FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 1-11593 THE SCOTTS COMPANY (Exact name of registrant as specified in its charter) Ohio 31-1199481 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 14111 Scottslawn Road Marysville, Ohio 43041 -------------------------------------- (Address of principal executive offices) (Zip Code) (513) 644-0011 (Registrant's telephone number, including area code) No change ---------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No____ Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. 18,980,553 Outstanding at May 6, 1996 - ------------------------------------- --------------------------- Common Shares, voting, no par value Page 1 of 27 pages Exhibit Index at page 17
THE SCOTTS COMPANY AND SUBSIDIARIES INDEX Page No. Part I. Financial Information: Item 1. Financial Statements Consolidated Statements of Income - Three month and six month periods ended April 1, 1995 and March 30, 1996 ....... 3 Consolidated Statements of Cash Flows - Six month periods ended April 1, 1995 and March 30, 1996 ......................... 4 Consolidated Balance Sheets - April 1, 1995, March 30, 1996 and September 30, 1995 .......................... 5 Notes to Consolidated Financial Statements ..................... 6-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .................. 11-14 Part II. Other Information: Item 1. Legal Proceedings .................................... 15 Item 4. Submission of Matters to a Vote of Security Holders .. 15 Item 6. Exhibits and Reports on Form 8-K ..................... 15 Signatures ............................................................. 16 Exhibit Index .......................................................... 17 Page 2
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE SCOTTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands except per share data) Three Months Ended Six Months Ended April 1 March 30 April 1 March 30 1995 1996 1995 1996 Net sales ...................... $236,092 $ 251,224 $334,111 $ 369,152 Cost of sales .................. 123,890 134,835 177,410 199,549 -------- --------- -------- --------- Gross profit ................... 112,202 116,389 156,701 169,603 -------- --------- -------- --------- Marketing ...................... 38,513 44,135 60,910 71,725 Distribution ................... 30,479 28,726 45,019 45,191 General and administrative ..... 6,997 8,969 12,964 17,026 Research and development ....... 2,963 2,905 5,728 5,568 Amortization of goodwill ....... 1,374 2,236 2,227 4,408 and other intangibles Other (income) expense, net .... 184 (837) 326 (595) Unusual items .................. -- 3,176 -- 5,231 -------- --------- -------- --------- Income from operations ......... 31,692 27,079 29,527 21,049 Interest expense ............... 8,114 8,118 13,808 14,719 -------- --------- -------- --------- Income before income taxes ..... 23,578 18,961 15,719 6,330 Income taxes ................... 9,785 8,331 6,523 2,874 -------- --------- -------- --------- Net income ..................... 13,793 10,630 9,196 3,456 ======== ========= ======== ========= Net income (loss) per common ... $ .73 $ .36 $ .49 $ (.08) share (note 7) ======== ========= ======== ========= Common shares used in net income (loss) per common ..... 18,820 29,350 18,762 18,778 share computation ======== ========= ======== ========= See Notes to Consolidated Financial Statements Page 3
THE SCOTTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Six Months Ended April 1 March 30 1995 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net income ..................................... $ 9,196 $ 3,456 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization .............. 11,908 14,320 Equity in income of unconsolidated ......... (382) business Postretirement benefits .................... 204 90 Unusual charges ............................ -- 4,476 Net increase in certain components of working capital ........................ (130,838) (167,245) Net change in other assets and liabilities and other adjustments ...... (504) 2,019 ------- ------- Net cash used in operating (110,034) (143,266) activities ......................... ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in plant and equipment, net ......... (10,891) (8,355) Investment in software ......................... (483) -- Investment in Affiliate ........................ (250) -- --------- --------- Net cash used in investing (11,624) (8,355) activities ......................... --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on term and other debt ................ (1,197) (264) Revolving lines of credit and bank line ........ 118,378 153,318 of credit, net Issuance of Common Shares ...................... -- 5,055 Deferred financing costs incurred .............. (275) -- Dividends on preferred stock ................... -- (4,874) ------- ------- Net cash provided by financing 116,906 153,235 activities ......................... ------- ------- Effect of exchange rate changes on cash .......... 676 (155) --------- --------- Net increase (decrease) in cash .................. (4,076) 1,459 Cash at beginning of period ...................... 10,695 7,028 --------- --------- Cash at end of period ............................ $ 6,619 $ 8,487 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION Interest paid, net of amount capitalized ....... $ 14,007 $ 12,171 Income taxes paid .............................. $ 996 $ 2,589 See Notes to Consolidated Financial Statements Page 4
