIONS(#)(2) LTIP PAYOUTS($) COMPENSATION($)
--------------------------- ------ ------------ ----------- ------------- --------------- ---------------
Charles M. Berger.......... 2001 $512,900 $ 85,000 0 $ 0 $48,417(4)
Chairman of the Board(3) 2000 $512,900 $598,015 0 $ 0 $26,038
1999 $512,855 $634,605 150,000 $ 0 $20,674
James Hagedorn............. 2001 $519,826 $ 64,650 60,000 $ 0 $39,173(4)
President and Chief 2000 $415,542 $343,598 0 $ 0 $17,861
Executive Officer(5) 1999 $369,000 $421,254 80,000 $ 0 $16,258
Michael P. Kelty, Ph.D..... 2001 $321,000 $ 66,818 24,000 $106,667(6) $52,439(4)
Vice Chairman and 2000 $294,558 $217,950 0 $ 0 $36,100
Executive Vice President 1999 $248,457 $126,342 15,000 $ 0 $19,508
Hadia Lefavre.............. 2001 $286,667 $ 25,875 20,000 $100,000(6) $22,051(4)
Executive Vice President, 2000 $288,102 $174,371 0 $ 0 $23,528
Human Resources 1999 $134,745 $110,252 80,000 $ 0 $ 9,274
Worldwide
G. Robert Lucas............ 2001 $324,460 $ 30,000 18,000 $106,667(6) $32,628(4)
Executive Vice President, 2000 $309,460 $235,796 0 $ 0 $32,257
General Counsel and 1999 $277,749 $255,469 15,000 $ 0 $15,263
Corporate Secretary(7)
Patrick J. Norton.......... 2001 $324,060 $ 31,200 15,000 $ 0 $11,356(4)
Executive Vice President 2000 $134,454 $143,911(9) 105,500(10) $ 0 $ 3,238
and Chief Financial 1999 -- -- -- $ 0 --
Officer(8)
---------------
(1) Includes compensation which may be deferred under the RSP and the Executive
Retirement Plan.
(2) These numbers represent options granted under the Company's 1996 Stock
Option Plan.
(3) Mr. Berger was named Chairman of the Board of the Company in August 1996.
From August 1996 until May 2001, he also served as Chief Executive Officer
of the Company, and from August 1996 until April 2000, he also served as
President of the Company.
(4) This number represents aggregate contributions made by the Company to the
RSP and the Executive Retirement Plan. For Dr. Kelty, this number also
includes transitional contributions in the aggregate amount of $22,275 made
by the Company to the RSP and the Executive Retirement Plan as a result of
his participation in the Pension Plan and the Excess Benefit Plan as
described below in " -- Pension Plans."
(5) Mr. Hagedorn was named President and Chief Executive Officer of the Company
in May 2001. He served as President and Chief Operating Officer of the
Company from April 2000 to May 2001, and as President, Scotts North
America, of the Company from December 1998 to April 2000.
(6) Reflects payments made in December 2000 under the Scotts Millennium Growth
Plan which was terminated in November 2000. This number represents a
pro-rated payment based on the Company's cumulative earnings per share for
the period from October 1, 1999 through September 30, 2000 and one-third
the number of cash performance units originally granted to the named
individual. The Compensation and Organization Committee determined that the
Company's cumulative earnings per share for that period satisfied the
threshold for payment of the maximum award. The number of cash performance
units originally granted to Dr. Kelty, Ms. Lefavre and Mr. Lucas were 1,600
units, 1,500 units and 1,600 units, respectively.
12
(7) Mr. Lucas retired as an executive officer of the Company effective
September 30, 2001. He served as Executive Vice President of the Company
from February 1999 to September 2001 and as General Counsel and Corporate
Secretary of the Company from May 1997 to September 2001. He was a Senior
Vice President of the Company from May 1997 to February 1999.
(8) Mr. Norton was named Executive Vice President and Chief Financial Officer
of the Company in May 2000, having served as interim Chief Financial
Officer since February 2000.
(9) This number includes $18,750, which represents the pro-rated amount of the
annual retainer Mr. Norton received for the period during the 2000 fiscal
year he served as a Non-Employee Director. See " -- Employment Agreements
and Termination of Employment and Change-in-Control Arrangements" below.
(10) On February 16, 2000, Mr. Norton received an automatic annual grant of
options to purchase 5,500 common shares in his capacity at that time as a
Non-Employee Director. That grant is included in the number shown.
GRANTS OF OPTIONS IN 2001 FISCAL YEAR
The following table summarizes information concerning individual grants of
non-qualified stock options made during the 2001 fiscal year to each of the
individuals named in the Summary Compensation Table. All of these grants were
made under the Company's 1996 Stock Option Plan. The Company has never granted
stock appreciation rights.
POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
---- ------------- ------------ --------- ---------- ------------- -------------
Charles M. Berger........... 0 -- -- -- -- --
James Hagedorn.............. 60,000(3) 7.56% $30.25 10/15/10 $1,142,400 $2,894,400
Michael P. Kelty, Ph.D...... 24,000(3) 3.02% $30.25 10/15/10 $ 456,960 $1,157,760
Hadia Lefavre............... 20,000(3) 2.52% $30.25 10/15/10 $ 380,800 $ 964,800
G. Robert Lucas............. 18,000(4) 2.27% $30.25 09/29/06 $ 185,220 $ 420,300
Patrick J. Norton........... 15,000(3) 1.89% $30.25 10/15/10 $ 285,600 $ 723,600
---------------
(1) In the event of a "Change in Control" (as defined in the 1996 Stock Option
Plan), each optionee will be permitted, in the optionee's discretion, to
surrender any option or portion thereof in exchange for a payment in cash of
an amount equal to the excess of the highest price paid for common shares of
the Company during the preceding 30-trading day period or offered in
conjunction with the Change in Control transaction, over the exercise price
for such option. Notwithstanding the foregoing, if the Compensation and
Organization Committee determines that the optionee will receive a new award
(or have the option honored or assumed) in a manner which preserves its
value and eliminates the risk that the value of the award will be forfeited
due to involuntary termination, no cash payment will be made as a result of
a Change in Control. If any cash payment is to be made with respect to
options granted within six months of the date on which a Change in Control
occurs, the cash payment will not occur unless and until the cash payment
may be made without subjecting the optionee to potential liability under
Section 16(b) of the Securities Exchange Act of 1934 by reason of such cash
payment. In the event of termination of employment by reason of retirement,
long-term disability or death, the options may thereafter be exercised in
full for a period of five years, subject to the stated terms of the options.
The options are forfeited if the optionee's employment is terminated for
cause. If an optionee's employment is terminated for any reason other than
retirement, long-term disability, death or for cause, any exercisable
options held by the optionee at the date of termination may be exercised for
a period of 90 days, subject to the stated terms of the options.
13
(2) The dollar amounts reflected in this table are the result of calculations at
the 5% and 10% annual appreciation rates set by the Securities and Exchange
Commission (the "SEC") for illustrative purposes, and assume the options are
held until their expiration date. Such dollar amounts are not intended to
forecast future financial performance or possible future appreciation in the
price of the Company's common shares. Shareholders are therefore cautioned
against drawing any conclusions from the appreciation data shown, aside from
the fact that optionees will only realize value from the option grants shown
if the price of the Company's common shares appreciates.
(3) These options were granted on October 18, 2000 and will become exercisable
on October 18, 2003.
(4) These options were granted on October 18, 2000 and became exercisable on
October 1, 2001, as a result of Mr. Lucas' retirement as an executive
officer of the Company.
OPTION EXERCISES IN 2001 FISCAL YEAR AND OPTION VALUES AT END OF 2001 FISCAL
YEAR
The following table summarizes information concerning options exercised
during the 2001 fiscal year and unexercised options held as of the end of the
2001 fiscal year by each of the individuals named in the Summary Compensation
Table.
NUMBER OF SECURITIES
NUMBER OF UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
SECURITIES OPTIONS AT FISCAL MONEY OPTIONS AT FISCAL
UNDERLYING YEAR-END(#) YEAR-END($)(1)
OPTIONS VALUE --------------------------- -----------------------------
NAME EXERCISED REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------- ----------- ----------- ------------- ------------ --------------
Charles M. Berger....... 0 N/A 550,000 0 $5,263,125 N/A
James Hagedorn.......... 0 N/A 240,000 140,000 $2,708,250 $231,000
Michael P. Kelty,
Ph.D.................. 38,547 $949,503 85,000 39,000 $1,004,125 $ 92,400
Hadia Lefavre........... 0 N/A 60,000 40,000 $ -- $ 77,000
G. Robert Lucas......... 10,000 $167,020 85,000 33,000(2) $ 530,625 $ 69,300(2)
Patrick J. Norton....... 0 N/A 36,000(3) 90,000 $ 61,875 $ 57,750
---------------
(1) "Value of Unexercised In-the-Money Options at Fiscal Year-End" is based upon
the fair market value of the Company's common shares on September 30, 2001
($34.10) less the exercise price of in-the-money options at the end of the
2001 fiscal year.
(2) These options became exercisable on October 1, 2001, as a result of Mr.
Lucas' retirement as an executive officer of the Company.
(3) This number includes options covering an aggregate of 11,000 common shares,
which were granted to Mr. Norton in his capacity as a Non-Employee Director.
PENSION PLANS
The Company maintains a tax-qualified, non-contributory defined benefit
pension plan (the "Pension Plan"). Eligibility for and accruals under the
Pension Plan were frozen as of December 31, 1997.
Monthly benefits under the Pension Plan upon normal retirement (age 65) are
determined under the following formula:
(a) (i) 1.5% of the individual's highest average annual compensation for
60 consecutive months during the ten-year period ending December
31, 1997; times
(ii) years of benefit service through December 31, 1997; reduced by
(b) (i) 1.25% of the individual's primary Social Security benefit (as of
December 31, 1997); times
(ii) years of benefit service through December 31, 1997.
Compensation includes all earnings plus 401(k) contributions and salary
reduction contributions for welfare benefits, but does not include earnings in
connection with foreign service, the value of a company car or separation or
other special allowances. An individual's primary Social Security benefit is
based on the
14
Social Security Act as in effect on December 31, 1997, and assumes constant
compensation through age 65 and that the individual will not retire earlier than
age 65. No more than 40 years of benefit service are taken into account. The
Pension Plan includes additional provisions for early retirement.
Benefits under the Pension Plan are supplemented by benefits under The O.M.
Scott & Sons Company Excess Benefit Plan (the "Excess Benefit Plan"). The Excess
Benefit Plan was established October 1, 1993 and was frozen as of December 31,
1997. The Excess Benefit Plan provides additional benefits to participants in
the Pension Plan whose benefits are reduced by limitations imposed under
Sections 415 and 401(a)(17) of the Internal Revenue Code of 1986 (the "Internal
Revenue Code"). Under the Excess Benefit Plan, executive officers and certain
key employees will receive, at the time and in the same form as benefits are
paid under the Pension Plan, additional monthly benefits in an amount which,
when added to the benefits paid to each participant under the Pension Plan, will
equal the benefit amount such participant would have earned but for the
limitations imposed by the Internal Revenue Code.
The estimated annual benefits under the Pension Plan and the Excess Benefit
Plan payable upon retirement at normal retirement age for each of the
individuals named in the Summary Compensation Table are:
YEARS OF BENEFIT SERVICE TOTAL BENEFIT
------------------------ -------------
Charles M. Berger................... 0.333 $ 134.01
James Hagedorn...................... 9.9167 $4,011.60
Michael P. Kelty, Ph.D.............. 17.5 $1,663.76
Hadia Lefavre....................... N/A N/A
G. Robert Lucas..................... N/A N/A
Patrick J. Norton................... N/A N/A
Associates participate in the RSP, formerly known as "The Scotts Company
Profit Sharing and Savings Plan." The RSP, as amended and restated effective as
of December 31, 1997, consolidated various defined contribution retirement plans
in effect at the Company and its domestic subsidiaries. The RSP permits 401(k)
contributions, employee after-tax contributions, Company matching contributions,
Company retirement contributions, and, between 1998 and 2002 for participants
whose benefits were frozen under the Pension Plan (including Dr. Kelty) and the
Scotts-Sierra Horticultural Products Company Retirement Plan for Salaried
Employees, certain transitional contributions based on age and service.
The Executive Retirement Plan is a nonqualified deferred compensation plan
for the benefit of certain officers and highly paid employees, including the
individuals named in the Summary Compensation Table. The Executive Retirement
Plan allows participants to make and have made on their behalf contributions
which could have been made under the terms of the RSP but for the limitations
imposed by the Internal Revenue Code on qualified defined compensation plans.
The Executive Retirement Plan also provides participants with the opportunity to
defer all or any part of bonus payments received pursuant to the Executive
Annual Incentive Plan (the "Executive Incentive Plan").
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Charles M. Berger, Chairman of the Board, entered into an employment
agreement with the Company, dated as of August 7, 1998 (as amended, the "Berger
Agreement"), which ended on September 30, 2001. Mr. Berger also served as Chief
Executive Officer until May 2001, and as President until April 2000. Under a
letter agreement, dated September 25, 2001, Mr. Berger will continue to serve as
Chairman of the Board of the Company from October 1, 2001 through the date of
the Company's 2003 Annual Meeting of Shareholders.
The Berger Agreement provided Mr. Berger with an annual base salary of
$500,000. In addition, he was entitled to participate in the Company's Executive
Incentive Plan at a target bonus opportunity of 65% of his base salary for the
1999 fiscal year, 75% of his base salary for the 2000 fiscal year and 85% of his
base salary for the 2001 fiscal year, and to receive certain employee benefits.
He also received grants of options under the
15
Company's 1996 Stock Option Plan on September 23, 1998, October 21, 1998 and
September 24, 1999, each for 75,000 common shares with an exercise price equal
to the closing price of common shares on the grant date.
Under the September 25, 2001 letter agreement, Mr. Berger will be paid an
annual base salary of $120,000 from October 1, 2001 through the Company's 2003
Annual Meeting date, and will be entitled to all benefits available to the
Company's executive officers other than incentive compensation and option
grants. As an award for prior service, Mr. Berger will also receive an aggregate
amount of $611,036.63, payable in monthly installments of $31,666.67 from
October 2001 through April 2003, with a final payment of $9,369.90 in May 2003.
It is expected that Mr. Berger will resign as Chairman of the Board and retire
at the Company's 2003 Annual Meeting of Shareholders. After his retirement, Mr.
Berger will continue to be paid monthly, at the rate of $120,000 per year,
through May 9, 2003, with no additional benefits other than those to which he is
entitled as a retiree. If Mr. Berger dies or becomes totally disabled or there
is a change in control of the Company, in each case before May 9, 2003, the
balance of any payments due to Mr. Berger through May 9, 2003 will be paid to
Mr. Berger or his estate or beneficiaries, as appropriate, in a lump sum within
90 days of Mr. Berger's death or total disability or the effective date of the
change in control.
In connection with the transactions contemplated by the Merger Agreement,
the Company entered into an employment agreement with Mr. James Hagedorn (the
"Hagedorn Agreement"). The Hagedorn Agreement had an original term of three
years, and is automatically renewed for an additional year each subsequent year,
unless either party notifies the other party of his/its desire not to renew. The
Hagedorn Agreement provides for a minimum annual base salary of $200,000 for Mr.
Hagedorn and participation in the various benefit plans available to senior
executive officers of the Company. In addition, pursuant to the Hagedorn
Agreement, the Company granted to Mr. Hagedorn options to acquire 24,000 common
shares. Upon certain types of termination of employment (e.g., a termination by
the Company for any reason other than "cause" (as defined in the Hagedorn
Agreement) or a termination by Mr. Hagedorn constituting "good reason" (also as
defined)), he will become entitled to receive certain severance benefits
including a payment equal to three times the sum of his base salary then in
effect plus his highest annual bonus in any of the three preceding years. Upon
termination of employment for any other reason, Mr. Hagedorn or his beneficiary
will be entitled to receive all unpaid amounts of base salary and benefits under
the executive benefit plans in which he participated. The Hagedorn Agreement
also contains confidentiality and noncompetition provisions which prevent Mr.
Hagedorn from disclosing confidential information about the Company and from
competing with the Company during his employment therewith and for an additional
three years thereafter.
At its meeting in September 2001, the Compensation and Organization
Committee of the Board of Directors of the Company agreed to certain employment,
severance and change in control agreements relating to Michael P. Kelty, Ph.D.,
Vice Chairman and Executive Vice President of the Company. Dr. Kelty's annual
salary was increased to $350,000 effective October 1, 2001; and his target bonus
opportunity remained at 50% of base salary. It was also agreed that he would
continue to be entitled to participate in the various benefit programs available
to senior executive officers of the Company. If Dr. Kelty's employment is
terminated within 18 months following a change in control of the Company (as
defined in the Company's 1996 Stock Option Plan), Dr. Kelty will be entitled to
receive a lump sum payment equal to two times his base salary plus two times his
target bonus opportunity. If Dr. Kelty's employment is terminated other than as
a result of a change in control and other than for cause, he will be entitled to
receive two times his base salary in effect at the date of termination in a lump
sum within 90 days after termination. As of December 14, 2001, these agreements
had not been reduced to writing.
G. Robert Lucas retired from the Company effective September 30, 2001.
Pursuant to the terms of his retirement, the Company agreed to pay Mr. Lucas an
award for past services of $535,800 payable in equal monthly installments from
October 2001 through and including September 2002, and his payout under the 2001
Executive Incentive Plan and to immediately vest all options.
Hadia Lefavre entered into a letter agreement with the Company, dated
October 14, 2001, under which Ms. Lefavre agreed to continue as Executive Vice
President, Human Resources until retirement on September 30, 2002, following
which she will receive an aggregate amount, payable in 12 equal monthly
installments, equal to her current annual base salary plus her target bonus
opportunity in effect on
16
September 30, 2002. If Ms. Lefavre dies or becomes totally disabled, her
employment is terminated by the Company without cause or there is a change in
control of the Company, in each case before September 30, 2002, those monthly
payments will be made to Ms. Lefavre or her estate or beneficiaries, as
appropriate, following her termination date or the effective date of the change
in control. For purposes of the Company's 1996 Stock Option Plan, if any of the
events described above occurs, Ms. Lefavre will be considered a retiree, and in
respect of options granted after October 14, 2001, will have the choice of
retaining the options or having them redeemed by the Company based on the
Black-Scholes value of the options on the grant date.
Patrick J. Norton entered into a letter agreement with the Company, dated
June 8, 2000, providing for the employment of Mr. Norton as Executive Vice
President and Chief Financial Officer of the Company from May 18, 2000 until
December 31, 2002. Mr. Norton's initial annual base salary was set at $300,000
with a target bonus opportunity under the Executive Incentive Plan of 50% of his
base salary, in each case to be reviewed annually. Mr. Norton also received an
option grant under the Company's 1996 Stock Option Plan on May 18, 2000,
covering 75,000 common shares with an exercise price equal to the closing price
of the common shares on the grant date. The annual retainer Mr. Norton was to
receive as a Non-Employee Director for the 2000 fiscal year was pro-rated to
reflect the time he served as a Non-Employee Director. There will be a similar
pro-ration of the annual retainer at such time as Mr. Norton resumes the status
of a Non-Employee Director.
REPORT OF THE COMPENSATION AND ORGANIZATION COMMITTEE ON EXECUTIVE COMPENSATION
ROLE OF THE COMPENSATION AND ORGANIZATION COMMITTEE
The Compensation and Organization Committee (the "Compensation Committee")
is made up of four members of the Board of Directors who are neither current nor
former employees of the Company. The Compensation Committee reviews the
Company's organizational structure, succession planning and ongoing functions of
the executive officers. It is also responsible for the Company's executive
compensation policies and programs. The Compensation Committee reviews and
recommends to the Board all compensation payments to the CEO and executive
officers of the Company and the aggregate incentive payments to the participants
in the Executive Incentive Plan.
In reaching compensation decisions, the Compensation Committee reviews
information from a variety of sources, which include proxy statement surveys and
industry surveys. In addition, the Compensation Committee has retained external
compensation consultants and legal counsel.
OBJECTIVES OF THE EXECUTIVE COMPENSATION PROGRAM
The Compensation Committee's primary objective is the establishment of
compensation programs for the Company's executive officers who are in a position
to maximize long-term shareholder value. The executive compensation program is
designed with a performance orientation, with a large portion of executive
compensation being "at risk". In pursuing this objective, the Compensation
Committee believes that the Company's executive compensation program must:
- Emphasize pay for performance, motivating both long-term and short-term
performance for the benefit of the Company's shareholders;
- Place greater emphasis on variable incentive compensation versus fixed or
base pay;
- Through its incentive plans, encourage and reward decision-making that
emphasizes long-term shareholder value;
- Provide a total compensation program competitive with those companies
with which the Company competes for top management talent on a global
basis; and
- Ensure the Company's continued growth and performance by attracting,
retaining and motivating talented executives and employees necessary to
meet the Company's strategic goals.
17
The Compensation Committee sets compensation levels which are designed to
be competitive with a comparison group of consumer products companies of similar
size and complexity (the "Comparison Group"). This comparative data may not
include the compensation paid by all of the companies that are included in the
S&P 500 Household Index which is used for comparative purposes in the
performance graph on page 21. Base salary and annual incentive opportunities are
targeted at the median of the Comparison Group companies, while long-term
incentives are targeted at the 50th percentile. The Company's competitive
compensation structure has enabled it to attract executives who, as key members
of the top management team, have been instrumental in improving the performance
of the Company.
The Compensation Committee does not have a policy that requires the
Company's executive compensation programs to qualify as performance-based
compensation under Section 162(m) of the Internal Revenue Code. The design and
administration of the Company's 1996 Stock Option Plan qualifies under Section
162(m) of the Internal Revenue Code as performance-based compensation. In all
cases, the Compensation Committee will continue to carefully consider the net
cost and value to the shareholders of its compensation policies.
OVERVIEW OF EXECUTIVE COMPENSATION AND 2001 FISCAL YEAR COMPENSATION COMMITTEE
ACTIONS
The Company's executive compensation program presently consists of three
principal components:
- Base Salary;
- Executive Incentive Plan; and
- 1996 Stock Option Plan
At the beginning of the 2001 fiscal year, all executive officers were eligible
to participate in the Scotts Millennium Growth Plan, which provided long-term
incentive compensation opportunities based on specified performance measures
related to the financial performance of the Company. The Scotts Millennium
Growth Plan was terminated in November 2000. Executive officers participating in
this plan received a pro-rated payment based on cumulative earnings per share
achieved for the period from October 1, 1999 through September 30, 2000.
BASE SALARY
The base salaries of the Company's executive officers and subsequent
adjustments to base salaries are determined relative to the following factors:
(1) the strategic importance to the Company of the executive officer's job
function; (2) the individual's performance in his or her position; (3) the
individual's potential to make a significant contribution to the Company in the
future; and (4) a comparison of industry compensation practices. The
Compensation Committee believes that all of these factors are important and the
relevance of each factor varies from individual to individual.
EXECUTIVE INCENTIVE PLAN
All executive officers are eligible to participate in the Executive
Incentive Plan, which provides annual incentive compensation opportunities based
on various performance measures related to the financial performance of the
Company and the achievement of individual goals and objectives for the fiscal
year.
The Compensation Committee oversees the operation of the Executive
Incentive Plan by evaluating and approving the plan's design as well as the
targets and objectives to be met by the Company and its executive officers and
the amount of incentive payable for specified attainment of those targets and
objectives. At the end of each fiscal year, the Compensation Committee
determines the extent to which the targets and objectives have been met and
awards incentive payments accordingly.
Incentives for executive officers in the corporate group are based on the
Company's net income and average debt reduction (80%) as well as on individual
goals (20%). Bonuses for executive officers in the Company's business groups are
typically based on the Company's net income and average debt reduction
18
(30%), the earnings before income tax and amortization of their particular
business group (50%) and individual goals (20%).
1996 STOCK OPTION PLAN
For the 2001 fiscal year, the Compensation Committee targeted long-term
incentive programs for executive officers at the 50th percentile of total
long-term incentive pay at Comparison Group companies. The Compensation
Committee uses the Black-Scholes method to calculate the long-term incentive
value of option grants and uses the Comparison Group companies as a benchmark.
For the 2001 fiscal year, the Compensation Committee targeted grants under
the 1996 Stock Option Plan at a level which achieved its desired long-term
incentive target. The Compensation Committee has on occasion further adjusted
annual option grants for certain recipients, based on corporate or individual
performance.
The 1996 Stock Option Plan enables the Compensation Committee to grant both
incentive stock options and non-qualified stock options, although no incentive
stock options have been granted to date. Options granted typically have a
three-year cliff vesting provision; however, this provision is sometimes
modified for grants made to associates outside of North America.
COMPENSATION OF THE CEO
The Compensation Committee, in conjunction with the CEO, establishes the
CEO's annual goals and objectives and evaluates his performance against these
goals and objectives annually in executive session.
On May 10, 2001, the Board of Directors elected a new CEO & President, Mr.
James Hagedorn. The Compensation Committee approved the employment terms of the
new CEO. The Company's executive compensation program is designed with a
performance orientation, with a large portion of executive compensation being
"at risk". Consistent with the overall goal of the executive compensation
program, Mr. Hagedorn's annual base salary was set below the median level at
$600,000. Mr. Hagedorn was granted a slightly above median stock option award
covering 125,000 common shares as of October 23, 2001. Mr. Hagedorn's target
incentive opportunity under the Executive Incentive Plan was set at 70% of his
salary for the 2001 fiscal year. In Mr. Hagedorn's position, 80% of his target
incentive is directly attributable to corporate performance (net income and
average debt reduction) with a performance modifier of 0 to 250%. The
Compensation Committee considered the remaining 20% of the target incentive,
with a performance modifier of 0 to 200%, to include individual accountabilities
for Mr. Hagedorn as follows:
- Corporate growth and operational excellence;
- Organizational development;
- Optimization of the Company's international business;
- Investor relations; and
- Corporate strategic planning.
In consideration of Mr. Hagedorn's performance with respect to his personal
goals during the 2001 fiscal year, he earned an incentive payment of $64,650. No
payment was earned in respect of the corporate performance portion.
With the election of Mr. Hagedorn to CEO, Mr. Berger continued his role as
Chairman of the Board of the Company. The Compensation Committee approved new
terms of employment for Mr. Berger on September 25, 2001 that are detailed above
in "-- Employment Agreements and Termination of Employment and Change-in-Control
Arrangements". Previously, Mr. Berger's employment had been governed by his
employment agreement, dated as of August 7, 1998, which extended through
September 2001. His annual base salary was frozen at $500,000, while his target
incentive opportunity under the Executive Incentive Plan increased from 65% in
1999, to 75% in 2000, and to 85% in 2001. In his position, 80% of Mr. Berger's
target incentive was directly attributable to corporate performance (net income
and average debt reduction) with a
19
performance modifier of 0 to 250%. With respect to the remaining 20% of the
target incentive, with a performance modifier of 0 to 200%, the Compensation
Committee considered Mr. Berger's individual accountabilities, including:
- Corporate strategic planning;
- Organizational development, with a global focus;
- Corporate growth and operational excellence;
- Capital investment optimization; and
- Investor relations.
