SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended September 30, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______________ to ___________________
Commission file number 1-11593
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The Scotts Company
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(Exact name of registrant as specified in its charter)
Ohio 31-1199481
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
14111 Scottslawn Road, Marysville, Ohio 43041
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 513-644-0011
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
9 7/8% Senior Subordinated Notes due New York Stock Exchange
August 1, 2004
Common Shares, Without Par Value New York Stock Exchange
(18,931,509 Common Shares outstanding
at February 23, 1996)
Securities registered pursuant to Section 12(g) of the Act: NONE
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to
this Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates of the
registrant at February 23, 1996 was $351,291,997.
This report contains 62 pages of which this is Page 1. The Index to Exhibits
begins at page 56.
<PAGE>
PART II
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
FIVE-YEAR SUMMARY
THE SCOTTS COMPANY AND SUBSIDIARIES
For the fiscal year ended September 30
(in thousands except share data) 1991 1992 1993(1) 1994(2) 1995(3)
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Consolidated Statement of Income
Data(4)
<S> <C> <C> <C> <C> <C>
Net sales ............................... $ 388,120 $ 413,558 $ 446,043 $ 606,339 $ 732,837
Cost of sales ........................... 207,956 213,133 244,218 319,730 394,369
------------ ------------ ------------ ------------ -----------
Gross profit ............................ 180,164 200,425 221,825 286,609 338,468
------------ ------------ ------------ ------------ -----------
Operating expenses:
Marketing ............................ 57,489 66,245 74,579 100,106 130,179
Distribution ......................... 57,056 61,051 67,377 84,407 104,513
General and administrative ........... 22,985 24,759 27,688 30,189 28,672
Research and development ............. 5,247 6,205 7,700 10,352 10,970
Other expenses, net .................. 2,000 20 660 2,283 1,560
------------ ------------ ------------ ------------ -----------
Total operating expenses ............. 144,777 158,280 178,004 227,337 275,894
------------ ------------ ------------ ------------ -----------
Income from operations .................. 35,387 42,145 43,821 59,272 62,574
Interest expense ........................ 30,932 15,942 8,454 17,450 26,320
------------ ------------ ------------ ------------ -----------
Income before income taxes,
extraordinary items and
cumulative effect of
accounting changes .................... 4,455 26,203 35,367 41,822 36,254
Income taxes ............................ 2,720 11,124 14,320 17,947 13,898
------------ ------------ ------------ ------------ -----------
Income before extraordinary items and
cumulative effect of accounting
changes ............................... 1,735 15,079 21,047 23,875 22,356
Extraordinary items:
Loss on early extinguishment of debt,
net of tax ............................ -- (4,186) -- (992) --
Utilization of net operating loss
carryforwards ......................... 2,581 4,699 -- -- --
Cumulative effect of changes in
accounting for postretirement
benefits, net of tax and income taxes . -- -- (13,157) -- --
------------ ------------ -----------
Net income .............................. $ 4,316 $ 15,592 $ 7,890 $ 22,883 $ 22,356
============ ============ ============ ============ ===========
Net income per common share: (5)
Income before extraordinary items and
cumulative effect of accounting
changes ............................... $ 0.15 $ 0.84 $ 1.07 $ 1.27 $ 0.99
Extraordinary items:
Loss on early extinguishment of debt,
net of tax ............................ -- (0.23) -- (0.05) --
Utilization of net operating loss ....... --
carryforwards ......................... 0.21 0.26 -- -- --
Cumulative effect of changes in
accounting for postretirement benefits,
net of tax and income taxes ........... -- -- (0.67) -- --
------------ ------------ ------------ ------------ -----------
Net income per common share .......... $ 0.36 $ 0.87 $ 0.40 $ 1.22 $ 0.99
============ ============ ============ ============ ===========
Common shares used in net income per
common share computation .............. 11,832,651 18,014,151 19,687,013 18,784,729 22,616,685
Consolidated Balance Sheet Data (4)
Working capital ......................... $ 21,260 $ 54,795 $ 88,526 $ 140,566 $ 226,998
Capital investment ...................... 8,818 19,896 15,158 33,402 23,606
Property, plant and equipment, net ...... 79,903 89,070 98,791 140,105 148,754
Total assets ............................ 260,729 268,021 321,590 528,584 809,045
Term debt, including current portion .... 182,954 31,897 92,524 223,885 272,446
Total shareholders' equity (deficit) .... (9,961) 175,929 143,013 168,160 380,790
</TABLE>
(1) Includes Republic Tool and Manufacturing Corp. ("Republic") from November
1992
(2) Includes Scotts-Sierra Horticulture Products Company ("Sierra") from
December 16, 1993
(3) Includes Scotts Miracle-Gro Products, Inc. and its subsidiaries
("Miracle-Gro Companies") from May 19, 1995
(4) Certain amounts have been reclassified to conform to 1995 presentation;
these changes did not impact net income.
(5) Net income (loss) per common share for fiscal 1991 has been restated to
eliminate the effect of accretion to redemption value of redeemable
common stock to be comparable with fiscal 1992. All per share amounts for
fiscal 1991 have been adjusted for the January 1992 reverse stock split,
in which every 2.2 shares of old Class A Common Stock were exchanged for
one share of new Class A Common Stock.
Page 2
<PAGE>
ITEM 7. 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 Scotts Company, ("Scotts"), and its
subsidiaries (collectively, the "Company") included elsewhere in this Report.
Results of Operations
FISCAL 1995 COMPARED WITH FISCAL 1994.
Net sales increased to $732.8 million, up approximately 20.9%, primarily
due to increased sales volume (14.5%) of which 5.2% resulted from a marketing
program incentivizing retailers to purchase their calendar fourth quarter and
1996 spring requirements early while deferring payment to 1996. The increase
in actual net sales also reflects the inclusion of Sierra for the full year in
1995 (3.4%) and Miracle-Gro from the merger date of May 19, 1995 (3.0%). On a
pro forma basis, including net sales of Sierra and Miracle-Gro from October 1,
1993, net sales increased by $95.0 million or 13.1% to $821.2 million.
Consumer Business Group net sales increased 21.6% to $501.9 million.
This increase resulted primarily from increased sales volume (16.3%, of which
7.0% resulted from the retailer incentive program discussed above) and the
inclusion of net sales of Miracle-Gro (5.3%). Sales to the Company's top ten
accounts (excluding Miracle-Gro sales) were up 27.4% over the prior year. Net
sales increases in lawn fertilizers and organics and to a lesser extent,
increases in seed and spreader sales were partially offset by the
unavailability of some fertilizer products as a result of production problems
which caused sales orders to be postponed to the first fiscal quarter of 1996.
Professional Business Group sales of $161.3 million increased by 11.1%,
primarily due to the inclusion of net sales for a full year of Sierra in 1995
(8.0%) and an increased demand for horticulture products (3.1%). International
sales increased by 43.7% to $69.6 million due to gains in these markets
combined with the positive impact resulting from the sale of Scotts products
in the Company's international distribution network (19.7%), the inclusion of
Sierra net sales for the full year (16.9%) and favorable exchange rates
(7.1%).
Cost of sales represented 53.8% of net sales, a 1.1% increase compared
to 52.7% of net sales last year. The increase resulted from higher prices for
urea, the source of nitrogen in most of the Company's fertilizer products,
increased sales of lower margin U.S. produced products internationally,
increased sales in lower margin domestic products, and to a lesser extent,
pricing incentives to major retailers.
Operating expenses increased approximately 21.4% which was proportional
to the sales increase. Marketing expense increased 30.0% due primarily to
increased promotional allowances to retailers (16.2%) and to a lesser extent
increased sales, a higher proportion of International sales which carry a
higher ratio of marketing cost to sales, and higher sales force incentives.
Distribution expense increased 23.8% as a result of higher sales volume,
higher warehousing and storage costs as a result of increased inventory
levels, higher freight rates and a higher proportion of the sales growth in
lower value per pound products. These increases were partially offset by a 5%
decline in general and administrative expense as a result of synergies
achieved from the integration of Sierra, cost controls and reduced management
incentives. In addition, the completion of the divestiture of the Peters U.S.
consumer water soluble fertilizer business resulted in a decrease of "other
expenses, net", of approximately $4.2 million. This gain was partially offset
by incremental intangible and goodwill amortization from acquisitions and the
Company's portion of the loss from Miracle Garden Care, Ltd. ("Miracle Garden
Care").
Interest expense increased 50.8%. The increase was caused by higher
interest rates on the floating-rate bank debt and the 9 7/8% Senior
Subordinated Notes due August 1, 2004 (the "Notes") compared with the floating
rate bank debt the Notes replaced (32.6%), a full year outstanding of the
borrowings to fund the Sierra acquisition (8.1%) and an increase in borrowing
levels (10.1%) principally to support higher working capital requirements and
capital expenditures.
Page 3
<PAGE>
The Company's effective tax rate decreased from 42.9% to 38.3% in 1995.
This decrease results primarily from the tax treatment of the disposition of
the Peters(R) line of U. S. consumer water-soluble fertilizer products
("CWSF") (3%) and resolution of prior year tax contingencies (3.9%) offset by
an increase in nondeductible amortization of intangible assets (1.3%).
Net income of $22.4 million decreased by $.5 million from 1994. Among
the significant items impacting 1995 results were increased revenues and costs
from new and existing marketing programs, the gain from the divestiture of the
Peters line of CWSF products, the lower effective tax rate, and the higher
cost of urea, each as discussed more fully above and an extraordinary charge
of $1.0 million in 1994 for the early extinguishment of debt.
FISCAL 1994 COMPARED WITH FISCAL 1993.
Net sales of $606.3 million increased by $140.3 million or 30.1%,
primarily due to increased volume, of which 4.3% resulted from a marketing
program incentivizing retailers to purchase their calendar fourth quarter and
1995 spring requirements early while deferring payment to 1995. The increase
included $105.6 million of sales from Sierra, which was acquired by the
Company on December 16, 1993.
Consumer Business Group sales of $419.6 million increased by $49.4
million or 13.3%. The growth was principally derived from increased volume to
major retailers, with sales to the Company's top ten accounts up 16% over the
prior year, and from sales for Sierra which accounted for $21.3 million of the
increase. Professional Business Group sales of $181.7 million increased by
$88.0 million or 93.9%. The increase was principally due to sales of Sierra
which accounted for $84.3 million of the increase.
On a proforma basis, including Sierra sales assuming that the
acquisition had occurred on October 1, 1992, sales increased by 7.1% for the
1994 year.
Cost of sales at 52.7% of net sales showed a slight increase from 52.4%
of net sales in fiscal 1993. The increase reflected a higher proportion of
spreader sales, which have lower margins.
Operating expenses of $227.3 million increased by $49.3 million or
27.7%. The increase was caused, in significant part, by the inclusion of
Sierra operating expenses in fiscal 1994. The increase was also caused, to a
lesser degree, by increased freight costs due to higher sales volume and by
higher marketing costs which reflected increased spending for national
advertising and promotion programs. The increase was partly offset by reduced
general and administrative expenses, exclusive of Sierra expenses, for fiscal
1994.
Interest expense of $17.5 million increased by $9.0 million principally
due to an increase in borrowing levels resulting from the acquisition of
Sierra in December 1993. The increase was also caused, to a lesser degree, by
the issuance of the Notes (see "Liquidity and Capital Resources" below) which
bear a higher fixed interest rate than the term debt prepaid with their net
proceeds.
Net income of $22.9 million increased by $15.0 million from $7.9 million
in fiscal 1993. The increase was primarily attributable to a non-recurring
charge in fiscal 1993 of $13.2 million, net of tax, for the cumulative effect
of accounting changes. Among significant items impacting 1994 results were
increased interest expense and a $1.0 million non-recurring charge, net of
tax, for financing costs related to the prepayment of term debt.
Liquidity and Capital Resources
Current assets of $350.9 million increased by $100.6 million compared
with September 30, 1994. The increase was partly attributable to the inclusion
of Miracle-Gro current assets in fiscal 1995 which amounted to $22.9 million.
The increase was also caused by higher receivables associated with
year-to-year sales increases in the latter four months of fiscal 1995 and to
higher inventory levels.
Page 4
<PAGE>
Current liabilities of $123.9 million increased by $14.2 million
compared with September 30, 1994. The increase was attributable to the
inclusion of Miracle-Gro's current liabilities which amounted to $13 million
and higher levels of trade payables and accrued liabilities primarily related
to marketing accruals, reflecting business growth. These items were offset by
a decrease in short-term debt due to the terms of the Fourth Amended and
Restated Credit Agreement (the "Credit Agreement") dated March 17, 1995, which
requires the Company to reduce revolving credit borrowing to no more than $225
million for 30 consecutive days each year as compared to $30 million prior to
the amendment.
Capital expenditures totaled approximately $23.6 million and $33.4
million for the fiscal years ended September 30, 1995 and 1994, respectively,
and are expected to be approximately $28.0 million in fiscal 1996. The key
capital project in fiscal 1994 was an investment of approximately $13.0
million in a new production facility for Scotts' Poly-S(R) controlled-release
fertilizers. The Credit Agreement restricts the amount the Company may spend
on capital expenditures to $50 million per year for fiscal 1995 and each year
thereafter. These expenditures will be financed with cash provided by
operations and utilization of available credit facilities.
Long-term debt increased by $51.9 million compared with September 30,
1994, of which $26.7 million was attributable to the change in terms of
borrowings under the Credit Agreement discussed above. The remaining increase
in borrowings was to support increased working capital and capital
expenditures.
Shareholders' equity increased by $212.6 million compared with September
30, 1994. This increase was primarily due to the issuance of Convertible
Preferred Stock with a fair market value of $177.3 million and Warrants with a
fair market value of $14.4 million in the merger with Miracle-Gro, as
discussed in footnote number 2 to the Company's Consolidated Financial
Statements. The remaining change in shareholders' equity was a result of net
income of $22.4 million, and the change in the cumulative foreign currency
adjustment of $2.0 million, partially offset by Convertible Preferred Stock
dividends of $3.6 million.
The primary sources of liquidity for the Company are funds generated by
operations and borrowings under the Company's Credit Agreement. The Credit
Agreement was amended and restated in March 1995. 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. Additional information on the
Credit Agreement is described in footnote number 8 to the Company's
Consolidated Financial Statements.
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. Beginning in January 1995, the Company has entered
into forward foreign exchange contracts and purchase currency options tied to
the economic value of receivables and 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 will minimize but not completely eliminate the Company's exposure
to adverse currency movements.
