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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 December 30, 1995
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 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.
18,883,994 Outstanding at February 9, 1996
- ------------------------------------- ---------------------------------
Common Shares, voting, no par value
Page 1 of 18 pages
Exhibit Index at page 16
THE SCOTTS COMPANY AND SUBSIDIARIES
INDEX
PAGE NO.
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Income - Three month
periods ended December 31, 1994 and December 30, 1995 ....... 3
Consolidated Statements of Cash Flows - Three month
periods ended December 31, 1994 and December 30, 1995 ....... 4
Consolidated Balance Sheets -
December 31, 1994, December 30, 1995 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 ............. 11-13
Part II. Other Information
Item 1. Legal Proceedings .......................................... 14
Item 6. Exhibits and Reports on Form 8-K ........................... 14
Signatures ............................................................ 15
Exhibit Index ......................................................... 16
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 amounts)
Three Months Ended
December 31 December 30
1994 1995
Net sales ..................................... $ 98,019 $ 117,928
Cost of sales ................................. 53,520 64,714
-------- ---------
Gross profit .................................. 44,499 53,214
-------- ---------
Marketing ..................................... 22,397 27,590
Distribution .................................. 14,540 16,465
General and administrative .................... 5,967 8,057
Research and development ...................... 2,765 2,663
Other expenses, net ........................... 995 4,469
-------- ---------
Loss from operations .......................... (2,165) (6,030)
Interest expense .............................. 5,694 6,601
-------- ---------
Loss before income tax benefit ................ (7,859) (12,631)
Income tax benefit ............................ (3,261) (5,457)
-------- ---------
Net loss ...................................... $ (4,598) $ (7,174)
======== =========
Net loss per common share ..................... $ (.25) $ (.51)
======== =========
Common shares used in net loss
per common share computation ................ 18,667 18,689
======== =========
See Notes to Consolidated Financial Statements
Page 3
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
December 31 December 30
1994 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................... $ (4,598) $ (7,174)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .................. 5,801 7,280
Equity in income of unconsolidated ............. -- (191)
business
Postretirement benefits ........................ 166 45
Net increase in certain components of
working capital ............................ (45,543) (81,432)
Net increase in other assets and
liabilities and other adjustments .......... 354 291
-------- --------
Net cash used in operating activities ....... (43,820) (81,181)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in plant and equipment, net ............. (5,012) (3,593)
Investment in affiliate ............................ (250) --
-------- --------
Net cash used in investing activities ....... (5,262) (3,593)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on term and other debt .................... (727) (182)
Revolving lines of credit and bank line of ......... 44,646 88,474
credit, net
Dividends on preferred stock ....................... -- (2,436)
Net cash provided by financing activities ... 43,919 85,856
-------- --------
Effect of exchange rate changes on cash .............. (122) (207)
-------- --------
Net increase (decrease) in cash ...................... (5,285) 875
Cash at beginning of period .......................... 10,695 7,028
-------- --------
Cash at end of period ................................ $ 5,410 $ 7,903
======== --------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of amount capitalized ........... $ 2,082 $ 3,343
Income taxes paid .................................. $ 890 $ 1,364
See Notes to Consolidated Financial Statements
Page 4
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
ASSETS
December 31 December 30 September 30
1994 1995 1995
Current Assets:
Cash and cash equivalents ............. $ 5,410 $ 7,903 $ 7,028
Accounts receivable, less allowances
of $3,213, $3,381 and $3,406, ........ 128,454 196,373 176,525
respectively
Inventories, net ...................... 145,095 184,629 143,953
Prepaid and other assets .............. 17,240 20,942 21,659
--------- --------- ---------
Total current assets ................. 296,199 409,847 349,165
--------- --------- ---------
Property, plant and equipment, net ...... 141,556 147,787 148,754
Trademarks, net ......................... -- 88,688 89,250
Other intangibles, net .................. 27,485 23,513 24,421
Goodwill ................................ 103,926 178,794 179,988
Other assets ............................ 4,957 15,883 15,772
--------- --------- ---------
Total Assets ......................... $ 574,123 $ 864,512 $ 807,350
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving credit line ................. $ 68,062 $ 36,071 $ 97
Current portion of term debt .......... 5,540 417 421