In consideration of Mr. Berger's performance with respect to his personal goals
during the 2001 fiscal year, he earned an incentive payment of $85,000. No
payment was earned in respect of the corporate performance portion.
SUBMITTED BY THE COMPENSATION AND ORGANIZATION COMMITTEE OF THE COMPANY:
JOSEPH P. FLANNERY, CHAIRMAN
ALBERT E. HARRIS
JOHN M. SULLIVAN
ARNOLD W. DONALD (FROM MAY 10, 2001)
20
PERFORMANCE GRAPH
The following line graph compares the yearly percentage change in the
Company's cumulative total shareholder return (as measured by dividing (i) the
sum of (A) the cumulative amount of dividends for the measurement period,
assuming dividend reinvestment, and (B) the difference between the price of the
Company's common shares at the end and the beginning of the measurement period;
by (ii) the price of the Company's common shares at the beginning of the
measurement period) against the cumulative return of (a) Standard & Poor's 500
Consumer Household Non-Durable Products Index ("S&P 500 Household Index"); and
(b) the Russell 2000 (the "Russell 2000"); each for the period from September
30, 1996 to September 30, 2001. The comparison assumes $100 was invested on
September 30, 1996 in the Company's common shares and in each of the foregoing
indices and assumes reinvestment of dividends.
[TOTAL SHAREHOLDER RETURNS GRAPH]
9/96 9/97 9/98 9/99 9/00 9/01
------- ------- ------- ------- ------- -------
The Scotts Company $100.00 $136.36 $159.09 $179.87 $174.03 $177.14
S&P 500
Household Index $100.00 $140.17 $138.49 $178.22 $151.67 $171.15
Russell 2000 $100.00 $133.19 $107.86 $126.79 $154.69 $120.13
AUDIT COMMITTEE MATTERS
In accordance with the SEC's regulations, the Audit Committee has issued
the following report:
REPORT OF THE AUDIT COMMITTEE FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
ROLE OF THE AUDIT COMMITTEE, INDEPENDENT AUDITORS AND MANAGEMENT
The Audit Committee consists of three independent directors and operates
under a written charter adopted by the Board of Directors. Annually, the Audit
Committee recommends to the Board of Directors the selection of the Company's
independent auditors. PricewaterhouseCoopers LLP was selected as the Company's
independent auditors for the 2001 fiscal year.
Management has the responsibility for the consolidated financial statements
and the financial reporting process, including the systems of internal
accounting and financial controls. The Company's independent auditors are
responsible for performing an audit of the Company's consolidated financial
statements in accordance with generally accepted auditing standards and issuing
their report thereon. The Audit Committee's responsibility is to provide
independent, objective oversight of these processes.
21
Pursuant to this responsibility, the Audit Committee met with management
and the independent auditors throughout the year. The Audit Committee reviewed
the audit plan and scope with the independent auditors, and discussed the
matters required by Statement on Auditing Standards No. 61 (Communication with
Audit Committees). The Audit Committee also met with the independent auditors,
without management present, to discuss the results of their audit work, their
evaluation of the Company's system of internal controls and the quality of the
Company's financial reporting.
In addition, the Audit Committee has discussed with the independent
auditors their independence from the Company and its management, including the
matters in written disclosures required by the Independence Standards Board
Standard No. 1 (Independence Discussions with Audit Committees).
MANAGEMENT'S REPRESENTATIONS AND AUDIT COMMITTEE RECOMMENDATIONS
Management has represented to the Audit Committee that the Company's
consolidated financial statements as of and for the year ended September 30,
2001, were prepared in accordance with generally accepted accounting principles
and the Audit Committee has reviewed and discussed the consolidated financial
statements with management and the independent auditors. Based on the Audit
Committee's discussions with management and the independent auditors and its
review of the report of the independent auditors to the Audit Committee, the
Audit Committee recommended to the Board of Directors (and the Board has
approved) that the audited consolidated financial statements be included in the
Company's Annual Report on Form 10-K for the year ended September 30, 2001 to be
filed with the SEC.
SUBMITTED BY THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS OF THE COMPANY:
L. JACK VAN FOSSEN, CHAIRMAN
ALBERT E. HARRIS (FROM MAY 10, 2001)
JOHN M. SULLIVAN
FEES OF INDEPENDENT AUDITORS
AUDIT FEES
PricewaterhouseCoopers LLP has billed the Company $1,111,394 for
professional services rendered for the audit of the Company's annual
consolidated financial statements for the 2001 fiscal year and the reviews of
the consolidated financial statements included in the Company's Quarterly
Reports on Form 10-Q filed during the 2001 fiscal year.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
PricewaterhouseCoopers LLP rendered no professional services to the Company
or its subsidiaries during the 2001 fiscal year in connection with the design
and implementation of financial information systems.
ALL OTHER FEES
PricewaterhouseCoopers LLP has billed the Company $353,679, in the
aggregate, for services (other than those covered under the heading "-- Audit
Fees") rendered during the 2001 fiscal year. These other fees include fees for
tax compliance and consulting services, acquisition related services and
retirement plan audits.
The Audit Committee has considered whether the provision of the services
covered under the heading "-- All Other Fees" is compatible with maintaining the
independence of PricewaterhouseCoopers LLP.
INDEPENDENT AUDITORS
The Board of Directors of the Company has selected PricewaterhouseCoopers
LLP as the Company's independent auditors for the 2002 fiscal year.
PricewaterhouseCoopers LLP, a certified public accounting firm, has served as
the Company's independent auditors since 1986.
22
A representative of PricewaterhouseCoopers LLP is expected to be present at
the Annual Meeting to respond to appropriate questions and to make such
statements as he/she may desire.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
James Hagedorn is the President and Treasurer and owns 83% of the shares of
Hagedorn Aviation, a company which owns the aircraft used for certain business
travel by James Hagedorn and, on occasion, certain members of senior management
of the Company. Horace Hagedorn is the Vice President of Hagedorn Aviation and
owns the remaining 17% equity interest. The Company pays charges by Hagedorn
Aviation for flight time at the rate of $150 per hour of flight. The charges
cover the cost to operate and maintain the aircraft. During the 2001 fiscal
year, the Company paid a total of approximately $25,530 to Hagedorn Aviation for
such service, which constituted more than five percent of Hagedorn Aviation's
consolidated gross revenues for its last full fiscal year.
Paul Hagedorn, who, along with his brother, James Hagedorn, and his sister,
Katherine Hagedorn Littlefield, is a general partner of the Hagedorn
Partnership, is employed by the Company as a graphics design specialist. During
the 2001 fiscal year, Paul Hagedorn received salary and bonus totaling $108,137
and employment benefits and reimbursement for travel expenses consistent with
those offered to other associates of the Company. In the 2001 fiscal year, the
Company paid aggregate rent and utility expenses of $8,728 for an office in
Atlanta, Georgia for Paul Hagedorn.
The Company subleases a portion of a building to the Hagedorn Partnership
at a rent of $1,437 per month plus payment for communication services. The
Hagedorn Partnership provides personnel, equipment and supplies to support the
Company's activities at that office. Under these arrangements, during fiscal
year 2001, the Company paid $94,656 to the Hagedorn Partnership and was paid
$11,867.
PROPOSAL NO. 2
SHAREHOLDER PROPOSAL
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST THE SHAREHOLDER PROPOSAL.
John C. Harrington, P.O. Box 6108, Napa, California 94581-1108, claiming
ownership of 100 common shares of the Company for more than one year and stating
that he will continue to hold the same through the date of the Annual Meeting,
has given notice that he intends to present for action at the Annual Meeting the
following resolution (the "Shareholder Proposal"):
"Genetic Engineering Shareholder Resolution to
The Scott's Company
WHEREAS: Some international markets for genetically engineered (GE)
seeds are threatened by extensive resistance, such as:
-- Countries around the world including Brazil, Greece and Thailand,
have instituted moratoriums or banned importation of GE seeds and
crops.(1)
-- Once in effect, the Biosafety Protocol, approved by representatives
of more than 130 countries, will require that GE seeds be subject to
the Advanced Informed Agreement, allowing countries to decide whether
to import GE seeds based on scientific assessments.
WHEREAS: There is some scientific concern that genetically engineered
agricultural products may be harmful to humans, animals or the
environment, for example:
-- Turf genetically engineered to be resistant to herbicides could lead
to increased pesticide use and increased exposure of children to
potentially hazardous chemicals.(2)
23
-- The American Society of Landscape Architects, with more than 14,000
members, are concerned that the use of GE grasses could potentially
affect the entire ecosystem of native plants.(3)
-- Research has shown that cross pollination with naturalized and
native populations of cross-compatible perennial relatives and native
species could lead to new weeds that are difficult to manage.(4)
-- The lawn and turf seed industry is second only to that of hybrid
corn seed. There is little scientific data available on the potential
risks from the sale and large-scale production of lawn and turf
seed.(5)
THEREFORE, BE IT RESOLVED: Shareholders request that the Board of
Directors review our Company's products which are genetically
engineered or altered and report to shareholders by August 2002 (at
reasonable cost and omitting proprietary information). This report
would identify all financial and legal risks, financial costs and
benefits, and environmental impacts of the continued use of genetically
engineered seeds, organisms, or products thereof sold under the
company's brand names.
---------------
(1)THIRD WORLD NETWORK INFORMATION SERVICE ON BIOSAFETY, 16 May 2001,
www.twnside.org.sg.
(2)The vast majority of Scotts' field trial applications for GE plants are for
herbicide resistance -- ie you can spray Roundup on them (or glufosinate) and it
won't kill them.
Source: http://www.nbiap.vt.edu/cfdocs/fieldtest3.cfm.
(3)New York Times, July 9, 2000. "Suburban Genetics: Scientists Searching for a
Perfect Lawn."
(4)Diversity, a News Journal for the International Genetic Resources Community,
Volume 16, Nos. 1 & 2, 2000.
(5)Ibid."
BOARD'S RECOMMENDATION
YOUR BOARD OF DIRECTORS BELIEVES THAT THE SHAREHOLDER PROPOSAL IS NOT IN
THE BEST INTEREST OF THE COMPANY OR ITS SHAREHOLDERS AND RECOMMENDS THAT THE
SHAREHOLDERS VOTE AGAINST THE SHAREHOLDER PROPOSAL FOR THE FOLLOWING REASONS:
The Company (A) has never sold, and does not now sell, genetically
engineered or altered products ("GE Products"); and (B) has never permitted, and
does not now permit, GE Products to be sold under the Company's brand names.
The Board of Directors believes that the Company's development and
commercialization of innovative products is an important key to the Company's
continued success. The Company has a long history of dedication to responsible
research in search of better, more effective and easier to use products. Today,
one aspect of that research is research into GE Products.
Before a GE Product may be sold in the United States, it must be
"deregulated" by appropriate governmental agencies. The Company has not
submitted a petition for deregulation with regard to any GE Product; however,
the Company intends to submit a petition for deregulation of a GE turfgrass
product in the near future. There can be no assurance that, if the Company
submits a petition for deregulation of this GE turfgrass product or any other GE
Product, the petition will be approved, or that if approved and commercially
introduced by the Company, any GE Product will generate any revenues for the
Company or contribute to the Company's earnings. As with all products
commercially introduced by the Company, any GE Product will meet and may exceed
all legally required testing and safety standards prior to introduction.
Deregulation involves compliance with the rules and regulations of and
cooperation with the United States Department of Agriculture ("USDA"), the
Environmental Protection Agency ("EPA") and/or the Food and Drug Administration
(the "FDA"). More specifically, as part of the deregulation process for any GE
turfgrass or GE ornamental plant product, the Company would be required to
present evidence to the
24
USDA in the form of scientifically rigorous studies showing that such GE Product
is not substantially different from non-GE plants of the same species. The
Company would also be required to satisfy other agencies, such as the EPA or the
FDA, as to their appropriate areas of regulatory authority. As such, in addition
to the Company's own dedication to and standards of safety, any GE Product for
which the Company seeks commercialization to the point of submitting a petition
for deregulation will be subjected to rigorous and thorough regulatory review.
The Board of Directors believes that it would be an inappropriate and
wasteful misuse of the Company's resources, financial and otherwise, to identify
and analyze risks, costs, benefits and environmental impacts associated with
products that the Company has never sold in the past, does not sell now and is
not reasonably certain to sell in the near future.
VOTE REQUIRED
Approval of the Shareholder Proposal requires the affirmative vote of a
majority of the common shares present in person, or by proxy, at the Annual
Meeting. Broker non-votes and abstentions will have the same effect as votes
against the Shareholder Proposal.
SHAREHOLDER PROPOSALS FOR 2003 ANNUAL MEETING
Proposals of shareholders intended to be presented at the 2003 Annual
Meeting of Shareholders must be received by the Secretary of the Company no
later than August 23, 2002, to be included in the Company's proxy, notice of
meeting and proxy statement relating to that meeting. Upon receipt of a
shareholder proposal, the Company will determine whether or not to include the
proposal in the proxy materials in accordance with applicable rules and
regulations promulgated by the SEC.
The SEC has promulgated rules relating to the exercise of discretionary
voting authority pursuant to proxies solicited by the Board of Directors. If a
shareholder intends to present a proposal at the 2003 Annual Meeting of
Shareholders and does not notify the Secretary of the Company of the proposal by
November 6, 2002, the proxies solicited by the Board of Directors for use at the
2003 Annual Meeting may be voted on the proposal, without discussion of the
proposal in the Company's proxy statement for that Annual Meeting.
In each case, written notice must be given to the Company's Secretary, at
the following address: The Scotts Company, 14111 Scottslawn Road, Marysville,
Ohio 43041, Attn: Secretary.
OTHER BUSINESS
As of the date of this Proxy Statement, the Board of Directors knows of no
matter that will be presented for action at the Annual Meeting other than those
discussed in this Proxy Statement. If any other matter requiring a vote of the
shareholders properly comes before the Annual Meeting, the persons acting under
the proxies solicited by the Board of Directors will vote and act according to
their best judgments in light of the conditions then prevailing.
ANNUAL REPORT ON FORM 10-K
Audited consolidated financial statements for the Company and its
subsidiaries for the 2001 fiscal year are included in the Company's 2001
Financial Statements and Other Information booklet which is being delivered with
this Proxy Statement. Additional copies of the Company's 2001 Financial
Statements and Other Information booklet, the Company's 2001 Summary Annual
Report and the Company's Annual Report on Form 10-K for the year ended September
30, 2001 (excluding exhibits, unless such exhibits have been specifically
incorporated by reference therein) may be obtained, without charge, from the
Company's Investor Relations Department at 14111 Scottslawn Road, Marysville,
Ohio 43041. The Form 10-K is also on file with the SEC, Washington, D.C. 20549.
25
HOUSEHOLDING OF ANNUAL MEETING MATERIALS
Earlier this year, the SEC approved a new rule concerning the delivery of
annual reports and proxy statements. It permits the Company to send a single set
of these documents to any household at which two or more shareholders reside if
the Company believes such shareholders are members of the same family or
otherwise share the same address. Each shareholder will continue to receive a
separate notice of the meeting and proxy card. This procedure, referred to as
householding, reduces the volume of duplicate information you receive and
reduces the Company's expenses. The Company plans to institute this procedure
for all relevant accounts for the 2003 proxy season. If you agree to
householding, you will help reduce printing and mailing costs for the Company. A
notice is being sent with this Proxy Statement to shareholders who will be
affected by householding.
This year, a limited number of brokerage firms have instituted
householding. If your family has multiple accounts holding common shares of the
Company, you may have received householding notification from your broker
earlier this year. Please contact your broker directly if you have questions,
require additional copies of the Proxy Statement, the 2001 Financial Statements
and Other Information or the 2001 Summary Annual Report or wish to revoke your
decision to household, and thereby receive multiple copies. These options are
available to you at any time.
By Order of the Board of Directors,
/s/ James Hagedorn
JAMES HAGEDORN
President and Chief Executive Officer
/s/ Charles M. Berger
CHARLES M. BERGER
Chairman of the Board
26
THE SCOTTS COMPANY
2002 ANNUAL MEETING OF SHAREHOLDERS
The Berger Learning Center
14111 Scottslawn Road
Marysville, Ohio 43041
937-644-0011
Fax 937-644-7568
JANUARY 25, 2002 AT 10:00 A.M., LOCAL TIME
[MAP TO ANNUAL MEETING]
DIRECTIONS
From Port Columbus to The Scotts Company North American Headquarters, The Berger
Learning Center.
Leaving Port Columbus, follow signs to I-270 North. Take I-270 around the city
to Dublin. Exit Route 33 to Marysville (northwest) approximately 15 miles.
Take the Scottslawn Road exit. Make a left and cross over highway. The Scotts
Company North American Headquarters -- Horace Hagedorn Building is the first
left. Follow signs for entry into The Berger Learning Center.
VOTE BY INTERNET - www.proxyvote.com
Use the Internet to transmit your voting
instructions up until 11:59 P.M. Eastern
THE SCOTTS COMPANY Time the day before the meeting date. Have
C/O PROXY SERVICES your proxy card in hand when you access the
P.O. BOX 9142 web site. You will be prompted to enter your
FARMINGDALE, NY 11735 12-digit Control Number which is located
below to obtain your records and to create
an electronic proxy voting instruction form.
VOTE BY PHONE -1-800-690-6903
Use any touch-tone telephone to transmit
your voting instructions up until 11:59 P.M.
Eastern Time the day before the meeting
date. Have your proxy card in hand when you
call. You will be prompted to enter your 12-
digit Control Number which is located below
and then follow the simple instructions the
Vote Voice provides you.
VOTE BY MAIL
Mark, sign, and date your proxy card and
return it in the postage-paid envelope we
have provided or return it to The Scotts
Company, c/o ADP, 51 Mercedes Way, Edgewood,
NY 11717.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: SCOTTS KEEP THIS PORTION FOR YOUR RECORDS
------------------------------------------------------------------------------------------------------------------------------------
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
------------------------------------------------------------------------------------------------------------------------------------
THE SCOTTS COMPANY
VOTE ON DIRECTORS
(YOUR BOARD RECOMMENDS THAT YOU VOTE FOR ALL NOMINEES)
FOR WITHHOLD FOR ALL To withhold authority to vote for any
1. Election of four directors, each for a term of three ALL ALL EXCEPT individual nominee, mark "For All Except"
years to expire at the 2005 Annual Meeting: and write the nominee's number on the line
below.
Nominees: 01) Charles M. Berger [ ] [ ] [ ] ____________________________________________
02) James Hagedorn
03) Karen G. Mills
04) John Walker, Ph.D.
For Against Abstain
VOTE ON SHAREHOLDER PROPOSAL
(YOUR BOARD RECOMMENDS THAT YOU VOTE AGAINST THE SHAREHOLDER PROPOSAL)
2. Adoption of the shareholder proposal relating to genetically engineered products. [ ] [ ] [ ]
TRANSACT SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING OR ANY ADJOURNMENT.
Please sign exactly as your name is stenciled hereon.
Note: Please fill in, sign, date and return this Proxy in the
enclosed envelope. When signing as Attorney, Executor, Administrator,
Trustee or Guardian, please give full title as such. If holder is a
corporation, please sign the full corporate name by authorized officer.
Joint Owners should each sign individually. (Please note any change
of address on this proxy card).
__________________________________________________________ __________________________________________________________
Signature [PLEASE SIGN WITHIN BOX] Date Signature (Joint Owners) Date
--------------------------------------------------------------------------------
THE SCOTTS COMPANY
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD JANUARY 25, 2002
The undersigned holder(s) of common shares of The Scotts Company (the "Company")
hereby appoints James Hagedorn and David M. Aronowitz, and each of them, the
Proxies of the undersigned, with full power of substitution, to attend the
Annual Meeting of Shareholders of the Company to be held at The Berger Learning
Center, 14111 Scottslawn Road, Marysville, Ohio 43041, on Friday, January 25,
2002, at 10:00 a.m., local time in Marysville, Ohio, and any adjournment, and to
vote all of the common shares which the undersigned is entitled to vote at such
Annual Meeting or any adjournment.
WHERE A CHOICE IS INDICATED, THE COMMON SHARES REPRESENTED BY THIS PROXY WHEN
PROPERLY EXECUTED WILL BE VOTED OR NOT VOTED AS SPECIFIED. IF NO CHOICE IS
INDICATED, THE COMMON SHARES REPRESENTED BY THIS PROXY WILL BE VOTED "FOR" THE
ELECTION OF THE NOMINEES LISTED IN PROPOSAL NO. 1 AS DIRECTORS OF THE COMPANY
AND "AGAINST" PROPOSAL NO.2. IF ANY OTHER MATTERS ARE PROPERLY BROUGHT BEFORE
THE ANNUAL MEETING OR ANY ADJOURNMENT, OR IF A NOMINEE FOR ELECTION AS A
DIRECTOR NAMED IN THE PROXY STATEMENT IS UNABLE TO SERVE OR FOR GOOD CAUSE WILL
NOT SERVE, THE COMMON SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN THE
DISCRETION OF THE PROXIES ON SUCH MATTERS OR FOR SUCH SUBSTITUTE NOMINEE(S) AS
THE DIRECTORS MAY RECOMMEND.
IF COMMON SHARE UNITS ARE ALLOCATED TO THE ACCOUNT OF THE UNDERSIGNED UNDER THE
SCOTTS COMPANY RETIREMENT SAVINGS PLAN (THE "RSP"), THEN THE UNDERSIGNED HEREBY
DIRECTS THE TRUSTEE OF THE RSP TO VOTE ALL COMMON SHARES OF THE COMPANY
REPRESENTED BY THE UNITS ALLOCATED TO THE UNDERSIGNED'S ACCOUNT UNDER THE RSP IN
ACCORDANCE WITH THE INSTRUCTIONS GIVEN HEREIN, AT THE COMPANY ANNUAL MEETING AND
AT ANY ADJOURNMENT, ON THE MATTERS SET FORTH ON THE REVERSE SIDE. IF NO
INSTRUCTIONS ARE GIVEN, THE PROXY WILL NOT BE VOTED BY THE TRUSTEE OF THE RSP.
The undersigned hereby acknowledges receipt of the Notice of the Annual Meeting
of Shareholders and the related Proxy Statement, the Company's 2001 Summary
Annual Report and the Company's 2001 Financial Statements and Other Information.
Any proxy heretofore given to vote the common shares which the undersigned is
entitled to vote at the Annual Meeting is hereby revoked.
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF THE SCOTTS COMPANY
(This Proxy continues and must be signed and dated on the reverse side)
--------------------------------------------------------------------------------
THE SCOTTS COMPANY
2001 FINANCIAL STATEMENTS AND OTHER INFORMATION
[COVER PHOTO]
THE SCOTTS COMPANY
2001 FINANCIAL STATEMENTS
AND OTHER INFORMATION
MESSAGE TO OUR SHAREHOLDERS
This 2001 Financial Statements and Other Information booklet contains our
audited consolidated financial statements and all of the information that the
regulations of the Securities and Exchange Commission (the "SEC") require be
presented in an Annual Report to Shareholders. For legal purposes, this is The
Scotts Company's 2001 Annual Report to Shareholders. This booklet does not
contain all of the information included in The Scotts Company's 2001 Annual
Report on Form 10-K. HOWEVER, THE 2001 ANNUAL REPORT ON FORM 10-K AS FILED WITH
THE SEC (EXCLUDING EXHIBITS, UNLESS SUCH EXHIBITS HAVE BEEN SPECIFICALLY
INCORPORATED BY REFERENCE THEREIN), WILL BE PROVIDED TO ANY SHAREHOLDER, WITHOUT
CHARGE, UPON WRITTEN REQUEST TO THE SCOTTS COMPANY, INVESTOR RELATIONS
DEPARTMENT, 14111 SCOTTSLAWN ROAD, MARYSVILLE, OHIO 43041.
---------------------
TABLE OF CONTENTS
PAGE
----
Message to Our Shareholders................................. 1
A Brief Description of Our Business......................... 2
Selected Financial Data..................................... 4
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 5
Quantitative and Qualitative Disclosures About Market
Risk...................................................... 18
Index to Consolidated Financial Statements.................. 19
Stock Price and Dividend Information........................ 63
Officers & Directors of The Scotts Company.................. 64
A BRIEF DESCRIPTION OF OUR BUSINESS
The Scotts Company (together with its subsidiaries, "Scotts" or the
"Company") is one of the most widely recognized marketers and manufacturers of
products for lawns, gardens, professional turf and horticulture. We believe that
our market leadership is driven by our leading brands, consumer-focused
marketing, product performance and extensive relationships with major U.S.
retailers. Our portfolio of consumer brands that we believe hold a top one or
two leading market share position in their respective U.S. markets includes the
following:
- Hyponex(R)
- Miracle-Gro(R)
- Ortho(R)
- Osmocote(R)
- Roundup(R)*
- Scotts(R)
- Turf Builder(R)
Our portfolio of European Union brands includes the following:
- Celaflor(R)
- Fertiligene(R)
- KB(R)
- Levington(R)
- Miracle-Gro(R)
- Nexa-Lotte(R)
- Shamrock(R)
- Substral(R)
- Weedol(R)
We divide our business into three reporting segments:
- North American Consumer;
- Global Professional; and
- International Consumer.
NORTH AMERICAN CONSUMER
In our North American Consumer segment, we manufacture and market products
and offer services that provide fast, easy and effective assistance to
homeowners who seek to nurture beautiful and weed and pest-free lawns, gardens
and indoor plants. These products and services are sold under brand names that
people know and trust, and that incorporate many of the best technologies
available to us. These products and services include:
TURF BUILDER(R). We sell a complete line of granular lawn fertilizer, weed
control, pest control and combination products under the Scotts Turf Builder(R)
brand name. The Turf Builder(R) line of products is designed to make it easy for
do-it-yourself consumers to select and properly apply the right product in the
right quantity for their lawns.
MIRACLE-GRO(R). We sell a complete line of water-soluble plant foods under
the Miracle-Gro(R) brand name. These products are designed to be dissolved in
water, creating a diluted nutrient solution which is poured over plants or
sprayed through an applicator and rapidly absorbed by a plant's roots and
leaves.
Miracle-Gro(R) products are specially formulated to give different kinds of
plants the right kind of nutrition. While Miracle-Gro(R) All-Purpose
Water-Soluble Plant food is the leading product in the Miracle-Gro(R) line by
market share, the Miracle-Gro(R) line includes other products such as
Miracle-Gro(R) Rose Plant Food, Miracle-Gro(R) Tomato Plant Food, Miracle-Gro(R)
Lawn Food and Miracle-Gro Bloom Booster(R). Miracle-Gro continues to look for
ways to improve the convenience of its products for the consumer. The
Miracle-Gro(R) Garden Feeder provides consumers with an easy, fast and effective
way to feed all the plants in their garden. We are also introducing a high
quality, slow release line of Miracle-Gro(R) plant foods for extended feeding
convenience.
---------------
* Roundup(R) is a registered trademark of Monsanto Technology LLC (an affiliate
of Monsanto Company (now known as Pharmacia Corporation)). We market and
distribute consumer Roundup(R) products for Monsanto under a long-term
marketing agreement. For additional information, please see the discussion
under the heading "-- North American Consumer - Roundup(R)".