As of September 30, 1995, the Company's European operations had foreign
exchange risk in various European currencies tied to the Dutch guilder. These
currencies include the Australian Dollar, Belgian Franc, German Mark, Spanish
Peseta, 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
September 30, 1995, outstanding foreign exchange forward contracts had a
contract value of approximately $25.1 million. These contracts had maturity
dates ranging from October 3, 1995 to October 31, 1995.
Page 5
<PAGE>
The merger with Miracle-Gro and its affiliated companies is described in
footnote number 3 to the Company's Consolidated Financial Statements. Any
additional working capital needs resulting from this transaction are expected
to be financed through funds generated from operations or available under the
Credit Agreement.
In the opinion of the Company's management, cash flows from operations
and capital resources will be sufficient to meet future debt service and
working capital needs during the 1996 fiscal year.
Inflation
The Company is subject to the effects of changing prices. The Company
has, however, generally been able to pass along inflationary increases in its
costs by increasing the prices of its products.
Accounting Issues
In March 1995, the Financial Accounting Standards Board ("the Board")
issued Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long Lived Assets and for Long Lived Assets
to be Disposed of" which establishes accounting standards for the impairment
of long lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used for long lived assets and certain
identifiable intangibles to be disposed of. The Company's current policies are
in accordance with SFAS No. 121.
In December 1995, the 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.
Challenges for 1996
Looking forward to 1996, management expects that increasing prices for
urea will continue to put downward pressure on gross margins. In addition,
certain non-recurring items which lowered the effective tax rate in 1995 will
not impact 1996 which is expected to result in an increase in the effective
income tax rate to approximately 43%. Planned investments in manufacturing
plant are expected to increase capacity in the summer months. As reported in
the Company's Form 10-Q for the quarter ended December 30, 1995, a $1.6
million charge was recorded in the first quarter of 1996 related to personnel
reductions.
Page 6
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Executive Officers of Registrant
The executive officers of Scotts, their positions and, as of March 1,
1996, their ages and years with Scotts (and its predecessors) are set forth
below.
Years with
the Company
(and its
Name Age Position(s) Held Predecessors)
Tadd C. Seitz 54 Chairman of the Board, 23
Interim President,
Chief Executive
Officer and Director
Paul D. Yeager 57 Executive Vice President 21
and Chief Financial
Officer
James Hagedorn 40 Director and Senior Vice 8
President, Consumer
Garden Group
Ronald E. Justice 51 Senior Vice President, 7 months
Operations
Michael P. Kelty 45 Senior Vice President, 16
Professional Business
Group
J. Blaine McKinney 52 Senior Vice President, 3
Consumer Sales
James L. Rogula 62 Senior Vice President, 1
Consumer Business
Group
Bernard R. Ford 52 Vice President, 17
Asia-Pacific and
Latin America
John A. Neal 55 Vice President, 4
Research and
Development
Lisle J. Smith 39 Vice President, 8
Administration and
Planning
L. Robert Stohler 54 Vice President, 3 months
International
Executive officers serve at the discretion of the Board of Directors (and
in the case of Mr. James Hagedorn, pursuant to an employment agreement).
The business experience of each of the persons listed above during the
past five years is as follows:
Following the resignation on February 22, 1996 of Theodore J. Host as
Director, President and Chief Executive Officer of the Company, the Board of
Directors appointed Mr. Seitz, President and Chief Executive Officer on an
interim basis while a search is conducted for a replacement. Mr. Seitz has
been Chairman of the Board of Scotts since 1991. Mr. Seitz was the Chief
Executive Officer of Scotts from 1987 to April 1995. He was also President of
Scotts' main operating subsidiary from 1983 until 1991.
Mr. Yeager has been an Executive Vice President of Scotts since 1991 and
a Vice President and the Chief Financial Officer of Scotts and its
predecessors since 1980. He was first Assistant Comptroller and then
Comptroller of Scotts' predecessor from 1974 to 1980.
Page 7
<PAGE>
Mr. Hagedorn was named Senior Vice President, Consumer Garden Group, of
Scotts in May 1995. He was Executive Vice President from 1989 until
consummation of the Merger in May 1995, of Stern's Miracle-Gro Products, Inc.
("Miracle-Gro Products"). He has been Executive Vice President of Scotts'
Miracle-Gro Products, Inc. ("Scotts Miracle-Gro") since May 1995. Mr. Hagedorn
is also a member of the Board of Directors of Miracle Holdings Limited
("Miracle Holdings") and Miracle Garden Care, both U.K. companies. He was
previously an officer and an F-16 pilot in the United States Air Force. He is
a board member of several not-for-profit corporations, including: The Farms
for City Kids Foundation, Clark Botanic Garden, Children's House and North
Shore University Hospital. James Hagedorn is the son of Horace Hagedorn, a
director of Scotts.
Mr. Justice was named Senior Vice President, Operations, of Scotts in
July 1995. From 1992 to 1995, he was Vice President of Operations for
Continental Baking, a producer of bread and cake bakery products and a
subsidiary of Ralston Purina Company. From 1991 to 1992, he served as Vice
President of Engineering for Frito-Lay, a snack food producer and a subsidiary
of Pepsico, Inc. From 1988 to 1991, he was Vice President of Manufacturing for
its Central Division.
Dr. Kelty was named Senior Vice President, Professional Business Group,
of Scotts in July 1995. Dr. Kelty has been Senior Vice President, Technology
and Operations, of Scotts since 1994. From 1988 to 1994, he served first as
Director, then as Vice President, of Research and Development of Scotts. Prior
to that, Dr. Kelty was the Director of Advanced Technology, Research of
Scotts, and from 1983 to 1987 he was Director, Chemical Technology
Development, of Scotts and its predecessors.
Mr. McKinney has been a Senior Vice President in the Consumer Business
Group, and Consumer Sales, of Scotts since 1992. From 1990 to 1992, he was
Vice President of Marketing and Sales of Salov, N.A., a manufacturer of
consumer products. From 1989 to 1990, he was Director of Sales of Rickett &
Colman, Ltd., a consumer products company.
Mr. Rogula was named Senior Vice President, Consumer Business Group, of
Scotts in January 1995. From May 1990 until the time he joined the Company, he
was President of The American Candy Company, a producer of non-chocolate
candies. From January 1990 to May 1990, he was an independent business
consultant.
Mr. Ford has been a Vice President of Scotts since 1987. Mr. Ford
currently holds the position of Vice President, Asia-Pacific and Latin
America. Other positions that Mr. Ford has held with Scotts and its
predecessors include Vice President, Strategy and Business Development,
Director of Market Development, Director of Export Marketing Services and
Director of Marketing.
Dr. Neal has been Vice President, Research and Development, of Scotts
since July 1995. From 1992 until the time he joined Scotts in 1994, he was
Vice President of Research and Development for Grace-Sierra Horticultural
Products Company (now Sierra). From 1987 to 1992, he was Manager of Research
and Development for the Western Chemicals and Industrial Resins, West,
divisions of Georgia Pacific Corporation, a forest products company.
Mr. Smith has been Vice President, Administration and Planning, of
Scotts since 1994. He served as Chief Financial Officer of Grace-Sierra
Horticultural Products Company (now Sierra) from 1991 until the time he joined
Scotts in 1993, and as Treasurer and Controller of that corporation from 1987
to 1991.
Mr. Stohler was named Vice President, International, of Scotts in
November 1995. From 1994 to 1995, he was President of Rubbermaid Europe S.A.,
a marketer of plastic housewares, toys, office supplies and janitorial and
food service products. From 1992 to 1994, he was Vice President and Chief
Financial Officer of Synthes (U.S.A.), a marketer and manufacturer of implants
and surgical instruments for orthopedic health care. From 1979 to 1991, he
held various positions with S. C. Johnson Wax, a packager of consumer goods,
institutional products and specialty chemicals, including most recently as
Director, Planning and Finance, Worldwide Innochem.
Page 8
<PAGE>
Directors of Registrant
Pursuant to the Code of Regulations of Scotts, the Board of Directors
has set the authorized number of directors at twelve (12). Three directors
hold office for terms expiring in 1996 (due to the resignation of Mr. Host),
four directors hold office for terms expiring in 1997, and four directors hold
office for terms expiring in 1998. The election of each class of directors is
a separate election. Pursuant to the terms of the Merger Agreement, the former
shareholders of Miracle-Gro Products, through their representative (the
"Miracle-Gro Representative"), designated Messrs. James Hagedorn, John Kenlon
and Horace Hagedorn as Board members. Until the earlier of the fifth
anniversary of the effective date of the Merger (May 19, 2000) (the
"Standstill Period") and such time as the former Miracle-Gro Products
shareholders no longer beneficially own at least 19% of the voting stock of
Scotts, the Miracle-Gro Representative will continue to be entitled to
designate one person to be nominated for election as a director in the class
whose term expires in any year.
As a result of the resignation of Mr. Host, a vacancy exists in the
class of Directors whose term expires in 1996. The Board of Directors does not
contemplate selection of a nominee to fill such vacancy until such time as a
replacement for Mr. Host is named.
Directors hold office until the next annual meeting of shareholders of
Scotts to elect members of the class whose term has expired, and until their
successors are duly elected and qualified, or until their earlier death,
resignation or removal. All of the directors were first appointed or elected
at the various dates set forth below and have been elected annually since
their respective appointments.
The following information with respect to the principal occupation or
employment, other affiliations and business experience of each director during
the last five years has been furnished to Scotts by each director. Except
where indicated, each director has had the same principal occupation for the
last five years.
INFORMATION CONCERNING DIRECTORS AS OF FEBRUARY 23, 1996:
CLASS 1. DIRECTORS (TERM EXPIRING 1996):
James Hagedorn, age 40
Senior Vice President, Consumer Garden Group, of Scotts since
May 1995 and Director of Scotts since 1995
Mr. Hagedorn was Executive Vice President from 1989 until consummation of
the Merger in May 1995 of Miracle-Gro Products. Mr. Hagedorn has been
Executive Vice President of Scotts' Miracle-Gro since May 1995. Mr. Hagedorn
also serves on the boards of Miracle Holdings and Miracle Garden Care, both
U.K. companies. He was previously an officer and an F-16 pilot in the United
States Air Force. He is a board member of several not-for-profit corporations,
including: The Farms for City Kids Foundation, Clark Botanic Garden,
Children's House and North Shore University Hospital. James Hagedorn is the
son of Horace Hagedorn.
Karen Gordon Mills, age 42 Director of Scotts since 1994
Ms. Mills is President of MMP Group, Inc., a management company that
monitors equity investments and provides consulting and investment banking
services. From 1983 to 1993, she served as Managing Director at E.S. Jacobs
and Company and as Chief Operating Officer of its Industrial Group. Ms. Mills
is currently on the boards of Triangle Pacific Corp., Armor All Products,
Inc., Arrow Electronics, Inc. and Telex Communications, Inc.
Page 9
<PAGE>
CLASS 1. DIRECTORS (TERM EXPIRING 1996): continued
Tadd C. Seitz, age 54
Chairman of the Board of Scotts
since 1991, Interim President and Chief
Executive Officer of Scotts since February 1996
and Director of Scotts since 1987
In February 1996, Mr. Seitz resumed his former posts of President and
Chief Executive Officer on an interim basis. Mr. Seitz was the Chief Executive
Officer of Scotts from 1987 to April 1995. He was also President of Scotts'
main operating subsidiary from 1983 until 1991. Mr. Seitz has been employed by
Scotts and its predecessors for twenty-three years. Mr. Seitz also serves as a
director of Holophane Corporation.
CLASS 2. DIRECTORS (TERM EXPIRING 1997):
James B Beard, age 60 Director of Scotts since 1989
Dr. Beard is Professor Emeritus of Turfgrass Physiology and Ecology at
Texas A&M University where he served from 1975 to 1992. He has been President
and Chief Scientist at the International Sports Turf Institute since July
1992. Dr. Beard is the author of six books and over 500 scientific articles on
turfgrass science and is an active lecturer and consultant both nationally and
internationally. He is a Fellow of the American Association of the Advancement
of Science and was the first President of the International Turfgrass Society.
John Kenlon, age 64 Director of Scotts since 1995
Mr. Kenlon was named Chief Operating Officer and President of Scotts'
Miracle-Gro in May 1995. Mr. Kenlon was the President of Miracle-Gro Products
from December 1985 until the consummation of the Merger in May 1995. Mr.
Kenlon began his association with the Miracle-Gro Companies in 1960.
John M. Sullivan, age 60 Director of Scotts since 1994
Mr. Sullivan was Chairman of the Board from 1987 to 1993, and President
and Chief Executive Officer from 1984 to 1993, of Prince Holdings, Inc., a
corporation which, through its subsidiaries, manufactures sporting goods.
Since his retirement from Prince Holdings, Inc. and its subsidiaries in 1993,
Mr. Sullivan has served as an independent director for various corporations,
none of which, other than Scotts, is registered under or subject to the
requirements of the Securities Exchange Act of 1934 or the Investment Company
Act of 1940.
L. Jack Van Fossen, age 58 Director of Scotts since 1993
Mr. Van Fossen was Chief Executive Officer and President of Red Roof
Inns., Inc., an owner and operator of motels, from May 1991 to June 1995.
Since July 1988, Mr. Van Fossen has also served as President of Nessoff
Corporation, a privately owned investment company. Mr. Van Fossen also serves
as a director of Cardinal Health, Inc.
CLASS 3. DIRECTORS (TERM EXPIRING 1998):
John S. Chamberlin, age 67 Director of Scotts since 1989
Since 1988, Mr. Chamberlin has served as an advisor for investment firms.
In 1990 and 1991, he was Chief Executive Officer of N.J. Publishing, Inc. He
has been Senior Advisor to Mancuso & Co. since 1990, Chairman of Life Fitness
Co. since 1992, Chairman of WNS, Inc. since 1993, and a director of
Healthsouth Corporation since 1993.
Page 10
<PAGE>
CLASS 3. DIRECTORS (TERM EXPIRING 1998): continued
Joseph P. Flannery, age 63 Director of Scotts since 1987
Mr. Flannery was a consultant to Clayton, Dubilier & Rice, Inc. from
September 1988 to December 1990. Mr. Flannery has been President, Chief
Executive Officer and Chairman of the Board of Directors of Uniroyal Holding,
Inc. since 1986. Mr. Flannery is also a director of Ingersoll Rand Company,
Kmart Corporation, Newmont Mining, Newmont Gold Company, Arvin Industries,
Inc., and APS Holding Corporation.
