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 April 2, 1994
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 0-19768
THE SCOTTS COMPANY
(Exact name of registrant as specified in its charter)
Delaware
31-199481
(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.
Class A Outstanding at May 6,
1994
Common Stock, voting, $.01 18,667,064
par value
Page 1 of 19 pages
Exhibit Index at page 18
THE SCOTTS COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
Item 1. Financial Statements
Consolidated Balance Sheets -
April 3, 1993, April 2, 1994 and September 30, 1993 3-4
Consolidated Statements of Income - Three month and six month
periods ended April 3, 1993 and April 2, 1994 5
Consolidated Statements of Cash Flows - Six month
periods ended April 3, 1993 and April 2, 1994 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-14
Part II. Other Information
Item 1. Legal Proceedings 14-15
Item 4. Submission of Matters to a vote of the Security
Holders 15-16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
ASSETS
April September
April 3 2 30
1993 1994 1993
Current Assets:
Cash and cash equivalents $ 2,999 $ 4,553 $ 2,323
Accounts receivable, less
allowances 141,053 200,763 60,848
of $2,638, $2,784 and $2,511,
respectively
Inventories:
Raw materials 34,773 53,302 31,905
Finished products 60,695 75,530 44,749
Total inventories 95,468 128,832 76,654
Other current assets 3,595 7,195 3,917
Total current assets 243,115 341,343 143,742
Property, plant and equipment, at
cost:
Land and land improvements 19,320 22,608 19,817
Buildings 35,956 40,796 36,300
Machinery and equipment 80,052 109,675 87,250
Furniture and fixtures 6,165 6,192 5,952
Construction in progress
5,279 8,937 4,687
146,772 188,208 154,006
Less accumulated depreciation
51,021 61,614 55,215
Net property, plant and equipment 95,751 126,594 98,791
Intangible assets, net of
accumulated amortization 21,790 25,108 19,972
of $19,664, $23,196, and $21,053,
respectively
Deferred costs and other assets, net
of accumulated
amortization of $7,234, $8,562, and
$7,770, respectively
19,564 22,256 17,745
Excess of costs over underlying
value of net assets
acquired (goodwill), net of
accumulated amortization
of $4,670, $6,296, and $5,123, 41,305 106,842 41,340
respectively
Total Assets
$421,525 $622,143 $321,590
The accompanying notes to consolidated financial
statements are an integral part of these statements.
Page 3
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
April 3 April 2 September 30
1993 1994 1993
Current Liabilities:
Revolving credit and bank line of
credit $ 75,499 $ 98,000 $ 705
Current portion of term debt 5,251 20,417 5,444
Accounts payable 50,786 64,036 28,279
Accrued liabilities 17,223 26,311 9,135
Accrued payroll and fringe benefits 9,297 12,372 12,035
Accrued taxes 8,930 7,990 9,253
Total current liabilities 166,986 229,126 64,851
Long-term debt, less current portion 96,955 211,171 87,080
Postretirement benefits other than 25,586 26,710 26,646
pensions
Total Liabilities 289,527 467,007 178,577
Shareholders' Equity:
Preferred Stock, $.01 par value,
authorized - - -
10,000 shares; none issued
Class A Common Stock, voting, par
value
$.01 per share; authorized
35,000,000 shares; 211 211 211
issued 21,073,430, 21,081,959, and
21,073,430 shares, respectively
Class B Common Stock, non-voting,
par value
$.01 per share; authorized - - -
35,000,000 shares;
none issued
Capital in excess of par value 192,871 193,618 193,263
Retained earnings (deficit) (19,682) 2,448 (9,008)
Cumulative foreign currency (47) 300 (12)
translation adjustment
Treasury stock 2,414,895 shares at (41,355) (41,441) (41,441)
cost
)
Total Shareholders' Equity 131,998 155,136 143,013
Total Liabilities and $ 421,525 $ 622,143 $321,590
Shareholders' Equity
The accompanying notes to consolidated financial
statements are an integral part of these statements.
