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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 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
THE SCOTTS COMPANY
1996 STOCK OPTION PLAN
SECTION l.
PURPOSE
The purpose of the Plan is to foster and promote the long-term financial
success of the Company and materially increase shareholder value by (a)
encouraging and providing for the acquisition of an ownership interest in the
Company by Employees and Eligible Directors, and (b) enabling the Company to
attract and retain the services of an outstanding management team upon whose
judgment, interest, and special effort the successful conduct of its
operations is largely dependent.
SECTION 2.
DEFINITIONS
2.1 Definitions. Whenever used herein, the following terms shall
have the respective meanings set forth below:
(a) "Act" means the Securities Exchange Act of 1934, as amended.
(b) "Award" means any Option.
(c) "Board" means the Board of Directors of the Company.
(d) "Cause" means (i) the willful failure by a Participant to perform
substantially his duties as an Employee of the Company (other than due to
physical or mental illness) after reasonable notice to the Participant of such
failure, (ii) the Participant's engaging in serious misconduct that is
injurious to the Company or any Subsidiary, (iii) the Participant's having
been convicted of, or entered a plea of nolo contendere to, a crime that
constitutes a felony or (iv) the breach by the Participant of any written
covenant or agreement with the Company or any Subsidiary not to disclose any
information pertaining to the Company or any Subsidiary or not to compete or
interfere with the Company or any Subsidiary.
(e) "Change in Control" means the occurrence of any of the following
events:
(i) the members of the Board at the beginning of any consecutive
twenty-four calendar month period (the "Incumbent Directors") cease for
any reason other than due to death to constitute at least a majority of
the members of the Board, provided that any director whose election, or
nomination for election by the Company's shareholders, was approved by a
vote of at least a majority of the members of the Board then still in
office who were members of the Board at the beginning of such
twenty-four calendar month period, shall be treated as an Incumbent
Director; or
(ii) any "person," including a "group" (as such terms are used in
Sections 13(d) and 14(d)(2) of the Act, but excluding the Company, any
of its Subsidiaries, or any employee benefit plan of the Company or of
any of its Subsidiaries,) is or becomes the "beneficial owner" (as
defined in Rule 13(d)(3) under the Act), directly or indirectly, of
securities of the Company representing more than 49% of the combined
voting power of the Company's then outstanding securities; or
(iii) the shareholders of the Company shall approve a definitive
agreement (1) for the merger or other business combination of the
Company with or into another corporation, a majority of the directors of
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which were not directors of the Company immediately prior to the merger
and in which the shareholders of the Company immediately prior to the
effective date of such merger own less than 50% of the voting power in
such corporation; or (2) for the sale or other disposition of all or
substantially all of the assets of the Company; or
(iv) the purchase of Stock pursuant to any tender or exchange
offer made by any "person," including a "group" (as such terms are used
in Sections 13(d) and l4(d)(2) of the Act), other than the Company, any
of its Subsidiaries, or an employee benefit plan of the Company or of
any of its Subsidiaries, for more than 49% of the Stock of the Company.
(f) "Change in Control Price" means the highest price per share of Stock
offered in conjunction with any transaction resulting in a Change in Control
(as determined in good faith by the Committee if any part of the offered price
is payable other than in cash) or, in the case of a Change in Control
occurring solely by reason of a change in the composition of the Board, the
highest Fair Market Value of the Stock on any of the 30 trading days
immediately preceding the date on which a Change in Control occurs.
(g) "Code" means the Internal Revenue Code of 1986, as amended.
(h) "Committee" means the Compensation and Organization Committee of the
Board which shall have the meaning ascribed to a "compensation committee" in
Section 1.162-27(c)(4) of the final regulations promulgated under Section
162(m) of the Code and which shall consist of three or more members, each of
whom shall be (i) a person from time to time permitted by the rules
promulgated under Section 16 of the Act in order for grants of Awards to be
exempt transactions under said Section 16 and (ii) receiving remuneration in
no other capacity than as a director, except as permitted under Section
1.162-27(e)(3) of the final regulations promulgated under Section 162(m) of
the Code and the rulings thereunder.
(i) "Company" means The Scotts Company, an Ohio corporation, and any
successor thereto.
