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 July 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 31-1199481
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14111 Scottslawn Road
Marysville, Ohio 43041
(Address of principal executive offices)
(Zip Code)
(513) 644-0011
(Registrant's telephone number, including area code)
(No change)
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether registrant (1) has filed all reports required
to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of
the latest practicable date.
Class A Outstanding at August 12, 1994
Common Stock, voting, $.01 par value 18,667,064
Page 1 of 18 pages
Exhibit Index at page 17
THE SCOTTS COMPANY AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets -
July 3, 1993, July 2, 1994 and September 30, 199 3-4
Consolidated Statements of Income - Three month and nine month
periods ended July 3, 1993 and July 2, 1994 5
Consolidated Statements of Cash Flows - Nine month
periods ended July 3, 1993 and July 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 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 BALANCE SHEETS
(Unaudited)
(in thousands)
ASSETS
July 3 July 2 September 30
1993 1994 1993
Current Assets:
Cash and cash equivalents $ 1,963 $ 8,812 $ 2,323
Accounts receivable, less
allowances of $3,154, $3,442
and $2,511, respectively 53,819 90,468 60,848
Inventories:
Raw materials 26,567 35,332 31,905
Finished products 45,157 71,112 44,749
Total inventories 71,724 106,444 76,654
Other current assets 4,320 6,742 3,917
Total current assets 131,826 212,466 143,742
Property, plant and equipment, at cost:
Land and land improvements 19,409 21,773 19,817
Buildings 36,014 40,925 36,300
Machinery and equipment 81,418 113,372 87,250
Furniture and fixtures 6,274 6,472 5,952
Construction in progress 4,691 15,022 4,687
147,806 197,564 154,006
Less accumulated depreciation 52,978 65,752 55,215
Net property, plant and
equipment 94,828 131,812 98,791
Intangible assets, net of accumulated
amortization of $20,572, $24,137,
and $21,053, respectively 20,881 23,938 19,972
Deferred costs and other assets, net of
accumulated amortization of
$7,553, $8,829, and $7,770,
respectively 19,596 21,743 17,745
Excess of costs over underlying
value of net assets acquired
(goodwill), net of accumulated
amortization of $4,957, $6,843,
and $5,123, respectively 41,019 106,453 41,340
Total Assets $ 308,150 $ 496,412 $ 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
July 3 July 2 September 30
1993 1994 1993
Current Liabilities:
Revolving credit and bank
line of credit $ - $ 913 $ 705
Current portion of term debt 5,581 20,403 5,444
Accounts payable 24,856 34,543 28,279
Accrued liabilities 16,158 21,932 9,135
Accrued payroll and fringe
benefits 11,123 13,471 12,035
Accrued taxes 11,806 8,687 9,253
Total current liabilities 69,524 99,949 64,851
Long-term debt, less current
portion 72,482 203,979 87,080
Postretirement benefits
other than pensions 26,111 26,742 26,646
Total Liabilities 168,117 330,670 178,577
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; issued 21,073,430,
21,081,959, and 21,073,430
shares, respectively 211 211 211
Class B Common Stock, non-voting,
par value $.01 per share;
authorized 35,000,000 shares;
none issued - - -
Capital in excess of par value 192,982 193,724 193,263
Retained earnings (deficit) (11,693) 11,853 (9,008)
Cumulative foreign currency
translation adjustment (26) 1,395 (12)
Treasury stock, 2,414,895
shares at cost (41,441) (41,441) (41,441)
Total Shareholders' Equity 140,033 165,742 143,013
Total Liabilities and
Shareholders' Equity 308,150 $ 496,412 $ 321,590
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 Nine Months Ended
July 3 July 2 July 3 July 2
1993 1994 1993 1994
Net sales $156,327 $200,915 $385,186 $476,665
Cost of sales 81,513 104,539 201,048 251,003
Gross profit 78,814 96,376 184,138 225,662
Operating expenses:
Marketing 24,882 32,765 62,228 78,676
Distribution 24,411 30,730 55,491 66,594
General and
administrative 7,498 7,781 21,991 22,122
Research and
development 1,691 2,814 5,295 7,752
Total operating
expenses 58,482 74,090 145,005 175,144
Income from