Page 4
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands except share data)
Three Months Ended Six Months
Ended
April 3 April 2 April 3 April 2
1993 1994 1993 1994
Net sales $161,102 $207,424 $228,859 $275,750
Cost of sales 82,481 109,100 119,535 146,464
Gross profit 78,621 98,324 109,324 129,286
Operating expenses:
Marketing 25,407 32,990 37,346 45,911
Distribution 21,262 24,888 31,080 35,864
General and administrative 8,206 9,331 14,493 14,341
Research and development 2,052 2,934 3,604 4,938
Total operating expenses 56,927 70,143 86,523 101,054
Income from operations 21,694 28,181 22,801 28,232
Interest expense 2,722 4,917 4,443 7,557
Other expenses, net 308 776 470 804
Income before income tax
provision and 18,664 22,488 17,888 19,871
cumulative effect of
accounting changes
Income tax provision 7,817 9,475 7,512 8,415
Income before cumulative effect
of 10,847 13,013 10,376 11,456
accounting changes (1)
Cumulative effect of changes in
accounting
for postretirement benefits, - - (13,157) -
net of tax and
income taxes (2)
Net income (loss) $ 10,847 $ 13,013 $ (2,781) $11,456
Net income (loss) per common
share (1) (2):
Income before cumulative
effect of
accounting changes $ .54 $ .69 $ .50 $ .61
Cumulative effect of changes
in accounting for
postretirement benefits, net
of tax and - - (.63) -
income taxes
Net income (loss) $ .54 $ .69 $ (.13) $ .61
Weighted average number of
common 20,138,585 18,890,221 20,637,432 18,855,200
shares outstanding
(1) Income before cumulative effect of accounting changes for the three
and six month periods ended April 3, 1993 has been restated to
reflect an ongoing net of tax charge of $325 or $.02 per share and
$787 or $.04 per share, respectively, resulting from the adoption of
SFAS No. 106 effective October 1, 1992.
(2) The net loss for the six month period ended April 3, 1993 has been
restated to reflect the cumulative effect of changes in
accounting for postretirement benefits (a net of tax change of
$14,932 or $.71 per share) and income taxes (a benefit of $1,775 or
$.08 per share).
The accompanying notes to consolidated financial
statements are an integral part of these statements.
Page 5
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
April 3 April 2
1993 1994
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ (2,781) $ 11,456
Adjustment to reconcile net income
(loss) to net cash
used in operating activities:
Depreciation and amortization 8,758 10,777
Cumulative effect of change in
accounting
for postretirement benefits 24,280 -
Postretirement benefits 1,296 64
Deferred income taxes (11,422) -
Net increase in certain
components of working capital (88,601) (120,160)
Net decrease in other assets
and liabilities
and other adjustments 636 667
Net cash used in operating
activities (67,834) (97,196)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in plant and equipment, (6,063) (12,436)
net
Acquisition of Sierra, net of cash
acquired - (118,986)
Acquisition of Republic, net of
cash acquired (16,366) -
Net cash used in investing
activities (22,429) (131,422)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under term debt 70,000 125,000
Payments on term and other debt (333) (428)
Revolving lines of credit and bank 64,688 106,295
line of credit, net
Issuance of Class A Common Stock - 160
Deferred financing costs incurred (618) -
Purchase of Class A Common Stock (41,355) -
Net cash provided by 92,382 231,027
financing activities
Effect of exchange rate changes on
cash - (179)
Net increase in cash 2,119 2,230
Cash at beginning of period 880 2,323
Cash at end of period $ 2,999 $ 4,553
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of amount
capitalized $2,467 $ 3,005
Income taxes paid 6,256 9,164
Detail of entities acquired:
Fair value of assets acquired 23,799 144,501
Liabilities assumed (7,433) (25,515)
Net cash paid for acquisition 16,366 118,986
The accompanying notes to consolidated financial
statements are an integral part of these statements.
Page 6
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation
The Scotts Company ("Scotts") through its wholly-owned
subsidiaries, The O. M. Scott & Sons Company ("OMS"),
Hyponex Corporation ("Hyponex Corporation ("Hyponex"),
Republic Tool and Manufacturing Corp. ("Republic") and Scott-
Sierra Horticultural Products Company (collectively, the
Company"), is engaged in the manufacture and sale of lawn
care and garden products. The Company's business is highly
seasonal with approximately 70% of sales occurring in the
second and third fiscal quarters. Substantially all of the
assets currently held by Scotts consist of the capital stock
of OMS and advances to OMS. The consolidated financial
statements include the financial statements of Scotts and
OMS. All material intercompany transactions have been
eliminated.