----
2
ORTHO(R). We sell a broad line of weed control, indoor and outdoor pest
control and plant disease control products under the Ortho(R) brand name.
Ortho(R) products are available in aerosol, liquid ready-to-use, concentrated,
granular and dust forms.
Ortho(R) products include Weed-B-Gon(R) to control weeds, Brush-B-Gon(R) to
control brush, and Bug-B-Gon(R), RosePride(R), Ortho-Klor(R), Ant-Stop(R),
Orthene(R) Fire Ant control, Ortho(R) Home Defense(R) and Flea-B-Gon(R) to
control pests.
GROWING MEDIA. We sell a complete line of growing media products for indoor
and outdoor uses under the Miracle-Gro(R), Scotts(R), Hyponex(R) and EarthGro(R)
brand names, as well as other labels. These products include retail potting
soils, garden soils, topsoil, manures, sphagnum peat and decorative barks and
mulches. The addition of Miracle-Gro(R) fertilizers to potting soils and garden
soils have turned low-margin commodity products into value-added brand leaders.
SCOTTS LAWNSERVICE(R). In addition to our products, we provide residential
lawn care, tree and shrub care and external pest control services through our
Scotts LawnService(R) business. These services consist primarily of fertilizer,
weed control, pest control and disease control applications.
ROUNDUP(R). In 1998, we entered into a long-term marketing agreement with
Monsanto and became Monsanto's exclusive agent for the marketing and
distribution of consumer Roundup(R) non-selective herbicide products in the
consumer lawn and garden market within the United States and certain other
specified countries, including Australia, Austria, Canada, France, Germany and
the United Kingdom.
OTHER PRODUCTS. We manufacture and market three lines of high quality lawn
spreaders under the Scotts(R) brand name: SpeedyGreen(R) rotary spreaders,
AccuGreen(R) drop spreaders and Handy Green(R) II lawn spreaders. We sell a line
of hose-end applicators for water-soluble plant foods like Miracle-Gro(R)
products, and lines of applicators under the Ortho(R), Dial 'n Spray(R),
Whirlybird(R) and Pull 'N Spray(R) trademarks for the application of certain
insect control products. We also sell numerous varieties and blends of high
quality grass seed, many of them proprietary, designed for different conditions
and geographies. These consumer grass seed products are sold under the Scotts
Pure Premium(R), Scotts Turf Builder(R), Scotts(R) and PatchMaster(R) brands.
LICENSED PRODUCTS. We have granted several royalty-bearing licenses to use
the Scotts(R) trademark, including: a license to Union Tools, Inc. for use on
garden tools; a license to Home Depot U.S.A., Inc. under which Home Depot
markets a line of motorized, walk-behind lawn mowers and tillers; and a license
under which Home Depot markets a line of high quality, riding/tractor lawn
mowers currently manufactured by Deere & Company.
GLOBAL PROFESSIONAL
Through our Global Professional segment, we sell professional products to
commercial nurseries, greenhouses, landscape service providers and specialty
crop growers in North America and internationally in many locations including
Africa, Australia, the Caribbean, the European Union, Japan, Latin America, the
Middle East, New Zealand and Southeast Asia.
We also sell a broad line of sophisticated controlled-release fertilizers,
water-soluble fertilizers, pesticide products, wetting agents and growing media
products to international professional customers under brand names that include
Banrot(R), Metro-Mix(R), Miracle-Gro(R), Osmocote(R), Peters(R), Poly-S(R),
Rout(R), ScottKote(R), Shamrock(R) and Sierra(R).
INTERNATIONAL CONSUMER
In our International Consumer segment, we sell consumer lawn and garden
products in over 25 countries outside of North America. Our International
Consumer segment also manages and markets the consumer Roundup(R) business with
Monsanto outside of North America under a long-term marketing agreement.
Our international consumer products and brand names vary from country to
country depending upon the market conditions, brand name strength and the nature
of our strategic relationships in a given country. In the United Kingdom, we
sell Miracle-Gro(R) plant fertilizers, Weedol(R) and Pathclear(R) herbicides,
EverGreen(R) lawn fertilizer and Levington(R) growing media. Our other
international brands include KB(R) and Fertiligene(R) in France, Celaflor(R),
Nexa-Lotte(R) and Substral(R) in Germany and Austria, and ASEF(R), KB(R) and
Substral(R) in the Benelux countries.
----
3
SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
2001(1) 2000 1999(2) 1998(3) 1997(4)
-------------------------------------------------------------------------------------------------------------
OPERATING RESULTS:
Net sales $1,747.7 $1,709.0 $1,602.5 $1,083.3 $871.7
Gross profit 651.4 658.5 615.2 368.3 298.1
Income from operations(5) 116.4 210.2 196.1 94.1 94.8
Income before extraordinary items 15.5 73.1 69.1 37.0 39.5
Income applicable to common
shareholders 15.5 66.7 53.5 26.5 29.7
Depreciation and amortization 63.6 61.0 56.2 34.5 26.8
FINANCIAL POSITION:
Working capital 245.7 234.1 274.8 135.3 146.5
Investments in property, plant and
equipment 63.4 72.5 66.7 41.3 28.6
Property, plant and equipment, net 310.7 290.5 259.4 197.0 146.1
Total assets 1,843.0 1,761.4 1,769.6 1,035.2 787.6
Total debt 887.8 862.8 950.0 372.5 221.3
Total shareholders' equity 506.2 477.9 443.3 403.9 389.2
CASH FLOWS:
Cash flows from operating activities 65.7 171.5 78.2 71.0 121.1
Cash flows from investing activities (101.0) (89.5) (571.6) (192.1) (72.5)
Cash flows from financing activities 21.4 (78.2) 513.9 118.4 (46.2)
RATIOS:
Operating margin 6.7% 12.2% 12.2% 8.7% 10.9%
Current ratio 1.5 1.6 1.7 1.6 2.1
Total debt to total book
capitalization 63.7% 64.3% 68.2% 48.0% 36.2%
Return on average shareholders' equity 3.1% 14.5% 12.6% 6.7% 7.9%
PER SHARE DATA:
Basic earnings per common share $ 0.55 $ 2.39 $ 2.93 $ 1.42 $1.60
Diluted earnings per common share 0.51 2.25 2.08 1.20 1.35
Price to diluted earnings per share,
end of period 66.9 14.9 16.6 25.5 19.4
Stock price at year-end 34.10 33.50 34.63 30.63 26.25
Stock price range -- High 47.10 42.00 47.63 41.38 30.56
Stock price range -- Low 28.88 29.44 26.63 26.25 17.75
OTHER:
EBITDA(6) 180.0 271.2 252.3 128.6 121.6
EBITDA margin(6) 10.3% 15.9% 15.7% 11.9% 13.9%
Interest coverage (EBITDA/interest
expense)(6) 2.1 2.9 3.2 4.0 4.8
Average common shares outstanding 28.4 27.9 18.3 18.7 18.6
Common shares used in diluted earnings
per common share calculation 30.4 29.6 30.5 30.3 29.3
Dividends on Class A Convertible
Preferred Stock $ 0.0 $ 6.4 $ 9.7 $ 9.8 $ 9.8
---------------
NOTE: Prior year presentations have been changed to conform to fiscal 2001
presentation; these changes did not impact net income.
(1) Includes Substral(R) brand acquired from Henkel KGaA from January 2001.
(2) Includes Rhone-Poulenc Jardin (nka Scotts France SAS) from October 1998,
ASEF Holding BV from December 1998 and the non-Roundup(R) ("Ortho") business
from January 1999.
(3) Includes Levington Group Limited (nka The Scotts Company (UK) Ltd.) from
December 1997 and EarthGro, Inc. from February 1998.
(4) Includes Miracle Holdings Limited (nka The Scotts Company (UK) Ltd.) from
January 1997.
(5) Income from operations for fiscal 2001 and 1998 includes $75.7 million and
$20.4 million of restructuring and other charges, respectively.
(6) EBITDA is defined as income from operations, plus depreciation and
amortization. We believe that EBITDA provides additional information for
determining our ability to meet debt service requirements. EBITDA does not
represent and should not be considered as an alternative to net income or
cash flow from operations as determined by generally accepted accounting
principles, and EBITDA does not necessarily indicate whether cash flow will
be sufficient to meet cash requirements.
----
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Scotts is a leading manufacturer and marketer of consumer branded products
for lawn and garden care and professional horticulture in the United States and
Europe. During fiscal 2001, our operations were divided into three business
segments: North American Consumer, Global Professional and International
Consumer. The North American Consumer segment includes the Lawns, Gardens,
Growing Media, Ortho, Scotts LawnService(R) and Canada businesses.
As a leading consumer branded lawn and garden company, we focus on our
consumer marketing efforts, including advertising and consumer research, to
create demand to pull products through the retail distribution channels. In the
past three years, we have spent approximately 5% of our gross sales annually on
media advertising to support and promote our products and brands. We have
applied this consumer marketing focus over the past several years, and we
believe that Scotts continues to receive a significant return on these marketing
expenditures. We expect that we will continue to focus our marketing efforts
toward the consumer and to make a significant investment in consumer marketing
expenditures in the future to drive market share and sales growth.
In fiscal 2001, we began two major initiatives that affect the way we go to
business with our customers in our North American consumer business segment. One
was the "one face to the customer" initiative whereby the separate sales forces
under our previous "Business Unit" structure were combined into a single,
centrally managed and coordinated sales force. The other major initiative was
the reduction in the number of, and amount of business we do through
distributors. The end objective of these initiatives was to improve the service
levels and relationships with our customers in North America. While we generally
believe that these initiatives were successful in fiscal 2001, and are important
to our future success, they did have the effect of increasing some costs in
2001, such as selling expenses, and further complicated order processing and
fulfillment in an environment where we were also going live on our new ERP
system in two significant businesses -- Lawns and Ortho.
Scotts' sales are seasonal in nature and are susceptible to global weather
conditions, primarily in North America and Europe. For instance, periods of wet
weather can slow fertilizer sales but can increase demand for pesticide sales.
Periods of dry, hot weather can have the opposite effect on fertilizer and
pesticide sales. We believe that the acquisitions we have made over the past
several years diversify both our product line risk and geographic risk to
weather conditions.
In fiscal 1999, we expanded our reach of product line offerings into the
controls segment with the acquisition of the Ortho(R) brand of control products
from Monsanto and the execution of the Roundup(R) marketing agreement. In
addition, over the past several years, we have made several acquisitions to
strengthen our international market position in the lawn and garden category
including Rhone-Poulenc Jardin, ASEF Holding BV and, most recently, Substral.
Each acquisition provided a significant addition to our then existing European
platform and strengthened our foothold in the continental European consumer lawn
and garden market. Through these acquisitions, we have established a strong
presence in France, Germany, Austria and the Benelux countries. These
acquisitions may also mitigate, to a certain extent, our susceptibility to
weather conditions by expanding the regions in which we operate.
The following discussion and analysis of our consolidated results of
operations and financial position should be read in conjunction with our
Consolidated Financial Statements included elsewhere in this booklet.
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5
RESULTS OF OPERATIONS
The following table sets forth the components of income and expense as a
percentage of net sales for the three years ended September 30, 2001:
Fiscal Year Ended September 30,
----------------------------------------------
2001 2000 1999
---------------------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 62.7 61.5 61.6
----- ----- -----
Gross profit 37.3 38.5 38.4
Commission earned from marketing agreement, net 1.2 1.7 1.8
Advertising and promotion 8.6 9.0 8.9
Selling, general and administrative 18.1 17.7 17.6
Amortization of goodwill and other intangibles 1.6 1.6 1.6
Restructuring and other charges 3.9 0.0 0.1
Other income, net (0.4) (0.4) (0.2)
----- ----- -----
Income from operations 6.7 12.2 12.2
Interest expense 5.0 5.5 4.9
----- ----- -----
Income before income taxes 1.7 6.7 7.3
Income taxes 0.8 2.5 3.0
----- ----- -----
Income before extraordinary item 0.9 4.2 4.3
Extraordinary loss on extinguishment of debt 0.0 0.0 0.4
----- ----- -----
Net income 0.9 4.2 3.9
Dividends on Class A Convertible Preferred Stock 0.0 0.4 0.6
----- ----- -----
Income applicable to common shareholders 0.9% 3.8% 3.3%
===== ===== =====
The following table sets forth net sales by business segment for the three
years ended September 30, 2001:
2001 2000 1999
----------------------------------------------------------------------------------------------------------
($millions)
North American Consumer:
Lawns $ 514.7 $ 470.1 $ 424.2
Gardens 151.9 152.8 145.3
Growing Media 305.3 292.8 257.1
Ortho 222.8 250.2 210.8
Scotts LawnService(R) 42.0 21.4 14.0
Canada 27.7 29.8 11.9
Other 38.2 36.2 76.7
-------- -------- --------
Total 1,302.6 1,253.3 1,140.0
International Consumer 264.1 274.6 289.8
Global Professional 181.0 181.1 172.7
-------- -------- --------
Consolidated $1,747.7 $1,709.0 $1,602.5
======== ======== ========
FISCAL 2001 COMPARED TO FISCAL 2000
Net sales for fiscal 2001 were $1,747.7 million, an increase of 2.3% over
fiscal 2000 sales of $1,709.0 million. As discussed below, net sales increased
over 4% in the North American Consumer segment; whereas, net sales declined by
3.8% in the International Consumer segment and Global Professional net sales
were flat.
North American Consumer net sales were $1,302.6 million in fiscal 2001, an
increase of 4% over fiscal 2000 net sales of $1,253.3 million. Net sales in the
Lawns business within this segment were $514.7 million in fiscal 2001, a 9.5%
increase over fiscal 2000 net sales of $470.1 million, primarily due to the
introduction of a new line of grass seed products. Net sales in the Growing
Media business increased
----
6
4.3% to $305.3 million in fiscal 2001 from $292.8 million in fiscal 2000. 2001
saw the continuation of the successful roll out of the value-added line of
Miracle-Gro(R) branded garden and potting soils in the Growing Media business.
Sales of branded soils increased from $74 million in fiscal 2000 to $101 million
in fiscal 2001. Net sales in the Ortho business decreased 11% to $222.8 million
in fiscal 2001 from $250.2 million in fiscal 2000 due primarily to the weather
and product availability issues due to ERP system data problems. Net sales in
the Scotts LawnService(R) business increased 96.3% to $42.0 million in fiscal
2001 from $21.4 million in fiscal 2000. This growth reflects continued expansion
through acquisitions and new branch openings, as well as the success of our
direct marketing campaign utilizing the Scotts(R) brand name. The other sales
category consists of sales under a supply agreement to the purchaser of the
ProTurf(R) business in 2001 and actual sales of the ProTurf(R) business in
fiscal 2000 prior to the date of sale. Selling price changes were not material
to net sales in fiscal 2001 or fiscal 2000.
International Consumer net sales decreased 3.8% to $264.1 million in fiscal
2001 compared to $274.6 million in fiscal 2000. Excluding the adverse impact of
changes in exchange rates, net sales for International Consumer increased over
3% compared to the prior year. The increase in sales is primarily due to the
successful sell-in of a new line of fertilizer products under the Substral(R)
brand name acquired January 1, 2001.
Net sales for Global Professional of $181.0 million for fiscal 2001 were
flat with fiscal 2000 net sales of $181.1 million. Excluding the unfavorable
impact of changes in foreign exchange rates, Global Professional net sales
increased approximately 3.5% year over year.
Gross profit decreased to $651.4 million in fiscal 2001 compared to $658.5
million in fiscal 2000. Excluding restructuring charges, gross profit was flat
year over year. Gross profit, including restructuring charges, as a percentage
of net sales was 37.3% in fiscal 2001 compared to 38.5% in fiscal 2000. The
decrease in gross profit as a percentage of net sales was driven by unfavorable
product mix in the Ortho and Gardens businesses and increased sales of seed
which has a lower margin than fertilizers and control products, offset by lower
distribution costs and the favorable margin impact from the value-added Growing
Media products.
The net commission earned from marketing agreement in fiscal 2001 was $20.8
million, compared to $29.3 million in fiscal 2000. Despite worldwide earnings
for the consumer Roundup(R) business increasing by approximately $4.0 million
from fiscal 2000 to fiscal 2001, the gross commission earned by Scotts was flat
due to the increased earnings targets and reduced commission rate schedule in
the commission calculation for 2001 as compared to 2000. In addition, the net
commission decreased due to the $10 million increase in contribution expenses as
specified in the agreement.
Advertising and promotion expenses for fiscal 2001 were $151.0 million, a
decrease of $2.8 million from fiscal 2000 advertising and promotion expenses of
$153.8 million. This decrease reflects the impact of improved media buying
efficiencies and lower advertising rates compared to the prior year.
Selling, general and administrative expenses for fiscal 2001 were $317.2
million, an increase of $14.5 million, or 4.8%, over similar expenses in fiscal
2000 of $302.7 million. As a percentage of sales, selling, general and
administrative expenses were 18.1% for fiscal 2001 compared to 17.7% for fiscal
2000. The increase in selling, general and administrative expenses from the
prior year is partially due to an increase in selling expenses as a result of
the change in the selling and distribution model for the North American Consumer
businesses. The increase in selling, general and administrative expenses is also
due to an increase in information technology expenses from the prior year as a
result of the cost of many information technology resources being capitalized
toward the cost of our enterprise resource planning system in fiscal 2000 and
the increased depreciation on the new ERP system in fiscal 2001. Most of these
information technology resources have assumed a system support function that is
now being expensed as incurred.
Selling, general and administrative expenses associated with restructuring
and other non-operating expenses were $68.4 million for fiscal 2001. These
charges, along with the $7.3 million which is included in cost of sales for the
write-off of inventory, were primarily associated with the closure or relocation
of certain plants and administrative facilities. Included in the $68.4 million
charge in selling, general and administrative costs is $20.4 million to
write-down to fair value certain property and equipment and other assets; $5.8
million of facility exit costs; $27.0 million of severance costs; and $15.2
million in other restructuring and other costs. The severance costs related to
reduction in force initiatives and facility
----
7
closures and consolidations in North America and Europe covering approximately
340 administrative, production, selling and other employees. Severance costs are
expected to be paid in fiscal 2002 with some payments extending into 2003. All
other fiscal 2001 restructuring related activities and costs are expected to be
completed by the end of fiscal 2002. The Company expects these restructuring
activities to result in expense savings of nearly $15 million in fiscal 2002
after reinvesting some of the savings to grow our brands in our International
businesses.
In fiscal 2002, the Company expects to recognize additional restructuring
and other charges, primarily for relocation costs for equipment, personnel and
inventory which must be expensed when incurred. Additional restructuring costs
may be incurred in fiscal 2002 as our review and evaluation of our facilities
and processes is an ongoing exercise aimed at achieving improved returns on
invested capital. See Note 4 of the Notes to Consolidated Financial Statements.
Amortization of goodwill and other intangibles increased to $27.7 million
in fiscal 2001 from $27.1 million in fiscal 2000 due to the additional
amortization related to the Substral acquisition in December 2000 and numerous
small acquisitions by Scotts LawnService(R) throughout fiscal 2001. In fiscal
2002, Scotts will adopt Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" which is expected to result in a
reduction in amortization expense in fiscal 2002 and future years. See Note 18
of the Notes to Consolidated Financial Statements.
Other income for fiscal 2001 was $8.5 million compared to $6.0 million for
fiscal 2000. The increase in other income was primarily due to the favorable
settlement of certain legal matters in the current year and an insurance
settlement from a seed warehouse fire. The prior year results also included
losses on the sale of miscellaneous assets which did not recur in fiscal 2001.
Income from operations for fiscal 2001 was $116.4 million compared to
$210.2 million for fiscal 2000. The decrease was the result of the current year
restructuring and other charges and increased selling, general and
administrative costs, the decline in the marketing agreement net commission and
higher depreciation expense for the new ERP system which was fully in service
for all of fiscal 2001.
For segment reporting purposes, earnings before interest, taxes and
amortization is used as the measure for income from operations or operating
income. On that basis, operating income in the North American Consumer segment
increased from $244.2 million in fiscal 2000 to $250.0 million in fiscal 2001
due to the 4% increase in sales offset by lower margins due to mix and higher
expenses for selling and the new ERP system. Operating income in the Global
Professional segment declined from $26.4 million in fiscal 2000 to $17.4 million
in fiscal 2001 due to lower sales due to weather and higher operating costs in
the international Professional business. The operating cost structure in the
international Professional business was addressed in the restructuring
initiatives undertaken in late fiscal 2001. International Consumer segment
operating income declined from income of $21.0 million in fiscal 2000 to a loss
of $3.3 million in fiscal 2001. Excluding restructuring charges, International
Consumer reported operating income of $6.7 million. The decline in income was
due to lower sales due to poor weather in Europe and higher operating costs. The
International Consumer cost structure was also addressed in 2001's restructuring
initiatives. The Corporate operating loss increased from $54.2 million in fiscal
2000 to $120.0 million in fiscal 2001 primarily due to restructuring charges
related to the domestic business.
Interest expense for fiscal 2001 was $87.7 million, a decrease of $6.2
million from fiscal 2000 interest expense of $93.9 million. The decrease in
interest expense was primarily due to favorable interest rates. The average rate
on our variable rate debt was 7.85% in fiscal 2001 compared to 8.78% in fiscal
2000.
Income tax expense was $13.2 million for fiscal 2001 compared to $43.2
million in fiscal 2000. The effective tax rate in fiscal 2001 was 46% compared
to 37.1% for fiscal 2000. The primary driver of the change in the effective tax
rate was the restructuring and other charges recorded in fiscal 2001, which
reduced pre-tax income thereby increasing the effect of non-deductible goodwill
amortization on the effective tax rate. Also, the prior year effective tax rate
benefited from the elimination of tax reserves due to the settlement of certain
tax contingencies.
Net income was $15.5 million for fiscal 2001, or $.51 per common share on a
diluted basis, compared to net income of $73.1 million for fiscal 2000, or $2.25
per common share on a diluted basis. Common shares and equivalents used in the
computation of fully diluted earnings per share in fiscal 2001 and
----
8
fiscal 2000 were 30.4 million and 29.6 million, respectively. The increase
reflects more common share equivalents due to higher average stock prices and
additional option grants to associates in fiscal 2001.
FISCAL 2000 COMPARED TO FISCAL 1999
Net sales for fiscal 2000 were $1,709 million, an increase of 6.6% over
fiscal 1999 net sales of $1,603 million. On a pro forma basis, assuming that the
Ortho and Rhone-Poulenc Jardin acquisitions had occurred on October 1, 1998, net
sales for fiscal 2000 were 4.5% higher than pro forma net sales for fiscal 1999.
The increase in net sales from year to year was driven by significant increases
in net sales across all businesses in the North American Consumer segment,
partially offset by decreases in net sales in the International Consumer segment
as discussed below.
North American Consumer net sales, excluding "Consumer Other" were $1,217
million in fiscal 2000, an increase of $154 million, or 14.5%, over net sales
for fiscal 1999 of $1,063 million. Net sales in the Lawns business increased
$45.9 million, or 10.8%, from fiscal 1999 to fiscal 2000, primarily due to a
significant increase in sales to and consumer takeaway from national home
centers. Net sales in the Gardens business increased $7.5 million, or 5.2%,
primarily driven by strong net sales and market share performance in the
water-soluble and tree spikes product lines and the successful introduction of
new products such as the Miracle-Gro(R) Garden Weed Preventer(TM) line in fiscal
2000. Net sales in the Growing Media business increased $35.7 million, or 13.9%,
due to strong category and market share growth, particularly for value-added
products such as Miracle-Gro(R) Potting Soils. Sales in the Ortho business
increased $39.4 million, or 18.7%, on an actual basis and $10.0 million, or
4.1%, on a pro forma basis, reflecting significantly improved volume with home
center retailers and improved category and market share performance on the
selective weed control product lines. Net sales for the Ortho business were
negatively impacted by the voluntary product return program for the registered
pesticide Ortho(R) Home Defense(R) Indoor & Outdoor Insect Killer, sold with the
Pull 'N Spray(R) pump dispenser, the phasing out of products containing the
active ingredient chlorpyrifos and reduced selling efforts by a primary
distributor prior to its termination on September 30, 2000. Consumer Other net
sales were the net sales of the ProTurf(R) business that was sold in May 2000.
Selling price changes did not have a significant impact on net sales in the
North American Consumer segment for fiscal 2000.
Global Professional segment net sales of $181.1 million in fiscal 2000 were
$8.4 million, or 4.9% above fiscal 1999 net sales of $172.7 million.
International Consumer segment net sales of $274.6 million in fiscal 2000
were $14.2 million lower than net sales for fiscal 1999 of $289.8 million.
Excluding the adverse impact of changes in exchange rates, net sales for the
International Consumer segment increased nearly 4% compared to the prior year
period. The increase is primarily due to improved results in the segment's
continental European consumer businesses partially offset by decreases in the
segment's U.K. consumer business caused by significant product rationalization
and unusually poor weather.
Gross profit increased to $658.5 million for fiscal 2000, an increase of
7.0% over fiscal 1999 gross profit of $615.2 million, driven by the 6.6%
increase in year-to-date net sales discussed above and a slight increase in
gross profit as a percentage of net sales. As a percentage of net sales, gross
profit was 38.5% for fiscal 2000 compared to 38.4% of net sales for fiscal 1999.
This increase in profitability on net sales was driven by a shift to direct
distribution to certain retail accounts, improved product mix toward higher
margin, value-added products and improved efficiencies in Scotts' production
plants, offset by increased urea, fuel and other raw material costs and a
significant erosion in the profitability of the ProTurf(R) business prior to its
sale.
The gross commission from marketing agreement in fiscal 2000 was $39.2
million, compared to $30.3 million in fiscal 1999. The increase in the gross
commission from year to year was driven by significantly higher sales of
consumer Roundup(R) worldwide year over year. Contribution expenses under
marketing agreement were $9.9 million for fiscal 2000, compared to $1.6 million
for fiscal 1999. The increase in contribution expenses was due to an increase in
the contribution payment to Monsanto and an increase of $3.2 million in the
amortization of the $32 million marketing fee paid to Monsanto as a result of
correcting the amortization period from 20 to 10 years. The $3.2 million of
additional amortization represents the additional amortization of $1.6 million
that was not recognized in fiscal 1999 and additional amortization of $1.6
million for fiscal 2000.
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Advertising expenses for fiscal 2000 were $153.8 million, an increase of
7.4% over fiscal 1999 advertising expenses of $143.2 million. Promotion expenses
are presented as a reduction of net sales. Promotion expenses increased from
$45.8 million in fiscal 1999 to $55.3 million in fiscal 2000. As a percentage of
net sales before deduction for promotion expenses, combined advertising and
promotion spending increased to 11.9% in fiscal 2000 from 11.5% in fiscal 1999.
This increase was primarily due to continued emphasis on increasing advertising
and promotion expenses to drive revenue growth within the North American
Consumer segment and investments in advertising and promotion to drive future
sales growth in the International Consumer segment.