Horace Hagedorn, age 80
Vice Chairman of the Board of Scotts since May 1995 and
Director of Scotts since 1995
Mr. Hagedorn was named Chairman and Chief Executive Officer of Scotts'
Miracle-Gro in May 1995. Mr. Hagedorn founded Miracle-Gro Products in 1950 and
served as Chief Executive Officer of Miracle-Gro Products from 1985 until the
consummation of the Merger in May 1995. Horace Hagedorn is the father of James
Hagedorn. His philanthropic interests include the "Miracle-Gro Kids" program,
in which 50 needy fifth grade children are fully sponsored through a four-year
college scholarship. He serves as a Trustee on the boards of the North Shore
University Hospital and the Institute for Community Development, both in
Manhasset, New York, and the board of the Buckley Country Day School in
Roslyn, New York. Mr. Hagedorn's recognitions include the "Man of the Year"
award from the National Lawn and Garden Distributors Association, and the
Distinguished Service Medal from the Garden Writers of America Association. He
was elected New York Regional Area "Entrepreneur of the Year" in 1993.
Donald A. Sherman, age 45 Director of Scotts since 1988
Mr. Sherman has been President of Waterfield Mortgage Company in Fort
Wayne, Indiana, since 1989. He also serves as a director of Union Acceptance
Corporation.
Page 11
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows, for the fiscal years ended September 30, 1995,
1994 and 1993, compensation awarded or paid to, or earned by, each person
serving as Scotts' Chief Executive Officer during the 1995 fiscal year and the
three other most highly compensated executive officers of Scotts.
<TABLE>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Awards
Securities
Underlying
Name and Fiscal Salary Bonus Options/ All Other
Principal Position Year ($) ($) SARS(#) (1) Compensation($)
- ------------------ ---- --- --- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Tadd C. Seitz:
Chairman of the Board, 1995 $379,500 $ 40,000 173,367 $ 3,383(2)
Interim President and 1994 $362,500 $228,965 85,527(3) $ 3,270(2)
Chief Executive ...... 1993 $341,725 $189,780 85,019 $ 3,270(2)
Officer (4)
Theodore J. Host:
President, Chief ..... 1995 $355,750 $ 0 110,857 $115,234(5)
Executive Officer .... 1994 $307,833 $196,650 54,277(3) $ 3,270(2)
and Chief Operating .. 1993 $283,750 $162,963 53,108 $ 3,270(2)
Officer (6)
Paul D. Yeager:
Executive Vice ....... 1995 $212,025 $ 0 35,253 $ 3,383(2)
President and Chief .. 1994 $202,250 $125,000 17,252(3) $ 3,270(2)
Financial Officer .... 1993 $192,750 $115,103 18,739 $ 3,270(2)
J. Blaine McKinney:
Senior Vice President, 1995 $199,533 $ 0 35,819 $ 3,383(2)
Consumer Business .... 1994 $191,667 $105,000 20,818(3) $ 1,907(2)
Group ................ 1993 $177,333 $ 87,365 35,409 $ 0
Michael P. Kelty:
Senior Vice President, 1995 $175,917 $ 0 22,859 $ 3,383(2)
Professional Business 1994 $156,917 $ 59,719 7,858(3) $ 3,270(2)
Group ................ 1993 $138,000 $ 58,158 7,830 $ 3,270(2)
</TABLE>
(1) These numbers represent options for common shares granted pursuant to
Scotts' 1992 Long Term Incentive Plan. See the table under "OPTION GRANTS
IN LAST FISCAL YEAR" for more detailed information on such options.
(2) Includes contributions made by the Company to The Scotts Company Profit
Sharing and Savings Plan.
(3) Reflects number of options actually granted with respect to the 1994
fiscal year. The Company has determined that the number of options
previously reported as granted with respect to the 1994 fiscal year was
incorrect.
Page 12
<PAGE>
(4) Mr. Seitz resigned as Chief Executive Officer of Scotts effective as of
April 6, 1995. On February 23, 1996 Mr. Seitz resumed his former posts as
President and Chief Executive Officer on an interim basis. He also serves
as Chairman of the Board.
(5) Includes contribution in the amount of $3,383 made by the Company to The
Scotts Company Profit Sharing and Savings Plan. In January 1992, Mr. Host
entered into an Employment Agreement with the Company pursuant to which
he agreed to purchase 45,454 of the Company's Common Shares at $9.90 per
share. The Internal Revenue Service required Mr. Host to report
additional compensation as income for tax purposes, as a result of such
purchase. The Compensation and Organization Committee of the Company's
Board agreed to reimburse Mr. Host the sum of $111,851 to cover his
increased tax liability.
(6) Mr. Host resigned as President and Chief Executive Officer effective as
of February 22, 1996. Mr. Host became Chief Executive Officer of Scotts
effective as of April 6, 1995. He had been Chief Operating Officer from
October 1991 until April 6, 1995.
GRANTS OF OPTIONS
The following table sets forth information concerning individual grants
of options made during the 1995 fiscal year to each of the executive officers
named in the Summary Compensation Table. Scotts has never granted stock
appreciation rights.
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
% of Potential
Number of Total Realizable
Securities Options Value at Assumed
Underlying Granted to Exercise Annual Rates of
Options Employees Price Expiration Stock Price
NAME Granted(#) in ($/Share) Date Appreciation
Fiscal Year For Option
Term(1)
5%($) 10%($)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tadd C. Seitz...... 87,840(2)(3) 13.10% $15.50 9/30/04 $856,396 $2,170,263
41,607(3)(4) 6.20% $16.25 11/03/02 $322,506 $ 773,474
43,920(3)(5) 13.90% $17.25 9/30/03 $412,696 $1,017,135
Theodore J. Host... 56,580(2)(3) 12.90% $15.50 9/30/04 $551,627 $1,397,922
25,987(3)(4) 3.90% $16.25 11/03/02 $201,432 $ 483,098
28,290(3)(5) 4.20% $17.25 9/30/03 $268,889 $ 662,707
Paul D. Yeager..... 18,000(2)(3) 2.70% $15.50 9/30/04 $175,491 $ 444,726
9,163(3)(4) 1.40% $16.25 11/03/02 $ 71,025 $ 170,340
8,090(3)(5) 1.20% $17.25 9/30/03 $76,893 $ 189,512
J. Blaine McKinney. 15,000(2)(3) 2.20% $15.50 9/30/04 $146,243 $ 370,605
9,979(3)(4) 1.50% $16.25 11/03/02 $77,350 $ 185,510
10,840(3)(5) 1.60% $17.25 9/30/03 $103,031 $ 253,932
Michael P. Kelty... 15,000(2)(3) 2.20% $15.50 9/30/04 $146,243 $ 370,605
3,829(3)(4) 0.60% $16.25 11/03/02 $29,680 $ 71,181
4,030(3)(5) 1.30% $17.25 9/30/03 $38,304 $ 94,405
</TABLE>
(1) The amounts reflected in this table represent certain assumed rates of
appreciation only. Actual realized values, if any, on option exercises
will be dependent on the actual appreciation of the common shares of
Scotts over the term of the options. There can be no assurances that the
Potential Realizable Values reflected in this table will be achieved.
(2) These options were granted under Scotts' 1992 Long Term Incentive Plan
and become exercisable in three approximately equal installments on each
of the first three anniversaries of the date of grant, subject to the
right of the Compensation and Organization Committee of Scotts' Board of
Directors to accelerate the exercisability of such options in its
discretion.
Page 13
<PAGE>
(3) In the event of a "change in control" (as defined in the 1992 Long Term
Incentive Plan), each option will be canceled in exchange for a payment
in cash of an amount equal to the excess of the highest price paid (or
offered) for common shares during the preceding 30 trading days over the
exercise price for such option. Notwithstanding the foregoing, if the
Compensation and Organization Committee determines that the holder of the
option will receive a new award (or have his prior award honored) in a
manner which preserves its value and eliminates the risk that the value
of the award will be forfeited due to an involuntary termination, no
settlement will occur as a result of a change in control. In the event of
termination of employment by reason of retirement, long term disability
or death, the options may thereafter be exercised in full for a period of
5 years, subject to the stated term of the options. The options are
forfeited if the holder's employment is terminated for cause. In the
event an option holder's employment is terminated for any reason other
than retirement, long term disability, death or cause, any exercisable
options held by him at the date of termination may be exercised for a
period of 30 days.
(4) These options (or a percent thereof) were originally to be earned under
the 1992 Long Term Incentive Plan based upon the Company's performance
during the 1995 fiscal year. However, on December 13, 1994, the Scotts'
Board of Directors approved its Compensation and Organization Committee's
recommendation to grant 100% of the common shares subject to these
options as of September 30, 1994.
(5) These options (or a percent thereof) were originally to be earned under
the 1992 Long Term Incentive Plan based upon the Company's performance
during the 1996 fiscal year. However, on December 13, 1994, Scotts' Board
of Directors approved its Compensation and Organization Committee's
recommendation to grant 100% of the common shares subject to these
options as of September 30, 1994.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to unexercised
options held as of the end of the 1995 fiscal year by each of the executive
officers named in the Summary Compensation Table.
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number
of Securities Number of Securities Underlying Value of Unexercised
Underlying Unexercised Options at In-the-Money
Options Value FY-End (#) Options At FY-End($)(1)
Name Exercised Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tadd C. Seitz ........................... 0 -- 127,389 216,524 $ 733,770 $1,264,758
Theodore J. Host ........................ 0 -- 216,222 138,384 $2,126,785 $ 808,291
Paul D. Yeager .......................... 0 -- 27,538 43,706 $ 159,089 $ 256,788
J. Blaine McKinney ...................... 0 -- 40,666 51,380 $ 235,299 $ 295,040
Michael P. Kelty ........................ 0 -- 11,722 26,825 $ 67,523 $ 162,129
(1) "Value of Unexercised In-the-Money Options at FY-End" is based upon the
fair market value of Scotts' common shares on September 30, 1995
($22.125) less the exercise price of in-the-money options at the end of
the 1995 Fiscal Year.
</TABLE>
Page 14
<PAGE>
PENSION PLANS
Scotts maintains a tax-qualified non-contributory defined benefit
pension plan (the "Pension Plan"). All employees of Scotts and its
subsidiaries (except for Hyponex, Sierra, Republic, and their respective
subsidiaries) are eligible to participate upon meeting certain age and service
requirements. The following table shows the estimated annual benefits
(assuming payment made in the form of a single life annuity) payable upon
retirement at normal retirement age (65 years of age) to an employee in
specified compensation and years of service classifications.(footnote 1)
PENSION PLANS TABLE
Annualized
Average YEARS OF SERVICE
Final Pay -------------------------------------------------------------------
10 15 20 25 30
- --------------------------------------------------------------------------------
$ 100,000 $13,201.50 $19,802.25 $26,403.00 $33,003.75 $39,604.50
250,000 35,701.50 53,552.25 71,403.00 89,253.75 107,104.50
500,000 73,201.50 109,802.25 146,403.00 183,003.75 219,604.50
750,000 110,701.50 166,052.25 221,403.00 276,753.75 332,104.50
1,000,000 148,201.50 222,302.25 296,403.00 370,503.75 444,604.50
1,250,000 185,701.50 278,552.25 371,403.00 464,253.75 557,104.50
Monthly benefits under the Pension Plan upon normal retirement (age 65)
are based upon an employee's average final pay and years of service, and are
reduced by 1.25% of the employee's PIA times the number of years of such
employee's service. Average final pay is the average of the 60 highest
consecutive months' compensation during the 120 months prior to retirement.
Pay includes all earnings and a portion of sales incentive payments,
management incentive payments and executive incentive payments, but does not
include earnings in connection with foreign service, the value of a company
car, separation or other special allowances and commissions. Additional
provisions for early retirement are included.
At September 30, 1995, the credited years of service (including certain
prior service with ITT Corporation, from whom Scotts' predecessor was acquired
in 1986) and the 1995 annual covered compensation for purposes of the Pension
Plan and the Excess Benefit Plan of the five executive officers of Scotts
named in the Summary Compensation Table were as follows:
Covered
Years of Service Compensation
Mr. Seitz 19 years 9 months $377,000
Mr. Host 3 years 11 months $368,750
Mr. Yeager 26 years 1 month $207,050
Mr. McKinney 3 years 4 months $194,433
Mr. Kelty 16 years 3 months $175,167
- ------------------
Footnote (1):
The Internal Revenue Code of 1986, as amended (the "Code"), places
certain limitations on the annual pension benefits which can be paid from the
Pension Plan. Such limitations are not reflected in the table. This table
reflects the total aggregate benefits payable annually upon retirement under
both the Pension Plan and The O. M. Scott & Sons Company Excess Benefit Plan
(which has been assumed by and is maintained by Scotts) (the "Excess Benefit
Plan"), which is discussed below. The Pension Plan and the Excess Benefit Plan
require an offset of 1.25% of the Social Security primary insurance amount
("PIA") for each year of service and such amount has been deducted from the
figures in the table. The PIA used in developing the figures in the table is
$13,764.00. Thus, the offset is $5,161.50 for a person with 30 years of
service. The maximum possible offset is $6,882.00 for a person with 40 years
of service.
Page 15
<PAGE>
Effective October 1, 1993, the Excess Benefit Plan was established. The
Excess Benefit Plan provides additional benefits to participants in the
Pension Plan whose benefits are reduced by limitations imposed under Sections
415 and 401(a)(17) of the Code. Under the Excess Benefit Plan, executive
officers and certain key employees will receive, at the same time and in the
same form as benefits paid under the Pension Plan, additional monthly benefits
in an amount which, when added to the benefits paid to the participant under
the Pension Plan, will equal the benefit amount such participant would have
earned but for the limitations imposed by the Code to the extent such
limitations apply.
COMPENSATION OF DIRECTORS
Each director of Scotts, other than any director employed by Scotts,
receives a $25,000 annual retainer for Board and committee meetings plus all
reasonable travel and other expenses of attending such meetings.
Directors, other than those employed by the Company (the "Nonemployee
Directors"), receive an annual grant on the first business day following the
date of each annual meeting of shareholders of options to purchase 4,000
common shares at an exercise price equal to the fair market value on the date
of the grant. Options granted to Nonemployee Directors become exercisable six
months after the date of grant and 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 Nonemployee Director ceases to be a member of
Scotts' Board of Directors.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company entered into an Employment Agreement with Mr. Host effective
October 1991 (the "Host Agreement") providing for his continued employment as
President and Chief Operating Officer of the Company until December 1996 at an
annual base salary of at least $270,000 per year, plus incentive bonus under
The Scotts Company Executive Incentive Plan.
In connection with the entering into of his Employment Agreement,
pursuant to a Stock Option Plan and Agreement dated as of January 9, 1992, Mr.
Host was granted options, which vested one-third on the date of grant and
one-third on each of the first and second anniversaries of his date of
employment, to purchase 136,364 common shares at a purchase price of $9.90 per
share. These options expire on January 8, 2002.