The consolidated balance sheets as at April 3, 1993 and
April 2, 1994, the related consolidated statements of income
for the three and six month periods ended April 3, 1993 and
April 2, 1994 and the related consolidated statements of cash
flows for the six month periods ended Arpil 3, 1993 and
April 2, 1994 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 the Company's fiscal
1993 Annual Report on Form 10-K.
Income before cumulative effect of accounting changes for the
three and six month periods ended April 3, 1993 has been
restated to reflect an ongoing charge of $325,000 or $.02 per
share and $787,000 or $.04 per share, respectively, resulting
from the adoption of Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employers Accounting for
Postretirement Benefits Other Than Pensions." Similarly, the
net loss for the six months ended April 3, 1993 has been
restated to reflect the cumulative effect of the adoption of
SFAS No. 106 (a net of tax charge of $14,932,000 or $.71 per
share) and SFAS No. 109, "Accounting for Income Taxes" (a
benefit of $1,775,000 or $.08 per share). The consolidated
balance sheet as of April 3, 1993 and the related statement
of cash flows for the six months then ended have also been
restated to reflect the accounting changes.
2. Acquisition
Effective December 16, 1993, the Company completed the
acquisition of Grace-Sierra Horticultural Products Company
(all further references to Grace-Sierra, now known as Scott-
Sierra Horticultural Products Company, will be made as
"Sierra") for an aggregate purchase price of approximately
$123,100,000, including estimated transaction costs of
$3,100,000. Sierra is a leading international manufacturer
and marketer of specialty fertilizers and related products
for the nursery, greenhouse, golf course and consumer
markets. Sierra manufactures controlled-release fertilizers
in the United States and the Netherlands, as well as water-
soluble fertilizers and specialty organics in the United
States. Approximately one-quarter of Sierra's net sales are
derived from European and other international markets;
approximately one-quarter of Sierra's assets are
internationally based. The purchase price was financed under
an amendment to the Company's Credit Agreement, whereby term
debt commitments available thereunder were increased to
$195,000,000.
Page 7
The acquisition was accounted for using the purchase method.
Accordingly, the purchase price has been allocated to the
assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition. The excess
of purchase price over the estimated fair value of the net
assets acquired ("goodwill") of approximately $66,541,000 is
being amortized on a straight line basis over 40 years.
Sierra's results of operations have been included in the
Consolidated Statements of Income from the acquisition date.
The following represents pro forma results of operations
assuming the Sierra acquisition had occurred effective
October 1, 1992 after giving effect to certain related
adjustments, including depreciation and amortization on
tangible and intangible assets, and interest on acquisition
debt.
Six Months Ended
(in thousands, except per
share amounts)
April 3 April 2
1993 1994
Net sales $ 291,041 $ 296,576
Income before cumulative effect
of accounting changes $ 10,639 $ 11,349
Net income (loss) $ (2,518) 11,349
Income per common share before
cumulative
effect of accounting changes $ .52 $ .60
Net income (loss) per common
share $ (.12) $ .60
The pro forma information provided does not purport to be
indicative of actual results of operations if the Sierra
acquisition had occurred as of October 1, 1992, and is not
intended to be indicative of future results or trends.
3. Long-term Debt
On December 16, 1993, the Company entered into an amendment
to its Credit Agreement to finance the Sierra acquisition.
The amendment increased the term debt commitments available
under the Credit Agreement to $195,000,000. The Credit
Agreement continues to provide a revolving credit commitment
of $150,000,000 through the scheduled maturity date of
March 31, 1996. The Company's long-term debt consists of the
following:
April 2 1994
Revolving credit loan and bank line of
credit $ 128,000,000
Term loan 195,000,000
Capital lease obligations and other 6,588,000
329,588,000
Less current portions 118,417,000
$211,171,000
Page 8
Scheduled maturities of term debt are as follows:
Fiscal Year
1994 $ 5,000,000
1995 25,000,000
1996 27,500,000
1997 32,500,000
1998 30,000,000
1999 and 75,000,000
thereafter
All other aspects of the Company's Credit Agreement remain
substantially the same.