Selling, general and administrative expenses in fiscal 2000 were $302.7
million, an increase of 7.6% over fiscal 1999 expenses of $281.2 million. As a
percentage of net sales, selling, general and administrative expenses were 17.7%
in fiscal 2000 and 17.6% in fiscal 1999. The increase in the dollar amount of
selling, general and administrative expenses was primarily related to additional
costs needed to support the increased net sales levels in the North American
Consumer businesses, infrastructure expenses within the International Consumer
segment, selling, general and administrative expenses for the Ortho business
which were not incurred in the first quarter of fiscal 1999 due to the timing of
the acquisition in January 1999, and increased legal costs as a result of the
various legal matters discussed in Note 15 of the Notes to Consolidated
Financial Statements.
Amortization of goodwill and other intangibles in fiscal 2000 was $27.1
million, an increase of $1.5 million over fiscal 1999 amortization of $25.6
million. This increase was primarily due to fiscal 1999 not reflecting a full
year of amortization related to the Ortho acquisition since the acquisition
occurred in January 1999.
Restructuring and other charges were $1.4 million in fiscal 1999. These
charges represent severance costs associated with the reorganization of the
North American Professional Business Group to strengthen distribution and
technical sales support, integrate brand management across market segments and
reduce annual operating expenses. Substantially all payments have been made as
of September 30, 2000. There were no restructuring charges incurred in fiscal
2000.
Other income in fiscal 2000 was $6.0 million compared to other income of
$3.6 million in the prior year. The increase in other income, on a net basis,
was primarily due to the $4.6 million gain resulting from the sale of the
ProTurf(R) business, partially offset by costs incurred in connection with
Scotts' voluntary return program for the registered pesticide Ortho(R) Home
Defense(R) Indoor & Outdoor Insect Killer, sold with the Pull 'N Spray(R) pump
dispenser and additional losses on disposals of miscellaneous fixed assets.
Income from operations for fiscal 2000 was $210.2 million compared to
$196.1 million for fiscal 1999. The increase in income from operations was due
primarily to the increase in net sales across the North American Consumer
businesses as noted above, partially offset by the decrease in net sales due to
the sale of the ProTurf(R) business.
Interest expense for fiscal 2000 was $93.9 million, an increase of $14.8
million over fiscal 1999 interest expense of $79.1 million. The increase in
interest expense was due to increased borrowings to fund the Ortho acquisition
and an increase in average borrowing rates under our credit facility, partially
offset by reduced working capital requirements.
Income tax expense was $43.2 million for fiscal 2000 compared to $47.9
million in the prior year. Scotts' effective tax rate decreased to 37.1% for
fiscal 2000 compared to 41.0% for the previous year. The decrease in the
effective tax rate for fiscal 2000 is due primarily to a reversal of $3.2
million of tax reserves upon resolution of certain outstanding tax matters
during the third quarter of fiscal 2000 and a reduction in the base tax rate for
the year, before reversal of reserves, to 40.0%.
In conjunction with the Ortho acquisition, in January 1999, Scotts
completed an offering of $330 million of 8 5/8% Senior Subordinated Notes due
2009. The net proceeds from this offering, together with borrowings under our
credit facility, were used to fund the Ortho acquisition and repurchase
approximately 97% of the then outstanding $100 million of 9 7/8% Senior
Subordinated Notes due August 2004. We recorded an extraordinary loss on the
extinguishment of the 9 7/8% Notes of $9.3 million, including a call premium of
$7.2 million and the write-off of unamortized issuance costs and discounts of
$2.1 million.
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Scotts reported net income of $73.1 million for fiscal 2000, or $2.25 per
common share on a diluted basis, compared to net income of $63.2 million for
fiscal 1999, or $2.08 per common share on a diluted basis. The diluted earnings
per share for fiscal 2000 is net of a one-time reduction of $0.22 per share
resulting from the early conversion of Class A Convertible Preferred Stock in
October 1999. The diluted earnings per share for fiscal 1999 is net of a $0.19
per share charge associated with the extraordinary loss on early extinguishment
of debt discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $65.7 million for fiscal 2001
compared to cash provided by operating activities of $171.5 million for fiscal
2000. The seasonal nature of our operations generally requires cash to fund
significant increases in working capital (primarily inventory and accounts
receivable) during the first and second quarters. The third fiscal quarter is a
period for collecting accounts receivable and liquidating inventory levels. The
decrease in cash provided by operating activities for fiscal 2001 compared to
the prior year was due to higher levels of inventory at September 30, 2001
compared to September 30, 2000, due, in part, to the move by major retailers to
reduce inventory investments and lower than anticipated net sales in the fourth
quarter of fiscal 2001.
Cash used in investing activities was $101.0 million for fiscal 2001
compared to $89.5 million in the prior year. The additional cash used for
investing activities in fiscal 2001 was primarily due to the $13.3 million in
payments toward the purchase of the Substral(R) business discussed in Note 5 of
the Notes to Consolidated Financial Statements, and other payments made toward
several lawn service acquisitions during fiscal 2001 partially offset by reduced
capital spending in fiscal 2001. Capital spending was $63.4 million in fiscal
2001 compared to $72.5 million in fiscal 2000. In line with our ongoing efforts
to improve return on invested capital, capital spending in fiscal 2002 is
expected to be approximately $50.0 million.
Financing activities provided cash of $21.4 million for fiscal 2001
compared to using cash of $78.2 million in the prior year. The increase in cash
from financing activities was primarily due to an increase in borrowings under
our revolving credit facility to fund operating and investing activities during
fiscal 2001.
Total debt was $887.8 million as of September 30, 2001, an increase of
$25.0 million compared with debt at September 30, 2000 of $862.8 million. The
increase in debt compared to the prior year was primarily due to additional
borrowings to fund operating and investing activities as discussed above and
seller notes from the Substral(R) and Scotts LawnService(R) acquisitions in
fiscal 2001.
Our primary sources of liquidity are funds generated by operations and
borrowings under our credit facility. The credit facility provides for
borrowings in the aggregate principal amount of $1.1 billion and consists of
term loan facilities in the aggregate amount of $525 million and a revolving
credit facility in the amount of $575 million. Borrowings outstanding under the
term loan facilities and revolving credit facility were $398.6 million and $94.7
million, respectively at September 30, 2001.
In July 1998, our Board of Directors authorized the repurchase of up to
$100 million of our common shares on the open market or in privately negotiated
transactions on or prior to September 30, 2001. As of September 30, 2001, we
repurchased 1,106,295 common shares, at a cost of $40.6 million, under this
program.
In October 2000, the Board of Directors approved the cancellation of the
third year commitment of $50 million under the share repurchase program. The
Board did authorize repurchasing the amount still outstanding under the second
year repurchase commitment (approximately $9.0 million) through September 30,
2001. Share repurchases are subject to the covenants contained in our credit
facility or our other debt instruments. Repurchased shares are held in treasury
and will be used for the exercise of employee stock options and for other valid
corporate purposes.
We believe cash flows from operations and capital resources will be
sufficient to meet debt service and working capital needs during fiscal 2002,
and thereafter for the foreseeable future. However, we cannot ensure that our
businesses will generate sufficient cash flows from operations, that currently
anticipated cost savings and operating improvements will be realized on schedule
or at all, or that future borrowings will be available under our credit facility
in amounts sufficient to pay indebtedness or fund
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other liquidity needs. Actual results of operations will depend on numerous
factors, many of which are beyond our control. We cannot ensure that we will be
able to refinance any indebtedness, including our credit facility, on
commercially reasonable terms, or at all.
At September 30, 2001, Scotts was not in compliance with debt covenants
pertaining to net worth, leverage and interest coverage. A waiver of
non-compliance for these covenant violations was received in October 2001. In
December 2001, Scotts amended the credit facility resulting in the elimination
or resetting of certain negative and affirmative covenants. See Note 8 and Note
22 of the Notes to Consolidated Financial Statements.
ENVIRONMENTAL MATTERS
We are subject to local, state, federal and foreign environmental
protection laws and regulations with respect to our business operations and
believe we are operating in substantial compliance with, or taking actions aimed
at ensuring compliance with, such laws and regulations. We are involved in
several legal actions with various governmental agencies related to
environmental matters. While it is difficult to quantify the potential financial
impact of actions involving environmental matters, particularly remediation
costs at waste disposal sites and future capital expenditures for environmental
control equipment, in the opinion of management, the ultimate liability arising
from such environmental matters, taking into account established reserves,
should not have a material adverse effect on our financial position. However,
there can be no assurance that the resolution of these matters will not
materially affect future quarterly or annual operating results.
ENTERPRISE RESOURCE PLANNING ("ERP")
In July 1998, we announced a project designed to bring our information
systems resources in line with our current strategic objectives. The project
included the redesign of certain key business processes in connection with the
installation of new software. SAP was selected as the primary software provider
for this project. As of October 1, 2000, all of the North American businesses
with the exception of Canada were operating under the new system. The
implementation of the Canadian system began during the third quarter of fiscal
2001 and was substantially complete by October 1, 2001. Through September 30,
2001, we spent approximately $55 million on the project, approximately 75% of
which has been capitalized and is being amortized over a period of four to eight
years. We are currently evaluating when, and to what extent, the new information
systems and applications will be implemented at our international locations.
EURO
A new currency called the "euro" has been introduced in certain Economic
and Monetary Union (EMU) countries. During 2002, all EMU countries are expected
to be operating with the euro as their single currency. Uncertainty exists as to
the effects the euro currency will have on the marketplace. We are assessing the
impact the EMU formation and euro implementation will have on our internal
systems and the sale of our products. Over $1.2 million of the costs associated
with this work was incurred during fiscal 2001. Some costs will likely be
incurred in the first quarter of fiscal 2002 and beyond as well but are not
expected to be material.
MANAGEMENT'S OUTLOOK
Results for fiscal 2001 were below management's expectations. Weather, the
economy, retailer initiatives to reduce their inventory investment and our own
product availability issues combined to make fiscal 2001 less profitable than
fiscal 2000. We believe we are aggressively addressing ways to improve
profitability of our business by the restructuring steps we took in late fiscal
2001 to reduce headcount and rationalize the supply chain, sales and
administrative organizations in North America and Europe. This process will
continue in fiscal 2002 and beyond. We also will continue to look for
opportunities to bring new products into the marketplace and profitably expand
our Scotts LawnService(R) business.
Looking forward, we maintain the following broad tenets to our strategic
plan:
(1) Promote and capitalize on the strengths of the Scotts(R),
Miracle-Gro(R), Hyponex(R) and Ortho(R) industry-leading brands, as
well as our portfolio of powerful brands in our international markets.
This involves a commitment to our retail partners that we will support
these brands through
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advertising and promotion unequaled in the lawn and garden consumables
market. In the Professional categories, it signifies a commitment to
customers to provide value as an integral element in their long-term
success;
(2) Commit to continuously study and improve knowledge of the market, the
consumer and the competition;
(3) Simplify product lines and business processes, to focus on those that
deliver value, evaluate marginal ones and eliminate those that lack
future prospects; and
(4) Achieve world leadership in operations, leveraging technology and
know-how to deliver outstanding customer service and quality.
We anticipate that we can deliver significant revenue and earnings growth
through emphasis on executing our strategic plan. We believe that we can
generate annual sales growth of 4% to 6% in our core businesses and annual
earnings growth of at least 10%. In addition, we have targeted improving our
return on invested capital. We believe that we can achieve our goal of realizing
a return on our invested capital commensurate with the average return on
invested capital for our consumer products peer group in the next three to four
years. We expect to achieve this goal by reducing overhead spending, tightening
capital spending controls, implementing return on capital measures into our
incentive compensation plans and accelerating operating performance and gross
margin improvements utilizing our new ERP capabilities in North America.
FORWARD-LOOKING STATEMENTS
We have made and will make "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 in our 2001 Summary Annual Report, in this booklet, in our
2001 Annual Report on Form 10-K and in other contexts relating to future growth
and profitability targets and strategies designed to increase total shareholder
value. Forward-looking statements also include, but are not limited to,
information regarding our future economic and financial condition, the plans and
objectives of our management and our assumptions regarding our performance and
these plans and objectives.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information, so long as those statements are identified as
forward-looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those discussed in the forward-looking statements. We desire to
take advantage of the "safe harbor" provisions of that Act.
The forward-looking statements that we make in our 2001 Summary Annual
Report, in this booklet, in our 2001 Annual Report on Form 10-K and in other
contexts represent challenging goals for our company, and the achievement of
these goals is subject to a variety of risks and assumptions and numerous
factors beyond our control. Important factors that could cause actual results to
differ materially from the forward-looking statements we make are described
below. All forward-looking statements attributable to us or persons working on
our behalf are expressly qualified in their entirety by the following cautionary
statements.
- ADVERSE WEATHER CONDITIONS COULD ADVERSELY IMPACT FINANCIAL RESULTS.
Weather conditions in North America and Europe have a significant impact
on the timing of sales in the spring selling season and overall annual
sales. Periods of wet weather can slow fertilizer sales, while periods of
dry, hot weather can decrease pesticide sales. In addition, an abnormally
cold spring throughout North America and/or Europe could adversely affect
both fertilizer and pesticide sales and therefore our financial results.
- OUR HISTORICAL SEASONALITY COULD IMPAIR OUR ABILITY TO PAY OBLIGATIONS AS
THEY COME DUE AND OPERATING EXPENSES.
Because our products are used primarily in the spring and summer, our
business is highly seasonal. For the past two fiscal years, approximately
75% to 77% of our net sales have occurred in the second and third fiscal
quarters combined. Our working capital needs and our borrowings peak near
the middle of our second fiscal quarter because we are generating fewer
revenues while
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13
incurring expenditures in preparation for the spring selling season. If
cash on hand is insufficient to pay our obligations as they come due,
including interest payments on our indebtedness, or our operating
expenses, at a time when we are unable to draw on our credit facility,
this seasonality could have a material adverse affect on our ability to
conduct our business. Adverse weather conditions could heighten this risk.
- OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH
AND PREVENT US FROM FULFILLING OUR OBLIGATIONS.
Our substantial indebtedness could:
- make it more difficult for us to satisfy our obligations;
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to fund future working capital, capital
expenditures, research and development costs and other general
corporate requirements;
- require us to dedicate a substantial portion of cash flows from
operations to payments on our indebtedness, which would reduce the
cash flows available to fund working capital, capital expenditures,
research and development efforts and other general corporate
requirements;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- place us at a competitive disadvantage compared to our competitors
that have less debt; and
- limit our ability to borrow additional funds.
If we fail to comply with any of the financial or other restrictive
covenants of our indebtedness, our indebtedness could become due and
payable in full prior to its stated due date. We cannot be sure that our
lenders would waive a default or that we could pay the indebtedness in
full if it were accelerated.
- TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF
CASH, WHICH WE MAY NOT BE ABLE TO GENERATE.
Our ability to make payments on and to refinance our indebtedness and to
fund planned capital expenditures and research and development efforts
will depend on our ability to generate cash in the future. This, to some
extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control. We
cannot assure that our business will generate sufficient cash flow from
operations or that currently anticipated cost savings and operating
improvements will be realized on schedule or at all. We also cannot assure
that future borrowings will be available to us under our credit facility
in amounts sufficient to enable us to pay our indebtedness or to fund
other liquidity needs. We may need to refinance all or a portion of our
indebtedness, on or before maturity. We cannot assure that we will be able
to refinance any of our indebtedness on commercially reasonable terms or
at all.
- PUBLIC PERCEPTIONS THAT THE PRODUCTS WE PRODUCE AND MARKET ARE NOT SAFE
COULD ADVERSELY AFFECT US.
We manufacture and market a number of complex chemical products, such as
fertilizers, growing media, herbicides and pesticides, bearing one of our
brands. On occasion, customers and some current or former employees have
alleged that some products failed to perform up to expectations or have
caused damage or injury to individuals or property. Public perception that
our products are not safe, whether justified or not, could impair our
reputation, damage our brand names and materially adversely affect our
business.
- BECAUSE OF THE CONCENTRATION OF OUR SALES TO A SMALL NUMBER OF RETAIL
CUSTOMERS, THE LOSS OF ONE OR MORE OF OUR TOP CUSTOMERS COULD ADVERSELY
AFFECT OUR FINANCIAL RESULTS.
Our top 10 North American retail customers together accounted for
approximately 70% of our fiscal year 2001 net sales and 37% of our
outstanding accounts receivable as of September 30, 2001. Our
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14
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.
- 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 introduce one-gallon and one-quart
glyphosate products, in fiscal year 2002. It is too early to determine
whether these product introductions will have a material adverse effect on
our sales of Roundup(R).
Our methylene-urea product composition patent, which covered Scotts Turf
Builder(R), Scotts Turf Builder(R) with Plus 2(R) with Weed Control and
Scotts Turf Builder(R) with Halts(R) Crabgrass Preventer, expired in July
2001 and could also result in increased competition. Any decline in sales
of Turf Builder(R) products after the expiration of the methylene-urea
product composition patent could adversely affect our financial results.
- THE HAGEDORN PARTNERSHIP, L.P., BENEFICIALLY OWNS APPROXIMATELY 40% OF
THE OUTSTANDING COMMON SHARES OF SCOTTS ON A FULLY DILUTED BASIS.
The Hagedorn Partnership, L.P., beneficially owns approximately 40% of the
outstanding common shares of Scotts on a fully diluted basis and has
sufficient voting power to significantly influence the election of
directors and the approval of other actions requiring the approval of our
shareholders.
- COMPLIANCE WITH ENVIRONMENTAL AND OTHER PUBLIC HEALTH REGULATIONS COULD
INCREASE OUR COST OF DOING BUSINESS.
Local, state, federal and foreign laws and regulations relating to
environmental matters affect us in several ways. In the United States, all
products containing pesticides must be registered with the United States
Environmental Protection Agency ("U.S. EPA") and, in many cases, similar
state agencies before they can be sold. The inability to obtain or the
cancellation of any registration could have an adverse effect on our
business. The severity of the effect would depend on which
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15
products were involved, whether another product could be substituted and
whether our competitors were similarly affected. We attempt to anticipate
regulatory developments and maintain registrations of, and access to,
substitute chemicals. We may not always be able to avoid or minimize these
risks.
The Food Quality Protection Act, enacted by the U.S. Congress in August
1996, establishes a standard for food-use pesticides, which is that a
reasonable certainty of no harm will result from the cumulative effect of
pesticide exposures. Under this act, the U.S. EPA is evaluating the
cumulative risks from dietary and non-dietary exposures to pesticides. The
pesticides in our products, certain of which may be used on crops
processed into various food products, continue to be evaluated by the U.S.
EPA as part of this exposure risk assessment. It is possible that the U.S.
EPA or a third party active ingredient registrant may decide that a
pesticide we use in our products will be limited or made unavailable to
us. For example, in June 2000, DowAgroSciences, an active ingredient
registrant, voluntarily agreed to a gradual phase-out of residential uses
of chlorpyrifos, an active ingredient used by us in our lawn and garden
products. In December 2000, the U.S. EPA reached agreement with various
parties, including manufacturers of the active ingredient diazinon,
regarding a phased withdrawal of residential uses of products containing
diazinon, used also by us in our lawn and garden products. We cannot
predict the outcome or the severity of the effect of the U.S. EPA's
continuing evaluations of active ingredients used in our products.
The use of certain pesticide and fertilizer products is regulated by
various local, state, federal and foreign environmental and public health
agencies. Regulations regarding the use of some pesticide and fertilizer
products may include requirements that only certified or professional
users apply the product, that the products be used only in specified
locations or that certain ingredients not be used. Users may be required
to post notices on properties to which products have been or will be
applied and may be required to notify individuals in the vicinity that
products will be applied in the future. Even if we are able to comply with
all such regulations and obtain all necessary registrations, we cannot
assure that our products, particularly pesticide products, will not cause
injury to the environment or to people under all circumstances. The costs
of compliance, remediation or products liability have adversely affected
operating results in the past and could materially affect future quarterly
or annual operating results.
The harvesting of peat for our growing media business has come under
increasing regulatory and environmental scrutiny. In the United States,
state regulations frequently require us to limit our harvesting and to
restore the property to an agreed-upon condition. In some locations, we
have been required to create water retention ponds to control the sediment
content of discharged water. In the United Kingdom, our peat extraction
efforts are also the subject of legislation.
In addition to the regulations already described, local, state, federal
and foreign agencies regulate the disposal, handling and storage of waste,
air and water discharges from our facilities. In June 1997, the Ohio
Environmental Protection Agency ("Ohio EPA") initiated an enforcement
action against us with respect to alleged surface water violations and
inadequate treatment capabilities at our Marysville facility and seeking
corrective action under the Resource Conservation Recovery Act. We have
met with the Ohio EPA and the Ohio Attorney General's office to negotiate
an amicable resolution of these issues. On December 3, 2001, an agreed
judicial Consent Order was submitted to the Union County Common Pleas
Court. Although this Consent Order is subject to public comment and both
parties may withdraw their consent to entry of the Order, we anticipate
the Consent Order will be entered by the court in January 2002.
During fiscal year 2001, we made approximately $1.3 million in
environmental capital expenditures and $2.1 million in other environmental
expenses, compared with approximately $1.2 million in environmental
capital expenditures and $1.8 million in other environmental expenses in
fiscal year 2000. Management anticipates that environmental capital
expenditures and other environmental expenses for fiscal year 2002 will
not differ significantly from those incurred in fiscal year 2001. The
adequacy of these anticipated future expenditures is based on our
operating in substantial
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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 anticipated agreed judicial Consent Order in
Ohio, that potentially contaminated soil can be remediated in place
rather than having to be removed and only specific stream segments will
require remediation as opposed to the entire stream.
If there is a significant change in the facts and circumstances
surrounding these assumptions or if we are found not to be in substantial
compliance with applicable environmental and public health laws and
regulations, it could have a material impact on future environmental
capital expenditures and other environmental expenses and our results of
operations, financial position and cash flows.
- THE IMPLEMENTATION OF THE EURO CURRENCY IN SOME EUROPEAN COUNTRIES
BETWEEN 1999 AND 2002 COULD ADVERSELY AFFECT US.
In January 1999, the "euro" was introduced in some Economic and Monetary
Union countries and by 2002, all Economic and Monetary Union countries are
expected to be operating with the euro as their single currency.
Uncertainty exists as to the effects the euro currency will have on the
marketplace. We are still assessing the impact the Economic and Monetary
Union formation and euro implementation may have on the sales of our
products and conduct of our business. We expect to take appropriate
actions based on the results of our assessment. However, there can be no
assurance that this issue will not have a material adverse effect on us or
our future operating results and financial condition.
- OUR SIGNIFICANT INTERNATIONAL OPERATIONS MAKE US MORE SUSCEPTIBLE TO
FLUCTUATIONS IN CURRENCY EXCHANGE RATES AND TO THE COSTS OF INTERNATIONAL
REGULATION.
We currently operate manufacturing, sales and service facilities outside
of North America, particularly in the United Kingdom, Germany and France.
Our international operations have increased with the acquisitions of
Levington, Miracle Garden Care Limited, Ortho and Rhone-Poulenc Jardin and
with the marketing agreement for consumer Roundup(R) products. In fiscal
year 2001, international sales accounted for approximately 20% of our
total sales. Accordingly, we are subject to risks associated with
operations in foreign countries, including:
- fluctuations in currency exchange rates;
- limitations on the conversion of foreign currencies into U.S. dollars;
- limitations on the remittance of dividends and other payments by foreign
subsidiaries;
- additional costs of compliance with local regulations; and
- historically, higher rates of inflation than in the United States.
The costs related to our international operations could adversely affect
our operations and financial results in the future.
----
17
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of our ongoing business, we are exposed to certain market risks,
including fluctuations in interest rates, foreign currency exchange rates and
commodity prices. We use derivative financial and other instruments, where
appropriate, to manage these risks. We do not enter into transactions designed
to mitigate our market risks for trading or speculative purposes.
INTEREST RATE RISK
We have various debt instruments outstanding at September 30, 2001 that are
impacted by changes in interest rates. As a means of managing our interest rate
risk on these debt instruments, we have entered into the following interest rate
swap agreements to effectively convert certain variable rate debt obligations to
fixed rates:
- A 20 million British Pounds Sterling notional amount swap to convert
variable rate debt obligations denominated in British Pounds Sterling to
a fixed rate. The exchange rate used to convert British Pounds Sterling
to U.S. dollars at September 30, 2001 was $1.47: 1 GBP.
- Four interest rate swaps with a total notional amount of $105.0 million
which are used to hedge certain variable-rate obligations under our
credit facility. The credit facility requires that we enter into hedge
agreements to the extent necessary to provide that at least 50% of the
aggregate principal amount of the 8 5/8% Senior Subordinated Notes due
2009 and term loan facilities is subject to a fixed rate.
The following table summarizes information about our derivative financial
instruments and debt instruments that are sensitive to changes in interest rates
as of September 30, 2001. For debt instruments, the table presents principal
cash flows and related weighted-average interest rates by expected maturity
dates. For interest rate swaps, the table presents expected cash flows based on
notional amounts and weighted-average interest rates by contractual maturity
dates. Weighted-average variable rates are based on implied forward rates in the
yield curve at September 30, 2001. The information is presented in U.S. dollars
(in millions):
Expected Maturity Date
--------------------------------- Fair
2002 2003 2004 2005 Thereafter Total Value
------------------------------------------------------------------------------------------------------------
Long-term debt:
Fixed rate debt $330.0 $330.0 $320.5
Average rate 8.625% 8.625%
Variable rate debt $31.3 $34.2 $34.2 $138.1 $255.5 $493.3 $493.3
Average rate 6.30% 6.30% 6.30% 6.40% 6.10% 6.23%
Interest rate derivatives:
Interest rate swap on GBP LIBOR $(0.5) $ (0.5) $ (0.5)
Average rate 7.62% 7.62%
Interest rate swaps on USD LIBOR $(1.6) $(0.6) $(0.1) $ (2.3) $ (2.2)
Average rate 5.13% 5.15% 5.18% 5.14%
OTHER MARKET RISKS
Our market risk associated with foreign currency rates is not considered to
be material. Through fiscal 2001, we had only minor amounts of transactions that
were denominated in currencies other than the currency of the country of origin.
We are subject to market risk from fluctuating market prices of certain raw
materials, including urea and other chemicals and paper and plastic products.
Our objectives surrounding the procurement of these materials are to ensure
continuous supply and to minimize costs. We seek to achieve these objectives
through negotiation of contracts with favorable terms directly with vendors. We
do not enter into forward contracts or other market instruments as a means of
achieving our objectives or minimizing our risk exposures on these materials.
----
18
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Financial Statements of The Scotts Company and
Subsidiaries:
Report of Management...................................... 20
Report of Independent Accountants......................... 21
Consolidated Statements of Operations for the fiscal years
ended September 30, 2001, 2000 and 1999................ 22
Consolidated Balance Sheets at September 30, 2001 and
2000................................................... 23
Consolidated Statements of Changes in Shareholders' Equity
and Comprehensive Income for the fiscal years ended
September 30, 2001, 2000 and 1999...................... 24
Consolidated Statements of Cash Flows for the fiscal years
ended September 30, 2001, 2000 and 1999................ 26
Notes to Consolidated Financial Statements.................. 27
----
19
REPORT OF MANAGEMENT
Management of The Scotts Company is responsible for the preparation,
integrity and objectivity of the financial information presented in this 2001
Financial Statements and Other Information booklet. The accompanying financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America and, accordingly, include some amounts
that are based on management's best judgments and estimates.