(j) "Director Option" means a Nonstatutory Stock Option granted to each
Eligible Director pursuant to Section 6.7 without any action by the Board or
the Committee.
(k) "Disability" means the inability of the Participant to perform his
duties for a period of at least six months due to a physical or medical
infirmity. Notwithstanding the foregoing, with respect to Incentive Stock
Options, the term "Disability" shall be defined as such term is defined in
Section 22(e)(3) of the Code.
(l) "Eligible Director" means, on any date, a person who is serving
as a member of the Board and who is not an Employee.
(m) "Employee" means any officer or other key executive and
management employee of the Company or of any of its Subsidiaries.
(n) "Fair Market Value" means, on any date, the closing price of the
Stock as reported on the New York Stock Exchange (or on such other recognized
market or quotation system on which the trading prices of the Stock are traded
or quoted at the relevant time) on such date. In the event that there are no
Stock transactions reported on the New York Stock Exchange (or such other
market or system) on such date, Fair Market Value shall mean the closing price
on the immediately preceding date on which Stock transactions were so
reported.
(o) "Option" means the right to purchase Stock at a stated price for a
specified period of time. For purposes of the Plan, an Option may be either
(i) an "Incentive Stock Option" (ISO) within the meaning of Section 422 of the
Code or (ii) a "Nonstatutory Stock Option" (NSO) which does not qualify for
treatment as an "Incentive Stock Option."
(p) "Participant" means any Employee designated by the Committee to
participate in the Plan.
(q) "Plan" means The Scotts Company 1996 Stock Option Plan, as in effect
from time to time.
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(r) "Retirement" means termination of a Participant's employment on or
after the normal retirement date or, with the Committee's approval, on or
after any early retirement date established under any retirement plan
maintained by the Company or a Subsidiary in which the Participant
participates.
(s) "Stock" means the Common Shares, without par value, of the
Company.
(t) "Subsidiary" means any corporation or partnership in which the
Company owns, directly or indirectly, 50% or more of the total combined voting
power of all classes of stock of such corporation or of the capital interest
or profits interest of such partnership.
2.2 Gender and Number. Except when otherwise indicated by the context,
words in the masculine gender used in the Plan shall include the feminine
gender, the singular shall include the plural, and the plural shall include
the singular.
SECTION 3.
ELIGIBILITY AND PARTICIPATION
Except as otherwise provided in Section 6.7, the only persons eligible
to participate in the Plan shall be those Employees selected by the Committee
as Participants.
SECTION 4.
POWERS OF THE COMMITTEE
4.l Power to Grant. The Committee shall determine the Participants to
whom Awards shall be granted, the type or types of Awards to be granted and
the terms and conditions of any and all such Awards. The Committee may
establish different terms and conditions for different types of Awards, for
different Participants receiving the same type of Award and for the same
Participant for each Award such Participant may receive, whether or not
granted at different times.
4.2 Administration. The Committee shall be responsible for the
administration of the Plan. The Committee, by majority action thereof, is
authorized to prescribe, amend, and rescind rules and regulations relating to
the Plan, to provide for conditions deemed necessary or advisable to protect
the interests of the Company, and to make all other determinations (including,
without limitation, whether a Participant has incurred a Disability) necessary
or advisable for the administration and interpretation of the Plan in order to
carry out its provisions and purposes. Determinations, interpretations, or
other actions made or taken by the Committee pursuant to the provisions of the
Plan shall be final, binding, and conclusive for all purposes and upon all
persons.
SECTION 5.
STOCK SUBJECT TO PLAN
5.1 Number. Subject to the provisions of Section 5.3, the number of
shares of Stock subject to Awards under the Plan may not exceed 1,500,000
shares of Stock. Subject to the provisions of Section 5.3, no Employee shall
receive Awards for more than 150,000 shares of Stock over any one-year period.
For this purpose, to the extent that any Award is cancelled (as described in
Section 1.162-27(e)(2)(vi)(B) of the final regulations promulgated under
Section 162(m) of the Code), such cancelled Award shall continue to be counted
against the maximum number of shares of Stock for which Awards may be granted
to an Employee under the Plan. The shares of Stock to be delivered under the
Plan may consist, in whole or in part, of treasury Stock or authorized but
unissued Stock, not reserved for any other purpose.