Accounts payable ...................... 53,565 54,414 63,207
Other current liabilities ............. 24,000 32,063 36,987
Accrued taxes ......................... 11,065 11,058 18,728
--------- --------- ---------
Total current liabilities ............ 162,232 134,023 119,440
--------- --------- ---------
Term debt, less current portion ......... 217,618 324,368 272,025
Postretirement benefits other than ...... 27,180 27,204 27,159
pensions
Other liabilities ....................... 3,492 5,152 5,209
--------- --------- ---------
Total Liabilities .................... 410,522 490,747 423,833
--------- --------- ---------
Commitments and Contingencies
Shareholders' Equity:
Class A Convertible Preferred Stock, .. -- 177,255 177,255
no par value
Common Shares ......................... 211 211 211
Capital in excess of par value ........ 193,418 207,557 207,551
Retained earnings ..................... 9,277 25,789 35,399
Cumulative translation gain ........... 2,136 3,934 4,082
Treasury stock, 2,415 shares in 1994
and 2,388 shares in 1995 at cost ..... (41,441) (40,981) (40,981)
--------- --------- ---------
Total Shareholders' Equity ........... 163,601 373,765 383,517
--------- --------- ---------
Total Liabilities and Shareholders' .. $ 574,123 $ 864,512 $ 807,350
Equity ========= ========= =========
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 December 31, 1994 and December 30,
1995, the related consolidated statements of income for the three month
periods ended December 31, 1994 and December 30, 1995 and the related
consolidated statements of cash flows for the three month periods ended
December 31, 1994 and December 30, 1995 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
and results of operations. 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
Scotts' fiscal 1995 Annual Report on Form 10-K.
The financial statements for the three month period ended December 31,
1994 have been revised to reflect a change in the timing of expense
recognition related to a promotional allowance offered to retail customers
introduced for the first time in fiscal 1995. The impact of this revision
was on timing of marketing promotional expense recognition in the first
three quarters of Scotts' 1995 fiscal year and did not impact the full
fiscal year results of operations.
2. INVENTORIES
(in thousands)
Inventories, net of provisions of $6,101, $6,189 and $6,711, consisted of:
December 31 December 30 September 30
1994 1995 1995
-------- -------- ------
Finished Goods $ 85,314 $ 112,981 $ 71,431
Raw Materials 59,781 71,648 72,522
-------- -------- --------
$ 145,095 $ 184,629 $ 143,953
======= ======= =======
Page 6
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
3. 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. (all further references will be made
as "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,
1993.
(in thousands, except per share amounts)
Three Months Ended
December 31,
1994
Net sales $ 109,906
=========
Net loss $ (3,769)
=========
Net loss per common share $ (0.33)
=========
For purposes of computing net loss per common share, Scotts' Class A
Convertible Preferred Stock is considered a common stock equivalent. Pro
forma primary net loss per common per share for the three months ended
December 31, 1994 is calculated using the weighted average common shares
outstanding for Scotts of 18,667,064. The computation of pro forma primary
net loss per common share assumed reduction of earnings for preferred
dividends and no conversion of the Class A Convertible Preferred Stock.
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, 1993, and is not
intended to be indicative of future results or trends.
4. FOREIGN EXCHANGE INSTRUMENTS
The Company enters into forward foreign exchange contracts and purchased
currency options 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 exposures.
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
$6,000 at December 30, 1995.
Page 7
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 30, 1995, the Company's European operations had foreign
exchange risk in various European 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 December 30, 1995, the Company had
outstanding forward foreign exchange contracts with a contract value of
approximately $35.4 million and outstanding purchased currency options
with a contract value of approximately $14.8 million. These contracts have
maturity dates ranging from January 3, 1996 to October 2, 1996.
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 adopting SFAS No. 123 on the
results of operations and the method of disclosure has not been
determined.
6. OTHER EXPENSE
Other expenses consisted of the following for the three months ended:
December 31, December 30,
1994 1995
------ ----
Foreign currency loss $ 362 $ 180
Facility closings - 504
Amortization 853 2,172
Personnel reduction 1,600
charge
Royalty income (140) (142)
Equity in income of
unconsolidated - (191)
businesses
Other (80) 346
---- ------
Total $ 995 $ 4,469
=== =====
7. NET LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average number of
common shares and common share equivalents (stock options, convertible
preferred stock and warrants) outstanding each period.
Page 8
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents information necessary to calculate net loss
per common share.