Management is responsible for maintaining a system of accounting and
internal controls which it believes is adequate to provide reasonable assurance
that assets are safeguarded against loss from unauthorized use or disposition
and that the financial records are reliable for preparing financial statements.
The selection and training of qualified personnel, the establishment and
communication of accounting and administrative policies and procedures and a
program of internal audits are important objectives of these control systems.
The financial statements have been audited by PricewaterhouseCoopers LLP,
independent accountants selected by the Board of Directors. The independent
accountants conduct a review of internal accounting controls to the extent
required by generally accepted auditing standards and perform such tests and
related procedures as they deem necessary to arrive at an opinion on the
fairness of the financial statements in accordance with generally accepted
accounting principles.
The Board of Directors, through its Audit Committee consisting solely of
non-management directors, meets periodically with management, internal audit
personnel and the independent accountants to discuss internal accounting
controls and auditing and financial reporting matters. The Audit Committee
reviews with the independent accountants the scope and results of the audit
effort. Both internal audit personnel and the independent accountants have
access to the Audit Committee with or without the presence of management.
----
20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
The Scotts Company:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity and
comprehensive income and cash flows present fairly, in all material respects,
the financial position of The Scotts Company at September 30, 2001, and
September 30, 2000, and the results of its operations and its cash flows for
each of the three years in the period ended September 30, 2001, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Columbus, Ohio
October 29, 2001, except for Note 22, as to which the date is December 12, 2001
----
21
THE SCOTTS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
(IN MILLIONS, EXCEPT PER SHARE DATA)
2001 2000 1999
----------------------------------------------------------------------------------------------------------
Net sales $1,747.7 $1,709.0 $ 1,602.5
Cost of sales 1,089.0 1,050.5 987.3
Restructuring and other charges 7.3
-------- -------- ---------
Gross profit 651.4 658.5 615.2
Gross commission earned from marketing
agreement 39.1 39.2 30.3
Contribution expenses under marketing
agreement 18.3 9.9 1.6
-------- -------- ---------
Net commission earned from marketing
agreement 20.8 29.3 28.7
Operating expenses:
Advertising and promotion 151.0 153.8 143.2
Selling, general and administrative 317.2 302.7 281.2
Restructuring and other charges 68.4 1.4
Amortization of goodwill and other
intangibles 27.7 27.1 25.6
Other income, net (8.5) (6.0) (3.6)
-------- -------- ---------
Income from operations 116.4 210.2 196.1
Interest expense 87.7 93.9 79.1
-------- -------- ---------
Income before income taxes 28.7 116.3 117.0
Income taxes 13.2 43.2 47.9
-------- -------- ---------
Income before extraordinary item 15.5 73.1 69.1
Extraordinary loss on early
extinguishment of debt, net of income
tax benefit 5.9
-------- -------- ---------
Net income 15.5 73.1 63.2
Dividends on Class A Convertible
Preferred Stock 6.4 9.7
-------- -------- ---------
Income applicable to common
shareholders $ 15.5 $ 66.7 $ 53.5
======== ======== =========
Basic earnings per share:
Before extraordinary loss $ 0.55 $ 2.39 $ 3.25
Extraordinary loss, net of tax (0.32)
-------- -------- ---------
$ 0.55 $ 2.39 $ 2.93
======== ======== =========
Diluted earnings per share:
Before extraordinary loss $ 0.51 $ 2.25 $ 2.27
Extraordinary loss, net of tax (0.19)
-------- -------- ---------
$ 0.51 $ 2.25 $ 2.08
======== ======== =========
Common shares used in basic earnings
per share calculation 28.4 27.9 18.3
Common shares and potential common
shares used in diluted earnings per
share calculation 30.4 29.6 30.5
See Notes to Consolidated Financial Statements.
----
22
THE SCOTTS COMPANY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 AND 2000
(IN MILLIONS EXCEPT PER SHARE DATA)
2001 2000
------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 18.7 $ 33.0
Accounts receivable, less allowance for uncollectible
accounts of $23.9 in 2001 and $11.7 in 2000 220.8 216.0
Inventories, net 368.4 307.5
Current deferred tax asset 52.2 25.1
Prepaid and other assets 34.1 62.3
--------- --------
Total current assets 694.2 643.9
Property, plant and equipment, net 310.7 290.5
Intangible assets, net 771.1 743.1
Other assets 67.0 83.9
--------- --------
Total assets $ 1,843.0 $1,761.4
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 71.3 $ 49.4
Accounts payable 150.9 153.0
Accrued liabilities 208.0 174.3
Accrued taxes 14.9 33.1
--------- --------
Total current liabilities 445.1 409.8
Long-term debt 816.5 813.4
Other liabilities 75.2 60.3
--------- --------
Total liabilities 1,336.8 1,283.5
--------- --------
Commitments and contingencies
Shareholders' equity:
Preferred shares, no par value, none issued
Common shares, no par value per share, $.01 stated
value per share, 31.3 shares issued in 2001 and 2000 0.3 0.3
Capital in excess of stated value 398.3 389.3
Retained earnings 212.3 196.8
Treasury stock at cost, 2.6 shares in 2001, 3.4 shares
in 2000 (70.0) (83.5)
Accumulated other comprehensive income (34.7) (25.0)
--------- --------
Total shareholders' equity 506.2 477.9
--------- --------
Total liabilities and shareholders' equity $ 1,843.0 $1,761.4
========= ========
See Notes to Consolidated Financial Statements.
----
23
THE SCOTTS COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
(IN MILLIONS)
Preferred Shares Common Shares Capital in Treasury Stock
---------------- --------------- Excess of Retained ---------------
Shares Amount Shares Amount Stated Value Earnings Shares Amount
-----------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 0.2 $ 177.3 21.1 $0.2 $208.9 $ 76.6 (2.8) $(55.9)
Net income 63.2
Foreign currency
translation
Minimum pension liability
Comprehensive income
Issuance of common shares
held in treasury 1.6 0.2 4.0
Purchase of common shares (0.3) (10.0)
Dividends on Class A
Convertible Preferred
Stock (9.7)
Conversion of Class A
Convertible Preferred
Stock (0.2) (3.4) 0.2 3.4
---- ------- ---- ---- ------ ------ ---- ------
Balance, September 30, 1999 0.0 173.9 21.3 0.2 213.9 130.1 (2.9) (61.9)
Net income 73.1
Foreign currency
translation
Minimum pension liability
Comprehensive income
Issuance of common shares
held in treasury 0.1 1.5 0.1 2.3
Purchase of common shares (0.6) (23.9)
Dividends on Class A
Convertible Preferred
Stock (6.4)
Conversion of Class A
Convertible Preferred
Stock (173.9) 10.0 173.9
---- ------- ---- ---- ------ ------ ---- ------
Balance, September 30, 2000 0.0 0.0 31.3 0.3 389.3 196.8 (3.4) (83.5)
Net income 15.5
Foreign currency
translation
Unrecognized loss on
derivatives
Minimum pension liability
Comprehensive income
Issuance of common shares
held in treasury 9.0 0.8 13.5
---- ------- ---- ---- ------ ------ ---- ------
Balance, September 30, 2001 0.0 $ 0.0 31.3 $0.3 $398.3 $212.3 (2.6) $(70.0)
==== ======= ==== ==== ====== ====== ==== ======
----
24
THE SCOTTS COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME (CONTINUED)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
(IN MILLIONS)
Accumulated Other
Comprehensive Income
-------------------------------------------
Minimum Pension Foreign
Liability Currency
Derivatives Adjustment Translation Total
--------------------------------------------------------------------------------------------------
Balance, September 30, 1998 $ $ (0.2) $ (3.0) $403.9
----- ------ ------ ------
Net income 63.2
Foreign currency translation (5.7) (5.7)
Minimum pension liability (4.0)(a) (4.0)
----- ------ ------ ------
Comprehensive income (4.0) (5.7) 53.5
Issuance of common shares held in treasury 5.6
Purchase of common shares (10.0)
Dividends on Class A Convertible Preferred
Stock (9.7)
Conversion of Class A Convertible Preferred
Stock
----- ------ ------ ------
Balance, September 30, 1999 $ (4.2) $ (8.7) $443.3
----- ------ ------ ------
Net income 73.1
Foreign currency translation (11.2) (11.2)
Minimum pension liability (0.9)(a) (0.9)
----- ------ ------ ------
Comprehensive income (0.9) (11.2) 61.0
Issuance of common shares held in treasury 3.9
Purchase of common shares (23.9)
Dividends on Class A Convertible Preferred
Stock (6.4)
Conversion of Class A Convertible Preferred
Stock
----- ------ ------ ------
Balance September 30, 2000 $ (5.1) $(19.9) $477.9
----- ------ ------ ------
Net income 15.5
Foreign currency translation
Unrecognized loss on derivatives (1.5)(b) (1.5)
Minimum pension liability (8.2)(a) (8.2)
----- ------ ------ ------
Comprehensive income 5.8
Issuance of common shares held in treasury 22.5
----- ------ ------ ------
Balance September 30, 2001 $(1.5) $(13.3) $(19.9) $506.2
===== ====== ====== ======
---------------
(a) Net of tax benefits of $5.5, $0.5, and $2.7 for fiscal 2001, 2000 and 1999,
respectively.
(b) Net of tax benefits of $1.1 for fiscal 2001.
See Notes to Consolidated Financial Statements.
----
25
THE SCOTTS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
(IN MILLIONS)
2001 2000 1999
----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 15.5 $ 73.1 $ 63.2
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 32.6 29.0 29.0
Amortization 31.0 32.0 27.2
Deferred taxes (19.9) 7.5 0.5
Extraordinary loss 5.9
Restructuring and other charges 27.7
Loss on sale of property 4.4 1.8
Gain on sale of business (4.6)
Changes in assets and liabilities, net of
acquired businesses:
Accounts receivable (14.2) 6.4 23.7
Inventories (68.5) 5.8 (21.6)
Prepaid and other current assets 31.4 (9.2) (25.2)
Accounts payable (2.8) 19.4 10.7
Accrued taxes and liabilities (22.7) 22.5 (10.7)
Restructuring reserves 37.3
Other assets 6.1 (4.7) (35.9)
Other liabilities 7.6 (6.4) 2.2
Other, net 4.6 (3.7) 7.4
------ ------ -------
Net cash provided by operating activities 65.7 171.5 78.2
------ ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment (63.4) (72.5) (66.7)
Proceeds from sale of equipment 1.8 1.5
Investments in acquired businesses, net of cash
acquired (26.5) (18.3) (506.2)
Payments on sellers notes (11.1) (1.0)
Other, net 0.5 (0.2)
------ ------ -------
Net cash used in investing activities (101.0) (89.5) (571.6)
------ ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under revolving and
bank lines of credit 61.7 (26.0) 65.3
Gross borrowings under term loans 260.0 525.0
Gross repayments under term loans (315.7) (23.7) (3.0)
Repayment of outstanding balance on previous
credit facility (241.0)
Issuance of 8 5/8% Senior Subordinated Notes 330.0
Extinguishment of 9 7/8% Senior Subordinated
Notes (107.1)
Settlement of interest rate locks (12.9)
Financing and issuance fees (1.6) (1.0) (24.1)
Dividends on Class A Convertible Preferred Stock (6.4) (12.1)
Repurchase of treasury shares (23.9) (10.0)
Cash received from exercise of stock options 17.0 2.8 3.8
------ ------ -------
Net cash provided by (used in) financing
activities 21.4 (78.2) 513.9
Effect of exchange rate changes on cash (0.4) (1.1) (0.8)
------ ------ -------
Net (decrease) increase in cash (14.3) 2.7 19.7
Cash and cash equivalents, beginning of period 33.0 30.3 10.6
------ ------ -------
Cash and cash equivalents, end of period $ 18.7 $ 33.0 $ 30.3
====== ====== =======
See Notes to Consolidated Financial Statements.
----
26
THE SCOTTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Scotts Company and its subsidiaries (collectively "Scotts" or the
"Company") are engaged in the manufacture and sale of lawn care and garden
products. The Company's major customers include mass merchandisers, home
improvement centers, large hardware chains, independent hardware stores,
nurseries, garden centers, food and drug stores, lawn and landscape service
companies, commercial nurseries and greenhouses, and specialty crop growers. The
Company's products are sold in the United States, Canada, the European Union,
the Caribbean, Southeast Asia, the Middle East, Africa, Australia, New Zealand,
Japan and Latin America.
ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The Scotts
Company and its subsidiaries. All material intercompany transactions have been
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying disclosures. Although these estimates are based on
management's best knowledge of current events and actions the Company may
undertake in the future, actual results ultimately may differ from the
estimates.
REVENUE RECOGNITION
Revenue is recognized when products are shipped and when title and risk of
loss transfer to the customer. For certain large multi-location customers,
products may be shipped to third-party warehousing locations. Revenue is not
recognized until the customer places orders against that inventory and
acknowledges ownership of the goods in writing. Provisions for estimated returns
and allowances are recorded at the time of shipment based on historical rates of
returns as a percentage of sales.
ADVERTISING AND PROMOTION
The Company advertises its branded products through national and regional
media, and through cooperative advertising programs with retailers. Retailers
are also offered 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. Amounts paid to or credited to customers for promotional activities
are classified as a reduction of net sales.
RESEARCH AND DEVELOPMENT
All costs associated with research and development are charged to expense
as incurred. Expense for fiscal 2001, 2000, and 1999 was $24.7 million, $24.1
million, and $21.7 million, respectively.
EARNINGS PER COMMON SHARE
Basic earnings per common share is based on the weighted-average number of
common shares outstanding each period. Diluted earnings per common share is
based on the weighted-average number of common shares and dilutive potential
common shares (stock options, convertible preferred stock and warrants)
outstanding each period.
----
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVENTORIES
Inventories are stated at the lower of cost or market, principally
determined by the FIFO method; however, certain growing media inventories are
accounted for by the LIFO method. At September 30, 2001 and 2000, approximately
9% and 13% of inventories, respectively, are valued at the lower of LIFO cost or
market. Inventories include the cost of raw materials, labor and manufacturing
overhead. The Company makes provisions for obsolete or slow-moving inventories
as necessary to properly reflect inventory value. Reserves for excess and
obsolete inventories were $22.3 million and $20.1 million at September 30, 2001
and 2000, respectively.
LONG-LIVED ASSETS
Property, plant and equipment, including significant improvements, are
stated at cost. Expenditures for maintenance and repairs are charged to
operating expenses as incurred. When properties are retired or otherwise
disposed of, the cost of the asset and the related accumulated depreciation are
removed from the accounts with the resulting gain or loss being reflected in
results of operations.
Depletion of applicable land is computed on the units-of-production method.
Depreciation of other property, plant and equipment is provided on the
straight-line method and is based on the estimated useful economic lives of the
assets as follows:
Land improvements 10 - 25 years
Buildings 10 - 40 years
Machinery and equipment 3 - 15 years
Furniture and fixtures 6 - 10 years
Software 3 - 8 years
Interest is capitalized on all significant capital projects. The Company
capitalized $3.1 million and $2.4 million of interest costs during fiscal 2001
and 2000, respectively.
Goodwill arising from business acquisitions is amortized over its useful
life, which is generally 20 to 40 years, on a straight-line basis. Intangible
assets include patents, trademarks and other intangible assets which are valued
at acquisition through independent appraisals. Patents, trademarks and other
intangible assets are being amortized on a straight-line basis over periods
varying from 7 to 40 years. Accumulated amortization at September 30, 2001 and
2000 was $150.2 million and $120.6 million, respectively.
Management assesses the recoverability of property and equipment, goodwill,
trademarks and other intangible assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable from its future undiscounted cash flows. If it is determined that an
impairment has occurred, an impairment loss is recognized for the amount by
which the carrying amount of the asset exceeds its estimated fair value.
INTERNAL USE SOFTWARE
The Company accounts for the costs of internal use software in accordance
with Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". Accordingly, costs other than
reengineering costs are expensed or capitalized depending on whether they are
incurred in the preliminary project stage, application development stage, or the
post-implementation/ operation stage. As of September 30, 2001 and 2000, the
Company had $36.7 million and $37.3 million, respectively, in unamortized
capitalized internal use computer software costs. Amortization of these costs
was $4.3 million during fiscal 2001 and $0.9 million during fiscal 2000.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid financial instruments with original
maturities of three months or less to be cash equivalents.
----
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENVIRONMENTAL COSTS
The Company recognizes environmental liabilities when conditions requiring
remediation are identified. The Company determines its liability on a site by
site basis and records a liability at the time when it is probable and can be
reasonably estimated. Expenditures which extend the life of the related property
or mitigate or prevent future environmental contamination are capitalized.
Environmental liabilities are not discounted or reduced for possible recoveries
from insurance carriers.
FOREIGN EXCHANGE INSTRUMENTS
Gains and losses on foreign currency transaction hedges are recognized in
income and offset the foreign exchange gains and losses on the underlying
transactions. Gains and losses on foreign currency firm commitment hedges are
deferred and included in the basis of the transactions underlying the
commitments.
All assets and liabilities in the balance sheets of foreign subsidiaries
whose functional currency is other than the U.S. dollar are translated into U.S.
dollar equivalents at year-end exchange rates. Translation gains and losses are
accumulated as a separate component of other comprehensive income and included
in shareholders' equity. Income and expense items are translated at average
monthly exchange rates. Foreign currency transaction gains and losses are
included in the determination of net income.
DERIVATIVE INSTRUMENTS
In the normal course of business, the Company is exposed to fluctuations in
interest rates and the value of foreign currencies. The Company has established
policies and procedures that govern the management of these exposures through
the use of a variety of financial instruments. The Company employs various
financial instruments, including forward exchange contracts and swap agreements,
to manage certain of the exposures when practical. By policy, the Company does
not enter into such contracts for the purpose of speculation or use leveraged
financial instruments. The Company's derivatives activities are managed by the
chief financial officer and other senior management of the Company in
consultation with the Finance Committee of the Board of Directors. These
activities include establishing the Company's risk-management philosophy and
objectives, providing guidelines for derivative-instrument usage and
establishing procedures for control and valuation, counterparty credit approval
and the monitoring and reporting of derivative activity. The Company's objective
in managing its exposure to fluctuations in interest rates and foreign currency
exchange rates is to decrease the volatility of earnings and cash flows
associated with changes in the applicable rates and prices. To achieve this
objective, the Company primarily enters into forward exchange contracts and swap
agreements whose values change in the opposite direction of the anticipated cash
flows. Derivative instruments related to forecasted transactions are considered
to hedge future cash flows, and the effective portion of any gains or losses is
included in other comprehensive income until earnings are affected by the
variability of cash flows. Any remaining gain or loss is recognized currently in
earnings. The cash flows of the derivative instruments are expected to be highly
effective in achieving offsetting cash flows attributable to fluctuations in the
cash flows of the hedged risk. If it becomes probable that a forecasted
transaction will no longer occur, the derivative will continue to be carried on
the balance sheet at fair value, and gains and losses that were accumulated in
other comprehensive income will be recognized immediately in earnings.
To manage certain of its cash flow exposures, the Company has entered into
forward exchange contracts and interest rate swap agreements. The forward
exchange contracts are designated as hedges of the Company's foreign currency
exposure associated with future cash flows. Amounts payable or receivable under
forward exchange contracts are recorded as adjustments to selling, general and
administrative expense. The interest rate swap agreements are designated as
hedges of the Company's interest rate risk associated with certain variable rate
debt. Amounts payable or receivable under the swap agreements are recorded as
adjustments to interest expense. Unrealized gains or losses resulting from
valuing these swaps at fair value are recorded in other comprehensive income.
----
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company adopted Statement of Financial Accounting Standards No. 133 as
of October 2000. Since adoption, there have been no gains or losses recognized
in earnings for hedge ineffectiveness or due to excluding a portion of the value
from measuring effectiveness.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to fiscal 2001 classifications.
NOTE 2. DETAIL OF CERTAIN FINANCIAL STATEMENT ACCOUNTS
2001 2000
---------------------------------------------------------------------------------------------
(in millions)
INVENTORIES, NET:
Finished goods $ 295.8 $ 232.9
Raw materials 72.6 74.6
------- -------
$ 368.4 $ 307.5
======= =======
2001 2000
---------------------------------------------------------------------------------------------
(in millions)
PROPERTY, PLANT AND EQUIPMENT, NET:
Land and improvements $ 38.9 $ 38.5
Buildings 119.5 109.0
Machinery and equipment 203.4 201.4
Furniture and fixtures 31.9 30.0
Software 42.0 39.5
Construction in progress 79.6 54.4
Less: accumulated depreciation (204.6) (182.3)
------- -------
Total $ 310.7 $ 290.5
======= =======
2001 2000
---------------------------------------------------------------------------------------------
(in millions)
INTANGIBLE ASSETS, NET:
Goodwill $ 352.3 $ 330.1
Trademarks 385.7 358.0
Other 183.3 175.6
Less: accumulated amortization (150.2) (120.6)
------- -------
Total $ 771.1 $ 743.1
======= =======
2001 2000
---------------------------------------------------------------------------------------------
(in millions)
ACCRUED LIABILITIES:
Payroll and other compensation accruals $ 35.2 $ 40.5
Advertising and promotional accruals 63.5 62.3
Restructuring accruals 30.1 0.0
Other 79.2 71.5
------- -------
Total $ 208.0 $ 174.3
======= =======
----
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2001 2000
---------------------------------------------------------------------------------------------
(in millions)
OTHER NON-CURRENT LIABILITIES:
Accrued pension and postretirement liabilities $ 62.0 $ 49.8
Legal and environmental reserves 7.0 10.5
Restructuring accruals 4.2 0.0
Other 2.0 0.0
------- -------
Total $ 75.2 $ 60.3
======= =======
NOTE 3. MARKETING AGREEMENT
Effective September 30, 1998, the Company entered into an agreement with
Monsanto Company ("Monsanto", now known as Pharmacia Corporation) for exclusive
domestic and international marketing and agency rights to Monsanto's consumer
Roundup(R) herbicide products. Under the terms of the agreement, the Company is
entitled to receive an annual commission from Monsanto in consideration for the
performance of its duties as agent. The annual commission is calculated as a
percentage of the actual earnings before interest and income taxes (EBIT), as
defined in the agreement, of the Roundup(R) business. Each year's percentage
varies in accordance with the terms of the agreement based on the achievement of
two earnings thresholds and on commission rates that vary by threshold and
program year.
The agreement also requires the Company to make fixed annual payments to
Monsanto as a contribution against the overall expenses of the Roundup(R)
business. The annual fixed payment is defined as $20 million. However, portions
of the annual payments for the first three years of the agreement are deferred.
No payment was required for the first year (fiscal 1999), a payment of $5
million was required for the second year and a payment of $15 million was
required for the third year so that a total of $40 million of the contribution
payments were deferred. Beginning in the fifth year of the agreement, the annual
payments to Monsanto increase to at least $25 million, which include per annum
interest charges at 8%. The annual payments may be increased above $25 million
if certain significant earnings targets are exceeded. If all of the deferred
contribution amounts are paid prior to 2018, the annual contribution payments
revert to $20 million. Regardless of whether the deferred contribution amounts
are paid, all contribution payments cease entirely in 2018.
The Company is recognizing a charge each year associated with the annual
contribution payments equal to the required payment for that year. The Company
is not recognizing a charge for the portions of the contribution payments that
are deferred until the time those deferred amounts are paid. The Company
considers this method of accounting for the contribution payments to be
appropriate after consideration of the likely term of the agreement, the
Company's ability to terminate the agreement without paying the deferred
amounts, and the fact that approximately $18.6 million of the deferred amount is
never paid, even if the agreement is not terminated prior to 2018, unless
significant earnings targets are exceeded.
The express terms of the agreement permit the Company to terminate the
agreement only upon Material Breach, Material Fraud or Material Willful
Misconduct by Monsanto, as such terms are defined in the agreement, or upon the
sale of the Roundup business by Monsanto. In such instances, the agreement
permits the Company to avoid payment of any deferred contribution and related
per annum charge. The Company's basis for not recording a financial liability to
Monsanto for the deferred portions of the annual contribution and per annum
charge is based on our assessment and consultations with our legal counsel and
the Company's independent accountants. In addition, the Company has obtained a
legal opinion from The Bayard Firm, P.A., which concluded, subject to certain
qualifications, that if the matter were litigated, a Delaware court would likely
conclude that the Company is entitled to terminate the agreement at will, with
appropriate prior notice, without incurring significant penalty, and avoid
paying the unpaid deferred amounts. We have concluded that, should the Company
elect to terminate the agreement at any balance sheet date, it will not incur
significant economic consequences as a result of such action.
The Bayard Firm was special Delaware counsel retained during fiscal 2000
solely for the limited purpose of providing a legal opinion in support of the
contingent liability treatment of the agreement previously adopted by the
Company and has neither generally represented or advised the Company nor
----
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
participated in the preparation or review of the Company's financial statements
or any SEC filings. The terms of such opinion specifically limit the parties who
are entitled to rely on it.
The Company's conclusion is not free from challenge and, in fact, would
likely be challenged if the Company were to terminate the agreement. If it were
determined that, upon termination, the Company must pay any remaining deferred
contribution amounts and related per annum charges, the resulting charge to
earnings could have a material impact on the Company's results of operations and
financial position. At September 30, 2001, contribution payments and related per
annum charges of approximately $46.4 million had been deferred under the
agreement. This amount is considered a contingent obligation and has not been
reflected in the financial statements as of and for the year then ended.
Monsanto has disclosed that it is accruing the $20 million fixed
contribution fee per year beginning in the fourth quarter of Monsanto's fiscal
year 1998, plus interest on the deferred portion.
The agreement has a term of seven years for all countries within the
European Union (at the option of both parties, the agreement can be renewed for
up to 20 years for the European Union countries). For countries outside of the
European Union, the agreement continues indefinitely unless terminated by either
party. The agreement provides Monsanto with the right to terminate the agreement
for an event of default (as defined in the agreement) by the Company or a change
in control of Monsanto or the sale of the Roundup(R) business. The agreement
provides the Company with the right to terminate the agreement in certain
circumstances including an event of default by Monsanto or the sale of the
Roundup(R) business. Unless Monsanto terminates the agreement for an event of
default by the Company, Monsanto is required to pay a termination fee to the
Company that varies by program year. The termination fee is $150 million for
each of the first five program years, gradually declines to $100 million by year
ten of the program and then declines to a minimum of $16 million if the program
continues for years 11 through 20.
In consideration for the rights granted to the Company under the agreement
for North America, the Company was required to pay a marketing fee of $32
million to Monsanto. The Company has deferred this amount on the basis that the
payment will provide a future benefit through commissions that will be earned
under the agreement and is amortizing the balance over ten years, which is the
estimated likely term of the agreement.
NOTE 4. RESTRUCTURING AND OTHER CHARGES
2001 CHARGES
During the third and fourth quarters of fiscal 2001, the Company recorded
$75.7 million of restructuring and other charges, primarily associated with the
closure or relocation of certain manufacturing and administrative facilities.
The $75.7 million in charges is segregated in the Statements of Operations in
two components: (i) $7.3 million included in cost of sales for the write-off of
inventory that was rendered unusable as a result of the restructuring activities
and (ii) $68.4 million included in selling, general and administrative costs.