Mr. Host resigned his positions with the Company on February 22, 1996.
The Company intends to negotiate a severance package with Mr. Host based on
the terms of the Host Agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
The following table furnishes certain information as of February 23,
1996 (except as otherwise noted), as to the common shares beneficially owned
by each of the directors of Scotts, by each of the executive officers of
Scotts named in the Summary Compensation Table and by all directors and
executive officers of Scotts as a group, and, to Scotts' knowledge, by the
only persons beneficially owning more than 5% of the outstanding common
shares.
Page 16
<PAGE>
<TABLE>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP (1)
Common Shares
Which Can Be
Acquired Upon
Conversion of
Convertible
Preferred Stock
Common or Upon Exercise
Name of Shares of Options or Percent of
Beneficial Owner Presently Warrants Total Class (2)
Held Exercisable
Within 60 Days
<S> <C> <C> <C> <C>
James B Beard........... 16,727 12,000 28,727 (3)
John S. Chamberlin...... 22,727 12,000 34,727 (3)
Joseph P. Flannery...... 10,000 12,000 22,000 (3)
Horace Hagedorn......... 0 526(4) 526 (3)
James Hagedorn.......... 0 13,262,631(5) 13,262,631 41.2%(5)
Theodore J. Host (6).... 45,454(7) 279,166 324,620 1.7%
Michael P. Kelty (6).... 52,909(8) 23,173 76,082 (3)
John Kenlon............. 0 234,642(9) 234,642 1.2%(9)
J. Blaine McKinney (6).. 2,100 67,592 69,692 (3)
Karen Gordon Mills...... 0 4,000 4,000 (3)
Tadd C. Seitz (6)....... 242,204(10)9) 226,793 468,997 2.4%
Donald A. Sherman....... 22,727 12,000 34,727 (3)
John M. Sullivan........ 1,000 8,000 9,000 (3)
L. Jack Van Fossen...... 1,200 8,000 9,200 (3)
Paul D. Yeager (6)...... 115,885(11) 48,457 164,342 (3)
All directors and
executive officers as a
group (20 persons)...... 563,300(12) 13,973,665 14,536,935 44.2%
Hagedorn Partnership, L.P. 0 13,262,631(13) 13,262,631 41.2%(13)
800 Port Washington Blvd.
Port Washington, NY 11050
The Capital Group 1,819,200(14) 0 1,819,200(14) 9.6%
Companies, Inc.
333 South Hope Street
Los Angeles, CA 90071
Capital Guardian Trust 1,305,200(14) 0 1,305,200(14) 6.9%
Company.
333 South Hope Street
Los Angeles, CA 90071
</TABLE>
(1) Unless otherwise indicated, the beneficial owner has sole voting and
dispositive power as to all common shares reflected in the table.
(2) The percent of class is based upon the sum of (i) 18,931,509 common
shares outstanding on February 23, 1996, and (ii) the number of common
shares as to which the named person has the right to acquire beneficial
ownership upon conversion of Convertible Preferred Stock or upon the
exercise of options or warrants exercisable within 60 days of February
23, 1996.
(3) Represents ownership of less than 1% of the outstanding common shares of
Scotts.
Page 17
<PAGE>
(4) Mr. Hagedorn owns (beneficially and of record) 10 shares of Convertible
Preferred Stock (less than 1% of such class) which are convertible into
526 common shares. Mr. Hagedorn is the father of the general partners of
Hagedorn Partnership, L.P., a Delaware limited partnership (the "Hagedorn
Partnership"), but is not himself a partner of, and does not have sole or
shared voting or dispositive power with respect to any of the Convertible
Preferred Stock or Warrants held by, the Hagedorn Partnership. See note
(13) below.
(5) Mr. Hagedorn is a general partner in the Hagedorn Partnership and has
shared voting and dispositive power with respect to the Convertible
Preferred Stock and Warrants held by the Hagedorn Partnership. See note
(13) below.
(6) Executive officer of Scotts named in the Summary Compensation Table.
(7) Includes 45,454 common shares which were issued to Mr. Host at the time
of his employment by the Company and which are pledged to Bank One, N.A.
(8) Includes 12,727 common shares owned by Dr. Kelty's wife.
(9) Mr. Kenlon beneficially owns 4,332 shares of Convertible Preferred Stock
(2.2% of such class), which are convertible into 228,000 common shares,
and Warrants to purchase 6,642 common shares. Each of Mr. Kenlon's four
children beneficially own Warrants to purchase an additional 15,000
common shares, for which Mr. Kenlon disclaims beneficial ownership. The
Hagedorn Partnership has the right to vote all of the Scotts' securities
held by Mr. Kenlon and his children, and has a right of first refusal
with respect to such securities. See note (13) below.
(10) Includes 20,000 common shares owned by Mr. Seitz' wife.
(11) Includes 100 common shares held by each of Mr. Yeager's wife and his two
daughters.
(12) See notes (4), (5) and (7) through (11) above and note (13) below. Also
includes common shares held by the respective spouses of executive
officers of Scotts and by their children who live with them.
(13) The Hagedorn Partnership owns (beneficially and of record) 190,658 shares
of Convertible Preferred Stock (97.8% of such class), which are
convertible into 10,034,631 common shares, and Warrants to purchase
2,933,358 common shares, and has the right to vote, and a right of first
refusal with respect to, the Scotts' securities held by Mr. Kenlon and
his children. See note (9) above. The general partners of the Hagedorn
Partnership are Mr. James Hagedorn, Katherine Hagedorn Littlefield, Paul
Hagedorn, Peter Hagedorn, Robert Hagedorn and Susan Hagedorn, each of
whom is a child of Mr. Horace Hagedorn and a former shareholder of
Miracle-Gro Products. Community Funds, Inc., a New York not-for-profit
corporation, is a limited partner in the Hagedorn Partnership.
The Merger Agreement provides for certain voting rights of, and certain
voting restrictions on, the holders of the Convertible Preferred Stock
and the Warrants (collectively, including the general and limited
partners of the Hagedorn Partnership, the "Miracle-Gro Shareholders").
The Merger Agreement also limits the ability of the Miracle-Gro
Shareholders to acquire additional voting securities of Scotts or to
transfer the Convertible Preferred Stock or the Warrants. See "-Voting
Restrictions on the Miracle-Gro Shareholders" and "-Standstill
Restrictions on the Miracle-Gro Shareholders" below.
(14) Based on information contained in a Schedule 13G dated February 9, 1996
filed with the Securities and Exchange Commission, certain operating
subsidiaries of The Capital Group Companies, Inc., ("Capital Group")
exercised investment discretion over various institutional accounts which
held as of December 29, 1995, 1,819,200 common shares of Scotts (9.6% of
the outstanding common
Page 18
<PAGE>
shares). Of such common shares, Capital Group exercised sole voting
power over 1,111,200 common shares and sole dispositive power over
1,819,200 common shares. Capital Guardian Trust Company ("Capital
Guardian Trust"), a bank, and one of such operating companies, exercised
investment discretion over 1,305,200 of said common shares. Of such
common shares, Capital Guardian Trust exercised sole voting power over
1,097,200 common shares and sole dispositive power over 1,305,200 common
shares. Capital Research and Management Company, a registered investment
adviser, and Capital International Limited, another operating
subsidiary, had investment discretion with respect to 500,000 and 14,000
common shares, respectively, of the above common shares.
To the Company's knowledge, based solely on a review of the copies of
the reports furnished to the Company and written representations that no other
reports were required during the 1995 fiscal year, all filing requirements
applicable to officers, directors and owners of more than 10% of the
outstanding common shares of the Company under Section 16(a) of the Securities
Exchange Act in 1934, as amended (the "Exchange Act"), were compiled with;
except that Mr. Stahl, a former executive officer, filed one report late
covering eight transactions all related to the cashless exercise of stock
options.
VOTING RESTRICTIONS ON THE MIRACLE-GRO SHAREHOLDERS
The Merger Agreement provides that until the earlier of the end of the
Standstill Period and such time as the Miracle-Gro Shareholders cease to own
at least 19% of Scotts' Voting Stock (as that term is defined in the Merger
Agreement), the Miracle-Gro Shareholders will be required to vote their shares
of Convertible Preferred Stock and common shares (i) for Scotts' nominees to
the Board of Directors, in accordance with the recommendation of the Board of
Directors' Nominating Committee and (ii) on all matters to be voted on by
holders of Voting Stock, in accordance with the recommendation of the Board of
Directors, except with respect to a proposal as to which shareholder approval
is required under the Ohio General Corporation Law relating to (a) the
acquisition of Voting Stock of Scotts, (b) a merger or consolidation, (c) a
sale of all or substantially all of the assets of Scotts, (d) a
recapitalization of Scotts or (e) an amendment to Scotts' Amended Articles of
Incorporation or Code of Regulations which would materially adversely affect
the rights of the Miracle-Gro Shareholders. Scotts has agreed that, without
the prior consent of the Shareholder Representative (as that term is defined
in the Merger Agreement), it shall not (x) issue Voting Stock (or Voting Stock
equivalents) constituting in the aggregate more than 12.5% of total voting
power of the outstanding Voting Stock (the "Total Voting Power") (other than
pursuant to employee benefit plans in the ordinary course of business) or (y)
in a single transaction or series of related transactions, make any
acquisition or disposition of assets which would require disclosure pursuant
to Item 2 of Form 8-K under the Securities Exchange Act of 1934 (the "Exchange
Act"); provided, however, that if five-sixths of the Board of Directors
determine that it is in the best interests of Scotts to make an acquisition
pursuant to clause (y), such acquisition may be made without the consent of
the Shareholder Representative. In addition, during the Standstill Period, the
Miracle-Gro Shareholders will be limited in their ability to enter into any
voting trust agreement without Scotts' consent or to solicit proxies or become
participants in any election contest (as such terms are used in Rule 14a-11 of
Regulation 14A under the Exchange Act) relating to the election of directors
of Scotts. Following the Standstill Period or such time as the Miracle-Gro
Shareholders cease to own at least 19% of the Voting Stock, the voting
restrictions provided in the Merger Agreement will expire.
STANDSTILL RESTRICTIONS ON THE MIRACLE-GRO SHAREHOLDERS
The Merger Agreement provides that during the Standstill Period, the
Miracle-Gro Shareholders may not acquire or agree to acquire, directly or
indirectly, beneficial ownership of Voting Stock representing more than 43% of
Total Voting Power (the "Standstill Percentage"). For purposes of calculating
beneficial ownership of Voting Stock against the Standstill Percentage, common
shares underlying unexercised Warrants or any subsequently granted employee
stock options will not be included. However, the terms of the Warrants provide
that, if exercised during the Standstill Period and to the extent that such
exercise would increase the aggregate beneficial ownership of the Miracle-Gro
Page 19
<PAGE>
Shareholders to more than 43% of Total Voting Power, such exercise may only be
for cash and not for common shares. To the extent that a recapitalization of
Scotts or a common share repurchase program by Scotts increases the aggregate
beneficial ownership of the Miracle-Gro Shareholders to an amount in excess of
44% of the Total Voting Power, the Miracle-Gro Shareholders will be required
to divest themselves of sufficient shares of Voting Stock to fall within the
44% of Total Voting Power limit. Scotts has agreed that it will use reasonable
efforts to ensure that employee stock options are funded with common shares
repurchased in the open market rather than with newly-issued common shares.
The Miracle-Gro Shareholders have agreed that, after the Standstill
Period, they will not acquire, directly or indirectly, beneficial ownership of
Voting Stock representing more than 49% of the Total Voting Power except
pursuant to a tender offer for 100% of the Total Voting Power, which tender
offer is conditioned upon the receipt of at least 50% of the Voting Stock
beneficially owned by shareholders of Scotts other than the Miracle-Gro
Shareholders and their affiliates and associates.
RESTRICTIONS ON TRANSFERS
During the Standstill Period, the Merger Agreement provides that no
Miracle-Gro Shareholder may transfer any common shares obtained upon
conversion of the Convertible Preferred Stock or exercise of the Warrants,
except (i) to Scotts or any person approved by Scotts; (ii) to a Permitted
Transferee (as that term is defined in the Merger Agreement) who agrees in
writing to abide by the provisions of the Merger Agreement; (iii) pursuant to
a merger or consolidation of Scotts or a plan of liquidation which has been
approved by Scotts' Board of Directors; (iv) in a bona fide public offering
registered under the Securities Act of 1933 (the "Securities Act") and
designed to prevent any person or group from acquiring beneficial ownership of
3% or more of the Total Voting Power; (v) subject to Scotts' right of first
offer, pursuant to Rule 145 or Rule 144A under the Securities Act, provided
that such sale would not knowingly result in any person or group's acquiring
beneficial ownership of 3% or more of the
Total Voting Power and all such sales by the Miracle-Gro Shareholders
within the preceding three months would not exceed, in the aggregate, the
greatest of the limits set forth in Rule 144(e)(1) under the Securities Act;
(vi) in response to a tender offer made by or on behalf of Scotts or with the
approval of Scotts' Board of Directors; or (vii) subject to Scotts' right of
first offer, in any other transfer which would not to the best knowledge of
the transferring Miracle-Gro Shareholder result in any person or group's
acquiring beneficial ownership of 3% or more of the Total Voting Power.
Neither the Convertible Preferred Stock nor, during the Standstill
Period, the Warrants may be transferred except (i) to Scotts or any person or
group approved by Scotts; (ii) to a Permitted Transferee who agrees in writing
to abide by the provisions of the Merger Agreement; (iii) pursuant to a merger
or consolidation of Scotts or a plan of liquidation of Scotts; or (iv) with
respect to Convertible Preferred Stock representing no more than 15% of the
outstanding common shares on a fully diluted basis or any number of Warrants:
(A) subject to Scotts' right of first offer, pursuant to Rule 145 or Rule 144A
under the Securities Act, provided that such sale would not knowingly result
in any person or group's acquiring beneficial ownership of 3% or more of the
Total Voting Power and all such sales by the Miracle-Gro Shareholders within
the preceding three months would not exceed, in the aggregate, the greatest of
the limits set forth in Rule 144(e)(1) under the Securities Act; or (B)
subject to Scotts' right of first offer, in any other transfer which would
not, to the best knowledge of the transferring Miracle-Gro Shareholder, result
in any person or group's acquiring beneficial ownership of 3% or more of the
Total Voting Power. For purposes of clauses (A) and (B) only, Scotts' right of
first offer with respect to shares of Convertible Preferred Stock would be at
a price equal to (x) the aggregate Market Price (as that term is defined in
the Merger Agreement) of the common shares into which such shares of
Convertible Preferred Stock could be converted at the time of the applicable
transfer notice multiplied by (y) 105%.