THE SCOTTS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) ASSETS Unaudited April 1 March 30 September 30 1995 1996 1995 _________ _________ ________ Current Assets: Cash .................................. $ 6,619 $ 8,487 $ 7,028 Accounts receivable, less allowances of $3,395, $3,908 and $3,406, respectively ......................... 252,509 315,392 176,525 Inventories ........................... 143,574 187,370 143,953 Prepaid and other assets .............. 18,601 21,907 23,354 --------- --------- --------- Total current assets ................. 421,303 533,156 350,860 --------- --------- --------- Property, plant and equipment, net ...... 143,791 147,382 148,754 Trademarks, net ......................... -- 88,125 89,250 Other intangibles, net .................. 26,529 22,096 24,421 Goodwill, net ........................... 103,224 181,600 179,988 Other assets ............................ 9,755 15,818 15,772 --------- --------- --------- Total Assets ......................... $ 704,602 $ 988,177 $ 809,045 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Revolving credit line ................. $ 39,852 $ 100,915 $ 97 Current portion of term debt .......... -- 221 421 Accounts payable ...................... 79,591 78,639 63,207 Accrued liabilities ................... 24,258 46,682 41,409 Accrued taxes ......................... 20,572 21,125 18,728 --------- --------- --------- Total current liabilities ............ 164,273 247,582 123,862 --------- --------- --------- Term debt, less current portions ........ 324,630 324,500 272,025 Postretirement benefits other than pensions ............................. 27,218 27,249 27,159 Other liabilities ....................... 7,622 5,103 5,209 --------- --------- --------- Total Liabilities .................... 523,743 600,434 428,255 --------- --------- --------- Shareholders' Equity: Class A Convertible Preferred Stock, no par value ......................... -- 177,255 177,255 Common Shares, no par value ........... 211 211 211 Capital in excess of par value ........ 193,155 207,695 207,551 Retained earnings ..................... 23,071 31,254 32,672 Cumulative translation gain ........... 5,863 3,391 4,082 Treasury stock, 2,415 shares on April 1, 1995, 2,102 shares on March 30, 1996 and 2,388 shares ..... (41,441) (36,063) (40,981) on September 30, 1995 at cost --------- --------- --------- Total Shareholders' Equity .......... 180,859 383,743 380,790 --------- --------- --------- Total Liabilities and Shareholders' Equity ............................. $ 704,602 $ 988,177 $ 809,045 ========= ========= ========= See Notes to Consolidated Financial Statements Page 5
THE SCOTTS COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. Organization and Basis of Presentation The Scotts Company ("Scotts") and its wholly owned subsidiaries, Hyponex Corporation ("Hyponex"), Republic Tool and Manufacturing Corp. ("Republic"), Scotts-Sierra Horticultural Products Company ("Sierra") and Scotts' Miracle-Gro Products, Inc. ("Miracle-Gro"), (collectively, the "Company"), are engaged in the manufacture and sale of lawn care and garden products. All material intercompany transactions have been eliminated. The consolidated balance sheets as of April 1, 1995 and March 30, 1996, the related consolidated statements of income for the three and six month periods ended April 1, 1995 and March 30, 1996 and the related consolidated statements of cash flows for the six month periods ended April 1, 1995 and March 30, 1996 are unaudited; however, in the opinion of management, such financial statements contain all adjustments necessary for the fair presentation of the Company's financial position, results of operations and cash flows. Interim results reflect all normal recurring adjustments and are not necessarily indicative of results for a full year. The interim financial statements and notes are presented as specified by Regulation S-X of the Securities Exchange Act of 1934, and should be read in conjunction with the financial statements and accompanying notes in the Company's fiscal 1995 Annual Report on Form 10-K/A. 2. Inventories (in thousands) Inventories, net of allowances of $6,118, $6,916 and $6,711, consisted of: April 1 March 30 September 30 1995 1996 1995 Raw material ...................... $ 56,326 $ 64,563 $ 71,431 Finished products ................. 