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5.2 Cancelled, Terminated, or Forfeited Awards. Except as provided in
Section 5.1, any shares of Stock subject to an Award which for any reason is
cancelled, terminated or otherwise settled without the issuance of any Stock
shall again be available for Awards under the Plan.
5.3 Adjustment in Capitalization. In the event of any Stock dividend or
Stock split, recapitalization (including, without limitation, the payment of
an extraordinary dividend), merger, consolidation, combination, spin-off,
distribution of assets to shareholders, exchange of shares, or other similar
corporate change, the aggregate number of shares of Stock available for Awards
under Section 5.1 or subject to outstanding Awards and the respective prices
and/or limitations applicable to outstanding Awards may be appropriately
adjusted by the Committee, whose determination shall be conclusive. If,
pursuant to the preceding sentence, an adjustment is made to the number of
shares subject to outstanding Options held by Participants a corresponding
adjustment shall be made to the number of shares subject to outstanding
Director Options and if an adjustment is made to the number of shares of Stock
authorized for issuance under the Plan, a corresponding adjustment shall be
made to the number of shares subject to each Director Option thereafter
granted pursuant to Section 6.7.
SECTION 6.
OPTIONS
6.1 Grant of Options. Options may be granted to Participants at such
time or times as shall be determined by the Committee. Options granted under
the Plan may be of two types: (i) Incentive Stock Options and (ii)
Nonstatutory Stock Options. The Committee shall have complete discretion in
determining the number of Options, if any, to be granted to a Participant.
Without limiting the foregoing, the Committee may grant Options containing
provisions for the issuance to the Participant, upon exercise of such Option
and payment of the exercise price therefor with previously owned shares of
Stock, of an additional Option for the number of shares so delivered, having
such other terms and conditions not inconsistent with the Plan as the
Committee shall determine. Each Option shall be evidenced by an Option
agreement that shall specify the type of Option granted, the exercise price,
the duration of the Option, the number of shares of Stock to which the Option
pertains, and such other terms and conditions not inconsistent with the Plan
as the Committee shall determine.
6.2 Option Price. Nonstatutory Stock Options and Incentive Stock Options
granted pursuant to the Plan shall have an exercise price which is not less
than the Fair Market Value of the Stock on the date the Option is granted. To
the extent that an Incentive Stock Option is granted to a Participant who owns
(actually or constructively under the provisions of Section 424(d) of the
Code) Stock possessing more than 10% of the total combined voting power of all
classes of Stock of the Company or of any Subsidiary, such Incentive Stock
Option shall have an exercise price which is not less than 110% of the Fair
Market Value on the date the Option is granted.
6.3 Exercise of Options. Options awarded to a Participant under the Plan
shall be exercisable at such times and shall be subject to such restrictions
and conditions including the performance of a minimum period of service, as
the Committee may impose, either at or after the time of grant of such
Options; provided, however, that if the Committee does not specify another
exercise schedule at the time of grant, each Option shall become exercisable
in three approximately equal installments on each of the first three
anniversaries of the date of grant, subject to the Committee's right to
accelerate the exercisability of such Option in its discretion.
Notwithstanding the foregoing, no Option shall be exercisable for more than 10
years after the date on which it is granted; provided, however, in the case of
an Incentive Stock Option granted to a Participant who owns (actually or
constructively under the provisions of Section 424(d) of the Code) Stock
possessing more than 10% of total combined voting power of all classes of
Stock of the Company or any Subsidiary, such Incentive Stock Option shall not
be exercisable for more than 5 years after the date on which it is granted.
6.4 Payment. The Committee shall establish procedures governing the
exercise of Options, which shall require that written notice of exercise be
given and that the Option price be paid in full in cash or equivalents,
including by personal check, at the time of exercise or pursuant to any
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arrangement that the Committee shall approve. The Committee may, in its
discretion, permit a Participant to make payment in Stock already owned by
him, valued at its Fair Market Value on the date of exercise, as partial or
full payment of the exercise price. As soon as practicable after receipt of a
written exercise notice and full payment of the exercise price, the Company
shall deliver to the Participant a certificate or certificates representing
the acquired shares of Stock.