Included in the $68.4 million charge in selling, general and administrative
costs is $20.4 million to write-down to fair value certain property and
equipment and other assets; $5.8 million of facility exit costs; $27.0 million
of severance costs; and $15.2 million in other restructuring and other costs.
The severance costs related to reduction in force initiatives and facility
closures and consolidations in North America and Europe covering approximately
340 administrative, production, selling and other employees. Severance costs are
expected to be paid in fiscal 2002 with some payments extending into 2003. All
other fiscal 2001 restructuring related activities and costs are expected to be
completed by the end of fiscal 2002.
----
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a rollforward of the restructuring and related charges
recorded in the third and fourth quarters of fiscal 2001:
Description Type Classification Charge Payment Balance
--------------------------------------------------------------------------------------------------
Severance Cash SG&A $27.0 $ (1.9) $25.1
Facility exit costs Cash SG&A 5.8 (0.6) 5.2
Other related costs Cash SG&A 15.2 (8.2) 7.0
----- ------ -----
Total cash 48.0 $(10.7) $37.3
----- ====== =====
Property and equipment writedowns Non-Cash SG&A 7.9
Obsolete inventory writeoffs Non-Cash Cost of sales 7.3
Other asset writedowns Non-Cash SG&A 12.5
-----
Total non-cash 27.7
-----
Total $75.7
=====
1999 CHARGES
During fiscal 1999, the Company recorded $1.4 million of restructuring
charges associated with management's decision to reorganize the North American
Professional Business Group to strengthen distribution and technical sales
support, integrate brand management across market segments and reduce annual
operating expenses. These charges represent costs to sever approximately 60
in-house sales associates who were terminated in fiscal 1999. Approximately $1.1
million of severance payments were made to these former associates during fiscal
1999. Of the remaining $0.3 million, $0.2 million was paid in fiscal 2000, and
the remainder was paid in fiscal 2001.
NOTE 5. ACQUISITIONS AND DIVESTITURES
On January 1, 2001, the Company acquired the Substral(R) brand and consumer
plant care business from Henkel KGaA. Substral(R) is a leading consumer
fertilizer brand in many European countries including Germany, Austria, Belgium,
France and the Nordics. Under the terms of the asset purchase agreement, the
Company acquired specified working capital and intangible assets associated with
the Substral(R) business. The purchase price will be determined based on the
value of the working capital assets acquired and the performance of the business
for the period from June 15, 2000 to December 31, 2000. The parties to the
transaction are still in the process of determining a final purchase price;
however, the Company's management estimates that the final purchase price will
be approximately $40 million. On June 29, 2001 and December 29, 2000, the
Company advanced $6.4 million and $6.9 million, respectively, to Henkel KGaA
toward the Substral(R) purchase price.
The Substral(R) acquisition was made in exchange for cash and notes due to
seller and was accounted for under the purchase method of accounting.
Accordingly, Substral's results have been included from the date of its
acquisition and the purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. Intangible assets associated with the purchase were $33.7 million.
Statement of Financial Accounting Standards No. 141, "Business
Combinations" was issued in June 2001. This new standard mandates the purchase
method of accounting for all business combinations entered into after June 30,
2001. The standard also requires the valuation of intangible assets apart from
goodwill for assets that arise as a result of contractual or legal rights or if
the right is separable (able to be sold, transferred, leased, licensed, etc.).
Goodwill is the residual amount after all tangible and other intangible assets
have been valued. All acquisitions in fiscal 2001 were in process or completed
prior to the effective date of SFAS No. 141.
----
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma results of operations give effect to the
Substral(R) brand acquisition as if it had occurred on October 1, 1999.
Fiscal Year Ended
September 30,
--------------------
2001 2000
----------------------------------------------------------------------------------
(in millions)
Net sales $1,752.3 $1,727.2
Income before extraordinary loss 16.2 69.5
Net income 16.2 69.5
Basic earnings per share:
Before extraordinary loss $ .57 $ 2.49
After extraordinary loss .57 2.49
Diluted earnings per share:
Before extraordinary loss $ .53 $ 2.34
After extraordinary loss .53 2.34
In May 2000, the Company sold its ProTurf(R) business to two buyers. The
terms of the agreement included the sale of certain inventory for approximately
$16.3 million and an arrangement for the use and eventual purchase of related
trademarks by the buyers. A gain of approximately $4.6 million for the sale of
this business is reflected in the Company's fiscal 2000 results of operations.
NOTE 6. RETIREMENT PLANS.
The Company offers a defined contribution profit sharing and 401(k) plan
for substantially all U.S. employees. Full-time employees may participate in the
plan on the first day of the month after being hired. Temporary employees may
participate after working at least 1,000 hours in their first twelve months of
employment and after reaching the age of 21. The plan allows participants to
contribute up to 15% of their compensation in the form of pre-tax or post-tax
contributions. The Company provides a matching contribution equivalent to 100%
of participants' initial 3% contribution and 50% of the participants' remaining
contribution up to 5%. Participants are immediately vested in employee
contributions, the Company's matching contributions and the investment return on
those monies. The Company also provides a base contribution to employees'
accounts regardless of whether employees are active in the plan. The base
contribution is 2% of compensation up to 50% of the Social Security taxable wage
base plus 4% of compensation in excess of 50% of the Social Security wage base.
Participants become vested in the Company's base contribution after three years
of service. The Company recorded charges of $10.3 million, $7.4 million and $8.4
million under the plan in fiscal 2001, 2000 and 1999, respectively.
In conjunction with the decision to offer the expanded defined contribution
profit sharing and 401(k) plan to domestic Company associates, management
decided to freeze benefits under certain defined benefit pension plans. These
pension plans covered substantially all full-time U.S. associates who had
completed one year of eligible service and reached the age of 21. The benefits
under these plans are based on years of service and the associates' average
final compensation or stated amounts. The Company's funding policy, consistent
with statutory requirements and tax considerations, is based on actuarial
computations using the Projected Unit Credit method. The Company also curtailed
its non-qualified supplemental pension plan which provides for incremental
pension payments from the Company so that total pension payments equal amounts
that would have been payable from the Company's pension plans if it were not for
limitations imposed by income tax regulations.
The Company also sponsors the following pension plans associated with the
international businesses it has acquired: Scotts Europe BV, ASEF Europe BV
(Netherlands), The Scotts Company (UK) Ltd., Miracle Garden Care, Scotts France
SAS, Scotts Celaflor GmbH (Germany) and Scotts Celaflor HG (Austria). These
plans generally cover all associates of the respective businesses and retirement
benefits are generally based on years of service and compensation levels. The
pension plans for Scotts Europe BV, ASEF Europe BV (Netherlands), The Scotts
Company (UK) Ltd., and Miracle Garden Care are funded plans. The remaining
international pension plans are not funded by separately held plan assets.
----
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with reduction in force initiatives implemented in fiscal
2001, curtailment (gains) or losses of ($0.2) million and $2.7 million were
recorded as components of restructuring expense for the international and
domestic defined benefit pension plans, respectively.
The following tables present information about benefit obligations, plan
assets, annual expense and other assumptions about the Company's defined benefit
pension plans ($ millions):
Curtailed
Defined International Curtailed
Benefit Plans Benefit Plans Excess Plan
----------------- --------------------- -----------------
2001 2000 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning
of year $ 59.5 $ 59.0 $ 72.1 $ 73.2 $ 1.9 $ 1.9
Service cost 3.6 2.9
Interest cost 4.6 4.1 4.0 3.7 0.1 0.1
Plan participants'
contributions 0.7 0.8
Curtailment loss (gain) 2.7 (0.2)
Actuarial (gain) loss 4.3 (2.7) (0.4) (0.1) (0.1)
Benefits paid (3.9) (3.6) (1.7) (1.6)
Foreign currency translation 0.3 (6.5)
------ ------ -------- -------- ------ ------
Benefit obligation at end of
year $ 67.2 $ 59.5 $ 76.1 $ 72.1 $ 1.9 $ 1.9
====== ====== ======== ======== ====== ======
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year 56.2 56.8 64.3 59.9
Actual return on plan assets 4.5 3.0 (13.7) 7.6
Employer contribution 0.1 2.8 1.2
Plan participants'
contributions 0.7 0.9
Benefits paid (3.9) (3.6) (1.7) (0.6)
Foreign currency translation (0.6) (4.7)
------ ------ -------- --------
Fair value of plan assets at
end of year $ 56.9 $ 56.2 $ 51.8 $ 64.3
====== ====== ======== ========
AMOUNTS RECOGNIZED IN THE
STATEMENT OF FINANCIAL
POSITION CONSIST OF:
Funded status (10.3) (3.3) (24.3) (7.8) (1.9) (1.9)
Unrecognized losses 12.1 8.3 15.8 0.7 0.3 0.3
------ ------ -------- -------- ------ ------
Net amount recognized $ 1.8 $ 5.0 $ (8.5) $ (7.1) $ (1.6) $ (1.6)
====== ====== ======== ======== ====== ======
2001 2000 1999 2001 2000 1999 2001 2000
----------------------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC
BENEFIT COST
Service cost $ $ $ $ 3.6 $ 3.5 $ 3.2 $ $
Interest cost 4.6 4.1 4.2 4.0 4.0 3.6 0.1 0.1
Expected return on plan assets (4.3) (4.4) (4.5) (4.8) (5.5) (3.7)
Net amortization and deferral 0.3 0.4 0.6 0.3
Curtailment loss (gain) 2.7 (0.2)
------ ------ ------ -------- -------- -------- ------ ------
Net periodic benefit cost $ 3.3 $ (0.3) $ 0.1 $ 2.6 $ 2.6 $ 3.4 $ 0.1 $ 0.1
====== ====== ====== ======== ======== ======== ====== ======
1999
------------------------------- ------
COMPONENTS OF NET PERIODIC
BENEFIT COST
Service cost $
Interest cost 0.1
Expected return on plan assets
Net amortization and deferral
Curtailment loss (gain)
------
Net periodic benefit cost $ 0.1
======
2001 2000 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------
Weighted average assumptions:
Discount rate 7.5% 7.75% 5.5-6.5% 5.4-6.5% 7.5% 7.75%
Expected return on plan
assets 8.0% 8.0% 4.0-8.0% 4.0-8.0% 8.0% 8.0%
Rate of compensation increase n/a n/a 2.5-4.0% 1.5-4.0% n/a n/a
----
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2001, the status of the international plans was as
follows:
2001 2000
--------------------------------------------------------------------------------------------
Plans with benefit obligations in excess of plan
assets:
Aggregate projected benefit obligations $73.9 $17.2
Aggregate fair value of plan assets 49.7 4.7
Plans with plan assets in excess of benefit
obligations:
Aggregate projected benefit obligations 2.1 54.9
Aggregate fair value of plan assets 2.1 59.6
NOTE 7. ASSOCIATE BENEFITS
The Company provides comprehensive major medical benefits to certain of its
retired associates and their dependents. Substantially all of the Company's
domestic associates become eligible for these benefits if they retire at age 55
or older with more than ten years of service. The plan requires certain minimum
contributions from retired associates and includes provisions to limit the
overall cost increases the Company is required to cover. The Company funds its
portion of retiree medical benefits on a pay-as-you-go basis.
Prior to October 1, 1993, the Company effected several changes in plan
provisions, primarily related to current and ultimate levels of retiree and
dependent contributions. Retirees as of October 1, 1993 are entitled to benefits
existing prior to these plan changes. These plan changes resulted in a reduction
in unrecognized prior service cost, which is being amortized over future years.
In connection with the reduction in force in fiscal 2001, the plan incurred
a curtailment expense of $3.7 million which was included in restructuring
expense.
The following table set for the information about the retiree medical plan:
2001 2000
---------------------------------------------------------------------------------------------
(in millions)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 18.0 $ 15.8
Service cost 0.3 0.4
Interest cost 1.4 1.3
Plan participants' contributions 0.3 0.3
Curtailment loss 3.7
Actuarial loss 1.2
Benefits paid (1.2) (1.0)
------ ------
Benefit obligation at end of year $ 22.5 $ 18.0
====== ======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ $
Employer contribution 0.9 0.7
Plan participants' contributions 0.3 0.3
Benefits paid (1.2) (1.0)
------ ------
Fair value of plan assets at end of year $ -- $ --
====== ======
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL
POSITION CONSIST OF:
Funded status $(22.5) $(18.0)
Unrecognized prior service costs (1.7) (3.0)
Unrecognized prior gain (0.3) (4.0)
------ ------
Net amount recognized $(24.5) $(25.0)
====== ======
----
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The discount rates used in determining the accumulated postretirement
benefit obligation were 7.5% and 7.75% in fiscal 2001 and 2000, respectively.
For measurement purposes, annual rates of increase in per capita cost of covered
retiree medical benefits assumed for fiscal 2001 and 2000 were 9.50% and 8.50%,
respectively. The rate was assumed to decrease gradually to 5.5% through the
year 2010 and remain at that level thereafter. A 1% increase in health cost
trend rate assumptions would increase the accumulated postretirement benefit
obligation (APBO) as of September 30, 2001 and 2000 by $0.5 million and $0.7
million, respectively. A 1% increase or decrease in the same rate would not have
a material effect on service or interest costs.
The Company is self-insured for certain health benefits up to $0.2 million
per occurrence per individual. The cost of such benefits is recognized as
expense in the period the claim is incurred. This cost was $14.7 million, $9.9
million and $11.0 million in fiscal 2001, 2000 and 1999, respectively. The
Company is self-insured for State of Ohio workers compensation up to $0.5
million per claim. Claims in excess of stated limits of liability and claims for
workers compensation outside of the State of Ohio are insured with commercial
carriers.
NOTE 8. DEBT
September 30,
--------------------------
2001 2000
--------------------------------------------------------------------------------------------
(in millions)
Revolving loans under credit facility $ 94.7 $ 37.3
Term loans under credit facility 398.6 452.2
Senior subordinated notes 320.5 319.2
Notes due to sellers 53.7 36.4
Foreign bank borrowings and term loans 9.4 7.1
Capital lease obligations and other 10.9 10.6
------ ------
887.8 862.8
Less current portions 71.3 49.4
------ ------
$816.5 $813.4
====== ======
Maturities of short- and long-term debt, including capital leases for the
next five fiscal years and thereafter are as follows:
Capital Leases Other
and Other Debt
----------------------------------------------------------------------------------------------
(in millions)
2002 $ 2.3 $ 70.7
2003 1.0 54.8
2004 0.8 36.8
2005 0.5 139.7
2006 0.3 1.1
Thereafter 6.3 585.0
----- ------
$11.2 $888.1
Less: amounts representing future interest (0.3) (11.2)
----- ------
$10.9 $876.9
===== ======
On December 4, 1998, The Scotts Company and certain of its subsidiaries
entered into a credit facility (the "Original Credit Agreement") which provided
for borrowings in the aggregate principal amount of $1.025 billion and consisted
of term loan facilities in the aggregate amount of $525 million and a revolving
credit facility in the amount of $500 million. Proceeds from borrowings under
the Original Credit Agreement of approximately $241.0 million were used to repay
amounts outstanding under the then existing credit
----
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
facility. The Company recorded a $0.4 million extraordinary loss, net of tax, in
connection with the retirement of the previous facility.
On December 5, 2000, The Scotts Company and certain of its subsidiaries
entered into an Amended and Restated Credit Agreement (the "Amended Credit
Agreement"), amending and restating in its entirety the Original Credit
Agreement. Under the terms of the Amended Credit Agreement, the revolving credit
facility was increased from $500 million to $575 million and the net worth
covenant was amended.
The term loan facilities consist of two tranches. The Tranche A Term Loan
Facility consists of three sub-tranches of French Francs, German Deutsche Marks
and British Pounds Sterling in an aggregate principal amount of $265 million
which are to be repaid quarterly over a 6 1/2 year period. The Tranche B Term
Loan Facility replaced the Tranche B and Tranche C facilities from the Original
Credit Agreement. Those facilities were prepayable without penalty. The new
Tranche B Term Loan Facility has an aggregate principal amount of $260 million
and is repayable in installments as follows: quarterly installments of $0.25
million beginning June 30, 2001 through December 31, 2006, quarterly
installments of $63.5 million beginning March 31, 2007 through September 30,
2007 and a final quarterly installment of $63.8 million on December 31, 2007.
The revolving credit facility provides for borrowings of up to $575
million, which are available on a revolving basis over a term of 6 1/2 years. A
portion of the revolving credit facility not to exceed $100 million is available
for the issuance of letters of credit. A portion of the facility not to exceed
$258.8 million is available for borrowings in optional currencies, including
German Deutsche Marks, British Pounds Sterling, French Francs, Belgian Francs,
Italian Lira and other specified currencies, provided that the outstanding
revolving loans in optional currencies other than British Pounds Sterling does
not exceed $138 million. The outstanding principal amount of all revolving
credit loans may not exceed $150 million for at least 30 consecutive days during
any calendar year.
Interest rates and commitment fees under the Amended Credit Agreement vary
according to the Company's leverage ratios and interest rates also vary within
tranches. The weighted-average interest rate on the Company's variable rate
borrowings at September 30, 2001 was 7.85% and at September 30, 2000 was 8.78%.
In addition, the Amended Credit Agreement requires that Scotts enter into hedge
agreements to the extent necessary to provide that at least 50% of the aggregate
principal amount of the 8 5/8% Senior Subordinated Notes due 2009 and term loan
facilities is subject to a fixed interest rate or interest rate protection for a
period of not less than three years. Financial covenants include minimum net
worth, interest coverage and net leverage ratios. Other covenants include
limitations on indebtedness, liens, mergers, consolidations, liquidations and
dissolutions, sale of assets, leases, dividends, capital expenditures, and
investments. The Scotts Company and all of its domestic subsidiaries pledged
substantially all of their personal, real and intellectual property assets as
collateral for the borrowings under the Amended Credit Agreement. The Scotts
Company and its subsidiaries also pledged the stock in foreign subsidiaries that
borrow under the Amended Credit Agreement.
At September 30, 2001, primarily due to the restructuring charges recorded
in fiscal 2001, Scotts was in default of the covenants in the Amended Credit
Agreement pertaining to net worth, leverage and interest coverage. The defaults
were waived to and including December 31, 2001 and the Company is now in
compliance at September 30, 2001 with the covenants as modified by the December
2001 amendment. See Note 22 regarding the December 2001 amendment to the Amended
Credit Agreement.
Approximately $15.1 million of financing costs associated with the
revolving credit facility have been deferred as of September 30, 2001 and are
being amortized over a period of approximately 7 years, beginning in fiscal year
1999.
In January 1999, The Scotts Company completed an offering of $330 million
of 8 5/8% Senior Subordinated Notes due 2009. The net proceeds from the
offering, together with borrowings under the Original Credit Agreement, were
used to fund the Ortho acquisition and to repurchase approximately $97 million
of outstanding 9 7/8% Senior Subordinated Notes due August 2004. The Company
recorded an extraordinary loss before tax on the extinguishment of the 9 7/8%
Notes of approximately $9.3 million, including a call premium of $7.2 million
and the write-off of unamortized issuance costs and discounts of
----
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$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 $16.0 million and $4.4 million,
respectively. The Company is imputing interest on the non-interest bearing notes
using an interest rate prevalent for similar instruments at the time of
acquisition (approximately 9% and 8%, respectively). In conjunction with other
acquisitions, notes were issued for certain portions of the total purchase price
that are to be paid in annual installments over periods ranging from four to
five years. The present value of remaining note payments is $14.4 million. The
Company is imputing interest on the non-interest bearing notes using an interest
rate prevalent for similar instruments at the time of the acquisitions
(approximately 8%).
In conjunction with the Substral(R) acquisition, notes were issued for
certain portions of the total purchase price that are to be paid in semi-annual
installments over a two-year period. The remaining note payments total $21.5
million. The interest rate on these notes is of 5.5%.
The foreign term loans of $6.0 million issued on December 12, 1997, have an
8-year term and bear interest at 1% below LIBOR. The present value of these
loans at September 30, 2001 and 2000 was $2.8 million and $3.2 million,
respectively. The loans are denominated in British Pounds Sterling and can be
redeemed, on demand, by the note holder. The foreign bank borrowings of $6.6
million at September 30, 2001 and $3.9 million at September 30, 2000 represent
lines of credit for foreign operations and are primarily denominated in French
Francs.
NOTE 9. SHAREHOLDERS' EQUITY
2001 2000
---------------------------------------------------------------------------------------
(in millions)
STOCK
Preferred shares, no par value:
Authorized 0.2 shares 0.2 shares
Issued 0.0 shares 0.0 shares
Common shares, no par value
Authorized 100.0 shares 100.0 shares
Issued 31.3 shares 31.3 shares
Class A Convertible Preferred Stock ("Preferred Shares") with a liquidation
preference of $195.0 million was issued in conjunction with the 1995 Miracle-Gro
merger transactions. These Preferred Shares had a 5% dividend yield and were
convertible upon shareholder demand into common shares at any time and at The
Scotts Company's option after May 2000 at $19.00 per common share. The
conversion feature associated with the Preferred Shares issued in connection
with the Miracle-Gro merger transactions was negotiated as an integral part of
the overall transaction. The conversion price exceeded the fair market value of
The Scotts Company's common shares on the date the two companies reached
agreement and, therefore, the Preferred Shares did not provide for a beneficial
conversion feature. Additionally, warrants to purchase 3.0 million common shares
of The Scotts Company were issued as part of the purchase price. The warrants
are exercisable upon shareholder demand for 1.0 million common shares at $21.00
per share, 1.0 million common shares at $25.00 per share and 1.0 million common
shares at $29.00 per share. The exercise term for the warrants expires November
2003. The fair value of the warrants at issuance has been included in capital in
excess of par value in the Company's Consolidated Balance Sheets.
----
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In fiscal 1999, certain of the Preferred Shares were converted into 0.2
million common shares at the holder's option. In October 1999, all of the then
outstanding Preferred Shares were converted into 10.0 million common shares. In
exchange for the early conversion, The Scotts Company paid the holders of the
Preferred Shares $6.4 million. That amount represents the dividends on the
Preferred Shares that otherwise would have been payable from the conversion date
through May 2000, the month during which the Preferred Shares could first be
redeemed by The Scotts Company. In addition, The Scotts Company agreed to
accelerate the termination of many of the standstill provisions in the
Miracle-Gro merger agreement that would otherwise have terminated in May 2000.
These standstill provisions include the provisions related to the Board of
Directors and voting restrictions, as well as restrictions on transfer.
Therefore, the former shareholders of Stern's Miracle-Gro Products, Inc.,
including Hagedorn Partnership, L.P., may vote their common shares freely in the
election of directors and generally on all matters brought before The Scotts
Company's shareholders. Following the conversion and the termination of the
standstill provisions described above, the former shareholders of Miracle-Gro
own approximately 40% of The Scotts Company's outstanding common shares and have
the ability to significantly influence the election of directors and approval of
other actions requiring the approval of The Scotts Company's shareholders.
In January 2001, the Amended Articles of Incorporation of The Scotts
Company were amended to change the authorized preferred stock from 195,000
shares of Class A Convertible Preferred Stock to 195,000 preferred shares, each
without par value.
The limitations on the ability of the former shareholders of Miracle-Gro to
acquire additional voting securities of The Scotts Company contained in the
merger agreement terminated as of October 1, 1999, except for the restriction
under which the former shareholders of Miracle-Gro may not acquire, directly or
indirectly, beneficial ownership of Voting Stock (as that term is defined in the
Miracle-Gro merger agreement) representing more than 49% of the total voting
power of the outstanding Voting Stock, except pursuant to a tender offer for
100% of that total voting power, which tender offer is made at a price per share
which is not less than the market price per share on the last trading day before
the announcement of the tender offer and is conditioned upon the receipt of at
least 50% of the Voting Stock beneficially owned by shareholders of The Scotts
Company other than the former shareholders of Miracle-Gro and their affiliates
and associates.
Under The Scotts Company 1992 Long Term Incentive Plan (the "1992 Plan"),
stock options and performance share awards were granted to officers and other
key employees of the Company. The 1992 Plan also provided for the grant of stock
options to non-employee directors of Scotts. The maximum number of common shares
that may be issued under the 1992 Plan is 1.7 million, plus the number of common
shares surrendered to exercise options (other than non-employee director
options) granted under the 1992 Plan, up to a maximum of 1.0 million surrendered
common shares. Vesting periods under the 1992 Plan vary and were determined by
the Compensation and Organization Committee of the Board of Directors.
Under The Scotts Company 1996 Stock Option Plan (the "1996 Plan"), stock
options may be granted to officers and other key employees of the Company and
non-employee directors of The Scotts Company. The maximum number of common
shares that may be issued under the 1996 Plan is 5.5 million. Vesting periods
under the 1996 Plan vary. Generally, a 3-year cliff vesting schedule is used
unless decided otherwise by the Compensation and Organization Committee of the
Board of Directors.
----
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregate stock option activity consists of the following (shares in
millions):
Fiscal Year Ended September 30,
---------------------------------------------------------------------
2001 2000 1999
--------------------- --------------------- ---------------------
Number of Number of Number of
Common WTD. Avg. Common WTD. Avg. Common WTD. Avg.
Shares Price Shares Price Shares Price
-------------------------------------------------------------------------------------------------
Beginning balance 4.9 $26.67 4.9 $26.33 3.8 $20.70
Options granted 0.9 28.66 0.3 37.39 1.4 35.70
Options exercised (0.8) 21.24 (0.1) 19.46 (0.2) 16.51
Options canceled (0.4) 27.96 (0.2) 36.87 (0.1) 30.94
---- ---- ----
Ending balance 4.6 27.94 4.9 26.67 4.9 26.33
---- ---- ----
Exercisable at September
30 3.0 $24.96 2.7 $21.45 1.9 $19.77
The following summarizes certain information pertaining to stock options
outstanding and exercisable at September 30, 2001 (shares in millions):
Options Outstanding Options Exercisable
------------------------------- --------------------
WTD. Avg. WTD. Avg. WTD. Avg.
Range of No. of Remaining Exercise No. of Exercise
Exercise Price Options Life Price Options Price
-------------------------------------------------------------------------------------------------
$15.00 - $20.00 1.2 4.18 $17.84 1.2 $17.84
$20.00 - $25.00 0.2 4.48 21.51 0.2 21.51
$25.00 - $30.00 0.5 6.23 27.25 0.5 27.12
$30.00 - $35.00 1.6 8.02 31.03 0.8 31.09
$35.00 - $40.00 1.0 7.98 36.36 0.3 36.80
$40.00 - $46.38 0.1 8.02 40.75 0.0 40.13
--- ------ --- ------
4.6 $27.94 3.0 $24.96
=== ====== === ======
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which changes the measurement,
recognition and disclosure standards for stock-based compensation. The Company,
as allowable, has adopted SFAS No. 123 for disclosure purposes only.
The fair value of each option granted has been estimated on the grant date
using the Black-Scholes option-pricing model based on the following assumptions
for those granted in fiscal 2001, 2000 and 1999: (1) expected market-price
volatility of 29.5%, 27.05% and 24.44%, respectively; (2) risk-free interest
rates of 4.4%, 6.0% and 6.0%, respectively; and (3) expected life of options of
6 years. Options are generally granted with a ten-year term. The estimated
weighted-average fair value per share of options granted during fiscal 2001,
2000 and 1999 was $11.74, $14.94 and $13.64, respectively.