87,248 122,807 72,522 -------- -------- -------- Total Inventories ............. $143,574 $187,370 $143,953 ======== ======== ======== 3. Foreign Exchange Instruments The Company enters into forward foreign exchange and currency options contracts to hedge its exposure to fluctuations in foreign currency exchange rates. These contracts generally involve the exchange of one currency for a second currency at some future date. Counterparties to these contracts are major financial institutions. Gains and losses on these contracts generally offset gains and losses on the assets, liabilities and transactions being hedged. Realized and unrealized foreign exchange gains and losses are recognized and offset foreign exchange gains or losses on the underlying exposure. Unrealized gains and losses that are designated and effective as hedges on such transactions are deferred and recognized in income in the same period as the hedged transactions. The net unrealized gain deferred totaled $49,379 at March 30, 1996. Page 6
THE SCOTTS COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements At March 30, 1996, the Company's European operations had foreign exchange risk in various currencies tied to the Dutch guilder. These currencies are: the Australian Dollar, Belgian Franc, German Mark, Spanish Peseta, Italian Lira, French Franc, British Pound and the U. S. Dollar. The Company's U. S. operations have foreign exchange rate risk in the Canadian Dollar, the Dutch Guilder and the British Pound which are tied to the U. S. Dollar. As of March 30, 1996, the Company had outstanding forward foreign exchange contracts with a contract value of approximately $24.1 million and outstanding purchased currency options with a contract value of approximately $4.7 million. These contracts have maturity dates ranging from April 3, 1996 to October 2, 1996. 4. Acquisitions Effective May 19, 1995, the Company completed the merger transactions with Stern's Miracle-Gro Products, Inc. and affiliated companies (the "Miracle-Gro Companies"). The ultimate surviving corporation is now known as Scotts' Miracle-Gro Products, Inc. ("Miracle-Gro"). Miracle-Gro is engaged in the marketing and distribution of plant foods and lawn and garden products primarily in the United States, Canada and Europe. The following pro forma results of operations give effect to the Miracle-Gro Companies acquisition as if it had occurred on October 1, 1994. (in thousands, except per share amounts) Three Months Ended Six Months Ended April 1, April 1, 1995 1995 ------- ------ Net sales ....................... $ 283,711 $ 393,617 ======= ======= Net income ...................... $ 21,585 $ 17,817 ======== ======= Net income per common share ..... $ .74 $ .61 ======== ======== For purposes of computing net income per common share, Scotts' Class A Convertible Preferred Stock is considered a common stock equivalent. Pro forma primary net income per common share for the three months and six months ended April 1, 1995 are calculated using the weighted average common shares outstanding of 29,153,000 and 29,083,000, respectively. The pro forma information provided does not purport to be indicative of actual results of operations if the merger transactions with the Miracle-Gro Companies had occurred as of October 1, 1994, and is not intended to be indicative of future results or trends. 5. Accounting Issues In December 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. Management is currently evaluating the provisions of SFAS No. 123 and at this time, the effect of adoption of SFAS No. 123 and the related disclosures have not been decided. Page 7
THE SCOTTS COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements 6. Unusual Items For the six months ended March 30, 1996, the Company recorded unusual charges of $5.2 million related to site closings and the personnel reduction. These non-recurring charges arose as a direct result of management's commitment to reduce costs and achieve more profitable growth. As of March 30, 1996 approximately $3.3 million has been accrued related to these charges. It is currently anticipated the remaining balance will be expended by the end of fiscal 1996. 7. Earnings Per Share Computation The earnings per share computation is based on the weighted average number of common shares and common share equivalents (stock options, convertible preferred stock and warrants) outstanding each period. The shares of Class A Convertible Preferred Stock were issued in connection with the Miracle-Gro merger transactions on May 19, 1995. These shares were not considered in the earnings per share computation for the six months ended March 30, 1996 because they were antidilutive for such period. The following table presents information necessary to calculate net income (loss) per common share. Three Months Ended Six Months Ended (in thousands) April 1, March 30, April 1, March 30, 1995 1996 1995 1996 ------------------ -------------------- Net income ...................... $13,793 $10,630 $ 9,196 $ 3,456 Preferred stock dividend ........ N/A -- N/A 4,874 ------- ------- -------- -------- Income (loss) applicable to common shares .............. $13,793 $10,630 $ 9,196 $ (1,418) ======= ======= ======== ======== Common shares used in net income (loss) per common share calculation ...... 18,820 29,350 18,762 18,778 ======= ======= ======== ======== Income (loss) per common ........ $ .73 $ .36 $ .49 $ (.08) share ......................... ======= ======= ======== ==== Fully diluted net income (loss) per common share is considered to be the same as primary net income (loss) per common share as it was not materially different from primary net income (loss) per common share. 8. Contingencies The Company's management continually evaluates the Company's contingencies, including various lawsuits and claims which arise in the normal course of business. In the opinion of management, its assessment of contingencies is reasonable and that 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 details the more significant of the Company's identified contingencies. Page 8
THE SCOTTS COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements In September 1991, the Company was identified by the Ohio Environmental Protection Agency (the "Ohio EPA") as a Potentially Responsible Party ("PRP") with respect to a site in Union County, Ohio (the "Hershberger site") that has allegedly been contaminated by hazardous substances whose transportation, treatment or disposal the Company allegedly arranged. Pursuant to a consent order with the Ohio EPA, the Company, together with four other PRP's identified to date, investigated the extent of contamination in the Hershberger site. The results of the investigation were that the site presents a low degree of risk and that the chemical compounds which contribute to the risk are not compounds used by the Company. As a result of the joint and several liability of PRP's, the Company may be subject to financial participation in the costs of the remediation plan, if any. However, management does not believe any such obligations would have a significant adverse effect on the Company's results of operations or financial condition. In July 1990, the Philadelphia district of the Army Corps of Engineers directed that peat harvesting operations be discontinued at Hyponex's Lafayette, New Jersey facility, and the Company complied. In May 1992, the Department of Justice in the U. S. District Court for the District of New Jersey, filed suit seeking a permanent injunction against such harvesting at that facility and civil penalties. The Philadelphia District of the Corps has taken the position that peat harvesting activities there require a permit under Section 404 of the Clean Water Act. If the Corps' position is upheld, it is possible that further harvesting of peat from this facility would be prohibited. The Company is defending this suit and is asserting a right to recover its economic losses resulting from the government's actions. Management does not believe that the outcome of this case will have a material adverse effect on the Company's operations or its financial condition. Furthermore, management believes the Company has sufficient raw material supplies available such that service to customers will not be adversely affected by continued closure of this peat harvesting operation. Sierra is a defendant in a private cost-recovery action relating to the Novak Sanitary Landfill, located near Allentown, Pennsylvania. By agreement with W. R. Grace-Conn., Sierra's liability is limited to a maximum of $200,000 with respect to this site. The Company's management does not believe that the outcome of this proceeding will have a material adverse effect on its financial condition or results of operations. On January 30, 1996, the United States Environmental Protection Agency (the "U. S. EPA") served a Complaint and Notice of Opportunity for Hearing upon Sierra's wholly-owned subsidiary, Scotts-Sierra Crop Protection Company ("Crop Protection"). The Complaint alleges labeling violations under the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA") during 1992 and 1993 and proposed penalties totaling $785,000, the maximum allowable under FIFRA according to management's calculations. On April 18, 1996, an EPA Administrative Law judge dismissed the EPA's complaint without prejudice, due to mistakes in the pleadings. If an amended complaint is filed, based upon Crop Protection's good faith compliance actions and FIFRA's provisions for "gravity-based" penalty reductions, management believes Crop Protection's maximum liability to be $200,000, which has been accrued in the financial statements. The Company does not believe that the outcome of this proceeding will have a material adverse effect on its financial condition or results of operations. Page 9