4. Income Taxes
The effective income tax rates used for the three and six
month periods ended April 2, 1994 differ from the statutory
federal rate principally due to state and local income tax
expense, amortization of goodwill and amortization of prepaid
pension costs.
5. 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. The following details the
more significant of these matters.
The Company has been involved in studying a landfill to which
it is believed some of the Company's solid waste had been
hauled in the 1970's. In September 1991, the Company was
named by the Ohio Environmental Protection Agency ("Ohio
EPA") as a Potentially Responsible Party ("PRP") with respect
to this landfill. Pursuant to a consent order with the Ohio
EPA, the Company, together with four other PRP's identified
to date, is investigating the extent of contamination at the
landfill and developing a remediation program.
In July 1990, the Company was directed by the Army Corps of
Engineers (the "Corps") to cease peat harvesting operations
at its New Jersey facility. The Corps has alleged that the
peat harvesting operations were in violation of the Clean
Water Act ("CWA"). The United States Department of Justice
has commenced a legal action to seek a permanent injunction
against peat harvesting at this facility and to recover civil
penalties under the CWA. This action had been suspended
while the parties engaged in discussion to resolve the
dispute. Those discussions have not resulted in a settlement
and accordingly the action has been reinstated. The Company
intends to defend the action vigorously but if the Corps'
position is upheld the Company could be prohibited from
further harvesting of peat at this location and penalties
could be assessed against the Company. In the opinion of
management, the outcome of this action will not have a
material effect on the Company's financial position or
results of operations. 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 potentially responsible party in connection with
the Lorentz Barrel and Drum Superfund Site in California, as
a result of its predecessor having shipped barrels to Lorentz
for reconditioning or sale between 1967 and 1972. Although
many other companies are participating in the remediation of
this site, issues relating to the allocation of the costs
have not yet been resolved. In addition, 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 these
Page 9
proceedings will in the aggregate have a material adverse
effect on its financial condition or results of operations.
In addition to being named as PRP's in the above noted
situations, the Company is subject to potential fines in
connection with certain EPA labeling violations under the
Federal Insecticide, Fungicide and Rodenticide Act (FIFRA).
The fines for such violations are based upon formulas as
stated in FIFRA. As determined by these formulas the
Company's maximum exposure for the violations is
approximately $810,000. The formulas allow for certain
reductions of the fines based upon achievable levels of
compliance. Based upon management's anticipated levels of
compliance, they estimate the Company's ultimate liability to
be $200,000, which has been accrued in the financial
statements.
6. Accounting Issues
In November 1992, the Financial Accounting Standards Board
issued SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," which changes the prevalent method
of accounting for benefits provided after employment but
before retirement. The Company is required to adopt
SFAS No. 112 no later than the first quarter of fiscal 1995.
Management is currently evaluating the provisions of
SFAS No. 112 and, at this time, the effect of adopting
SFAS No. 112 has not been determined.
Page 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended April 2, 1994 versus Three Months Ended April
3, 1993
Net sales of $207,424,000 increased by $46,322,000 or
approximately 28.8%. Net sales for the three months ended April
2, 1994 included $39,145,000 of sales from Grace-Sierra
Horticultural Products Company, now known as Scotts-Sierra
Horticultural Products Company, ("Sierra") which was acquired by
the Company on December 16, 1993. Sales for the period, before
inclusion of Sierra sales, increased 4.5% to $168,279,000
principally due to increased volume. March 1994 sales were
particularly strong, increasing over 1993 sales by approximately
21.6% excluding Sierra sales. This was due to improved spring
weather conditions in much of the country, also accounting for
Consumer Business Group sales which increased 4.9% to
$151,508,000 for the quarter. Professional Business Group sales
decreased 2.0% to $15,950,000 reflecting what Scotts management
believes to be a continuing trend by golf course customers to
order closer to spring usage. The Professional Business Group
portion of the Company's business is gradually firming and Scotts
management believes that there is momentum, going into the peak
Professional selling season of August to November. Composting
revenues of $821,000 increased by $480,000.