Following the Standstill Period, the Warrants and the common shares
underlying the Warrants and the Convertible Preferred Stock will be freely
transferable, subject to the requirements of the Securities Act and applicable
law.
Page 20
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(a) Documents Filed as Part of this Report
1 & 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES:
The response to this portion of Item 14 is submitted as a separate
section of this Annual Report on Form 10-K. Reference is made to "Index to
Consolidated Financial Statements and Financial Statement Schedules" beginning
at Page F-1 (page 56 as sequentially numbered).
3. EXHIBITS:
Exhibits filed with this Annual Report on Form 10-K are attached
hereto. For a list of such exhibits, see "Index to Exhibits" beginning at page
E-1 (page 56 as sequentially numbered). The following table provides certain
information concerning executive compensation plans and arrangements required
to be filed as exhibits to this Annual Report on Form 10-K.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
EXHIBIT DESCRIPTION LOCATION
NO.
10(a) The Scotts Incorporated herein by
Company reference to Scotts'
Employees' Annual Report on
Pension Plan Form 10-K for the
fiscal year ended
September 30, 1994
(File No. 0-19768)
[Exhibit 10(a)]
10(b) First Amendment Incorporated herein by
to The Scotts reference to Scotts'
Company Annual Report on
Employees' Form 10-K for the
Pension Plan fiscal year ended
dated April 18, September 30, 1995
1995 (File No. 1-11593)
[Exhibit 10(b)]
10(c) Second Amendment Incorporated herein by
to The Scotts reference to Scotts'
Company Annual Report on
Associates' Form 10-K for the
[Employees'] fiscal year ended
Pension Plan September 30, 1995
dated December 5, (File No. 1-11593)
1995 and [Exhibit 10(c)]
effective as of
December 31, 1995
10(d) Second Incorporated herein by
Restatement of reference to Scotts'
The Scotts Annual Report on
Company Profit Form 10-K for the
Sharing and fiscal year ended
Savings Plan September 30, 1994
(File No. 0-19768)
[Exhibit 10(b)]
Page 21
<PAGE>
10(e) First Amendment Incorporated herein by
to the Second reference to Scotts'
Restatement of Annual Report on
The Scotts Form 10-K for the
Company Profits fiscal year ended
Sharing and September 30, 1995
Savings Plan (File No. 1-11593)
effective as of [Exhibit 10(e)]
July 1, 1995
10(f) Second Amendment Incorporated herein by
to the Second reference to Scotts'
Restatement of Annual Report on
The Scotts Form 10-K for the
Company Profit fiscal year ended
Sharing and September 30, 1995
Savings Plan (File No. 1-11593)
dated December 5, [Exhibit 10(f)]
1995 and
effective as of
December 31, 1995
10(i) Employment Incorporated herein by
Agreement, dated reference to the Annual
as of October 21, Report on Form 10-K for
1991, between the fiscal year ended
Scotts (as September 30, 1993 of
successor to The The Scotts Company, a
O. M. Scott & Delaware corporation
Sons Company ("Scotts Delaware")
("OMS")) and (File No. 0-19768)
Theodore J. Host [Exhibit 10(g)]
10(j) Stock Option Plan Incorporated herein by
and Agreement, reference to Scotts'
dated as of Annual Report on
January 9, 1992, Form 10-K for the
between Scotts fiscal year ended
(as successor to September 30, 1994
Scotts Delaware) (File No. 0-19768)
and Theodore J. [Exhibit 10(f)]
Host
10(k) The O. M. Scott & Incorporated herein by
Sons Company reference to Scotts
Excess Benefit Delaware's Annual
Plan, effective Report on Form 10-K for
October 1, 1993 the fiscal year ended
September 30, 1993
(File No. 0-19768)
[Exhibit 10(h)]
10(l) The Scotts Incorporated herein by
Company 1992 Long reference to Scotts
Term Incentive Delaware's Registration
Plan Statement on Form S-8
filed on March 26, 1993
(Registration
No. 33-60056)
[Exhibit 4(f)]
10(m) The Scotts Incorporated herein by
Company 1995 reference to Scotts'
Executive Annual Annual Report on
Incentive Plan Form 10-K for the
fiscal year ended
September 30, 1995
(File No. 1-11593)
[Exhibit 10(m)]
Page 22
<PAGE>
10(n) Letter of Incorporated herein by
understanding, reference to Scotts'
dated October 11, Annual Report on
1993, regarding Form 10-K for the
terms of fiscal year ended
employment of September 30, 1995
John A. Neal by (File No. 1-11593)
Scotts [Exhibit 10(n)]
10(o) Letter of Incorporated herein by
understanding, reference to Scotts'
dated October 11, Annual Report on
1993, regarding Form 10-K for the
terms of fiscal year ended
employment of September 30, 1995
Lisle J. Smith by (File No. 1-11593)
Scotts [Exhibit 10(o)]
10(p) Employment Incorporated herein by
Agreement, dated reference to Scotts'
as of May 19, Annual Report on
1995, between Form 10-K for the
Scotts and James fiscal year ended
Hagedorn September 30, 1995
(File No. 1-11593)
[Exhibit 10(p)]
(b) Reports on Form 8-K
On August 2, 1995, 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 in connection with the Merger Transactions with the
Miracle-Gro Companies.
(c) Exhibits
See Item 14(a) (3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate section
of this Annual Report on Form 10-K. Reference is made to "Index to
Consolidated Financial Statements and Financial Statement Schedules" beginning
at page F-1 (page 25 as sequentially numbered).
Page 23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Dated February 29, 1996 By /S/ TADD C. SEITZ
Tadd C. Seitz
Chairman of the Board,
Interim President and
Chief Executive Officer
Page 24
<PAGE>
THE SCOTTS COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(Items 8 and 14(a))
Form 10-K/A
ANNUAL REPORT
Data submitted herewith:
Consolidated Financial Statements of The Scotts Company and Subsidiaries:
Report of Independent Accountants ......................... F-2
Consolidated Statements of Income for the years ended
September 30, 1993, 1994 and 1995 ..................... F-3
Consolidated Statements of Cash Flows for the years
ended September 30, 1993, 1994 and 1995................ F-4
September 30, 1993, 1994 and 1995
Consolidated Balance Sheets at September 30, 1994 ......... F-5
and 1995
Consolidated Statements of Changes in Shareholders'
Equity for the years ended September 30, 1993, 1994
and 1995............................................... F-6
Notes to Consolidated Financial Statements ............. F-7 - F-22
Schedules Supporting the Consolidated Financial Statements:
Report of Independent Accountants on Financial ............ F-23
Statement Schedules
II - Valuation and Qualifying Accounts ................ F-24 - F-26
Schedules other than those listed above are omitted since they are not
required or are not applicable, or the required information is shown in the
consolidated financial statements or notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of
Directors of The Scotts Company
We have audited the accompanying consolidated balance sheets of The Scotts
Company and Subsidiaries as of September 30, 1994 and 1995, and the related
consolidated statements of income, cash flows and changes in shareholders'
equity for each of the three years in the period ended September 30, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Scotts
Company and Subsidiaries as of September 30, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note 2, the accompanying financial statements have been
restated.
Coopers & Lybrand L. L. P.
Columbus, Ohio
November 15, 1995
F-2
<PAGE>
THE SCOTTS COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
for the years ended September 30, 1993, 1994 and 1995
(in thousands except per share amounts)
1993 1994 1995
-------- -------- ------
Net sales ................................. $ 466,043 $ 606,339 $732,837
Cost of sales ............................. 244,218 319,730 394,369
--------- --------- --------
Gross profit .............................. 221,825 286,609 338,468
--------- --------- --------
Marketing ................................. 74,579 100,106 130,179
Distribution .............................. 67,377 84,407 104,513
General and administrative ................ 27,688 30,189 28,672
Research and development .................. 7,700 10,352 10,970
Other expenses, net ....................... 660 2,283 1,560
--------- --------- --------
Income from operations .................... 43,821 59,272 62,574
Interest expense .......................... 8,454 17,450 26,320
--------- --------- --------
Income before taxes, extraordinary item and
cumulative effect of accounting changes 35,367 41,822 36,254
Income taxes .............................. 14,320 17,947 13,898
--------- --------- --------
Income before extraordinary item and
cumulative effect of accounting changes 21,047 23,875 22,356
Extraordinary Item:
Loss on early extinguishment of debt, . -- (992) --
net of tax
Cumulative effect of changes in accounting
for postretirement benefits, net of tax and (13,157) -- --
income taxes
--------- --------- --------
Net income ................................ $ 7,890 $ 22,883 $ 22,356
========= ========= ========
Net income per common share:
Income before extraordinary item and
cumulative effect of accounting
changes ........................... $ 1.07 $ 1.27 $ 0.99
Extraordinary item:
Loss on early extinguishment of
debt, net of tax ................. -- (.05) --
Cumulative effect of changes in accounting
for postretirement benefits, net of tax
and income taxes ...................... (.67) -- --
--------- --------- --------
Net income per common share ........... $ .40 $ 1.22 $ 0.99
========= ========= ========
Common shares used in net income per ...... 19,687 18,785 22,617
common share computation ========= ========= ========
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
<TABLE>
THE SCOTTS COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended September 30, 1993, 1994 and 1995
1993 1994 1995
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income ............................... $ 7,890 $ 22,883 $ 22,356
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation ..................... 12,278 13,375 16,056
Amortization ..................... 5,866 8,562 9,599
Extraordinary loss on early ...... -- 992 --
extinguishment of debt
Cumulative effect of change
in accounting for
postretirement benefits ........ 24,280 -- --
Postretirement benefits .......... 2,366 368 145
Deferred income taxes ............ (12,740) 5,378 (2,596)
Loss/(gain) on sale of ........... 94 29 (55)
equipment
Gain on Peters divestiture ....... (4,227)
Equity in loss of unconsolidated . 1,216
businesses
Provision for losses on accounts . 1,409 1,974 1,533
receivable
Other ............................ 748 234 (309)
Changes in assets and
liabilities:
Accounts receivable .......... (10,002) (33,846) (36,661)
Inventories .................. (11,147) (10,406) (22,984)
Prepaid and other current .... (393) (2,065) (2,119)
assets
Accounts payable ............. (2,390) 6,400 12,049
Accrued liabilities .......... 1,630 6,220 9,567
Other assets and ............. 4,784 (10,231) 906
liabilities
--------- --------- ---------
Net cash provided by ..... 24,673 9,867 4,476
operating activities
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in plant and equipment ........ (15,158) (33,402) (23,606)
Investment in affiliate .................. (250)
Acquisitions, net of cash acquired ....... (16,366) (117,107) --
Cash acquired in merger with ............. 6,449
Miracle-Gro
Proceeds from sale of equipment .......... 194 384 718
Proceeds from Peters divestiture ......... 9,966
--------- --------- ---------
Net cash used in investing (31,330) (150,125) (6,723)
activities
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under term debt .............. 70,000 289,215 --
Payments on term and other debt .......... (640) (166,844) (27,127)
Net (payments) borrowings under revolving (18,238) 30,500 27,402
credit
Net (payments) borrowings under bank line (953) 1,211 (1,819)
of credit
Deferred financing cost incurred ......... (628) (5,139) (486)
(Purchase) Issuance of Common Shares ..... (41,441) 160 436
Dividends on Class A Convertible Preferred -- -- (1,122)
Stock
--------- --------- ---------
--------- --------- ---------
Net cash provided by (used 8,100 149,103 (2,716)
in) financing activities
--------- --------- ---------
Effect of exchange rate changes on cash ...... -- (473) 1,296
--------- --------- ---------
Net increase (decrease) in cash .............. 1,443 8,372 (3,667)
Cash, beginning of period .................... 880 2,323 10,695
--------- --------- ---------
Cash, end of period .......................... $ 2,323 $ 10,695 $ 7,028
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest (net of amount capitalized) ..... $ 6,169 $ 10,965 $ 23,808
Income taxes paid ........................ 11,500 20,144 11,339
Businesses acquired:
Fair value of assets acquired ........ 23,799 143,520 235,564
Liabilities assumed .................. (7,433) (26,413) (39,875)
Net cash paid for acquisition ........ 16,366 117,107 --
Class A Convertible Preferred
Stock issued ....................... 177,255
Warrants issued ...................... 14,434
Dividends declared not paid .............. 2,437
See Notes to Consolidated Financial
Statements
</TABLE>
<PAGE>
THE SCOTTS COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1994 and 1995
(in thousands)
ASSETS
1994 1995
--------- --------
Current Assets:
Cash ............................................. $ 10,695 $ 7,028
Accounts receivable, less allowance of $2,933
in 1994 and $3,406 in 1995 ....................... 115,772 176,525
Inventories, net ................................. 106,636 143,953
Prepaid and other assets ......................... 17,151 23,354
--------- ---------
Total current assets ......................... 350,860
250,254
--------- ---------
Property, plant and equipment, net ................... 140,105 148,754
Trademarks, net ...................................... -- 89,250
Other intangibles, net ............................... 28,880 24,421
Goodwill ............................................. 104,578 179,988
Other assets ......................................... 4,767 15,772
--------- ---------
Total Assets
$ 528,584 $ 809,045
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving credit line ............................ $ 23,416 $ 97
Current portion of term debt ..................... 3,755 421
Accounts payable ................................. 46,967 63,207
Accrued liabilities .............................. 31,167 41,409
Accrued taxes .................................... 4,383 18,728
--------- ---------
Total current liabilities .................... 109,688 123,862
--------- ---------
Term debt, less current portion ...................... 220,130 272,025
Postretirement benefits other than pensions .......... 27,014 27,159
Other liabilities .................................... 3,592 5,209
--------- ---------
Total Liabilities ............................ 360,424 428,255
--------- ---------
Commitments and Contingencies
Shareholders' Equity:
Class A Convertible Preferred Stock, no par value -- 177,255
Common shares, no par value, issued 21,082 shares 211 211
in 1994 and 1995
Capital in excess of par value ................... 193,450 207,551
Retained earnings ................................ 13,875 32,672
Cumulative translation adjustments ............... 2,065 4,082
Treasury stock, 2,415 shares in 1994 and 2,388 ... (41,441) (40,981)
shares in 1995, at cost
--------- ---------
Total Shareholders' Equity ................... 168,160 380,790
--------- ---------
Total Liabilities and Shareholders' Equity
$ 528,584 $ 809,045
========= =========
See Notes to Consolidated Financial Statements
F-5
<PAGE>
<TABLE>
THE SCOTTS COMPANY AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity for the
years ended September 30, 1993, 1994 and 1995
(in thousands)
Convertible Capital
Class A in Retained Cumulative Total
Preferred Stock Common Shares Excess Of Earnings/ Treasury Stock Translation Shareholders'
Shares Amount Shares Amount Par Value (Deficit) Shares Amount Gain(loss) Equity/
(Deficit)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1992 21,073 $211 $192,604 $(16,898) $ 12 $175,929
Net income 7,890 7,890
Amortization of unearned
compensation 24 24
Options outstanding 635 635
Foreign currency
translation (24) (24)
adjustment
Purchase of common (2,415) $(41,441) (41,441)
shares --- ---- ------ ---- -------- ------- ------ -------- ----- --------
Balance, September 30, 21,073 211 193,263 (9,008) (2,415) (41,441) (12) 143,013
1993
Net income 22,883 22,883
Foreign currency
translation 2,077 2,077
adjustment
Amortization of unearned
compensation 27 27
Issuance of common shares 9 160 160
--- ---- ------ ---- -------- ------- ------ -------- ----- --------
Balance, September 30, 1994 21,082 211 193,450 13,875 (2,415) (41,441) 2,065 168,160
Issuance of common shares (24) 27 460 436
held in treasury
Net income 22,356 22,356
Dividends (3,559) (3,559)
Amortization of unearned
compensation 24 24
Foreign currency
translation adjustment 2,017 2,017
Issuance of Class A
Convertible Preferred 195 $177,255 177,255
Stock
Issuance of warrants 14,434 14,434
Options outstanding (333) (333)
--- ---- ------ ---- -------- ------- ------ -------- ----- --------
Balance, September 30, 195 $177,255 21,082 $211 $207,551 $32,672 (2,388) $(40,981) $4,082 $380,790