operations 16,332 22,286 39,133 50,518
Interest expense 2,365 4,749 6,808 12,306
Other expenses, net 220 950 690 1,754
Income before income tax
provision and cumulative
effect of accounting
changes 13,747 16,587 31,635 36,458
Income tax provision 5,761 7,182 13,273 15,597
Income before cumulative
effect of accounting
changes (1) 7,986 9,405 18,362 20,861
Cumulative effect of changes
in accounting for postretirement
benefits, net of tax and
income taxes (2) - - (13,157) -
Net income $ 7,986 $ 9,405 $ 5,205 $ 20,861
Net income (loss)
per common share (1) (2):
ncome before cumulative
effect of
accounting
changes $ .43 $ .50 $ .92 $ 1.11
Cumulative effect
of changes in accounting
for postretirement benefits,
net of tax and
income taxes - - (.66) -
Net income $ .43 $ .50 $ .26 $ 1.11
Weighted average
number of common
shares
outstanding 18,743,752 18,810,783 20,029,917 18,840,229
Income before cumulative effect of accounting changes for the three and nine
month periods ended July 3, 1993 has been
restated to reflect an ongoing net of tax charge of $325 or $.02 per share
and $1,112 or $.06 per share, respectively,
resulting from the adoption of SFAS No. 106 effective October 1, 1992.
The net income for the nine month period ended July 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 of $.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)
Nine Months Ended
July 3 July 2
1993 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,205 $ 20,861
Adjustment to reconcile
net income to net cash
used in operating activities:
Depreciation and amortization 13,372 16,424
Cumulative effect of change in accounting
for postretirement benefits 24,280 -
Postretirement benefits 1,831 96
Deferred income taxes (11,842) -
Net increase in certain components of
working capital (649) (13,388)
Net decrease (increase) in other assets and
liabilities and other adjustments 1,056 (4,465)
Net cash provided by operating activities 33,253 19,528
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in plant and equipment, net (8,415) (21,655)
Acquisition of Sierra, net of cash acquired (118,986)
Acquisition of Republic, net of cash acquired (16,366) -
Net cash used in investing activities (24,781) (140,641)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under term debt 70,000 125,000
Payments on term and other debt (515) (5,691)
Revolving credit and bank line of credit, net (34,811) 7,208
Issuance of Class A Common Stock - 160
Deferred financing costs incurred (622) -
Purchase of Class A Common Stock (41,441) -
Net cash (used in) provided by
financing activities (7,389) 126,677
Effect of exchange rate changes on cash - 925
Net increase in cash 1,083 6,489
Cash at beginning of period 880 2,323
Cash at end of period $ 1,963 $ 8,812
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of amount capitalized $ 4,835 $ 7,430
Income taxes paid 9,196 14,229
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"),
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 of July 3, 1993 and July 2, 1994, the
related consolidated statements of income for the three and nine month
periods ended July 3, 1993 and July 2, 1994 and the consolidated statements
of cash flows for the nine month periods ended July 3, 1993 and July 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 and Exchange Commission, and should be read in conjunction with
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 nine
month periods ended July 3, 1993 has been restated to reflect an ongoing
charge of $325,000 or $.02 per share and $1,112,000 or $.06 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 income for the nine months ended July 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 July 3, 1993 and the
related statement of cash flows for the nine months
then ended have also been restated to reflect these accounting changes.
2. Acquisitions
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
$66,834,000 is
being amortized on a straight line basis over 40 years. Sierra results of
operations have
been included in the Consolidated Statements of Income from the respective
acquisition
dates.
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.