6.5 Incentive Stock Options. Notwithstanding anything in the Plan to the
contrary, no term of this Plan relating to Incentive Stock Options shall be
interpreted, amended or altered, nor shall any discretion or authority granted
under the Plan be so exercised, so as to disqualify the Plan under Section 422
of the Code, or, without the consent of any Participant affected thereby, to
cause any Incentive Stock Option previously granted to fail to qualify for the
Federal income tax treatment afforded under Section 421 of the Code. Further,
the aggregate Fair Market Value (determined as of the time an Incentive Stock
Option is granted) of the Stock with respect to which Incentive Stock Options
are exercisable for the first time by any Participant during any calendar year
(under all option plans of the Company and all Subsidiaries of the Company)
shall not exceed $100,000.
6.6 Director Options. Notwithstanding anything else contained herein to
the contrary, on the first business day following the date of each annual
meeting of shareholders during the term of the Plan, each Eligible Director
shall receive a Director Option to purchase 4,000 shares of Stock at an
exercise price per share equal to the Fair Market Value of the Stock on the
date of grant. Each Director Option shall be exercisable six months after the
date of grant and shall remain exercisable until the earlier to occur of (i)
the tenth anniversary of the date of grant or (ii) the first anniversary of
the date the Eligible Director ceases to be a member of the Board, except that
if the Eligible Director ceases to be a member of the Board after having been
convicted of, or pled guilty or nolo contendere to, a felony, his Director
Options shall be cancelled on the date he ceases to be a director. An Eligible
Director may exercise a Director Option in the manner described in Section
6.4.
SECTION 7.
TERMINATION OF EMPLOYMENT
7.1 Termination of Employment Due to Retirement. Unless otherwise
determined by the Committee at the time of grant, in the event a Participant's
employment terminates by reason of Retirement, any Options granted to such
Participant which are then outstanding (whether or not exercisable prior to
the date of such termination) may be exercised at any time prior to the
expiration of the term of the Options or within five (5) years (or such
shorter period as the Committee shall determine at the time of grant)
following the Participant's termination of employment, whichever period is
shorter. Notwithstanding any provision contained herein, with respect to any
Incentive Stock Option, a Participant who terminates his employment by reason
of Retirement may exercise such Incentive Stock Option at any time prior to
the expiration of the term of the Option or within three (3) months following
the Participant's termination of employment, whichever period is shorter.
7.2 Termination of Employment Due to Death or Disability. Unless
otherwise determined by the Committee at the time of grant, in the event a
Participant's employment terminates by reason of death or Disability, any
Options granted to such Participant which are then outstanding (whether or not
exercisable prior to the date of such termination) may be exercised by the
Participant or the Participant's designated beneficiary, and if none is named,
in accordance with Section 10.2, at any time prior to the expiration date of
the term of the Options or within five (5) years (or such shorter period as
the Committee shall determine at the time of grant) following the
Participant's termination of employment, whichever period is shorter.
Notwithstanding any provision contained herein, with respect to any Incentive
Stock Option, a Participant whose employment terminates by reason of death or
Disability may exercise (or his designated beneficiary may exercise, in the
case of death) such Incentive Stock Option at any time prior to the expiration
of the term of the Option or within one (1) year following the Participant's
termination of employment, whichever period is shorter.
7.3 Termination of Employment For Cause. Unless otherwise determined by
the Committee at the time of grant, in the event a Participant's employment is
terminated for Cause, any Options granted to such Participant which are then
outstanding (whether or not exercisable prior to the date of such termination)
shall be forfeited.
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7.4 Termination of Employment for Any Other Reason. Unless otherwise
determined by the Committee at or after the time of grant, in the event the
employment of the Participant shall terminate for any reason other than one
described in Section 7.1, 7.2 or 7.3, any Options granted to such Participant
which are exercisable at the date of the Participant's termination of
employment shall remain exercisable until the earlier to occur of (i) the
expiration of the term of such Options or (ii) the thirtieth day following the
Participant's termination of employment, whichever period is shorter.
SECTION 8.