1995 --- -------- ------ ---- -------- ------- ------ --------- ------ --------
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
On September 20, 1994, the shareholders voted to reincorporate Scotts from
Delaware to Ohio. As a result of the reincorporation, The Scotts Company, a
Delaware corporation, merged into The Scotts Company ("Scotts Ohio"), an
Ohio corporation. Immediately following the consummation of the merger, The
O. M. Scott & Sons Company was merged into Scotts Ohio. 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.
INVENTORIES
Inventories are principally stated at the lower of cost or market,
determined by the FIFO method; certain inventories of Hyponex (primarily
organic products) are accounted for by the LIFO method. At September 30,
1994 and 1995, approximately 31% and 25% of inventories, respectively, are
valued at the lower of LIFO cost or market. Inventories include the cost of
raw materials, labor and manufacturing
overhead.
The Company makes provisions for obsolete or slow-moving inventories as
necessary to properly reflect inventory value. Inventories, net of
provisions of $6,108,000 and $6,711,000 as of September 30, 1994 and 1995,
respectively, consisted of:
(in thousands) 1994 1995
---- ----
Finished Goods $ 55,102 $ 72,551
Raw Materials 52,639 71,624
-------- --------
FIFO Cost 107,741 144,175
LIFO Reserve (1,105) (222)
-------- ---------
$ 106,636 $ 143,953
======= =======
REVENUE RECOGNITION
Revenue generally is recognized when products are shipped. For certain
large multi-location customers, revenue is recognized when products are
shipped to intermediate locations and ownership is acknowledged by the
customer.
ADVERTISING AND CONSUMER GUARANTEE
The Company has a cooperative advertising program with retailers whereby
the Company reimburses retailers for the qualifying portion of their
advertising costs. Such advertising allowances are based on the timing of
orders and deliveries. Retailers are also offered allowances for promotion
of Scotts' products in the retail store. The Company provides for the cost
of these programs in the period the sales to retailers occur. All other
advertising costs are expensed as incurred.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accrues amounts for product non-performance claims by consumers
under the Company's product guarantee program. The provision is determined
by applying an experience rate to sales in the period the related products
are shipped to retailers.
INVESTMENTS IN UNCONSOLIDATED BUSINESSES
The Company's investments in affiliated companies which are not majority
owned or controlled are accounted for using the equity method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including significant improvements, are
stated at cost. Expenditures for maintenance and repairs are charged to
operating expenses as incurred. When properties are retired, or otherwise
disposed of, the cost of the asset and the related accumulated depreciation
are removed from the accounts.
Depletion of applicable land is computed on the units-of-production method.
Depreciation of other property, plant and equipment is provided on the
straight-line method and is based on the estimated useful economic lives of
the assets as follows:
Land improvements 10-25 years
Buildings 10-40 years
Machinery and equipment 3-15 years
Furniture and fixtures 6-10 years
Property, plant and equipment at September 30, 1994 and 1995 consisted of
the following:
(in thousands)
1994 1995
---- ----
Land and improvements $21,856 $27,796
Buildings 41,313 45,032
Machinery and equipment 111,639 136,213
Furniture and fixtures 8,861 10,262
Construction in progress 24,340 11,916
-------- --------
208,009 231,219
Less accumulated depreciation 67,904 82,465
$140,105 $148,754
Property subject to capital leases in the amount of $1,270,000 and $264,000
(net of accumulated amortization of $2,303,000 in 1994 and $2,042,000 in
1995) has been included in machinery and equipment at September 30, 1994
and 1995, respectively.
The Company capitalized interest costs of $321,000 in fiscal 1994 and
$194,000 in fiscal 1995 as part of the cost of major asset construction
projects.
RESEARCH AND DEVELOPMENT
Significant costs are incurred each year in connection with research and
development programs that are expected to contribute operating profits in
future years. All costs associated with research and development are
charged to expense as incurred.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTANGIBLE ASSETS
Goodwill arising from business acquisitions is amortized over 40 years on a
straight-line basis. Other intangible assets consist primarily of patents
and debt issuance costs. Debt issuance costs are being amortized over the
terms of the various agreements. Patents and trademarks are being amortized
on a straight-line basis over periods varying from 7 to 40 years.
Accumulated amortization at September 30, 1994 and 1995 was $42,438,000 and
$52,182,000, respectively.
During the year ended September 30, 1994, the Company incurred $5.1 million
of debt issuance costs related to the issuance of Term Debt and 9 7/8%
Senior Subordinated Notes and recognized an extraordinary charge of
$992,000, net of income taxes of $662,000, for unamortized debt issuance
costs in connection with certain debt prepayments. During the year ended
September 30, 1995, the Company incurred approximately $500,000 of debt
issuance costs related to its Fourth Amended and Restated Credit Agreement.
Company management periodically assesses the recoverability of goodwill,
trademarks and other intangible assets by determining whether the
amortization of such assets over the remaining lives can be recovered
through projected undiscounted net cash flows generated by such assets. In
1995, goodwill was reduced by $3,485,000 related to the disposition of the
Peters U.S. consumer water-soluble fertilizer business.
FOREIGN CURRENCY
The Company enters into forward foreign exchange and currency options
contracts to hedge its exposure to fluctuation in foreign currency exchange
rates. These contracts generally involve the exchange of one currency for a
second currency at some future date. Counterparties to these contracts are
major financial institutions. Gains and losses on these contracts generally
offset gains and losses on the assets, liabilities and transactions being
hedged.
Realized and unrealized foreign exchange gains and losses are recognized
and offset foreign exchange gains or losses on the underlying exposures.
Unrealized gains and losses that are designated and effective as hedges on
such transactions are deferred and recognized in income in the same period
as the hedged transactions. The net unrealized gain deferred totaled $2,000
at September 30, 1995.
At September 30, 1995, the Company's European operations had foreign
exchange risk in various European currencies tied to the Dutch guilder.
These currencies are the Australian Dollar, Belgian Franc, German Mark,
Spanish Peseta, 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 September 30, 1995, the Company had outstanding forward
foreign exchange contracts with a contract value of approximately
$25,100,000. These contracts have maturity dates ranging from October 3,
1995 to October 31, 1995.
All assets and liabilities in the balance sheets of foreign subsidiaries
whose functional currency is other than the U.S. dollar are translated into
United States dollar equivalents at year-end exchange rates. Translation
gains and losses are accumulated as a separate component of shareholders'
equity. Income and expense items are translated at average monthly exchange
rates. Cumulative foreign currency translation gain was $2,065,000 and
$4,082,000 as of September 30, 1994 and
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1995, respectively. Foreign currency transaction gains and losses are
included in determining net income. In fiscal 1993, 1994 and 1995, the
Company recorded foreign currency transaction losses in other expenses of
$196,000, $491,000 and $944,000, respectively. The cash flows related to
these gains and losses are classified in the statement of cash flows, as
part of cash flows from operating activities.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of the assets
and liabilities using enacted tax rates.
U.S. federal and state income taxes and foreign taxes are provided
currently on the undistributed earnings of foreign subsidiaries, giving
recognition to current tax rates and applicable foreign tax credits.
NET INCOME PER COMMON SHARE
Net income per common share is based on the weighted-average number of
common shares and common share equivalents (stock options, convertible
preferred stock and warrants) outstanding each period.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to fiscal 1995 classifications.
2. RESTATEMENT
In February 1996, the Company restated its earnings for the year ended
September 30, 1995 for the understatement of accrued liabilities related to
promotional allowances provided to retail customers. The restatement
reduced income before taxes by $4,422,000 and reduced net income by
$2,727,000 or $0.12 per share.
3. MERGERS AND ACQUISITIONS
REPUBLIC
Effective November 19, 1992, the Company acquired Republic headquartered in
Carlsbad, California. Republic designs, develops, manufactures and markets
lawn and garden equipment with the substantial majority of its revenue
derived from the sale of its products to mass merchandisers, home centers
and garden outlets in the United States. The purchase price of
approximately $16,366,000 was financed under the Company's revolving credit
agreement.
The acquisition was accounted for using the purchase method. Accordingly,
the purchase price was allocated among 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 values of the net
assets acquired ("goodwill") of approximately $6,400,000 is being amortized
on a straight-line basis over 40 years.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Republic's results of operations have been included in the Company's
Consolidated Statements of Income since November 19, 1992. As such, the
Company's fiscal 1993 pro forma results of operations are not materially
different from actual results and are therefore not presented.
SIERRA
Effective December 16, 1993, the Company completed the acquisition of
Grace-Sierra Horticultural Products Company (all further references to
Grace-Sierra, now known as Scotts-Sierra Horticultural Products Company,
will be made as "Sierra") for an aggregate purchase price of approximately
$121,221,000, including transaction costs of $1,221,000. Additionally, the
Company incurred $2,261,000 of deferred financing fees related to its
financing of the acquisition. 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 revolving credit
agreement, whereby term debt commitments available thereunder were
increased to $195,000,000.
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 $65,755,000 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.
MIRACLE-GRO
Effective May 19, 1995, the Company completed the merger transactions with
Stern's Miracle-Gro Products, Inc. ("Miracle-Gro Products") and affiliated
companies (the "Miracle-Gro Companies") for an aggregate purchase price of
approximately $195,689,000. The consideration was comprised of $195,000,000
face amount of Class A Convertible Preferred Stock of Scotts with a fair
value of $177,255,000, warrants to purchase 3,000,000 common shares of
Scotts with a fair value of $14,434,000 and $4,000,000 of estimated
transaction costs. The Preferred Stock has a dividend yield of 5.0% and is
convertible into common shares of Scotts at $19.00 per share. The warrants
are exercisable for 1,000,000 common shares at $21.00 per share, 1,000,000
common shares at $25.00 per share and 1,000,000 common shares at $29.00 per
share. The fair value of the warrants has been included in capital in
excess of par value in the Company's September 30, 1995 balance sheet.
The Miracle-Gro Companies are engaged in the marketing and distribution of
plant foods and lawn and garden products primarily in the United States and
Canada and Europe. On December 31, 1994, Miracle-Gro Products Limited ("MG
Limited"), a subsidiary of Miracle-Gro, entered into an agreement to
exchange its equipment and a license for distribution of Miracle-Gro
products in certain areas of Europe for a 32.5% equity interest in a U.K.
based garden products company. The initial period of the license is five
years and may be extended up to twenty years from January 1, 1995, under
certain circumstances set forth in the license agreement. MG Limited is
entitled to annual royalties for the first five years of the license.
The Federal Trade Commission ("FTC"), in granting permission for the
acquisition of the Miracle-Gro Companies, required that the Company divest
its Peters line of consumer water soluble fertilizers. See Note 3.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The merger transactions have been 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
the acquisition. The excess of purchase price over the estimated fair
values of the net assets acquired ("goodwill") of approximately $82,182,000
and trademarks of $90,000,000 are being amortized on a straight-line basis
over 40 years. The Miracle-Gro Companies results of operations have been
included in the Consolidated Statements of Income from the acquisition date
of May 19, 1995.
The following pro forma results of operations give effect to the above
Sierra acquisition as if it had occurred on October 1, 1992 and the
Miracle-Gro Companies acquisition as if it had occurred on October 1, 1993.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
YEAR ENDED
SEPTEMBER 30
1994 1995
Net sales $726,231 $821,189
======= =======
Income before
extraordinary
item and cumulative $ 36,607 $ 32,943
effect of accounting ======== ========
changes
Net income $ 35,615 $ 32,943
======== ========
Income per common share
before extraordinary item
and cumulative effect $ 1.26 $ 1.13
of accounting changes ========== ==========
Net income per common $ 1.23 $ 1.13
share ========== ==========
On a pro forma basis, The Miracle-Gro Companies contributed net sales of
$99,066,000 and $110,225,000, net income of $12,839,000 and $13,026,000 and
net income (loss) per common share of $(.01) and $.02 for the years ended
September 30, 1994 and 1995, respectively. For purposes of computing net
income per common share, the Class A Convertible Preferred Stock is
considered a common share equivalent. Pro forma primary net income per
common share for the years ended September 30, 1994 and 1995 are calculated
using the weighted average common shares outstanding for Scotts of
18,785,000 and 22,617,000, respectively, and the common shares that would
have been issued assuming conversion of Class A Convertible Preferred Stock
at the beginning of the year to 10,263,000 common shares. The computation
of pro forma primary net income per common share assuming reduction of net
income for preferred dividends and no conversion of Class A Convertible
Preferred Stock was anti-dilutive.
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 the Miracle-Gro Companies acquisition had occurred as
of October 1, 1993, and is not intended to be indicative of future results
or trends.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PETERS DIVESTITURE
On July 28, 1995, the Company divested its Peters line of U.S. consumer
water-soluble fertilizers for approximately $9,966,000. The gain on the
divestiture was approximately $4,200,000. In connection with this
transaction, the Company has entered into a supply agreement through August
26, 1997 in which the Company will produce all product requirements for the
buyer at cost plus an agreed upon profit percentage. The transaction is
pursuant to a FTC consent order which the Company entered into in
connection with its merger transactions with the Miracle-Gro Companies.