Cost of sales represented 52.6% of net sales compared with 51.2%
last year. The increase was primarily due to a delay in the
start-up of a new line of spreaders which caused a delay in
product availability which had the effect of increasing costs for
the spreaders sold. The increase was also caused, in part, by
lower than expected margins due to the product mix of organic
products sold during the period.
Operating expenses of $70,143,000 increased by $13,216,000 or
approximately 23.2%. The increase was partly caused by the
inclusion of Sierra operating expenses this year and partly by
increased freight costs due to higher sales. Higher marketing
expenses also accounted for part of the increase, reflecting the
Company's increased spending for national advertising and
promotion programs, such as sponsorship of the Tradition Golf
Tournament and the agreement with Major League Baseball which
allows the Company to display its trademark on signs, scoreboards
and grounds crew uniforms at many ballparks. The increase was
partly offset by reduced general and administrative expenses,
exclusive of Sierra expenses, for the quarter.
Interest expense of $4,917,000 increased by $2,195,000 or
approximately 80.6%, principally due to an increase in borrowing
levels resulting from the acquisition of Sierra in December 1993.
Net income of $13,013,000 increased by $2,166,000 or
approximately 20.0%. The increase was primarily attributable to
increased operating income which was partly offset by higher
interest expense this year.
Six Months Ended April 2, 1994 versus Six Months Ended April 3,
1993.
Net sales of $275,750,000 increased by $46,891,000 or
approximately 20.5%. Net sales for the six months ended April 2,
1994 included $44,025,000 of sales from Sierra. Sales for the
period, before inclusion of Sierra sales, increased 1.3% to
$231,725,000. The increase reflected increased sales volume as
improved weather arrived in the Company's key geographic areas
late in the second fiscal quarter, which allowed the Company to
overcome a sales decline in the first fiscal quarter. Consumer
Business Group sales increased 2.6% to $195,673,000.
Professional Business Group sales of $34,021,000 reflected an
8.7% decrease from the comparable period last year but also a
marked improvement over the first fiscal quarter which suffered a
decline of 14.0%. Composting revenues of $2,031,000 increased by
$1,178,000.
Page 11
Cost of sales represented 53.1% of net sales compared with 52.2%
last year, primarily due to a delay in the start-up of a new line
of spreaders as well as lower than expected margins due to
product mix of organic products sold.
Operating expenses of $101,054,000 increased by $14,531.000 or
approximately 16.8%. The increase was partly caused by the
inclusion of Sierra operating expenses this year and partly by
increased freight costs due to higher sales for the period as
well as more less-than-truckload shipments in the first fiscal
quarter due to a delay in the availability of a new line of
spreaders. The increase was also caused by increased spending
for national advertising and promotion programs and was partly
offset by decreased general and administrative expenses,
exclusive of Sierra expenses, which were managed at a lower level
this year.
Interest expense of $7,557,000 increased by $3,114,000 or
approximately 70.1%. The increase was primarily attributable to
an increase in borrowing levels resulting from purchase of a
block of Scotts' Class A Common Stock in February 1993 and the
acquisition of Sierra in December 1993.
Income before the cumulative effect of accounting changes
increased by $1,080,000 to $11,456,000. The increase was
primarily attributable to increased operating income which was
partly offset by higher interest expense and income taxes.
Net income of $11,456,000 increased by $14,237,000 from a loss of
$2,781,000 last year. The increase was primarily attributable to
a prior period non-recurring charge of $13,157,000 for the
cumulative effect of changes in accounting for postretirement
benefits, net of tax and income taxes as well as increased
operating income partly offset by higher interest expense and
taxes.
Financial Position as at April 2, 1994.
Capital expenditures for the fiscal year ending September 30,
1994 are expected to be approximately $31,500,000 including
capital expenditures of Sierra. The key capital project is a
$13,000,000 investment in a new production facility to increase
capacity to meet demand for the Company's Poly-Sr controlled-
release fertilizers. Capital expenditures will be financed with
cash provided by operations and utilization of existing credit
facilities.