THE SCOTTS COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements During 1993 and 1994, Stern's Miracle-Gro Products, Inc. ("Miracle-Gro Products") discussed with Pursell Industries, Inc. ("Pursell") the feasibility of forming a joint venture to produce and market a line of slow-release lawn food, and in October 1993, signed a non-binding "heads of agreement." After the merger transactions between the Company and the Miracle-Gro Companies were announced, Pursell demanded that Miracle-Gro Products reimburse it for monies allegedly spent by Pursell in connection with the proposed project. Because Miracle-Gro Products does not believe that any such monies are due or that any such joint venture ever was formed, on February 10, 1995, it instituted an action in the Supreme Court of the State of New York, Stern's Miracle-Gro Products, Inc. v. Pursell Industries, Inc. Index No. 95-004131 (Nassau Co.) (the "New York Action"), seeking declarations that, among other things, Miracle-Gro Products owed no monies to Pursell relating to the proposed project and that no joint venture was formed. Pursell moved to dismiss the New York Action in favor of the Alabama action described below, which motion was granted August 7, 1995. On March 2, 1995, Pursell instituted an action in the United States District Court for the Northern District of Alabama, Pursell Industries, Inc. v. Stern's Miracle-Gro Products, Inc., CV-95-C-0524-S (the "Alabama Action"), alleging, among other things, that a joint venture was formed, that Miracle-Gro Products breached an alleged joint venture contract, committed fraud, and breached an alleged fiduciary duty owed Pursell by not informing Pursell of negotiations concerning the merger transactions. On December 18, 1995, Pursell filed an amended complaint in the Alabama Action in which Scotts was named as an additional party defendant. The amended complaint contains a number of allegations and seeks compensatory damages in excess of $10 million, punitive damages of $20 million, treble damages as allowed by law and injunctive relief with respect to the advertising and trade dress allegations. The Company does not believe that the amended complaint has any merit and intends to vigorously defend that action. On April 14, 1996, in response to discussions with Scotts regarding the possible infringement upon certain Scotts' patents by one or several of Pursell's controlled-release fertilizers, Pursell instituted a second action in the United States District Court for the Northern District of Alabama, Pursell Industries, Inc. v. The Scotts Company, CV-96-AR-931-S (the "Patent Action"). Pursell has alleged, among other things, that Scotts' marking of its Poly-S fertilizers with its patents constitutes false marking under 35 U.S.C. Sec. 292 and that Scotts' conduct constitutes unfair competition. The complaint seeks declarations that, among other things, Scotts' patents are invalid and that Pursell has not infringed any of Scotts' patents. It further seeks that Scotts be enjoined from bringing a patent infringement suit against Pursell and requests that Pursell be awarded its costs of this action and such other relief as deemed proper. The Company does not believe that this action has merit and intends to vigorously defend it and to possibly bring counterclaims against Pursell. Page 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements of the Company included elsewhere in this report. NET SALES BY BUSINESS UNIT (in thousands) Three Months Ended April 1, 1995 March 30, 1996 % Change ------------- -------------- -------- Consumer Lawn $174,560 $147,336 (15.6)% Consumer Garden 6,811 47,235 593.5 % Professional 34,073 34,984 2.7 % International 20,648 21,669 4.9 % -------- -------- Consolidated $236,092 $251,224 6.4 % ======= ======= Six Months Ended April 1, 1995 March 30, 1996 % Change ------------- -------------- -------- Consumer Lawn $227,813 $211,164 (7.3)% Consumer Garden 9,130 59,850 555.5 % Professional 61,979 61,115 (1.4)% International 35,189 37,023 5.2 % -------- -------- Consolidated $334,111 $369,152 10.5 % ======= ======= Results of Operations Three Months Ended March 30, 1996, versus Three Months Ended April 1, 1995 Net sales increased 6.4% to $251.2 million. The increase is primarily attributed to the inclusion of Miracle-Gro, partially offset by decreases in sales due to the marketing program incentivizing retailers to purchase their spring requirements early, the divestiture of the Peters