5. OTHER EXPENSES
Other expenses consisted of the following for the years ended September 30:
(in thousands)
1993 1994 1995
---- ---- ----
Foreign currency loss $ 196 $ 168 $ 337
Royalty income (980) (1,726) (857)
Amortization 1,625 3,888 5,309
Gain on Peters divestiture (4,227)
Equity in loss of
unconsolidated 1,216
businesses
Other (181) (47) (218)
-------- --------- -------
Total $ 660 $ 2,283 $ 1,560
======== ======= =======
6. PENSION
Scotts Ohio, Sierra and Scotts' Miracle-Gro have defined benefit pension
plans covering substantially all full-time associates who have completed
one year of eligible service and reached the age of 21. The benefits under
these plans are based on years of service and the associates' average final
compensation for the Scotts Ohio plan and for Sierra salaried employees and
stated amounts for Sierra hourly employees. The Company's funding policy,
consistent with statutory requirements and tax considerations, is based on
actuarial computations using the Projected Unit Credit method.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the plans' funded status and the related
amounts recognized in the Consolidated Balance Sheets.
(in thousands) September 30,
1994 1995
----------------------
Over- Under-
Funded Funded
Actuarial present value of benefit obligations: Accumulated benefit
obligation:
Vested benefits .................. $(29,768) $(31,436) $(1,593)
Nonvested benefits ............... (5,093) (5,241) (496)
Additional obligation for
projected compensation increases.... (5,919) (6,669) (130)
-------- -------- -------
Projected benefit obligation for
service rendered to date................ (40,780) (43,346) (2,219)
Plan assets at fair value, primarily
corporate bonds, U.S. bonds and cash
equivalents............................. 38,901 40,287 1,468
-------- -------- -------
Plan assets less than projected
benefit obligations....................... (1,879) (3,059) (751)
Unrecognized net asset being
amortized over 11-1/2 years............... (234) (297) 16
Unrecognized net loss .................... 4,137 5,197 148
-------- -------- -------
Prepaid pension costs ................ $ 2,024 $ 1,841 $ (587)
======== =======
Pension cost includes the following components:
Year Ended September 30,
(in thousands) 1993 1994 1995
---- ---- ----
Service cost $ 1,571 $ 1,685 $ 1,732
Interest cost 2,628 2,968 3,280
Actual return on plan (2,774) (3,092) (5,104)
assets
Net amortization and (18) (53) 2,046
deferral ------- ------- -----
Net pension cost $ 1,407 $ 1,508 $ 1,954
===== ===== =====
The weighted average settlement rate used in determining the actuarial
present value of the projected benefit obligation was 8% as of September
30, 1993, 1994 and 1995. Future compensation was assumed to increase 4%
annually for fiscal 1993, 1994 and 1995. The expected long-term rate of
return on plan assets was 9% in fiscal 1993, 1994 and 1995.
The Company has a non-qualified supplemental pension plan covering certain
employees, which provides for incremental pension payments from the
Company's funds so that total pension payments equal amounts that would
have been payable from the Company's pension plans if it were not for
limitations imposed by income tax regulations. The projected benefit
obligation relating to this unfunded plan totaled $1,498,000 and $1,240,000
at September 30, 1994 and 1995, respectively. Pension expense for the plan
was $171,000 and $445,000 in 1994 and 1995, respectively.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. ASSOCIATE BENEFITS
The Company provides comprehensive major medical benefits to some of its
retired associates and their dependents. Substantially all of the Company's
associates become eligible for these benefits if they retire at age 55 or
older with more than ten years of service. The plan requires certain
minimum contributions from retired associates and includes provisions to
limit the overall cost increases the Company is required to cover. The
Company funds its portion of retiree medical benefits on a pay-as-you-go
basis.
Effective October 1, 1992, the Company changed its method of accounting for
postretirement benefit costs other than pensions by adopting SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
The Company elected to immediately recognize the cumulative effect of the
change in accounting which resulted in a charge of $14,932,000, net of
income taxes, of $9,348,000, or $.76 per share. In addition to the
cumulative effect, the Company's retiree medical costs applying the new
accounting method increased $1,437,000, net of income taxes, of $929,000,
or $.07 per share, during fiscal 1993 as a result of the change in
accounting. Prior to October 1, 1993, the Company effected several changes
in plan provisions, primarily related to current and ultimate levels of
retiree and dependent contributions. Current retirees will be entitled to
benefits existing prior to these plan changes. These plan changes resulted
in a reduction in unrecognized prior service cost, which is being amortized
over future years.
Net periodic postretirement benefit costs for fiscal 1994 and 1995 included
the following components:
1994 1995
---- ----
(in thousands)
Service cost - benefits attributed
to associate $ 419 $ 428
service during the year
Interest cost on accumulated
postretirement 1,276 1,446
benefit obligation
Amortization of prior service costs
and gains
from changes in assumptions (921) (904)
------- -------
Net periodic postretirement $ 774 $ 970
benefit cost ======= =======
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the retiree medical plan status reconciled
to the amount included in the Consolidated Balance Sheets, as of September
30, 1994 and 1995.
1994 1995
---- ----
(in thousands)
Accumulated postretirement benefit
obligation:
Retirees $ 7,136 $ 10,034
Fully eligible active plan 437 395
participants
Other active plan participants 8,789 9,071
------- -------
Total accumulated postretirement
benefit obligation 16,362 19,500
Unrecognized prior service cost 8,590 7,686
Unrecognized gain (loss) from
changes in assumptions 2,062 (27)
------- --------
Accrued postretirement benefit cost $ 27,014 $ 27,159
====== ======
The discount rates used in determining the accumulated postretirement
benefit obligation were 8.5% and 8.0% in 1994 and 1995, respectively. For
measurement purposes, a 14% annual rate of increase in per capita cost of
covered retiree medical benefits was assumed for fiscal 1994 and a 12%
annual rate for 1995; the rate was assumed to decrease gradually to 5.5%
through the year 2014 and remain at that level thereafter. A 1% increase in
the health care cost trend rate assumptions would increase the accumulated
postretirement benefit obligation as of September 30, 1994 and 1995 by
$957,000 and $1,072,000, respectively.
Both Scotts Ohio and Hyponex have defined contribution profit sharing
plans. Both plans provide for associates to become participants following
one year of service. The Hyponex plan also requires associates to have
reached the age of 21 for participation. The plans provide for annual
contributions which are entirely at the discretion of the respective Board
of Directors.
Contributions are allocated among the participants employed as of the last
day of the calendar year, based upon participants' earnings. Each
participant's share of the annual contributions vest according to the
provisions of the plans. The Company has provided a profit sharing
provision for the plans of $1,993,000, $2,097,000 and $1,498,000 for fiscal
1993, 1994 and 1995, respectively. The Company's policy is to deposit the
contributions with the trustee in the following year.
Sierra has a savings and investment plan ("401K Plan") for certain salaried
U.S. employees. Participants may make voluntary contributions to the plan
between 2% and 16% of their compensation. Sierra contributes the lesser of
50% of each participant's contribution or 3% of each participant's
compensation. Sierra's contribution for 1994 and 1995 were $99,000 and
$70,000, respectively.
The Company is self-insured for certain health benefits up to $200,000 per
occurrence per individual. The cost of such benefits is recognized as
expense in the period the claim occurred. This cost was $6,662,000,
$6,177,000 and $7,861,000 in 1993, 1994 and 1995, respectively. The Company
is self-insured for State of Ohio workers compensation up to $500,000 per
claim. The cost for workers compensation was $268,000, $297,000 and
$331,000 in 1993, 1994 and 1995, respectively. Claims in excess of stated
limits of liability and claims for workers compensation outside of the
State of Ohio are insured with commercial carriers. The Company had an
accrued vacation liability of $4,903,000 and $4,791,000 at September 30,
1994 and 1995, respectively.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Adoption of this standard in the first quarter of fiscal
1995 had no material effect on the financial statements.
8. DEBT
(in thousands)
1994 1995
---- ----
Revolving credit line $ 53,416 $ 172,597
9 7/8% Senior Subordinated Notes
$100 million 99,221 99,307
face amount
Term loan 93,598 -
Capital lease obligations and other 1,066 639
--------- ----------
247,301 272,543
Less current portions 27,171 518
-------- ----------
$ 220,130 $ 272,025
======= =======
Maturities of term debt for the next five years are as follows:
(in thousands)
1996 $ 518
1997 140
1998 78
1999 -
2000 and thereafter 272,500
On March 17, 1995, the Company entered into the Fourth Amended and Restated
Credit Agreement ("Agreement") with Chemical Bank ("Chemical") and various
participating banks. The Agreement provides, on an unsecured basis, up to
$375 million to the Company, comprised of an uncommitted advance facility
and a committed revolving credit facility through the scheduled termination
date of March 31, 2000. The Agreement contains a requirement limiting the
maximum amount borrowed to $225 million for a minimum of 30 consecutive
days each fiscal year.
Interest pursuant to the commercial paper/competitive advance facility is
determined by auction. Interest pursuant to the revolving credit facility
is at a floating rate initially equal, at the Company's option, to the
Alternate Base Rate as defined in the Agreement without additional margin
or the Eurodollar Rate as defined in the Agreement plus a margin of .3125%
per annum, which margin may be decreased to .25% or increased up to .625%
based on the changes in the unsecured debt ratings of the Company.
Applicable interest rates for the various borrowing facilities ranged from
5.9% to 6.2% at September 30, 1995. The Agreement provides for the payment
of an annual administration fee of $100,000 and a facility fee of .1875%
per annum, which fee may be reduced to .15% or increased up to .375% based
on the unsecured debt ratings of the Company.
The Agreement contains certain financial and operating covenants, including
maintenance of interest coverage ratios, maintenance of consolidated net
worth, and restrictions on additional indebtedness and capital
expenditures. Dividends and stock repurchases are restricted only in the
event of default. The Company was in compliance with all required covenants
at September 30, 1995.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 1995, the Company had available an unsecured $2,000,000
line of credit with a bank, which is renewable annually, of which
$1,916,000 and $97,000 was outstanding at September 30, 1994 and 1995,
respectively.
On July 19, 1994, the Company issued $100,000,000 9 7/8% Senior
Subordinated Notes. Net proceeds were $96,354,000, after original issue
discount of $788,000 and expenses of $2,858,000. The Notes are subject to
redemption, at the option of the Company, in whole or in part at any time
on or after August 1, 1999 at a declining premium to par until 2001 and at
par thereafter and are not subject to sinking fund requirements. The fair
market value of the 9 7/8% Senior Subordinated Notes, estimated based on
the quoted market prices for same or similar issues was approximately
$107,203,000 at September 30, 1995.
9. SHAREHOLDERS' EQUITY
STOCK
(in thousands)
1994 1995
---- ----
Class A Convertible
Preferred Stock, no par
value:
Authorized None 195,000 shares
Issued None 195,000 shares
Common shares, no par value
Authorized 35,000 shares 50,000 shares
Issued 21,082 shares 21,082 shares
On February 23, 1993, the Company purchased all of the shares of Class A
Common Stock held by a fund managed by Clayton, Dubilier & Rice, Inc. In
aggregate, 2,414,895 shares of Class A Common Stock were purchased for
approximately $41,441,000, including transaction costs. As a result of this
transaction, 18,667,064 and 18,693,934 Common Shares were outstanding as of
September 30, 1994 and 1995, respectively.
Effective with the Miracle-Gro Companies merger transactions, $195,000,000
face amount of Class A Convertible Preferred Stock was issued as part of
the purchase price. This Preferred Stock is convertible into 10,263,158
common shares at $19.00 per common share. Additionally, warrants to
purchase 3,000,000 common shares of Scotts were issued as part of the
purchase price. The warrants are exercisable for 1,000,000 common shares at
$21.00 per share, 1,000,000 common shares at $25.00 per share and 1,000,000
common shares at $29.00 per share. The exercise term for the warrants
expires September 2003. The fair value of the warrants has been included in
capital in excess of par value in the Company's September 30, 1995 balance
sheet.
The Class A Convertible Preferred Stock has certain voting restrictions and
limits on the ability of the shareholders to acquire additional voting
securities of the Company. The Class A Convertible Preferred Stock is
subject to redemption five years from the date of issuance. Both the Class
A Convertible Preferred Stock and the warrants have limits on
transferability.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On November 4, 1992, Scotts adopted The Scotts Company 1992 Long Term
Incentive Plan (the "Plan"). The Plan was approved by the shareholders at
Scotts' annual meeting on February 25, 1993. Under the Plan, stock options,
stock appreciation rights and performance share awards may be granted to
officers and other key employees of the Company. The Plan also provides for
Board members, who are neither employees of the Company nor associated with
Clayton, Dubilier & Rice, Inc., to receive stock options. The maximum
number of common shares that may be issued under the Plan is 1,700,000,
plus the number of shares surrendered to exercise options (other than
director options) granted under the Plan, up to a maximum of 1,000,000
surrendered shares.
In addition, pursuant to various employment agreements, the Company granted
300,000 stock options in fiscal 1993.
Aggregate stock option activity consists of the following:
Year Ended September 30
1993 1994 1995
---- ---- ----
Options outstanding at 136,364 586,289 1,364,589
October 1
Options granted 449,925 942,354 435,420
Options exercised - (8,529) (26,870)
Options canceled (155,525) (111,014)
--------- ---------- -----------
-
Options outstanding at 586,289 1,364,589 1,662,125
======= ========= =========
September 30
Options exercisable at 90,910 204,422 575,938
=========== ============ ============
September 30
Option prices per share:
Granted $16.25-$18.75 $17.25-$19.375 $15.50-$21.375
============= ============== ==============
Exercised $18.75 $16.25
====== ======
During fiscal 1993 and 1994, 128,880 and 117,220, respectively, of
performance share awards were granted. These awards entitle the grantee to
receive shares or, at the grantee's election, the equivalent value in cash
or stock options, subject to stock ownership requirements. These awards are
conditioned on the attainment of certain performance and other objectives
established by the Compensation and Organization Committee of Scotts' Board
of Directors.
Compensation for certain stock options results from the difference between
the grant price and market price at the date of grant, and is recognized
over the vesting period of the options. Compensation for performance share
awards is initially measured at the grant date based upon the current
market value of the common shares, with adjustments made quarterly for
market price fluctuations. The Company recognized compensation expense for
stock options and performance share awards of $635,000 and $0 in fiscal
1993 and 1994, respectively. In 1995, the Plan was amended to cancel
outstanding performance share awards. Previously recognized compensation of
$300,000 was recognized as a reduction of compensation expense.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to an employment agreement, an officer of Scotts purchased 45,454
common shares at a purchase price of $9.90 per share in January 1992. The
Company has recognized $118,000 of unearned compensation equivalent to the
difference between the fair market value and the purchase price of the
common shares as a charge to capital in excess of par value. This unearned
compensation is being amortized on a straight line basis over the period of
the employment agreement.