THREE MONTHS ENDED
(in thousands) December 31, December 30,
1994 1995
Net loss ................... $ (4,598) $ (7,174)
Preferred stock dividend ... -- (2,436)
-------- --------
Net loss applicable to
common shares .......... $ (4,598) ($ 9,610)
======== ========
Common shares outstanding:
Weighted average outstanding 18,667 18,689
======== ========
Net loss per common share .. $ (.25) $ (.51)
======== ========
Fully diluted net loss per common share is considered to be the same as
primary net loss per common share as it was not materially different from
primary net loss per common share.
8. CONTINGENCIES
The Company is involved in various lawsuits and claims which arise in the
normal course of business. In the opinion of management, these claims
individually and in the aggregate are not expected to result in a material
adverse effect on the Company's financial position or results of
operations, 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
these matters.
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. Accordingly, the Company has elected not to participate in any
remediation which might be required at the site. 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
Page 9
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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. It proposes penalties totalling $785,000, the
maximum allowable under FIFRA according to management's calculations.
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.
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.
Page 10
ITEM II. 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.
Results of Operations
Three Months Ended December 30, 1995 versus Three Months Ended December 31,
1994 (restated)
Net sales increased to $117.9 million, up 20.3%. The increase is at-
tributed to additional unit sales volume which increased sales 16.7% and
increases in average selling prices of approximately 3.6%. Increased purchases
from the marketing program incentivizing retailers to purchase their spring
requirements early ($13.7 million) and the inclusion of Miracle-Gro ($13.1
million) were the primary factors of the sales volume gain. On a pro forma
basis, including Miracle-Gro, net sales increased by $8.0 million or 7.3%.
Consumer Business Group net sales increased by 37.5% to $76.4 million.
The increase is attributed to additional unit sales volume which increased
sales 29.8% and increases in average selling prices of approximately 7.7%.
Sales increased in all categories including fertilizers, spreaders and garden
products. Increased purchases from the retailer incentive program discussed
above ($13.7 million) and the inclusion of Miracle-Gro ($13.1 million) were
the primary factors of the sales volume gain. Professional Business Group net
sales decreased 6.4% to $26.1 million. The decrease was a result of the loss
of exclusivity of an advanced control chemistry and a decrease in Horticulture
due to competitive pressures. International sales increased by 5.6% to $15.4
million. The increase resulted primarily from increased sales volume in Canada
and the Pacific Rim.
Cost of sales represented 54.9% of net sales, nearly flat compared to 54.6% of
net sales last year.
Operating expenses increased approximately 27% due partially to the inclusion
of Miracle-Gro. Marketing expenses increased 23.2% due to increased
promotional allowances to retailers and increased advertising. Distribution
costs increased 13.2% as a result of higher sales volume and increased
warehousing costs partially offset by lower distribution costs for
Miracle-Gro, and as a result of favorable sales mix. General and
administrative expenses increased 35% due to the inclusion of Miracle-Gro. In
addition, a $1.6 million charge for personnel reductions, goodwill and other
amortization of $1.1 million related to the Miracle-Gro Companies merger
transactions and a $.5 million charge for closed facilities consisting of
three composting sites and the Scotts U.K. distribution operation resulted in
a $3.5 million increase in "other expenses, net."
Interest expense increased 15.9%. The increase was caused primarily by an
increase in borrowing levels (13.5%) principally to support higher sales
levels recorded in the past six months.
The Company's effective tax rate increased from 41.5% to 43.2% in 1996. This
increase results primarily from an increase in nondeductible amortization of
intangible assets discussed above.
Net loss of $7.2 million increased by $2.6 million from 1995. Among the
significant items impacting 1996 results were the inclusion of Miracle-Gro
which increased sales and marketing expenses, increased revenues offset by
higher benefit costs, the $1.6 million charge for personnel reduction, higher
interest expense and higher tax rates as discussed more fully above.
Page 11
Financial Position as of December 30, 1995
Current assets of $409.8 million increased by $60.7 million compared with
current assets at September 30, 1995 and by $113.6 compared with current
assets at December 31, 1994. 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 December
relative to September. In addition, international inventories increased. The
increase compared with December 31, 1994 was due in part to the inclusion of
Miracle-Gro's current assets which amounted to $38.7 million. The increase was
also caused by higher receivables associated with sales increases in the past
six months and to higher inventory levels.