Nine Months Ended
(in thousands, except per share amounts)
July 3 July 2
1993 1994
Net sales $ 477,131 $ 497,491
Income before cumulative
effect of accounting changes $ 18,731 $ 20,754
Net income $ 5,574 $ 20,754
Income per common share before cumulative
effect of accounting changes $ .93 $ 1.10
Net income per common share $ .28 $ 1.10
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 at July 2, 1994 consists of
the following:
Revolving credit loan and bank line of credit $ 28,913,000
Term loan 190,000,000
Capital lease obligations and other 6,382,000
225,295,000
Less current portions 21,316,000
$ 203,979,000
Page 8
Scheduled maturities of term debt are as follows:
Fiscal Year
1995 $ 25,000,000
1996 27,500,000
1997 32,500,000
1998 30,000,000
1999 and thereafter 75,000,000
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 nine month periods ended
July 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 did not result 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. Management estimates that the Company's share of
remediation
costs for this site will be less than $200,000. 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 and such amounts have been
provided for in
the accompanying financial statements.
Page 9
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 a PRP 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 assessment of anticipated levels of
compliance, the
Company's ultimate liability is estimated 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.
7. On July 19, 1994, the Company issued $100,000,000 of Senior Subordinated
Notes at
9 7/8% due August 1, 2004. The net proceeds of the notes of approximately
$96,400,000
were used to reduce term loans.
Page 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended July 2, 1994 versus Three Months Ended July 3, 1993.
Net sales of $200,915,000 increased by $44,588,000 or approximately 28.5%,
primarily due to
increased volume. The increase included $32,570,000 of sales from Scott-Sierra
Horticultural
Products Company ("Sierra") which was acquired by the Company on December 16,
1993. On a
proforma basis that includes Sierra sales on a historical basis and assuming
the acquisition had
occurred on October 1, 1992, sales increased by 8% for the quarter. Net sales
for the Consumer
Business Group increased 6.1% to $144,200,000. Net sales for the Professional
Business Group
increased 14.7% to $22,641,000, led by a strong increase in sales to golf
courses. Composting
revenues of $1,504,000 more than doubled from $734,000 for the comparable
period last year.
The Company now has composting operations in 17 sites, almost twice last years
number of sites.
Cost of sales represented 52.0% of net sales reflecting a slight improvement
over 52.1% for the
comparable period last year.
Operating expenses of $74,090,000 increased by $15,608,000 or approximately
26.7%. The
increase was caused in significant part by the inclusion of Sierra operating
expenses this year.
The increase was also caused, to a lesser degree by increased freight costs due
to higher sales
and by higher marketing expenses which reflected the Company's increased
spending for national
advertising and promotion programs. The increase was partly offset by reduced
general and
administrative expenses, exclusive of Sierra expenses, for the quarter.
Interest expense of $4,749,000 increased by $2,384,000 or approximately 100.8%,
principally due
an increase in borrowing levels resulting from the acquisition of Sierra in
December, 1993.
Net income of $9,405,000 increased by $1,419,000 or approximately 17.8%. The
increase was
primarily attributable to increased operating income this year which was partly
offset by higher
interest expense and income taxes.
Nine Months Ended July 2, 1994 versus Nine Months Ended July 3, 1993.
Net sales of $476,665,000 increased by $91,479,000 or approximately 23.7%
primarily due to
increased volume. The increase included $76,594,000 of sales from Sierra. On
a proforma basis
that includes Sierra sales on a historical basis and assuming the acquisition
had occurred on
October 1, 1992, sales for the nine months increased by 4.3%. Consumer
Business Group sales
increased by 4.1% to $339,875,000. Sales continued to be particularly
strong through mass
merchandisers, with sales for the nine months up 15.2% in the three largest
national accounts and
9.6% in the ten largest national accounts. Professional Business Group sales
of $56,662,000
were down just slightly from $57,024,000 for the comparable period last year
due to a steady
increase in sales over the second and third fiscal quarters offsetting lower
than expected sales in
the first quarter. Composting revenues of $3,534,000 increased by $1,951,000,
a 123.2%
increase from last year, reflecting the increase in composting sites which are
now in operation.