CHANGE IN CONTROL
8.l Accelerated Vesting and Payment. Subject to the provisions of
Section 8.2 below, in the event of a Change in Control, each Option (excluding
any Director Option) shall be cancelled in exchange for a payment in cash of
an amount equal to the excess of the Change in Control Price over the exercise
price for such Option.
8.2 Alternative Awards. Notwithstanding Section 8.l, no cancellation or
cash settlement or other payment shall occur with respect to any Award or any
class of Awards if the Committee reasonably determines in good faith prior to
the occurrence of a Change in Control that such Award or Awards shall be
honored or assumed, or new rights substituted therefor (such honored, assumed
or substituted award hereinafter called an "Alternative Award"), by a
Participant's employer (or the parent or a subsidiary of such employer)
immediately following the Change in Control, provided that any such
Alternative Award must:
(i) be based on stock which is traded on an established securities
market, or which will be so traded within 60 days of the Change in Control;
(ii) provide such Participant (or each Participant in a class of
Participants) with rights and entitlements substantially equivalent to or
better than the rights, terms and conditions applicable under such Award,
including, but not limited to, an identical or better exercise or vesting
schedule and identical or better timing and methods of payment;
(iii) have substantially equivalent economic value to such Award
(determined at the time of the Change in Control); and
(iv) have terms and conditions which provide that in the event that the
Participant's employment is involuntarily terminated or constructively
terminated, any conditions on a Participant's rights under, or any
restrictions on transfer or exercisability applicable to, each such
Alternative Award shall be waived or shall lapse, as the case may be.
For this purpose, a constructive termination shall mean a termination by
a Participant following a material reduction in the Participant's
compensation, a material reduction in the Participant's responsibilities or
the relocation of the Participant's principal place of employment to another
location, in each case without the Participant's written consent.
8.3 Director Options. Upon a Change in Control, each Director Option
granted to an Eligible Director shall be cancelled in exchange for a payment
in cash of an amount equal to the excess of the Change in Control Price over
the exercise price for such Director Option unless (i) the Stock remains
traded on an established securities market following the Change in Control and
(ii) such Eligible Director remains on the Board following the Change in
Control.
8.4 Options Granted Within Six Months of the Change in Control. If any
Option (including a Director Option) granted within six months of the date on
which a Change in Control occurs (i) is held by a person subject to the
reporting requirements of Section 16(a) of the Act and (ii) is to be cashed
out pursuant to Section 8.1 or 8.3, such cash out shall not occur unless and
until, in the opinion of the Company's counsel, such cash out could occur
without such reporting person being potentially subject to liability under
Section 16(b) of the Act by reason of such cash out.
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SECTION 9.
AMENDMENT, MODIFICATION, AND TERMINATION OF PLAN
The Board or the Committee may at any time terminate or suspend the
Plan, and from time to time may amend or modify the Plan; provided, however,
that no amendment may be made to Section 6.6 or any other provision of the
Plan relating to Director Options within six months of the last date on which
any such provision was amended. Any such amendment, termination or suspension
may be made without the approval of the shareholders of the Company except as
such shareholder approval may be required (a) to satisfy the requirements of
Rule 16b-3 under the Act, or any successor rule or regulation, (b) to satisfy
applicable requirements of the Code or (c) to satisfy applicable requirements
of any securities exchange on which are listed any of the Company's equity
securities. No amendment of the Plan shall result in any Committee member's
losing his status as a "disinterested person" as defined in Rule 16b-3 under
the Act, or any successor rule or regulation, with respect to any employee
benefit plan of the Company or result in the Plan's losing its status as a
plan satisfying the requirements of said Rule 16b-3. No amendment,
modification, or termination of the Plan shall in any manner adversely affect
any Award theretofore granted under the Plan, without the consent of the
Participant.
SECTION 10
MISCELLANEOUS PROVISIONS
10.1 Nontransferability of Awards. No Awards granted under the Plan may
be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and distribution.
All rights with respect to Awards granted to a Participant under the Plan
shall be exercisable during his lifetime only by such Participant and all
rights with respect to any Director Options granted to an Eligible Director
shall be exercisable during his lifetime only by such Eligible Director.