U.S. consumer water soluble fertilizer business and the late-breaking spring. On a pro forma basis, assuming the Miracle-Gro merger occurred October 1, 1994, net sales decreased by $32.5 million or 11.5% The Consumer Lawn Business Group had net sales of $147.3 million, a de- crease of 15.6%. The decrease is attributable to the impact of the marketing program incentivizing retailers to purchase their spring requirements early and the late-breaking spring in most parts of the country. The marketing program resulted in large trade inventories entering the 1996 selling season. Sales decreases in fertilizers, spreaders and organics were partially offset by increased seed sales. The Consumer Garden Business Group had net sales of $47.2 million, an increase of 593.5%, due to the inclusion of Miracle-Gro, partially offset by the divestiture of the Peters U.S. consumer water soluble fertilizer business. Professional Business Group net sales increased 2.7% to $35.0 million principally due to volume. International sales increased 4.9% to $21.7 million. The increase resulted primarily from increased sales volume. Page 11
Cost of sales represented 53.7% of net sales, up 1.2% compared to 52.5% of net sales last year. The increase was partially attributable to higher raw materials costs and to a lesser extent, sales mix which reflected increased volume in lower margin products. Operating expenses increased approximately 10.9% due partially to the inclusion of Miracle-Gro. Marketing expenses increased 14.6% due to increased promotional allowances to retailers and increased national advertising. Distribution expenses decreased 5.8% principally as a result of a sales mix which includes Miracle-Gro, which has a proportionately lower distribution cost. General and administrative expenses increased 28.2% due to the inclusion of Miracle-Gro, and increased outside services. Other expenses, net decreased by 554.9% due to lower foreign exchange losses and an increase in income of unconsolidated businesses. Amortization of goodwill and other intangibles increased as a result of the merger with Miracle-Gro. Unusual expenses of $3.2 million were recorded for restructuring charges related to personnel reductions and facilities closings. The Company's effective tax rate increased from 41.5% to 43.9%. This increase results primarily from an increase in nondeductible amortization of goodwill and intangible assets. Net income of $10.6 million decreased by $3.2 million from 1995. Among the significant items impacting 1996 results were the inclusion of Miracle-Gro, decreased revenues in the Consumer Lawn Business Group, the $3.2 million charge for restructuring and the higher effective tax rate. Six Months Ended March 30, 1996 versus Six Months Ended April 1, 1995 Net sales increased to $369.2 million, up 10.5%. The increase is primarily attributed to the inclusion of Miracle-Gro, partially offset by decreases due to the marketing program which incentivized retailers to purchase spring requirements early, the divestiture of the Peters U.S. consumer water soluble fertilizer business, the loss of exclusivity of an advanced control chemistry, and the late-breaking spring. On a pro forma basis, net sales decreased by $24.5 million or 6.2%. Consumer Lawn Business Group had net sales of $211.2 million, a decrease of 7.3%. The decrease is attributable to the impact of the marketing program incentivizing retailers to purchase their spring requirements early, the divestiture of the Peters U.S. consumer water soluble fertilizer business and the late-breaking spring in most parts of the country. The marketing program resulted in large trade inventories entering the 1996 selling season. Sales decreases in fertilizers, spreaders and organics were partially offset by sales increases in seed. The Consumer Garden Business Group had net sales of $59.9 million, an increase of 555.5% due to the inclusion of Miracle-Gro, partially offset by the divestiture of the Peters U.S. consumer water soluble fertilizer business. Professional Business Group net sales decreased 1.4%. International sales increased 5.2% to $37.0 million. The increase resulted primarily from increased sales volume. Cost of sales represented 54.1% of net sales, up 1% compared to 53.1% of net sales last year. The increase was partially attributable to higher raw materials costs and to a lesser extent, sales mix which reflected increased volume in lower margin products. Operating expenses increased 16.8% due partially to the inclusion of Miracle-Gro. Marketing expenses increased 17.8% due to increased promotional allowances to retailers and increased national advertising. Distribution costs increased 0.4% as a result of a sales mix which includes Miracle-Gro, which has a proportionately lower distribution cost. General and administrative expenses increased 31.3% due to the inclusion of Miracle-Gro, increased spending in corporate communications and increased outside services. Page 12