Cost of sales represented 52.7% of net sales compared with 52.2% last year.
The increase was
principally caused by a delay in the start-up of a new line of spreaders which
affected margins in
the first two fiscal quarters. These initial start-up problems have been
resolved and production of
the new line of spreaders is proceeding according to plan. The increase was
also caused, in part,
by lower than expected margins due to unfavorable price and mix of organics
products sold earlier
in the year.
Page 11
Operating expenses of $175,144,000 increased by $30,139,000 or approximately
20.8%. The
increase was caused in significant part by the inclusion of Sierra operating
expenses this year.
The increase was also caused to a lesser degree by increased freight costs due
to higher sales
for the period and by increased spending for national advertising programs and
was offset in part
by decreased general and administrative expenses, exclusive of Sierra expenses,
which were
managed at a lower level this year.
Interest expense of $12,306,000 increased by $5,498,000 or approximately 80.8%.
The increase
was principally due to increased borrowing levels for the Sierra acquisition
and also caused, in
part, by purchase of a block of Scotts' Class A Common Stock in February 1993
(as discussed in
the Company's annual report for the year ended September 30, 1993).
Income before the cumulative effect of accounting changes increased by
$2,499,000 to
$20,861,000. The increase was principally attributable to increased operating
income which was
partly offset by higher interest expense and income taxes.
Net income of $20,861,000 increased by $15,656,000 from net income of
$5,205,000 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 income
taxes.
Financial Position as at July 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-S (R) controlled-release fertilizers. Capital expenditures will
be financed with cash
provided by operations and utilization of existing credit facilities.
Current assets of $212,466,000 increased by $68,724,000 compared with current
assets at
September 30, 1993 and by $80,640,000 compared with current assets at July 3,
1993. The
increases were partly attributable to the inclusion of Sierra's current assets
this year which
amounted to $32,038,000. The increases were also caused, in part, by higher
inventory levels
this year, which were principally due to the inclusion of planned inventories
of spreaders which the
Company now produces and organic products prepacked in anticipation of seasonal
sales and by
a higher level of accounts receivable this year due to increased sales.
Total assets of $496,412,000 increased by $174,822,000 compared with September
30, 1993 and
by $188,262,000 compared with July 3, 1993. The increases are principally due
to the inclusion
of Sierra's total assets which amounted to $131,270,000 including goodwill of
$65,987,000.
The increases are also caused, in part, by increases in accounts receivable and
inventory levels
which are mentioned above.
Total liabilities of $330,670,000 increased by $152,093,000 compared with total
liabilities at
September 30, 1993 and by $162,553,000 compared with July 3, 1993. The
increases were
principally 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 $22,272,000.
Shareholders' equity of $165,742,000 increased by $22,729,000 compared with
September 30,
1993, primarily due to $20,861,000 of net income for the nine months ended July
2, 1994. The
increase was also caused, in part, by a cumulative foreign currency translation
adjustment of
$1,395,000 related to translating the assets and liabilities of Sierra's
foreign subsidiaries to U.S.
dollars. Shareholders' equity increased by $25,709,000 compared with July 3,
1993 principally
due to net income of $23,546,000 for the twelve months ended July 2, 1994 and
partly by the
foreign currency translation adjustment mentioned above.
Page 12
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 $150,000,000 through March 31, 1996 and provided
$195,000,000 of term
debt with scheduled maturities extending through September 30, 2000. On
July 2, 1994 there
was $190,000,000 outstanding under the Credit Agreement. In July 1994,
$96,402,000 of the
term debt was prepaid with the net proceeds of a Senior Subordinated Note
offering which is
described below. As of the date of this report, the Credit Agreement provides
$93,598,000 of term
debt. 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 $30,000,000 for 30 consecutive days each year. The
covenant to
reduce borrowings for 30 consecutive days was satisfied for fiscal 1994 during
July.