10.2 Beneficiary Designation. Each Participant and each Eligible
Director under the Plan may from time to time name any beneficiary or
beneficiaries (who may be named contingently or successively) to whom any
benefit under the Plan is to be paid or by whom any right under the Plan is to
be exercised in case of his death. Each designation shall revoke all prior
designations by the same Participant or Eligible Director, shall be in a form
prescribed by the Committee, and shall be effective only when filed in writing
with the Committee. In the absence of any such designation, benefits remaining
unpaid at the Participant's death shall be paid to or exercised by his
surviving spouse, if any, or otherwise to or by his estate and Director
Options outstanding at the Eligible Director's death shall be exercised by his
surviving spouse, if any, or otherwise by his estate.
10.3 No Guarantee of Employment or Participation. Nothing in the Plan
shall interfere with or limit in any way the right of the Company or any
Subsidiary to terminate any Participant's employment at any time, nor confer
upon any Participant any right to continue in the employ of the Company or any
Subsidiary. No Employee shall have a right to be selected as a Participant,
or, having been so selected, to receive any future Awards. Nothing in the Plan
shall confer upon an Eligible Director a right to continue to serve on the
Board or to be nominated for reelection to the Board.
10.4 Tax Withholding. The Company shall have the power to withhold, or
require a Participant or Eligible Director to remit to the Company, an amount
sufficient to satisfy Federal, State, and local withholding tax requirements
on any Award under the Plan, and the Company may defer payment of cash or
issuance of Stock until such requirements are satisfied. The Committee may, in
its discretion, permit a Participant to elect, subject to such conditions as
the Committee shall impose, (i) to have shares of Stock otherwise issuable
under the Plan withheld by the Company or (ii) to deliver to the Company
previously acquired shares of Stock having a Fair Market Value sufficient to
satisfy all or part of the Participant's estimated total Federal, state, and
local tax obligation associated with the transaction.
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10.5 Indemnification. Each person who is or shall have been a member of
the Committee or of the Board shall be indemnified and held harmless by the
Company against and from any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by him in connection with or resulting
from any claim, action, suit, or proceeding to which he may be made a party or
in which he may be involved by reason of any action taken or failure to act
under the Plan and against and from any and all amounts paid by him in
settlement thereof, with the Company's approval, or paid by him in
satisfaction of any judgment in any such action, suit, or proceeding against
him, provided he shall give the Company an opportunity, at its own expense, to
handle and defend the same before he undertakes to handle and defend it on his
own behalf. The foregoing right of indemnification shall not be exclusive and
shall be independent of any other rights of indemnification to which such
persons may be entitled under the Company's Articles of Incorporation or Code
of Regulations, by contract, as a matter of law, or otherwise.
10.6 No Limitation on Compensation. Nothing in the Plan shall be
construed to limit the right of the Company to establish other plans or to pay
compensation to its Employees or directors, in cash or property, in a manner
which is not expressly authorized under the Plan.
10.7 Requirements of Law. The granting of Awards and the issuance of
shares of Stock shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required. Notwithstanding the foregoing, no
Stock shall be issued under the Plan unless the Company is satisfied that such
issuance will be in compliance with applicable federal and state securities
laws. Certificates for Stock delivered under the Plan may be subject to such
stock transfer orders and other restrictions as the Committee may deem
advisable under the rules, regulations and other requirements of the
Securities and Exchange Commission, any stock exchange upon which the Stock is
then listed or traded, the Nasdaq National Market or any applicable federal or
state securities law. The Committee may cause a legend or legends to be placed
on any such certificates to make appropriate reference to such restrictions.
10.8 Term of Plan. The Plan shall be effective upon its adoption by the
Committee, subject to approval by the Board and approval by the affirmative
vote of the holders of a majority of the shares of voting stock present in
person or represented by proxy at the 1996 Annual Meeting of Shareholders. The
Plan shall continue in effect, unless sooner terminated pursuant to Section 9,
until the tenth anniversary of the date on which it is adopted by the Board.
10.9 Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Ohio.
10.10 No Impact On Benefits. Plan Awards are not compensation for
purposes of calculating an Employee's rights under any employee benefit plan.
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