Current liabilities of $134.0 million increased by $14.6 million compared with
current liabilities at September 30, 1995 and decreased by $28.2 million
compared with current liabilities at December 31, 1994. The increase compared
with September 30, 1995 is caused, in part, by increased short-term
borrowings, offset by lower trade payables and accrued expenses. The decrease
compared with December 31, 1994 is caused by a decrease in short-term debt due
to the terms of the Fourth Amended and Restated Credit Agreement (the "Credit
Agreement") dated March 17, 1995, which requires the Company to reduce
revolving credit borrowing to no more than $225 million for 30 consecutive
days each year as compared to $30 million prior to the amendment.
Capital expenditures for the year ended September 30, 1996 are expected to be
approximately $28.0 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. These expected capital expenditures will be
financed with cash provided by operations and utilization of available credit
facilities.
Long-term debt increased by $52.3 million compared with long-term debt at
September 30, 1995 and by $106.8 compared with long-term debt at December 31,
1994. The increase as compared to September 30, 1995 was to support increased
working capital and capital expenditures. The increase compared to December
31, 1994 was attributable to the change in terms of borrowings under the
Credit Agreement discussed above ($31.6 million) and the remaining increase in
borrowings was to support increased working capital and capital expenditures.
Shareholders' equity decreased $9.8 million compared with shareholders' equity
at September 30, 1995 and increased by $210.2 million compared with
shareholders' equity at December 31, 1994. The decrease compared with
September 30, 1995 reflects the net loss for the three months ended December
30, 1995 of $7.2 million, the Convertible Preferred Stock dividends of $2.4
million and the change in the cumulative foreign currency adjustment of $.2
million. The increase compared with December 31, 1994 resulted primarily due
to 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 in the
merger transactions with the Miracle-Gro Companies. The remaining change in
shareholders' equity was a result of net income for the twelve months ended
December 30, 1995 of $22.5 million and the change in the cumulative foreign
currency adjustment of $1.8 million, partially offset by Convertible Preferred
Stock dividends of $6.0 million.
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 and payables and expected cash flows denominated in non-local
foreign currencies. Management anticipated that these financial statements
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 will
minimize but not completely eliminate the Company's exposure to adverse
currency movements.
Page 12
As of December 30, 1995, the Company's European operations had foreign
exchange risk in various European currencies tied to the Dutch Guilder. These
currencies include the Austrian 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 December 30, 1995, outstanding foreign exchange forward
contracts had a contract value of approximately $35.4 million and outstanding
purchased currency options had a contract value of approximately $14.8
million. These contracts have maturity dates ranging from January 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 future debt service and working
capital needs during the 1996 fiscal year.
Inflation
The Company is subject to the effects 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.
Accounting Issues
In December 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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 is involved in various lawsuits and claims that arise in the
normal course of business. In the opinion of management, these claims
individually and in the aggregate are not expected to result in a material
adverse effect on the Company's financial position or results of operations;
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.
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Part II - OTHER INFORMATION
Item 1. Legal Proceedings
See footnote number 8 to the Company's
Consolidated Financial Statements
Items 2-5.
Not applicable
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
December 30, 1995.
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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 FEBRUARY 12, 1996 /S/ PAUL D. YEAGER
- ------------------------------- Paul D. Yeager
Executive Vice President
Chief Financial Officer
Principal Accounting Officer
Page 15
THE SCOTTS COMPANY
QUARTERLY REPORT ON FORM 10-Q FOR
FISCAL QUARTER ENDED DECEMBER 30, 1995
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
11 Computation of Net Income (Loss)
Per Common Share ................................ 17
27 Financial Data Schedule ......................... 18
Page 16
Exhibit 11(a)
THE SCOTTS COMPANY
Computation of Net Income (Loss) Per Common Share
Primary (Unaudited)
(Dollars in thousands except per share amounts)
For the Three Months Ended
December 31 December 30,
1994 1995
---- ----
Net loss for computing net loss
per common share:
Net loss ......................................... $(4,598) $(7,174)
Preferred stock dividend ......................... -- (2,436)
------- -------
Net loss applicable to common shares ............. $(4,598) $(9,610)
======= =======
Net loss per common share ........................ $ (.25) $ (.51)
======= =======
Computation of Weighted Average Number
of Common Shares Outstanding (Unaudited)
For the Three Months Ended
December 31, December 30,
1994 1995
----- ----
Weighted average number of
shares for computing net loss
per common share 18,667,064(1) 18,688,934 (1)
========== ==========
___________________
(1) On a fully diluted basis, weighted average shares outstanding did not
differ from the primary calculation due to the anti-dilutive effect of
common stock equivalents in a loss period.
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