Current assets of $341,343,000 increased by $197,601,000 compared
with current assets at September 30, 1993 and by $98,228,000
compared with current assets at April 3, 1993. The increase
compared with September 30, 1993 is partly attributable to the
seasonal nature of the Company's business, with inventory and
accounts receivable levels being generally higher at the end of
March relative to the end of September. The increase was also
caused, in part, by inclusion of Sierra's current assets which
amounted to $56,377,000. The increase compared with April 3,
1993 was partly caused by inclusion of Sierra's current assets
and also by a higher level of accounts receivable due to greatly
increased sales volume in March this year (for which receivables
had not yet been collected) and higher inventory levels which
were primarily due to an planned increase in inventories of
organic products prepacked in anticipation of the Spring selling
season.
Total assets of $622,143,000 increased by $300,553,000 compared
with September 30, 1993 and by $200,618,000 compared with April
3, 1993. The increase compared with September 30 was partly due
to the seasonality of the the Company's business and partly due
to the inclusion of Sierra's total assets which amounted to
$156,050,000, including goodwill of $66,541,000. The increase
compared with April 3, 1993 is primarily due to inclusion of
Sierra's total assets and also due, in part, to the increases in
accounts receivable and inventory levels which are mentioned
above.
Page 12
Total liabilities of $467,007,000 increased by $288,430,000
compared with total liabilities at September 30, 1993 and by
$177,480,000 compared with total liabilities at April 3, 1993.
The increase compared with September 30, 1993 is partly caused by
the seasonality of the the Company's business, which is reflected
in higher levels of accounts payable and accrued liabilities. It
is also caused by $125,000,000 of term debt incurred in December
1993 to facilitate the acquisition of Sierra and by inclusion of
Sierra's total liabilities which amounted to $26,710,000. The
increase compared with April 3, 1993 was primarily caused by the
borrowings for the Sierra acquisition and by inclusion of
Sierra's total liabilities.
Shareholders' equity of $155,136,000 increased by $12,123,000
compared with shareholders' equity on September 30, 1993,
primarily due to $11,456,000 of net income for the six months
ended April 2, 1994. Shareholders' equity increased by
$23,138,000 compared with April 3, 1993. This increase was
primarily due to net income of $22,127,000 for the twelve months
ended April 2, 1994.
The primary sources of liquidity for the Company's operations are
funds generated by operations and borrowings under the Company's
Third Amended and Restated Credit Agreement ("Credit Agreement").
The Credit Agreement was amended in December 1993 to provide
financing for and permit the acquisition of Sierra. As amended,
the Credit Agreement provides a revolving credit commitment of
$150.0 million through March 31, 1996 and $195.0 million of term
debt with scheduled maturities commencing on April 30, 1994 and
extending through September 30, 2000. The Credit Agreement
contains financial covenants which, among other things, limit
capital expenditures, require maintenance of Adjusted Operating
Profit, Consolidated Net Worth and Interest Coverage (each as
defined therein) and require the Company to reduce revolving
credit borrowings to no more than $30.0 million for 30
consecutive days each year.
The Company's business is highly seasonal which is reflected in
working capital requirements. Working capital requirements are
greatest from November through May, the peak production period,
and are at their highest in March. Working capital needs are
relatively low in the summer months.
In the opinion of Scotts management, cash flows from operations
and capital resources will be sufficient to meet future debt
service and working capital needs.
Accounting Issues
In November 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits" ("SFAS 112"), which
changes the prevalent method of accounting for benefits provided
after employment but before retirement. The Company must adopt
SFAS 112 no later than the first quarter of fiscal 1995.
Management is currently evaluating the provisions of SFAS 112
and, at this time, the effect of adopting SFAS 112 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 of 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.
Page 13
The Company has been involved in studying a landfill to which it
is believed some of the Company's solid waste had been hauled in
the 1970's. In September 1991, the Company was named by the Ohio
Environmental Protection Agency ("Ohio EPA") as a Potentially
Responsible Party )("PRP") with respect to this landfill.