Had compensation expense been recognized for fiscal 2001, 2000 and 1999 in
accordance with provisions of SFAS No. 123, the Company would have recorded net
income and earnings per share as follows:
2001 2000 1999
-------------------------------------------------------------------------------------------------
(in millions, except per share data)
Net income used in basic earnings per
share calculation $10.8 $ 59.4 $ 55.3
Net income used in diluted earnings
per share calculation $10.8 $ 59.4 $ 45.3
Earnings per share:
Basic $0.38 $ 2.12 $ 2.50
Diluted $0.35 $ 2.00 $ 1.82
----
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The pro forma amounts shown above are not necessarily representative of the
impact on net income in future years as additional option grants may be made
each year.
NOTE 10. EARNINGS PER COMMON SHARE
The following table presents information necessary to calculate basic and
diluted earnings per common share.
Year Ended September 30,
-------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------------------------------
(in millions, except per share data)
BASIC EARNINGS PER COMMON SHARE:
Net income before extraordinary loss $15.5 $73.1 $69.1
Net income 15.5 73.1 63.2
Class A Convertible Preferred Stock dividend 0.0 (6.4) (9.7)
----- ----- -----
Income available to common shareholders 15.5 66.7 53.5
Weighted-average common shares outstanding
during the period 28.4 27.9 18.3
Basic earnings per common share
Before extraordinary item $0.55 $2.39 $3.25
After extraordinary item $0.55 $2.39 $2.93
DILUTED EARNINGS PER COMMON SHARE:
Net income used in diluted earnings per
common share calculation $15.5 $66.7 $63.2
Weighted-average common shares outstanding
during the period 28.4 27.9 18.3
Potential common shares:
Assuming conversion of Class A Convertible
Preferred Stock 0.0 0.0 10.2
Assuming exercise of options 0.9 0.8 1.0
Assuming exercise of warrants 1.1 0.9 1.0
----- ----- -----
Weighted-average number of common shares
outstanding and dilutive potential common
shares 30.4 29.6 30.5
Diluted earnings per common share
Before extraordinary item $0.51 $2.25 $2.27
After extraordinary item $0.51 $2.25 $2.08
NOTE 11. INCOME TAXES
The provision for income taxes, net of tax benefits associated with the
1999 extraordinary losses of $4.1 million consists of the following:
Year Ended September 30,
-------------------------------------------
2001 2000 1999
------------------------------------------------------------------------------------------------
(in millions)
Currently payable:
Federal $29.9 $27.8 $34.5
State 2.9 3.6 4.4
Foreign 0.3 4.3 4.4
Deferred:
Federal (18.1) 6.9 0.5
State (1.8) 0.6 0.0
----- ----- -----
Income tax expense $13.2 $43.2 $43.8
===== ===== =====
----
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The domestic and foreign components of income before taxes are as follows:
Year Ended September 30,
---------------------------------------------
2001 2000 1999
------------------------------------------------------------------------------------------------
(in millions)
Domestic $30.3 $107.1 $100.0
Foreign (1.6) 9.2 6.9
----- ------ ------
Income before taxes $28.7 $116.3 $106.9
===== ====== ======
A reconciliation of the federal corporate income tax rate and the effective
tax rate on income before income taxes is summarized below:
Year Ended September 30,
-------------------------------------------
2001 2000 1999
------------------------------------------------------------------------------------------------
Statutory income tax rate 35.0% 35.0% 35.0%
Effect of foreign operations 2.6 (0.3) (0.7)
Goodwill amortization and other effects
resulting from purchase accounting 7.5 2.7 3.0
State taxes, net of federal benefit 2.5 2.4 2.6
Resolution of previous contingencies -- (2.8) --
Other (1.6) 0.1 1.1
----- ----- -----
Effective income tax rate 46.0% 37.1% 41.0%
===== ===== =====
The net current and non-current components of deferred income taxes
recognized in the Consolidated Balance Sheets at September 30 are:
September 30,
-----------------------------
2001 2000
----------------------------------------------------------------------------------------------
(in millions,
except per share data)
Net current assets $ 52.2 $ 25.1
Net non-current assets 15.4 16.2
------ ------
Net assets $ 67.6 $ 41.3
====== ======
The components of the net deferred tax asset are as follows:
September 30,
-----------------------------
2001 2000
----------------------------------------------------------------------------------------------
(in millions)
ASSETS
Inventories $ 14.7 $ 11.5
Accrued liabilities 56.1 33.3
Postretirement benefits 20.5 14.3
Foreign net operating losses 1.6 1.9
Other 11.8 12.9
------ ------
Gross deferred tax assets 104.7 73.9
Valuation allowance (1.0) (1.1)
------ ------
Net deferred tax assets 103.7 72.8
LIABILITIES
Property, plant and equipment (21.8) (18.2)
Other (14.3) (13.3)
------ ------
Net assets $ 67.6 $ 41.3
====== ======
----
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net operating loss carryforwards in foreign jurisdictions were $5.2 million
and $6.2 million at September 30, 2001 and 2000, respectively. The use of these
acquired carryforwards is subject to limitations imposed by the tax laws of each
applicable country.
The valuation allowance of $1.0 million at September 30, 2001 and September
30, 2000 is to provide for operating losses for which the benefits are not
expected to be realized. Foreign net operating losses of $1.9 million can be
carried forward indefinitely.
Deferred taxes have not been provided on unremitted earnings of certain
foreign subsidiaries and foreign corporate joint ventures that arose in fiscal
years beginning on or before September 2001 as such earnings have been
permanently reinvested.
NOTE 12. FINANCIAL INSTRUMENTS
A description of the Company's financial instruments and the methods and
assumptions used to estimate their fair values is as follows:
LONG-TERM DEBT
At September 30, 2001 and 2000, Scotts had $330 million outstanding of
8 5/8% Senior Subordinated Notes due 2009. The fair value of these notes was
estimated based on recent trading information. Variable rate debt outstanding at
September 30, 2001 and 2000 consisted of revolving borrowings and term loans
under the Company's credit facility and local bank borrowings for certain of the
Company's foreign operations. The carrying amounts of these borrowings are
considered to approximate their fair values.
INTEREST RATE SWAP AGREEMENTS
At September 30, 2001 and 2000, Scotts had outstanding five interest rate
swaps with major financial institutions that effectively convert variable-rate
debt to a fixed rate. One swap has a notional amount of 20.0 million British
Pounds Sterling under a five-year term expiring in April 2002 whereby Scotts
pays 7.6% and receives three-month LIBOR. The remaining four swaps have notional
amounts between $20 million and $35 million ($105 million in total) with three,
four or five year terms commencing in January 1999. Under the terms of these
swaps, the Company pays rates ranging from 5.05% to 5.18% and receives
three-month LIBOR.
Scotts enters into interest rate swap agreements as a means to hedge its
interest rate exposure on debt instruments. In addition, the Company's Amended
Credit Agreement requires that Scotts enter into hedge agreements to the extent
necessary to provide that at least 50% of the aggregate principal amount of the
8 5/8% Senior Subordinated Notes due 2009 and term loan facilities subject to a
fixed interest rate or interest rate protection for a period of not less than
three years. Since the interest rate swaps have been designated as hedging
instruments, their fair values are reflected in the Company's Consolidated
Balance Sheets. Net amounts to be received or paid under the swap agreements are
reflected as adjustments to interest expense. The fair value of the swap
agreements was determined based on the present value of the estimated future net
cash flows using implied rates in the applicable yield curve as of the valuation
date.
INTEREST RATE LOCKS
In fiscal 1998, Scotts entered into two contracts, each with notional
amounts of $100.0 million, to lock the treasury rate component of Scotts'
anticipated offering of debt securities in the first quarter of fiscal 1999. One
of the interest rate locks expired in October 1998 and was rolled over into a
new rate lock that expired in February 1999. The other rate lock expired in
February 1999.
Scotts entered into the interest rate locks to hedge its interest rate
exposure on the offering of the 8 5/8% Senior Subordinated Notes due 2009. The
net amount paid under the interest rate locks is reflected as an adjustment to
the carrying amount of the 8 5/8% Senior Subordinated Notes.
----
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values of the Company's financial instruments are as
follows for the fiscal years ended September 30:
2001 2000
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------------------------------------------------------
(in millions)
Revolving and term loans under credit facility $493.3 $493.3 $489.5 $489.5
Senior subordinated notes 330.0 320.5 330.0 319.2
Foreign bank borrowings and term loans 9.4 9.4 7.1 7.1
Interest rate swap agreements (2.7) (2.7) -- 2.6
Excluded from the fair value table above are the following items that are
included in the Company's total debt balances at September 30, 2001 and 2000:
2001 2000
----------------------------------------------------------------------------------------------
(in millions)
Amounts paid to settle treasury locks $ (9.5) $(10.8)
Non-interest bearing notes 53.7 36.4
Capital lease obligations and other 10.9 10.6
The fair value of the non-interest bearing notes is not considered
determinable since there is no established market for notes with similar
characteristics and since they represent notes that were negotiated between the
Company and the seller as part of transactions to acquire businesses.
NOTE 13. OPERATING LEASES
The Company leases buildings, land and equipment under various
noncancellable lease agreements for periods of two to six years. The lease
agreements generally provide that the Company pay taxes, insurance and
maintenance expenses related to the leased assets. Certain lease agreements
contain purchase options. At September 30, 2001, future minimum lease payments
were as follows:
(in millions)
2002 $15.6
2003 10.0
2004 6.4
2005 4.2
2006 3.1
Thereafter 26.5
-----
Total minimum lease payments $65.8
=====
The Company also leases transportation and production equipment under
various one-year operating leases, which provide for the extension of the
initial term on a monthly or annual basis. Total rental expenses for operating
leases were $22.0 million, $17.8 million and $18.5 million for fiscal 2001, 2000
and 1999, respectively. The total to be received from sublease rentals in place
at September 30, 2001 is $0.6 million. The future minimum lease payments of $1.2
million related to the prior World Headquarters office lease are included in
restructuring expense.
----
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. COMMITMENTS
The Company has entered into the following purchase commitments:
SEED: The Company is obligated to make future purchases based on estimated
yields and other market purchase commitments. At September 30, 2001, estimated
annual seed purchase commitments were as follows:
(in millions)
2002 $56.7
2003 $38.2
2004 $21.0
2005 $ 7.6
2006 $ 0.7
The Company made purchases of $53.9 million and $31.2 million under this
obligation in fiscal 2001 and 2000, respectively.
PEAT: In March 2000, the Company entered in a contract to purchase peat over
the next ten years. There is an option to extend the term of this agreement for
a further period of ten years, on or before the eighth anniversary of this
agreement. The minimum volume purchase obligations under the March 2000 contract
are as follows:
Approximate Value
Cubic Meters Based on Average Prices
--------------------------------------------------------------------------------------
(in millions)
2002 1,046,000 $11.1
2003 1,067,000 11.3
2004 1,088,000 11.5
2005 1,110,000 11.7
2006 1,132,000 12.0
Thereafter 2,830,000 30.0
In the event that in any one contract year, the Company does not purchase
the minimum required volume, the Company will be required to pay a cash penalty
based upon the marginal contribution to the supplier of all those products which
the Company has failed to purchase.
In the event that the volume purchases in a contract year are less than 97%
of the contract requirements, the Company shall pay 80% of the supplier's
marginal contribution multiplied by the number of cubic meters by which the
volume equivalent to 97% of the contract requirements was not reached. An amount
of 50% of the supplier's marginal contribution multiplied by the number of cubic
meters would also be paid based on the remaining 3% contract purchase obligation
shortfall. A reverse approach applies for purchases made by the Company that are
in excess of the minimum volume purchase obligation in any contract year. The
Company purchased 974,000 cubic meters of peat under this arrangement in fiscal
2001.
MEDIA ADVERTISING: As of September 30, 2001 the Company has committed to
purchase $7.8 million of airtime for both national and regional television
advertising in fiscal 2002.
NOTE 15. CONTINGENCIES
Management continually evaluates the Company's contingencies, including
various lawsuits and claims which arise in the normal course of business,
product and general liabilities, property losses and other fiduciary liabilities
for which the Company is self-insured. In the opinion of management, its
assessment of contingencies is reasonable and related reserves, in the
aggregate, are adequate; however, there can be no assurance that future
quarterly or annual operating results will not be materially affected by final
resolution of these matters. The following matters are the more significant of
the Company's identified contingencies.
----
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENVIRONMENTAL MATTERS
In June 1997, the Ohio Environmental Protection Agency ("Ohio EPA")
initiated an enforcement action against us with respect to alleged surface water
violations and inadequate treatment capabilities at our Marysville facility and
seeking corrective action under the federal Resource Conservation Recovery Act.
The action relates to several discontinued on-site disposal areas which date
back to the early operations of the Marysville facility that we had already been
assessing under a voluntary action program of the state. Since initiation of the
action, we have continued to meet with the Ohio Attorney General and the Ohio
EPA in an effort to complete negotiations of an amicable resolution of these
issues. On December 3, 2001, an agreed judicial Consent Order was submitted to
the Union County Common Pleas Court. Although this Consent Order is subject to
public comment and both parties may withdraw their consent to entry of the
Order, we anticipate the Consent Order will be entered by the court in January
2002.
Since receiving notice of the enforcement action in June 1997, we have
continually assessed the potential costs to satisfactorily remediate the
Marysville site and to pay any penalties sought by the state. Although the terms
of the Consent Order have now been agreed to, the extent of any possible
contamination and an appropriate remediation plan have yet to be determined. As
of September 30, 2001, we estimate that the possible total cost that could be
incurred in connection with this matter is approximately $10 million. We have
accrued for the amount we consider to be the most probable and believe the
outcome will not differ materially from the amount reserved.
In addition to the dispute with the Ohio EPA, we are negotiating with the
Philadelphia District of the U.S. Army Corps of Engineers regarding possible
discontinuation of our peat harvesting operations in at our Lafayette, New
Jersey facility. We are also addressing remediation concerns raised by the
Environmental Agency of the United Kingdom with respect to emissions to air and
groundwater at our Bramford (Suffolk), United Kingdom facility. We have reserved
for our estimates of probable losses to be incurred in connection with each of
these matters as of September 30, 2001, but we do not believe that either issue
is material.
Regulations and environmental concerns also exist surrounding peat
extraction in the United Kingdom and the European Union. In August 2000, the
nature conservation advisory body to the U.K. government notified us that three
of our peat harvesting sites in the United Kingdom were under consideration as
possible "Special Areas of Conservation" under European Union law. We are
currently challenging this consideration. If we are unsuccessful, local planning
authorities in the United Kingdom will be required to review the impact of
activities likely to affect these areas and it is possible that these
authorities could modify or revoke the applicable consents, in which case we
believe we should be entitled to compensation and we believe we would have
sufficient raw material supplies available to replace the peat produced in such
areas.
The Company has determined that quantities of cement containing asbestos
material at certain manufacturing facilities in the United Kingdom should be
removed.
At September 30, 2001, $7.0 million is accrued for the environmental
matters described herein. The significant components of the accrual are: (i)
costs for site remediation of $4.7 million; (ii) costs for asbestos abatement of
$1.8 million; and (iii) fines and penalties of $0.5 million. The significant
portion of the costs accrued as of September 30, 2001 are expected to be paid in
fiscal 2002 and 2003; however, payments could be made for a period thereafter.
We believe that the amounts accrued as of September 30, 2001 are adequate
to cover known environmental exposures based on current facts and estimates of
likely outcome. However, the adequacy of these accruals is based on several
significant assumptions:
(i) that we have identified all of the significant sites that must be
remediated;
(ii) that there are no significant conditions of potential contamination
that are unknown to the Company; and
----
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 is
reported to have subsequently changed its name to Aventis Environmental Health
Science USA LP) filed a complaint in the U.S. District Court for the Southern
District of New York (the "New York Action"), against the Company, a subsidiary
of the Company and Monsanto (now Pharmacia) seeking damages and injunctive
relief for alleged antitrust violations and breach of contract by the Company
and its subsidiary and antitrust violations and tortious interference with
contact by Monsanto. AgrEvo also contends that the Company's execution of
various agreements with Monsanto, including the Roundup(R) marketing agreement,
as well as the Company's subsequent actions, violated the purchase agreements
between AgrEvo and the Company. AgrEvo is requesting unspecified damages as well
as affirmative injunctive relief, and is seeking to have the court invalidate
the Roundup(R) marketing agreement as violative of the federal antitrust laws.
On June 29, 1999, AgrEvo also filed a complaint in the Superior Court of
the State of Delaware (the "Delaware Action") against two of the Company's
subsidiaries seeking damages for alleged breach of contract. AgrEvo alleges
that, under the contracts by which a subsidiary of the Company purchased a
herbicide business from AgrEvo in May 1998, two of the Company's subsidiaries
have failed to pay AgrEvo approximately $0.6 million. AgrEvo is requesting
damages in this amount, as well as pre- and post-judgment interest and
attorneys' fees and costs. The Company's subsidiaries have moved to dismiss or
stay this action. On January 31, 2000, the Delaware court stayed AgrEvo's action
pending the resolution of a motion to amend the New York Action, and the
resolution of the New York Action. The Company's subsidiaries intend to
vigorously defend the asserted claims.
If the above actions are determined adversely to the Company, the result
could have a material adverse effect on our results of operations, financial
position and cash flows. The Company believes that it will prevail in the AgrEvo
matter and that any potential exposure that the Company may face cannot be
reasonably estimated. Therefore, no accrual has been established related to
these matters.
CENTRAL GARDEN & PET COMPANY
On June 30, 2000, the Company filed suit against Central Garden & Pet
Company in the U.S. District Court for the Southern District of Ohio to recover
approximately $17 million in outstanding accounts receivable from Central Garden
with respect to the Company's 2000 fiscal year. The Company's complaint was
later amended to seek approximately $24 million in accounts receivable and
additional damages for other breaches of duty. On April 13, 2001, Central Garden
filed an answer and counterclaim in the Ohio action. On April 24, 2001, Central
Garden filed an amended counterclaim. Central Garden's counterclaims include
allegations that the Company and Central Garden had entered into an oral
agreement in April 1998 whereby the Company would allegedly share with Central
Garden the benefits and liabilities of any future business integration between
the Company and Pharmacia Corporation (formerly Monsanto). Central Garden has
asserted several causes of action, including breach of oral contract and
fraudulent misrepresentation, and seeks damages in excess of $900 million. In
addition, Central Garden asserts various other causes of action including breach
of written contract and quantum valebant and seeks damages in excess of $76
million based on the allegations that Central Garden was entitled to receive a
cash payment rather than a credit for the value of inventory Central alleges was
improperly seized by the Company. These allegations are made without regard to
the fact that the amounts sought from Central in litigation filed by the Company
and Pharmacia are net of any such alleged credit. The Company believes all of
Central Garden's counterclaims in Ohio are without merit and it intends to
vigorously defend against them. Pharmacia (formerly Monsanto) also filed suit
against Central Garden in Missouri state court, seeking unspecified damages
allegedly due Pharmacia under a four-year alliance agreement between Pharmacia
and Central Garden.
----
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 7, 2000, Central Garden filed suit against the Company and
Pharmacia in the U.S. District Court for the Northern District of California
(San Francisco Division) alleging various claims, including breach of contract
and violations of federal antitrust laws, and seeking an unspecified amount of
damages and injunctive relief. On October 26, 2000, the District Court granted
the Company's motion to dismiss Central Garden's breach of contract claims for
lack of subject matter jurisdiction. On November 17, 2000, Central Garden filed
an amended complaint in the District Court, re-alleging various claims for
violations of federal antitrust laws and also alleging state antitrust claims
under the Cartwright Act, Section 16726 of the California Business and
Professions Code. Fact discovery is set to conclude in December 2001. The trial
date for the California federal action is set for July 15, 2002.
On October 31, 2000, Central Garden filed an additional complaint against
the Company and Pharmacia in the California Superior Court of Contra Costa
County. That complaint seeks to assert the breach of contract claims previously
dismissed by the District Court in the California federal action described
above, and additional claims under Section 17200 of the California Business and
Professions Code. On December 4, 2000, the Company and Pharmacia jointly filed a
motion to stay this action based on the pendency of prior lawsuits (including
the three actions described above) that involve the same subject matter. By
order dated February 23, 2001, the Superior Court stayed the action pending
before it.
The Company believes that all of Central Garden's federal and state claims
are entirely without merit and it intends to vigorously defend against them. If
the above actions are determined adversely to the Company, the result could have
a material adverse effect on the Company's results of operations, financial
position and cash flows. The Company believes that it will prevail in the
Central Garden matters and that any potential exposure that the Company may face
cannot be reasonably estimated. Therefore, no accrual has been established
related to these matters.
NOTE 16. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of trade accounts receivable.
The Company sells its consumer products to a wide variety of retailers,
including mass merchandisers, home centers, independent hardware stores,
nurseries, garden outlets, warehouse clubs and local and regional chains.
Professional products are sold to commercial nurseries, greenhouses, landscape
services, and growers of specialty agriculture crops.
At September 30, 2001, 70% of the Company's accounts receivable was due
from customers in North America. Approximately 85% of these receivables were
generated from the Company's North American Consumer segment. The most
significant concentration of receivables within this segment was from home
centers, which accounted for 20%, followed by mass merchandisers at 12% of the
Company's receivables balance at September 30, 2001. No other retail
concentrations (e.g., independent hardware stores, nurseries, etc. in similar
markets) accounted for more than 10% of the Company's accounts receivable
balance at September 30, 2001.
The remaining 15% of North American accounts receivable was generated from
customers of the Global Professional segment located in North America. As a
result of the changes in distribution methods made in fiscal 2000 for the Global
Professional segment customers in North America, nearly all products are sold
through distributors. Accordingly, nearly all of the Global Professional
segment's North American accounts receivable at September 30, 2001 is due from
distributors.
The 30% of accounts receivable generated outside of North America is due
from retailers, distributors, nurseries and growers. No concentrations of
customers or individual customers within this group account for more than 10% of
the Company's accounts receivable balance at September 30, 2001.
At September 30, 2001, the Company's concentrations of credit risk were
similar to those existing at September 30, 2000.
----
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's two largest customers accounted for the following percentage
of net sales in each respective period:
Largest 2nd Largest
Customer Customer
---------------------------------------------------------------------------------------------
2001 27.8% 14.6%
2000 22.9% 8.9%
1999 17.4% 11.6%
Sales to the Company's two largest customers are reported within Scotts'
North American Consumer segment. No other customers accounted for more than 10%
of fiscal 2001, 2000 or 1999 net sales.
NOTE 17. OTHER EXPENSE (INCOME)
Other expense (income) consisted of the following for the fiscal years
ended September 30:
2001 2000 1999
-------------------------------------------------------------------------------------------------
(in millions)
Royalty income.......................... $(4.9) $(5.1) $(4.0)
Legal and insurance settlements......... (3.6)
Gain on sale of ProTurf(R) business..... (4.6)
Asset valuation and write-off charges... 0.1 1.8 1.2
Foreign currency losses................. 0.5 0.9 0.1
Other, net.............................. (0.6) 1.0 (0.9)
----- ----- -----
Total................................... $(8.5) $(6.0) $(3.6)
===== ===== =====
NOTE 18. NEW ACCOUNTING STANDARDS
In May 2000, the Emerging Issues Task Force (EITF) reached consensus on
Issue 00-14, "Accounting for Certain Sales Incentives". This Issue requires
certain sales incentives (e.g., discounts, rebates, coupons) offered by the
Company to distributors, retail customers and consumers to be classified as a
reduction of sales revenue. Like many other consumer products companies, the
Company has historically classified these costs as advertising, promotion, or
selling expenses. The Company adopted the guidance in fiscal 2001 with no impact
on fiscal 2001 results of operations.
In January 2001, the EITF reached consensus on Issue 00-22, "Accounting for
Points and Certain Other Time or Volume-Based Sales Incentive Offers". This
Issue requires certain allowances and discounts (e.g., volume discounts) paid to
distributors and retail customers to be classified as a reduction of sales
revenue. Like many other consumer products companies, the Company has
historically classified these cost as advertising, promotion, or selling
expenses. The Company adopted the guidance in fiscal 2001 with no impact on
fiscal 2001 results of operations.
In April 2001, the EITF reached consensus on Issue 00-25, "Accounting for
Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products". This Issue requires that certain
consideration from a vendor to a retailer be classified as a reduction of sales
revenue. Like many other consumer products companies, the Company has
historically classified these costs as advertising, promotion, or selling
expenses. The guidance is effective for the Company's first quarter of fiscal
2002. Scotts does not anticipate that the new accounting policy will impact
fiscal 2002 results of operations.
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standard No. 141, "Business Combinations". SFAS No. 141
requires that all business combinations initiated after June 30, 2001, be
accounted for using the purchase accounting method and also established specific
criteria for recognition of intangible assets separately from goodwill. The
acquisitions discussed in Note 5 herein were accounted for using the purchase
method of accounting.
----
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2001, the FASB issued Statement of Accounting Standard No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 142 eliminates the requirement
to amortize indefinite-lived assets such as goodwill. It also requires an annual
review for impairment of indefinite-lived assets. Scotts will adopt SFAS No. 142
beginning with the first quarter of fiscal 2002. The Company expects that the
elimination of amortization of indefinite-lived assets will increase earnings
per share in fiscal 2002 by $.50 to $.55. The Company is still evaluating the
impact that impairment testing may have on future periods.
Also in June 2001, the FASB issued Statement of Accounting Standard No.
143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses
accounting and reporting standards for legal obligations associated with the
retirement of tangible long-lived assets. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
Scotts is in the process of evaluating the impact of SFAS No. 143 on its
financial statements and will adopt the provisions of this statement in the
first quarter of fiscal year 2003.
In August 2001, the FASB issued Statement of Accounting Standard No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144
supersedes Financial Accounting Standard No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of" and Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations; Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequent Occurring Events and Transactions". SFAS No. 144 addresses
accounting and reporting standards for the impairment or disposal of long-lived
assets. It is effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company is in the process of evaluating
the impact of SFAS No. 144 on its financial statements and will adopt the
provisions of this statement in the first quarter of fiscal year 2003.
NOTE 19. SUPPLEMENTAL CASH FLOW INFORMATION
2001 2000 1999
-----------------------------------------------------------------------------------------------
(in millions)
Interest paid (net of amount
capitalized) $86.5 $88.3 $ 63.6
Income taxes paid 47.2 10.0 50.3
Dividends declared not paid 0.0 0.0 2.5
Businesses acquired:
Fair value of assets acquired, net of
cash 53.5 4.8 691.2
Liabilities assumed 0.0 0.0 (149.3)
----- ----- ------
Net assets acquired 53.5 4.8 541.9
Cash paid 26.5 2.7 4.8
Notes issued to seller 27.0 2.1 35.7
Debt issued $ 0.0 $ 0.0 $501.4
NOTE 20. SEGMENT INFORMATION
For fiscal 2001, the Company was divided into three reportable
segments--North American Consumer, Global Professional and International
Consumer. The North American Consumer segment consists of the Lawns, Gardens,
Growing Media, Ortho, Lawn Service and Canada businesses. These segments differ
from those used in the prior year due to the sale of the Company's professional
turfgrass business in May 2000 and the resulting change in management reporting
structure.