Other expenses, net, decreased by 282.5% due to an increase in income of unconsolidated businesses and lower foreign currency exchange impacts. Amortization of goodwill and other intangibles increased as a result of the merger with Miracle-Gro. Unusual expenses of $5.2 million were recorded for restructuring charges related to personnel reductions and facilities closings. Interest expense increased 6.6%. The increase was caused primarily by an increase in borrowing levels in the first quarter. The Company's effective tax rate increased from 41.5% to 45.4% in 1996. This increase results primarily from an increase in nondeductible amortization of goodwill and intangible assets. Net income of $3.5 million decreased by $5.7 million from 1995. Among the significant items impacting 1996 results were the inclusion of Miracle-Gro, decreased revenues in the Consumer Lawns Business Group and Professional Business Group, a $5.2 million charge for restructuring and the higher effective tax rate. Financial Position as of March 30, 1996 Current assets of $533.2 million increased by $182.3 million compared with current assets at September 30, 1995 and by $111.9 million compared with current assets at April 1, 1995. The increase compared with September 30, 1995 is primarily attributable to the seasonal nature of the Company's business, with inventory and accounts receivable levels generally being higher in March relative to September. The increase compared with April 1, 1995 was due in part to the inclusion of Miracle-Gro's current assets which amounted to $69.4 million. The increase was also caused by higher receivables and higher inventory levels. Current liabilities of $247.6 million increased by $123.7 million compared with current liabilities at September 30, 1995 and by $83.3 million compared with current liabilities at April 1, 1995. The increase compared with September 30, 1995 is caused in part by increased short-term borrowings, accounts payable and accrued expenses. The increase as compared with April 1, 1995 is caused in part by the inclusion of Miracle-Gro's current liabilities which amount to $19.9 million . The increase was also caused by higher short-term borrowings and accrued expenses. Capital expenditures for the year ended September 30, 1996 are expected to be approximately $20.0 million. The Credit Agreement restricts the amount the Company may spend on capital expenditures to $50 million per year for fiscal 1996 and each year thereafter. Fiscal 1996 capital expenditures are expected to be financed with cash provided by operations and utilization of available credit facilities. Long-term debt increased by $52.5 million compared with long-term debt at September 30, 1995. The increase as compared to September 30, 1995 was to support the seasonal increase in working capital and capital expenditures. Shareholders' equity increased by $3.0 million compared with shareholders' equity at September 30, 1995 and by $202.9 million compared with shareholders' equity at April 1, 1995. The increase compared with September 30, 1995 reflects net income for the six months of $3.5 million and the issuance of treasury stock for options exercised of $5.1 million offset by Convertible Preferred Stock dividends of $4.9 million and the change in the cumulative foreign currency adjustment of $0.7 million. The increase compared with April 1, 1995 is primarily a result of the merger with Miracle-Gro, including the issuance of Convertible Preferred Stock with a fair market value of $177.3 million and Warrants with a fair market value of $14.4 million. The remaining change in shareholders' equity was a result of net income for the twelve months ended March 30, 1996 of $16.6 million, and the issuance of treasury stock for options exercised of $5.5 million offset by the change in the cumulative foreign currency adjustment of $2.5 million and Convertible Preferred Stock dividends of $8.4 million. Page 13
The Company has foreign exchange rate risk related to international earnings and cash flows. During fiscal 1995, a management program was designed to minimize the exposure to adverse currency impacts on the cash value of the Company's non-local currency receivables and payables, as well as the associated earnings impact. The Company has entered into forward foreign exchange contracts and purchased currency options tied to the economic value of receivables, payables and expected cash flows denominated in non-local foreign currencies. Management anticipates that these financial instruments will act as an effective hedge against the potential adverse impact of exchange rate fluctuations on the Company's results of operations, financial condition and liquidity. It