Pursuant to a consent order with the Ohio EPA, the Company,
together with four other PRP's identified to date, is
investigating the extent of contamination at the landfill and
developing a remediation program.
In July 1990, the Company was directed by the Army Corps of
Engineers (the "Corps") to cease peat harvesting operations at
its New Jersey facility. The Corps has alleged that the peat
harvesting operations were in violation of the Clean Water Act
("CWA"). The United States Department of Justice has commenced a
legal action to seek a permanent injunction against peat
harvesting at this facility and to recover civil penalties under
the CWA. This action had been suspended while the parties
engaged in discussion to resolve the dispute. Those discussions
have not resulted in a settlement and accordingly the action has
been reinstated. The Company intends to defend the action
vigorously but if the Corps' position is upheld the Company could
be prohibited from further harvesting of peat at this location
and penalties could be assessed against the Company. In the
opinion of management, the outcome of this action will not have a
material effect on the Company's financial position or results of
operations. 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 PRP in connection with the Lorentz Barrel and Drum
Superfund Site in California, as a result of its predecessor
having shipped barrels to Lorentz for reconditioning or sale
between 1967 and 1972. Although many other companies are
participating in the remediation of this site, issues relating to
the allocation of the costs have not yet been resolved. In
addition, 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 these proceedings will in the aggregate have a
material adverse effect on its financial condition or results of
operations. In addition to being named as PRP's in the above
noted situations, the Company is subject to potential fines in
connection with certain EPA labeling violations under the Federal
Insecticide, Fungicide and Rodenticide Act (FIFRA). The fines
for such violations are based upon formulas as stated in FIFRA.
As determined by these formulas the Company's maximum exposure
for the violations is approximately $810,000. The formulas allow
for certain reductions of the fines based upon achievable levels
of compliance. Based upon management's anticipated levels of
compliance, they estimate the Company's ultimate liability to be
$200,000, which has been accrued in the financial statements.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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. The following details the
more significant of these matters.
The Company has been involved in studying a landfill to which
it is believed some of the Company's solid waste had been
hauled in the 1970's. In September 1991, the Company was
named by the Ohio Environmental Protection Agency ("Ohio EPA")
as a Potentially Responsible Party )("PRP") with respect to
this landfill. Pursuant to a consent order with the Ohio EPA,
the Company, together with four other PRP's identified to
date, is investigating the extent of contamination at the
landfill and developing a remediation program.
Page 14
In July 1990, the Company was directed by the Army Corps of
Engineers (the "Corps") to cease peat harvesting operations at
its New Jersey facility. The Corps has alleged that the peat
harvesting operations were in violation of the Clean Water Act
("CWA"). The United States Department of Justice has
commenced a legal action to seek a permanent injunction
against peat harvesting at this facility and to recover civil
penalties under the CWA. This action had been suspended while
the parties engaged in discussion to resolve the dispute.
Those discussions have not resulted in a settlement and
accordingly the action has been reinstated. The Company
intends to defend the action vigorously but if the Corps'
position is upheld the Company could be prohibited from
further harvesting of peat at this location and penalties
could be assessed against the Company. In the opinion of
management, the outcome of this action will not have a
material effect on the Company's financial position or results
of operations. 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 potentially responsible party in connection with
the Lorentz Barrel and Drum Superfund Site in California, as a
result of its predecessor having shipped barrels to Lorentz
for reconditioning or sale between 1967 and 1972. Although
many other companies are participating in the remediation of
this site, issues relating to the allocation of the costs have
not yet been resolved. In addition, 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 these
proceedings will in the aggregate have a material adverse
effect on its financial condition or results of operations.
In addition to being named as PRP's in the above noted
situations, the Company is subject to potential fines in
connection with certain EPA labeling violations under the
Federal Insecticide, Fungicide and Rodenticide Act (FIFRA).
The fines for such violations are based upon formulas as
stated in FIFRA. As determined by these formulas the
Company's maximum exposure for the violations is approximately
$810,000. The formulas allow for certain reductions of the
fines based upon achievable levels of compliance. Based upon
management's anticipated levels of compliance, they estimate
the Company's ultimate liability to be $200,000, which has
been accrued in the financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of The Scotts Company was
held in Columbus, Ohio on March 8, 1994. The meeting was held
for the purpose of electing a board of directors and ratifying
the appointment of independent auditors.