The North American Consumer segment specializes in dry, granular
slow-release lawn fertilizers, lawn fertilizer combination and lawn control
products, grass seed, spreaders, water-soluble and controlled-release garden and
indoor plant foods, plant care products and potting soils, barks, mulches and
other growing media products and pesticides products. Products are marketed to
mass merchandisers, home improvement centers, large hardware chains, nurseries
and gardens centers.
The Global Professional segment is focused on a full line of horticulture
products including controlled-release and water-soluble fertilizers and plant
protection products, grass seed, spreaders, customer application services and
growing media. Products are sold to lawn and landscape service companies,
----
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
commercial nurseries and greenhouses and specialty crop growers. Prior to June
2000, this segment also included the Company's ProTurf(R) business, which was
sold in May 2000.
The International Consumer segment provides products similar to those
described above for the North American Consumer segment to consumers in
countries other than the United States and Canada.
The following table presents segment financial information in accordance
with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". Pursuant to SFAS No. 131, the presentation of the segment
financial information is consistent with the basis used by management (i.e.,
certain costs not allocated to business segments for internal management
reporting purposes are not allocated for purposes of this presentation). Prior
periods have been restated to conform to this basis of presentation.
N.A. Global International
Consumer Professional Consumer Corporate Total
-----------------------------------------------------------------------------------------------------
(in millions)
Net Sales:
2001 $1,302.6 $181.0 $264.1 $ -- $1,747.7
2000 1,253.3 181.1 274.6 -- 1,709.0
1999 1,140.0 172.7 289.8 -- 1,602.5
Income (loss) from
Operations:
2001 $ 250.0 $ 17.4 $ (3.3) $(120.0) $ 144.1
2000 244.2 26.4 21.0 (54.2) 237.4
1999 232.8 35.2 29.2 (75.4) 221.8
Operating Margin:
2001 19.2% 9.6% (1.2)% nm 8.2%
2000 19.5% 14.6% 7.6% nm 13.9%
1999 20.4% 20.4% 10.1% nm 13.8%
Depreciation and
Amortization:
2001 $ 39.9 $ 5.1 $ 14.0 $ 4.6 $ 63.6
2000 36.0 4.9 12.7 7.4 61.0
1999 33.6 2.1 12.6 7.9 56.2
Capital Expenditures:
2001 $ 56.4 $ 1.9 $ 5.1 $ -- $ 63.4
2000 32.1 9.8 9.5 21.1 72.5
1999 22.5 5.7 10.6 27.9 66.7
Long-Lived Assets:
2001 $ 752.0 $ 65.4 $264.3 $ -- $1,081.7
2000 697.5 72.7 263.4 -- 1,033.6
Total Assets:
2001 $1,200.1 $141.0 $397.9 $ 104.0 $1,843.0
2000 1,120.8 173.8 384.3 82.5 1,761.4
---------------
nm -- Not meaningful
Income (loss) from operations reported for Scotts' three operating segments
represents earnings before amortization of intangible assets, interest and
taxes, since this is the measure of profitability used by management.
Accordingly, the Corporate operating loss for the fiscal years ended September
30, 2001, 2000 and 1999 includes amortization of certain intangible assets,
corporate general and administrative expenses, certain other income/expense not
allocated to the business segments and North America restructuring charges in
fiscal 2001. International restructuring charges of approximately $10.4 million
are included in International Consumer's operating loss in fiscal 2001. Global
Professional operating income in fiscal 2001 is net of restructuring charges of
$2.9 million.
Total assets reported for Scotts' operating segments include the intangible
assets for the acquired businesses within those segments. Corporate assets
primarily include deferred financing and debt issuance costs, corporate
intangible assets as well as deferred tax assets.
----
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for fiscal 2001 and 2000.
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Full Year
--------------------------------------------------------------------------------------------------------------------
(in millions, except per share data)
FISCAL 2001
Net sales $ 149.1 $ 740.0 $ 610.3 $248.3 $1,747.7
Gross profit 34.6 319.1 230.7 67.0 651.4
Net income (loss) (51.2) 84.8 45.4 (63.5) 15.5
Basic earnings (loss) per
common share $ (1.83) $ 3.01 $ 1.60 $(2.24) $ 0.55
Common shares used in
basic EPS calculation 28.0 28.2 28.3 28.4 28.4
Diluted earnings (loss)
per common share $ (1.83) $ 2.80 $ 1.49 $(2.24) $ 0.51
Common shares and
dilutive potential
common shares used in
diluted EPS calculation 28.0 30.3 30.6 28.4 30.4
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Full Year
--------------------------------------------------------------------------------------------------------------------
(in millions, except per share data)
FISCAL 2000
Net sales $ 186.1 $ 693.9 $ 581.4 $247.6 $1,709.0
Gross profit 68.4 286.3 225.3 76.7 656.7
Net income (loss) (30.8) 63.4 52.8 (12.3) 73.1
Basic earnings (loss) per
common share $ (1.32) $ 2.27 $ 1.89 $(0.44) $ 2.39
Common shares used in
basic EPS calculation 28.2 27.9 27.9 28.0 27.9
Diluted earnings (loss)
per common share $ (1.32) $ 2.15 $ 1.77 $(0.44) $ 2.25
Common shares and
dilutive potential
common shares used in
diluted EPS calculation 28.2 29.5 29.7 28.0 29.6
Certain reclassifications have been made within interim periods.
Common stock equivalents, such as stock options, are excluded from the
diluted loss per share calculation in periods where there is a net loss because
their effect is anti-dilutive.
Scotts' business is highly seasonal with approximately 75% of sales
occurring in the second and third fiscal quarters combined.
NOTE 22. SUBSEQUENT EVENT
In December 2001, the Amended Credit Agreement was amended to redefine
EBITDA, to eliminate the net worth covenant and to modify the covenants
pertaining to interest coverage and leverage. The amendment also increases the
amount that may be borrowed in optional currencies to $360 million from $258.8
million and amends how proceeds from future equity or subordinated debt
offerings, if any, will be used towards mandatory prepayments of revolving
credit facility borrowings.
----
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTORS
In January 1999, The Scotts Company issued $330 million of 8 5/8% Senior
Subordinated Notes due 2009 to qualified institutional buyers under the
provisions of Rule 144A of the Securities Act of 1933.
The Notes are general obligations of The Scotts Company and are guaranteed
by all of the existing wholly-owned, domestic subsidiaries and all future
wholly-owned, significant (as defined in Regulation S-X of the Securities and
Exchange Commission) domestic subsidiaries of The Scotts Company. These
subsidiary guarantors jointly and severally guarantee The Scotts Company's
obligations under the Notes. The guarantees represent full and unconditional
general obligations of each subsidiary that are subordinated in right of payment
to all existing and future senior debt of that subsidiary but are senior in
right of payment to any future junior subordinated debt of that subsidiary.
The following information presents consolidating Statements of Operations
and Statements of Cash Flows for the three years ended September 30, 2001 and
consolidated Balance Sheets as of September 30, 2001 and 2000. Separate audited
financial statements of the individual guarantor subsidiaries have not been
provided because management does not believe they would be meaningful to
investors.
----
54
THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
(IN MILLIONS)
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
--------------------------------------------------------------------------------------------------
Net sales $947.3 $390.0 $410.4 $ $1,747.7
Cost of sales 630.7 216.4 241.9 1,089.0
Restructuring and other
charges 2.5 1.4 3.4 7.3
------ ------ ------ ------ --------
Gross profit 314.1 172.2 165.1 651.4
Gross commission earned from
marketing agreement 34.6 4.5 39.1
Contribution expenses under
marketing agreement 16.9 1.4 18.3
------ ------ ------ ------ --------
Net commission earned from
marketing agreement 17.7 3.1 20.8
Advertising and promotion 97.6 10.1 43.3 151.0
Selling, general and
administrative 187.6 21.6 108.0 317.2
Restructuring and other
charges 47.5 11.0 9.9 68.4
Amortization of goodwill and
other intangibles 1.7 15.8 10.2 27.7
Equity income in
non-guarantors (61.7) 61.7
Intracompany allocations 1.0 (9.1) 8.1
Other (income) expense, net (3.5) (5.4) 0.4 (8.5)
------ ------ ------ ------ --------
Income (loss) from operations 61.6 128.2 (11.7) (61.7) 116.4
Interest (income) expense 78.4 (14.3) 23.6 87.7
------ ------ ------ ------ --------
Income (loss) before income
taxes (16.8) 142.5 (35.3) (61.7) 28.7
Income taxes (benefit) (32.3) 60.5 (15.0) 13.2
------ ------ ------ ------ --------
Net income (loss) $ 15.5 $ 82.0 $(20.3) $(61.7) $ 15.5
====== ====== ====== ====== ========
----
55
THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
(IN MILLIONS)
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $15.5 $82.0 $(20.3) $(61.7) $ 15.5
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 15.5 10.2 6.9 32.6
Amortization 1.9 15.7 13.4 31.0
Deferred taxes (19.9) (19.9)
Equity income in non-guarantors (61.7) 61.7
Restructuring and other charges 13.2 14.5 27.7
Loss on sale of property
Changes in assets and
liabilities, net of acquired
businesses:
Accounts receivable 0.4 (10.3) (4.3) (14.2)
Inventories (48.9) (5.2) (14.4) (68.5)
Prepaid and other current
assets 28.7 (1.5) 4.2 31.4
Accounts payable (6.5) (2.9) 6.6 (2.8)
Accrued taxes and liabilities 32.6 (72.1) 16.8 (22.7)
Restructuring reserves 13.3 11.4 12.6 37.3
Other assets (3.9) 13.3 (3.3) 6.1
Other liabilities 1.6 (10.8) 16.8 7.6
Other, net 10.4 0.4 (6.2) 4.6
----- ----- ------ ------ -------
Net cash (used in) provided by
operating activities (7.8) 44.7 28.8 65.7
----- ----- ------ ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and
equipment (41.8) (13.9) (7.7) (63.4)
Proceeds from sale of equipment
Investments in acquired businesses,
net of cash acquired (13.5) (13.0) (26.5)
Repayment of seller notes (1.2) (9.9) (11.1)
----- ----- ------ ------ -------
Net cash used in investing activities (41.8) (28.6) (30.6) (101.0)
----- ----- ------ ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under
revolving and bank lines of credit 2.2 2.2 4.4
Cash received from exercise of stock
options 17.0 17.0
Intercompany financing 17.8 (14.9) (2.9)
----- ----- ------ ------ -------
Net cash provided by (used in)
financing activities 37.0 (14.9) (0.7) 21.4
Effect of exchange rate changes on
cash (0.4) (0.4)
----- ----- ------ ------ -------
Net increase (decrease) in cash (12.6) 1.2 (2.9) (14.3)
Cash and cash equivalents, beginning
of period 16.0 (0.6) 17.6 33.0
----- ----- ------ ------ -------
Cash and cash equivalents, end of
period $ 3.4 $ 0.6 $ 14.7 $ 0.0 $ 18.7
===== ===== ====== ====== =======
----
56
THE SCOTTS COMPANY
BALANCE SHEET
AS OF SEPTEMBER 30, 2001
(IN MILLIONS, EXCEPT PER SHARE INFORMATION)
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
-------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 3.4 $ 0.6 $ 14.7 $ $ 18.7
Accounts receivable, net 93.3 53.1 74.4 220.8
Inventories, net 236.8 54.0 77.6 368.4
Current deferred tax asset 52.2 0.5 (0.5) 52.2
Prepaid and other assets 16.7 2.6 14.8 34.1
-------- ------ ------ --------- --------
Total current assets 402.4 110.8 181.0 694.2
Property, plant and equipment,
net 196.5 75.0 39.2 310.7
Intangible assets, net 28.8 478.6 263.7 771.1
Other assets 49.7 6.1 11.2 67.0
Investment in affiliates 898.2 (898.2)
Intracompany assets 215.6 (215.6)
-------- ------ ------ --------- --------
Total assets 1,575.6 886.1 495.1 (1,113.8) 1,843.0
======== ====== ====== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt 31.5 15.0 24.8 71.3
Accounts payable 75.1 20.5 55.3 150.9
Accrued liabilities 124.0 26.6 57.4 208.0
Accrued taxes 16.4 2.8 (4.3) 14.9
-------- ------ ------ --------- --------
Total current liabilities 247.0 64.9 133.2 445.1
Long-term debt 559.1 5.8 251.6 816.5
Other liabilities 48.8 0.4 26.0 75.2
Intracompany liabilities 188.3 27.3 (215.6)
-------- ------ ------ --------- --------
Total liabilities 1,043.2 71.1 438.1 (215.6) 1,336.8
Commitments and Contingencies
Shareholders' Equity:
Preferred shares, no par value,
none issued
Investment from parent 488.1 60.4 (548.5)
Common shares, no par value per
share, $.01 stated value per
share, issued 31.3 shares in
2001 0.3 0.3
Capital in excess of stated
value 398.3 398.3
Retained earnings 212.3 329.3 20.4 (349.7) 212.3
Treasury stock at cost, 2.6
shares issued (70.0) (70.0)
Accumulated other comprehensive
income (8.5) (2.4) (23.8) (34.7)
-------- ------ ------ --------- --------
Total shareholders' equity 532.4 815.0 57.0 (898.2) 506.2
-------- ------ ------ --------- --------
Total liabilities and
shareholders' equity $1,575.6 $886.1 $495.1 $(1,113.8) $1,843.0
======== ====== ====== ========= ========
----
57
THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
(IN MILLIONS)
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
-------------------------------------------------------------------------------------------------
Net sales $897.7 $406.2 $405.1 $ $1,709.0
Cost of sales 557.3 260.2 233.0 1,050.5
------ ------ ------ ------ --------
Gross profit 340.4 146.0 172.1 658.5
Gross commission earned from
marketing agreement 34.9 4.3 39.2
Contribution expenses under
marketing agreement 9.2 0.7 9.9
------ ------ ------ ------ --------
Net commission earned from
marketing agreement 25.7 3.6 29.3
Advertising and promotion 85.6 25.9 42.3 153.8
Selling, general and
administrative 183.3 25.9 93.5 302.7
Amortization of goodwill and
other intangibles 2.0 15.5 9.6 27.1
Equity income in
non-guarantors (52.4) 52.4
Intracompany allocations (19.7) 9.8 9.9
Other (income) expenses, net 1.8 (8.7) 0.9 (6.0)
------ ------ ------ ------ --------
Income (loss) from operations 165.5 77.6 19.5 (52.4) 210.2
Interest (income) expense 81.5 (11.3) 23.7 93.9
------ ------ ------ ------ --------
Income (loss) before income
taxes 84.0 88.9 (4.2) (52.4) 116.3
Income taxes (benefit) 10.9 33.9 (1.6) 43.2
------ ------ ------ ------ --------
Net income (loss) $ 73.1 $ 55.0 $ (2.6) $(52.4) $ 73.1
====== ====== ====== ====== ========
----
58
THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
(IN MILLIONS)
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
-------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $73.1 $ 55.0 $ (2.6) $(52.4) $73.1
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 16.0 8.0 5.0 29.0
Amortization 5.6 16.5 9.9 32.0
Deferred taxes 7.5 7.5
Equity income in non-
guarantors (52.4) 52.4
Loss on sale of fixed assets 0.6 1.8 2.0 4.4
Gain on sale of business (4.6) (4.6)
Changes in assets and
liabilities, net of
acquired businesses:
Accounts receivable 48.3 (43.5) 1.6 6.4
Inventories (18.2) 12.5 11.5 5.8
Prepaid and other current
assets (13.0) 1.2 2.6 (9.2)
Accounts payable (5.0) 17.9 6.5 19.4
Accrued taxes and other
liabilities 51.5 (12.7) (16.3) 22.5
Other assets (1.8) (6.5) 3.6 (4.7)
Other liabilities 3.1 (1.0) (8.5) (6.4)
Other, net (4.9) 1.5 (0.3) (3.7)
------ ------ ------ ------ -----
Net cash provided by operating
activities 105.8 50.7 15.0 171.5
------ ------ ------ ------ -----
CASH FLOWS FROM INVESTING
ACTIVITIES
Investment in property, plant and
equipment (53.2) (9.0) (10.3) (72.5)
Proceeds from sale of equipment 1.8 1.8
Investments in non-guarantors (11.8) (4.1) (2.4) (18.3)
Repayments of seller notes 7.0 (8.0) (1.0)
Other net 0.5 0.5
------ ------ ------ ------ -----
Net cash used in investing
activities (57.5) (13.1) (18.9) (89.5)
------ ------ ------ ------ -----
CASH FLOWS FROM FINANCING
ACTIVITIES
Net (repayments) borrowings under
revolving and bank lines of
credit (48.2) 4.5 (7.0) (50.7)
Dividends on Class A
Convertible Preferred Stock (6.4) (6.4)
Repurchase of treasury shares (23.9) (23.9)
Cash received from exercise of
stock options 2.8 2.8
Intercompany financing 34.9 (45.8) 10.9
------ ------ ------ ------ -----
Net cash used in financing
activities (40.8) (41.3) 3.9 (78.2)
Effect of exchange rate changes on
cash (1.1) (1.1)
------ ------ ------ ------ -----
Net increase (decrease) in cash 7.5 (3.7) (1.1) 2.7
Cash and cash equivalents,
beginning of period 8.5 3.1 18.7 30.3
------ ------ ------ ------ -----
Cash and cash equivalents, end of
period $16.0 $ (0.6) $ 17.6 $ 0.0 $33.0
====== ====== ====== ====== =====
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59
THE SCOTTS COMPANY
BALANCE SHEET
AS OF SEPTEMBER 30, 2000
(IN MILLIONS, EXCEPT PER SHARE INFORMATION)
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
-----------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 16.0 $ (0.6) $ 17.6 $ $ 33.0
Accounts receivable, net 103.2 42.7 70.1 216.0
Inventories, net 189.6 54.7 63.2 307.5
Current deferred tax asset 26.1 0.5 (1.5) 25.1
Prepaid and other assets 42.2 1.1 19.0 62.3
-------- ------ ------ --------- --------
Total current assets 377.1 98.4 168.4 643.9
Property, plant and equipment, net 191.8 60.0 38.7 290.5
Intangible assets, net 81.1 417.9 244.1 743.1
Other assets 66.2 6.5 11.2 83.9
Investment in affiliates 836.5 (836.5)
Intracompany assets 246.5 (246.5)
-------- ------ ------ --------- --------
Total assets 1,552.7 829.3 462.4 (1,083.0) 1,761.4
======== ====== ====== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt 29.6 2.6 17.2 49.4
Accounts payable 81.6 22.7 48.7 153.0
Accrued liabilities 119.1 16.9 38.3 174.3
Accrued taxes (12.4) 48.5 (3.0) 33.1
-------- ------ ------ --------- --------
Total current liabilities 217.9 90.7 101.2 409.8
Long-term debt 555.2 4.7 253.5 813.4
Other liabilities 43.8 16.5 60.3
Intracompany liabilities 238.3 8.2 (246.5)
-------- ------ ------ --------- --------
Total liabilities 1,055.2 95.4 379.4 (246.5) 1,283.5
Commitments and Contingencies
Shareholders' Equity:
Preferred shares, no par value,
none issued
Investment from parent 488.7 59.8 (548.5)
Common shares, no par value
share, $.01 stated value per
share, 31.3 shares issued in
2000 0.3 0.3
Capital in excess of stated value 389.3 389.3
Retained earnings 196.8 247.3 40.7 (288.0) 196.8
Treasury stock at cost, 3.4
shares issued (83.5) (83.5)
Accumulated other comprehensive
income (5.4) (2.1) (17.5) (25.0)
-------- ------ ------ --------- --------
Total shareholders' equity 497.5 733.9 83.0 (836.5) 477.9
-------- ------ ------ --------- --------
Total liabilities and
shareholders' equity $1,552.7 $829.3 $462.4 $(1,083.0) $1,761.4
======== ====== ====== ========= ========
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60
THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
(IN MILLIONS)
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
---------------------------------------------------------------------------------------------------
Net sales $731.1 $466.2 $405.2 $ $1,602.5
Cost of sales 465.2 296.8 225.3 987.3
------ ------ ------ ------ --------
Gross profit 265.9 169.4 179.9 615.2
Gross commission earned from
marketing agreement 28.6 1.7 30.3
Contribution expenses under
marketing agreement 1.6 1.6
------ ------ ------ ------ --------
Net commission earned from
marketing agreement 27.0 1.7 28.7
Advertising and promotion 55.0 39.4 48.8 143.2
Selling, general and administrative 156.7 39.6 84.9 281.2
Restructuring and other charges 1.4 1.4
Amortization of goodwill and other
intangibles 12.8 4.2 8.6 25.6
Equity income in non-guarantors (55.7) 55.7
Intracompany allocations (12.8) 2.8 10.0
Other income, net (3.1) (0.1) (0.4) (3.6)
------ ------ ------ ------ --------
Income (loss) from operations 138.6 83.5 29.7 (55.7) 196.1
Interest (income) expense 55.9 23.2 79.1
------ ------ ------ ------ --------
Income (loss) before income taxes 82.7 83.5 6.5 (55.7) 117.0
Income taxes (benefit) 13.6 31.8 2.5 47.9
------ ------ ------ ------ --------
Income (loss) before extraordinary
item 69.1 51.7 4.0 (55.7) 69.1
Extraordinary loss on early
extinguishment of debt, net of
income tax benefit 5.9 5.9
------ ------ ------ ------ --------
Net income (loss) $ 63.2 $ 51.7 $ 4.0 $(55.7) $ 63.2
====== ====== ====== ====== ========
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61
THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
(IN MILLIONS)
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 63.2 $ 51.7 $ 4.0 $(55.7) $ 63.2
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 12.9 9.6 6.5 29.0
Amortization 8.8 8.5 9.9 27.2
Deferred taxes 0.5 0.5
Equity income in non-guarantors (55.7) 55.7
Extraordinary loss 5.9 5.9
Loss on sale of property 2.7 (1.0) 0.1 1.8
Changes in assets and liabilities,
net of acquired businesses:
Accounts receivable 4.1 19.6 23.7
Inventories (27.9) 6.3 (21.6)
Prepaid and other current assets (16.5) 1.9 (10.6) (25.2)
Accounts payable 14.8 (0.2) (3.9) 10.7
Accrued taxes and other
liabilities (11.0) 25.7 (25.4) (10.7)
Other assets (35.4) 0.7 (1.2) (35.9)
Other liabilities 9.8 (3.0) (4.6) 2.2
Other, net 2.6 0.4 4.4 7.4
------ ------ ------- ------ -------
Net cash provided by (used in) operating
activities (21.2) 120.2 (20.8) 78.2
------ ------ ------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and
equipment (48.1) (7.9) (10.7) (66.7)
Proceeds from sale of equipment 1.0 0.5 1.5
Investments in acquired businesses, net
of cash acquired (350.1) (156.1) (506.2)
Other (1.0) 1.5 (0.7) (0.2)
------ ------ ------- ------ -------
Net cash used in investing activities (398.2) (5.9) (167.5) (571.6)
------ ------ ------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving and bank
lines of credit 419.7 167.6 587.3
Repayment of outstanding balance on old
credit facility (241.0) (241.0)
Issuance of 8 5/8% Senior Subordinated
Notes 330.0 330.0
Extinguishment of 9 7/8%
Senior Subordinated Notes (107.1) (107.1)
Settlement of interest rate locks (12.9) (12.9)
Financing and issuance fees (24.1) (24.1)
Dividends on Class A Convertible
Preferred Stock (12.1) (12.1)
Repurchase of treasury shares (10.0) (10.0)
Cash received from exercise of stock
options 3.8 3.8
Investment from parent 76.7 (109.1) 32.4
------ ------ ------- ------ -------
Net cash provided by (used in) financing
activities 423.0 (109.1) 200.0 513.9
Effect of exchange rate changes on cash 0.0 (0.8) (0.8)
------ ------ ------- ------ -------
Net increase in cash 3.6 5.2 10.9 19.7
Cash and cash equivalents, beginning of
period 4.9 (2.1) 7.8 10.6
------ ------ ------- ------ -------
Cash and cash equivalents, end of period $ 8.5 $ 3.1 $ 18.7 $ 0.0 $ 30.3
====== ====== ======= ====== =======
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62
STOCK PRICE AND DIVIDEND INFORMATION
The common shares of The Scotts Company trade on the New York Stock
Exchange under the symbol "SMG".
Sale Prices
------------------------
High Low
--------------------------------------------------------------------------------------
FISCAL 2000
1st quarter $41.250 $35.250
2nd quarter 42.000 29.438
3rd quarter 41.500 32.688
4th quarter 37.500 31.000
FISCAL 2001
1st quarter $38.125 $28.875
2nd quarter 43.070 36.625
3rd quarter 47.100 36.130
4th quarter 42.020 33.320
We have not paid dividends on the common shares in the past and do not
presently plan to pay dividends on the common shares. It is presently
anticipated that earnings will be retained and reinvested to support the growth
of our business. The payment of any future dividends on common shares will be
determined by the Board of Directors of Scotts in light of conditions then
existing, including our earnings, financial condition and capital requirements,
restrictions in financing agreements, business conditions and other factors.
As of November 27, 2001, there were approximately 7,200 shareholders
including holders of record and our estimate of beneficial holders.
----
63
OFFICERS AND DIRECTORS
OF
THE SCOTTS COMPANY
EXECUTIVE OFFICERS
James Hagedorn
President and Chief Executive Officer, Director
Charles M. Berger
Chairman of the Board, Director
Michael P. Kelty, Ph.D.
Vice Chairman and
Executive Vice President
David M. Aronowitz
Executive Vice President,
General Counsel and
Corporate Secretary
Michel J. Farkouh
Executive Vice President,
International Consumer
Business Group
Hadia Lefavre
Executive Vice President,
Human Resources Worldwide
Patrick J. Norton
Executive Vice President and
Chief Financial Officer, Director
L. Robert Stohler
Executive Vice President,
North America
OUTSIDE DIRECTORS
Arnold W. Donald
Chairman and Chief Executive Officer,
Merisant Company
Company selling health,
nutritional and lifestyle products
Joseph P. Flannery
Chairman, President and
Chief Executive Officer,
Uniroyal Holding, Inc.
Manufacturer of tires
Horace Hagedorn
Director Emeritus
Albert E. Harris
President (retired),
EDBH, Inc.
John Kenlon
Senior Vice President (retired),
Consumer Gardens Business Group
The Scotts Company
Katherine Hagedorn Littlefield
Chairman,
Hagedorn Partnership, L.P.
Private investment partnership
Karen G. Mills
Managing Director and Founder,
Solera Capital
Private equity firm
John M. Sullivan
Independent director for
several companies
L. Jack Van Fossen
President,
Nessoff Corporation
Privately-held investment company
John Walker, Ph.D.
Chairman,
Advent International plc
Private equity management company
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64
[LOGO] THE SCOTTS COMPANY
14111 Scottslawn Road
Marysville, Ohio 43041
(937) 644-0011
www.scotts.com