On July 19, 1994 Scotts and OMS jointly issued $100,000,000 of 9 7/8% Senior
Subordinated
Notes due August 1, 2004 ("Notes") at 99.212% of face value. The net proceeds
of the offering
were $96,402,000 after underwriting discount and estimated expenses and this
amount was used
to prepay term debt outstanding under the Credit Agreement. Scheduled term
debt maturities
were adjusted to reflect the prepayment in accordance with the terms of the
Credit Agreement. All
of the Notes are subordinated to other outstanding debt, principally to banks.
The Notes are
subject to redemption, at the Company's option, in whole or in part, at any
time after August 1,
1999 at redemption prices specified in the Notes indenture. In order to redeem
the Notes, the
Company must obtain approval of the banks party to the Credit Agreement as
specified therein.
The Notes require a limited number of financial covenants which are generally
less restrictive than
the financial covenants contained in the Credit Agreement. As a result of
issuing the Notes, the
Company will experience a one-time extraordinary non-cash charge of
approximately $1.1 million
net of tax for unamortized deferred financing costs related to the prepayment
of the term debt. In
addition, the Notes fixed interest rate of 9 7/8% is higher than the floating
interest rate paid on the
term debt which will cause an increase in interest expense, at least in the
near term. Company
management however, believed it was prudent to have obtained what they consider
to be
attractive fixed rate, ten year financing to replace part of the Company's
floating rate borrowings.
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 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 into 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 did
not result 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.
Management estimates
that the Company's share of remediation costs for this site will be less than
$200,000. 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 and such amounts
have been provided
for in the accompanying financial statements. 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)
relating to actions
by Sierra prior to its acquisition by the Company. 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. Management estimates
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.
Page 14
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. Management estimates that the Company's share of
remediation
costs for this site will be less than $200,000. 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 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 - None
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 August 16, 1994
/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 JULY 2, 1994
EXHIBIT INDEX
Exhibit Page
Number Description Number
11(a) Computation of Net Income
Per Common Share 18
Page 17
Exhibit 11a
THE SCOTTS COMPANY
Computation of Net Income Per Common Share
(in thousands except share amounts)
For the Three Months Ended For the Nine Months Ended
July 3, July 2, July 3, July 2,
1993 1994 1993 1994
Net income for computing
net income per
common share:
Income before cumulative
effect of
accounting changes $ 7,986 $ 9,405 $ 18,362 $ 20,861
Cumulative effect of
changes in accounting
for postretirement
benefits, net of
tax and income taxes - - (13,157) -
Net income 7,986 $ 9,405 $ 5,205 $ 20,861
Net income per
common share:
Income before cumulative
effect of accounting
changes $ .43 $ .50 $ .92 $ 1.11
- - (.66) -
Net income $ .43 $ .50 $ .26 $ 1.11
Computation of Weighted Average Number
of Common Shares Outstanding
For the Three Months Ended For the Nine Months Ended
July 3, July 2, July 3, July 2,
1993 1994 1993 1994
Weighted average common
shares outstanding
during the period 18,658,535 18,667,064 19,935,979 18,661,667
Effect of options
outstanding based upon
the Treasury Stock Method:
Performance shares 13,042 56,607 17,489 76,016
December 1992 - 300,000
at $ 18.00 - - - 5,722
November 1992 - 123,925
at $ 16.25 8,969 12,754 11,716 16,471
January 1992 - 136,364
at $ 9.90 63,206 68,801 64,733 70,715
June 1992 - 15,000
at $ 16.25 - 1,330 - 1,717
October 1993 - 129,950
at $ 17.25 - 4,227 - 7,790
March 1993 - 24,000
at $ 18.25 - - - 131
Weighted average common
shares outstanding
during the period for
computing net income
(loss) per
common share 18,743,752 18,810,783 20,029,917 18,840,229
Fully diluted weighted average shares outstanding were not materially different than primary
weighted average shares outstanding for the periods presented.