is recognized, however, that the program is intended to minimize but cannot completely eliminate the Company's exposure to adverse foreign currency movements. As of March 30, 1996, the Company's European operations had foreign exchange risk in various currencies tied to the Dutch Guilder. These currencies include the Australian Dollar, Belgian Franc, German Mark, Spanish Peseta, Italian Lira, French Franc, British Pound and the U.S. Dollar. The Company's U.S. operations had foreign exchange rate risk in the Canadian Dollar, Dutch Guilder and the British Pound which are tied to the U.S. Dollar. As of March 30, 1996, outstanding foreign exchange forward contracts had a contract value of approximately $24.1 million and outstanding purchased currency options had a contract value of approximately $4.7 million. These contracts have maturity dates ranging from April 3, 1996 to October 2, 1996. The primary sources of liquidity for the Company are funds generated by operations and borrowings under the Company's Credit Agreement. As amended, the Credit Agreement is unsecured and provides up to $375 million through March 31, 2000 and does not contain a term loan facility. In the opinion of the Company's management, cash flows from operations and capital resources will be sufficient to meet debt service and working capital needs during the 1996 fiscal year. Inflation The Company is subject to the effect of changing prices. The Company has, however, generally been able to pass along inflationary increases in its costs by increasing the prices of its products. Selective price increases for products which contain urea became effective at the beginning of 1996. The price increases offset higher urea prices experienced by the Company. In addition, the Company has entered into a supply agreement through the year 2000, under which the Company is required to purchase set tonnage of urea at a set price. Accounting Issues In December 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. Management is currently evaluating the provisions of SFAS No. 123 and at this time, the effect of adopting SFAS No. 123 on the results of operations and the method of disclosure has not been determined. Contingencies The Company's management continually evaluates the Company's contingencies, including various lawsuits and claims which arise in the normal course of business. In the opinion of management, its assessment of contingen- cies is reasonable and the 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. Additional information with respect to the more significant of these matters is described in footnote number 8 to the Company's Consolidated Financial Statements. Page 14
PART II - OTHER INFORMATION Item 1 Legal Proceedings Please see the information provided in Footnote 8 to the Company's Consolidated Financial Statements on pages 8 and 9 of this Report, which information is incorporated herein by reference. Item 2-3 Not applicable. Item 4 - Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders of the Company (the "Annual Meeting") was held in Columbus, Ohio on April 9, 1996. The result of the vote of the shareholders for each of the matters submitted to the shareholders at the Annual Meeting is as follows: A. The proposal to elect three directors for terms of three years: Nominee Votes For Withheld Not Voted --------- ----------- ---------- ----------- James Hagedorn 23,141,916 80,507 Karen Gordon Mills 23,177,933 44,490 Tadd C. Seitz 23,168,953 53,470 Each of the nominees was elected. The Directors whose terms of office continue after the Annual Meeting are James B Beard, John Kenlon, John M. Sullivan, L. Jack VanFossen, John S. Chamberlin, Joseph P. Flannery, Horace Hagedorn and Donald A. Sherman. B. The proposal to approve the adoption of the Company's 1996 Stock Option Plan: Broker For Against Abstain Non Votes ----- --------- --------- ----------- 18,945,876 425,050 792,046 3,059,451 This proposal was approved. Item 6 - Exhibits and Reports on Form 8-K. (a) See Exhibit Index at page 16 for a list of the exhibits included herewith. (b) No reports on Form 8-K were filed during the fiscal quarter ended March 30, 1996. Page 15
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE SCOTTS COMPANY Date May 14, 1996 /s/ Paul D. Yeager ----------------------------------- Paul D. Yeager Executive Vice President Chief Financial Officer Principal Accounting Officer Page 16
THE SCOTTS COMPANY QUARTERLY REPORT ON FORM 10-Q FOR FISCAL QUARTER ENDED MARCH 30, 1996 EXHIBIT INDEX Exhibit Page Number Description Number - ------------------------------------------------------------------------------ 10 The Scotts Company 1996 Stock Option Plan ......... Pages 18-25 11 Computation of Net Income Per Common Share ........ Page 26 27 Financial Data Schedule ........................... Page 27 Page 17