The results of the vote of the stockholders for each of the
proposals is as follows:
The proposal to elect nine directors to serve for the ensuing
year:
Shares
Nominee Votes For Withheld Not Voted
James B. 16,059,316 700 2,598,519
Beard
John S. 16,057,616 2,400 2,598,519
Chamberlin
Alberto 16,050,416 9,600 2,598,519
Cribiore
Joseph P. 16,058,216 1,800 2,598,519
Flannery
Theodore J. 16,058,216 1,800 2,598,519
Host
Tadd C. 16,059,016 1,000 2,598,519
Seitz
Donald A. 16,059,516 500 2,598,519
Sherman
John M. 16,051,016 9,000 2,598,519
Sullivan
L. Jack Van 16,057,316 2,700 2,598,519
Fossen
Page 15
Each of the foregoing persons was elected as a director of
the Company.
The proposal to ratify appointment of Coopers & Lybrand as
independent auditors for fiscal year 1994:
Shares
For Against Abstain Not
Voted
16,014,612 11,400 34,004 2,598,519
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
11(a) Computation of Net Income Per Common Share
(b) Reports on Form 8-K.
On December 30, 1993, Scotts filed a Form 8-K to report the
acquisition of Grace-Sierra
Horticultural Products Company by The O. M. Scott & Sons
Company. On February 28,
1994, Scotts filed a Form 8-K/A to include the financial
statements specified by
Rules 3-05 and 11-01 of Regulation S-X and Items 7(a) and
7(b) of Form 8-K.
Page 16
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 16, 1994 /s/ Paul D.
Yeager
Paul D. Yeager
Executive Vice President
Chief Financial Officer
Principal Accounting Officer
Page 17
THE SCOTTS COMPANY
QUARTERLY REPORT ON FORM 10-Q FOR
FISCAL QUARTER ENDED APRIL 2, 1994
EXHIBIT INDEX
Exhibit
Page
Number Description
Number
11(a) Computation of Net Income Per Common Share
19
Page 18
Exhibit 11a
THE SCOTTS COMPANY
Computation of Net Income Per Common Share
(in thousands except share amounts)
For the Three For the Six
Months Ended Months Ended
April April April April
3, 2, 3, 2,
1993 1994 1993 1994
Net income for computing
net income per
common share:
Income before cumulative
effect of accounting
changes $ 10,847 $ 13,013 $ 10,376 $ 11,456
Cumulative effect of
changes in accounting
for postretirement
benefits, net of tax and
income taxes - - (13,157) -
Net income (loss) $ 10,847 $ 13,013 (2,781) 11,456
Net income per common
share:
Income before cumulative
effect of accounting
changes $ .54 $ .69 $ .50 $ .61
Cumulative effect of
changes in accounting
for postretirement
benefits, net of tax and
income taxes - - (.63) -
Net income (loss) .54 .69 (.13) .61
Computation of Weighted Average Number
of Common Shares Outstanding
For the Three For the Six
Months Ended Months Ended
April April April April
3, 2, 3, 2,
1993 1994 1993 1994
Weighted average common
shares outstanding
during the period 20,038,475 18,659,472 20,564,344 18,658,999
Effect of options
outstanding based upon
the Treasury Stock
Method:
Performance shares - 102,484 - 84,961
December 1992 - 300,000
at $ 18.00 17,937 17,425 11,172 9,678
November 1992 - 123,925
at $ 16.25 15,790 21,540 - 18,184
January 1992 -
136,364 at $ 9.90 66,383 73,326 61,916 71,598
June 1992 -
15,000 at $ 16.25 - 2,245 - 1,896
October 1993 -
129,950 at $ 17.25 - 12,649 - 9,432
March 1993 -
24,000 at $ 18.25 - 1,080 - 452
Weighted average common
shares outstanding
during the period for
computing net income
(loss) per common share 20,138,585 18,890,221 20,637,432 18,855,200
Fully diluted weighted average shares outstanding were not
materially different than primary
weighted average shares outstanding for the periods
presented.