A significant portion of the price paid by certain officers and management
associates is financed by a major bank. The Company has guaranteed the full
and prompt payment of debt outstanding by management investors to purchase
common shares of approximately $230,000, $140,000 and $-0- at September 30,
1993, 1994 and 1995, respectively.
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.
10. NET INCOME PER COMMON SHARE
Net income per common share is based on the weighted average number of
common shares and common share equivalents (stock options, convertible
preferred stock and warrants) outstanding each period.
The following table presents information necessary to calculate net income
per common share for fiscal years ended September 30, 1993, 1994 and 1995.
YEAR ENDED SEPTEMBER 30,
(in thousands) 1993 1994 1995
---- ---- ----
Common shares outstanding
Weighted average 19,607 18,663 18,670
outstanding
Common share equivalents 80 122 3,947
-------- -------- --------
Adjusted outstanding 19,687 18,785 22,617
======== ======== ========
Net income
Net income before
extraordinary
items and cumulative
effect of
accounting changes $1.07 $1.27 $0.99
Extraordinary Items
Loss on early
extinguishment
of debt, net of tax - (0.05) -
Cumulative effect of
changes
in accounting for
postretirement
benefits, net of tax and
income
taxes (0.67) - -
------ -- --
Net income per common share $0.40 $1.22 $0.99
========= ========== ==========
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For 1993, 1994 and 1995, fully diluted net income per common share is
considered to be the same as primary net income per common share as it was
not materially different than primary net income per common share.
11. INCOME TAXES
The Company adopted SFAS No. 109 effective October 1, 1992, resulting in a
benefit of $1,775,000 being reported as a cumulative effect of accounting
change in the fiscal 1993 Consolidated Statement of Income. Assets recorded
in prior business combinations net-of-tax were adjusted to pre-tax amounts,
resulting in recognition of $1,501,000 of deferred tax liabilities at the
date of adoption.
The provision for income taxes consists of the following:
(in thousands) YEAR ENDED SEPTEMBER 30,
1993 1994 1995
---- ---- ----
Currently Payable:
Federal $14,537 $ 7,400 $ 9,373
State 1,400 2,131 2,634
Foreign - 2,376 4,487
Deferred:
Federal (11,694) 4,290 (2,220)
State (1,046) 1,088 (376)
--------- ------- -------
Income Tax Expense $ 3,197 $17,285 $13,898
======= ====== ======
Income tax expense is included in the financial statements as follows:
(in thousands)
Operations $14,320 $17,947 $13,898
Cumulative effect of change
in accounting principle (11,123) - -
Extraordinary items - (662) -
----------- -------- ----------
Income Tax Expense $ 3,197 $17,285 $13,898
======= ====== ======
Deferred income taxes for fiscal 1994 and 1995 reflect the impact of
differences between the amounts of assets and liabilities for financial
reporting purposes and such amounts as determined by tax regulations.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net deferred tax asset (liability) are as follows:
(in thousands) SEPTEMBER 30,
1994 1995
ASSETS
Accounts receivable $ 987 $ 1,024
Inventory 1,816 3,453
Accrued expenses 7,649 9,181
Postretirement benefits 10,576 10,633
Other 4,166 4,776
------- -------
Gross deferred tax assets $ 25,194 $ 29,067
------ ------
LIABILITIES
Property and equipment (16,511) (18,288)
Taxes on repatriated foreign ( 500) -
earnings -------- -----------
Gross deferred tax liabilities (17,011) (18,288)
------ ------
Net asset $ 8,183 $ 10,779
======= ======
The net current and non-current components of deferred income taxes
recognized in the Consolidated Balance Sheets at September 30 are:
(in thousands) 1994 1995
---- ----
Net current asset $ 10,452 $ 14,563
Net non-current asset (liability) (2,269) (3,784)
-------- --------
Net asset $ 8,183 $ 10,779
======= ======
A reconciliation of the Federal corporate income tax rate and the effective
tax rate on income before income taxes is summarized below:
YEAR ENDED SEPTEMBER 30,
1993 1994 1995
---- ---- ----
Statutory income tax rate 35.0% 35.0% 35.0%
Pension amortization 0.7 0.1 0.1
Peters sale - - (3.0)
Goodwill amortization and
other
permanent differences 4.7 2.1 3.4
resulting
from purchase accounting
State taxes, net of federal 3.4 5.6 4.4
benefit
Reversal of previous tax
contingencies - - (3.9)
Other (3.3) 0.1 2.3
------ ----- -----
Effective income tax rate 40.5% 42.9% 38.3%
==== ==== ====
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company acquired certain tax credit carryforwards in connection with
its acquisition of Sierra. Net operating loss carryforwards in the U.S.
total $2,965,000 and expire through 2007. Net operating loss carryforwards
in foreign jurisdictions total $1,059,000 and expire through 2000. The use
of these acquired carryforwards is subject to limitations imposed by the
Internal Revenue Code.
12. LEASES
The Company leases buildings, land and equipment under various
noncancellable lease agreements for periods of two to six years. The lease
agreements generally provide that the Company pay taxes, insurance and
maintenance expenses related to the leased assets. Certain lease agreements
contain purchase options. At September 30, 1995, future minimum lease
payments were as follows:
Year Ending Capital Operating
September 30, Leases Leases Total
(In Thousands)
1996 $ 481 $ 10,106 $10,587
1997 168 9,146 9,314
1998 72 6,608 6,680
1999 - 4,151 4,151
2000 and - 3,155 3,155
thereafter ------ ------- -------
Total minimum 721 $ 33,166 $ 33,887
lease payments ====== ======
Less: Amount
representing
interest 82
Present value
of net
minimum $ 639
lease payments ===
The Company also leases transportation and production equipment under
various one-year operating leases, which provide for the extension of the
initial term on a monthly or annual basis. Total rental expenses for
operating leases were $9,125,000, $12,914,000 and $14,660,000 for fiscal
1993, 1994 and 1995, respectively.
13. COMMITMENTS AND CONTINGENCIES
Seed production agreements obligate the Company to make future purchases
based on estimated yields. Seed purchases under production agreements for
fiscal 1993, 1994 and 1995 were approximately $9,281,000, $6,508,000 and
$6,934,903, respectively. At September 30, 1995, estimated annual seed
purchase commitments were as follows:
Year Ending
September 30,
(In Thousands)
1996 $12,310
1997 5,780
1998 3,868
1999 1,706
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company had a contractual commitment to purchase neem-based
bioinsecticide. The commitment was a multi-year, take or pay arrangement.
The Company was relieved of the take or pay commitment during fiscal 1995
and reduced material costs by $1,137,500 representing liabilities related
to this contract.
Sierra has a supply agreement through 2000, subject to renewal thereafter,
under which Sierra is required to purchase, at prices determined by
formulas, 100% of its requirements for vermiculite.
The Company is involved in various lawsuits and claims which arise in the
normal course of business. In the opinion of management, these claims
individually and in the aggregate are not expected to result in a material
adverse effect on the Company's financial position or results of
operations, however, there can be no assurance that future quarterly or
annual operating results will not be materially affected by final
resolution of these matters. The following details the more significant of
these matters.
In September, 1991, the Company was identified by the Ohio Environmental
Protection Agency (the "Ohio EPA") as a Potentially Responsible Party
("PRP") with respect to a site in Union County, Ohio (the "Hershberger
site") that has allegedly been contaminated by hazardous substances whose
transportation, treatment or disposal the Company allegedly arranged.
Pursuant to a consent order with the Ohio EPA, the Company, together with
four other PRP's identified to date, investigated the extent of
contamination in the Hershberger site. The results of the investigation
were that the site presents a low degree of risk and that the chemical
compounds which contribute to the risk are not compounds used by the
Company. Accordingly, the Company has elected not to participate in any
remediation which might be required at the site. As a result of the joint
and several liability of PRPs, the Company might possibly 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 conditions.
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 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. Many other
companies are participating in the remediation of this site, and issues
relating to the allocation of the costs have been resolved with the Company
being identified as a de minimis contributor. The Company settled this
matter by means of a one-time payment totalling $1,000 to the
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
United States EPA and the State of California. 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.
Sierra 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, Sierra'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 anticipated levels of compliance, management
estimates Sierra's liability to be $200,000, which has been accrued in the
financial statements.
During 1993 and 1994, 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 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.
14. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of trade accounts
receivable. The Company sells its consumer products to a wide variety of
retailers, including mass merchandisers, home centers, independent
hardware stores, nurseries, garden outlets, warehouse clubs and local and
regional chains. Professional products are sold to golf courses, schools
and sports fields, nurseries, lawn care service companies and growers of
specialty agriculture crops.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1993 and 1994, two customers accounted for 18.0% and 9.3% and 15.1% and
9.5% of consolidated net sales, respectively. In 1995, three customers
account for 14.4%, 13.1%, and 5.9% of consolidated net sales. No other
customer accounted for more than 5% of consolidated net sales. As of
September 30, 1995, three accounts comprised 16.1% and 10.7% and 2.4% of
outstanding trade accounts receivable. The Company performs a credit
review before extending credit to a customer. The Company establishes its
allowances for doubtful accounts based on factors surrounding the credit
risk of specific customers, historical trends and other information.
15. RELATED PARTIES
Clayton, Dubilier & Rice, Inc., a private investment firm in which a
director of the Company is an owner, was paid $125,000 in 1993 by the
Company for financial advisory and management consulting services. These
services ceased effective with the Class A Common Stock purchase described
in Note 8.
As part of the merger transactions with the Miracle-Gro Companies, the
Company assumed debt of which $1,600,000 was payable to the Hagedorn
Family Fund. This amount has since been repaid.
16. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations for fiscal 1994 and 1995 (in thousands except share data):
FISCAL 1994 JANUARY 1 APRIL 2 JULY 2 SEPTEMBER 30 FULL YEAR
----------- --------- ------- ------ ---------- ---------
Net sales .............. $ 68,326 $207,424 $200,915 $129,674 $606,339
Gross profit ........... 30,962 98,324 96,376 60,947 286,609
Income (loss) before
extraordinary ........ (1,557) 13,013 9,405 3,014 23,875
items
Net income (loss) ...... (1,557) 13,013 9,405 2,022 22,883
Net income (loss)
per common share:
Income (loss)
before extraordinary ... (.08) .69 .50 .16 1.27
item
Net income (loss) ...... (.08) .69 .50 .11 1.22
per common share
Common shares used
in net income per
common share
computation .......... 18,659 18,890 18,811 18,728 18,785
FISCAL 1995 DECEMBER 31 APRIL 1 JULY 1 SEPTEMBER 30 FULL YEAR
----------- ----------- ------- ------ ------------ ---------
Net sales $98,019 $236,092 $229,028 $169,698 $732,837
Gross profit 44,499 112,202 108,513 73,254 338,468
Net income (4,598) 13,793 13,026 135 22,356
(loss)(1)(2)
Net income (loss)
per common share (.25) .73 .55 (.12) 0.99
(1)(2)
Common shares used
in net income per
common share
computation 18,667 18,820 23,580 19,137 22,617
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Net income (loss) for each of the first three quarters of fiscal 1995
have been restated to reflect a change in the timing of expense
recognition related to a promotional allowance offered to retailers
introduced for the first time in fiscal 1995. The impact is on timing
of marketing promotional expense recognition in the first three
quarters of the fiscal year and did not impact full year net income.
The impact by quarters is as follows: increased the loss for the
quarter ended December 31, 1994 by $1,460 or $.08 per share; decreased
net income for the quarter ended April 1, 1995 by $1,021 or $.06 per
share; and increased net income for the quarter ended July 1, 1995 by
$2,481 or $.10 per share.
(2) Net income in the fourth quarter of fiscal 1995 has been restated to
reflect an increase in accrued liabilities for promotional allowances
to retail customers. The effect was to decrease net income in the
fourth quarter of fiscal 1995 by $2,727 or $.14 per common share.
F-27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Shareholders and Board of
Directors of The Scotts Company
Our report on the consolidated financial statements of The Scotts Company is
included on page F-2 of this Form 10-K. In connection with our audits of such
financial statements, we have also audited the financial statement schedules
listed in the index on page F-1 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the consolidated financial statements taken as a
whole, present fairly, in all material respects, the information required to
be included therein.
Coopers & Lybrand L. L. P.
Columbus, Ohio
November 15, 1995
F-28
<PAGE>
<TABLE>
THE SCOTTS COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the year ended September 30, 1993
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------
Balance at Additions charged to Deduction Balance at
Classification beginning of period costs and expenses from reserves end of period
- ------------------------------------------------------------------------------------------------------------------
Valuation and qualifying accounts
deducted from the assets to
which they apply:
<S> <C> <C> <C> <C>
Inventory reserve $ 3,159,000 $ 829,000 $ 177,000 $ 3,811,000
========= ========== ========== =========
Allowance for doubtful accounts $ 2,110,000 $ 1,409,000 $ 1,008,000 $ 2,511,000
========= ========= ========= =========
Other valuation and qualifying account:
Product guarantee $ 200,000 $ 620,000 $ 690,000 $ 130,000
========== ========== ========== ==========
</TABLE>
F-29
<PAGE>
<TABLE>
THE SCOTTS COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the year ended September 30, 1994
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------
Balance at Additions charged to Deduction Balance at
Classification beginning of period costs and expenses from reserves end of period
- ------------------------------------------------------------------------------------------------------------------
Valuation and qualifying accounts
deducted from the assets to
which they apply:
<S> <C> <C> <C> <C>
Inventory reserve $ 3,811,000 $ 2,987,000 $ 690,000 $ 6,108,000
========= ========= ========== =========
Allowance for doubtful accounts $ 2,511,000 $ 1,974,000 $ 1,552,000 $ 2,933,000
========= ========= ========= =========
Other valuation and qualifying account:
Product guarantee $ 130,000 $ 778,000 $ 789,000 $ 119,000
========== ========== ========== ==========
</TABLE>
F-30
<PAGE>
<TABLE>
THE SCOTTS COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the year ended September 30, 1995
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------
Balance at Additions charged to Deduction Balance at
Classification beginning of period costs and expenses from reserves end of period
- ------------------------------------------------------------------------------------------------------------------
Valuation and qualifying accounts
deducted from the assets to
which they apply:
<S> <C> <C> <C> <C>
Inventory reserve $6,108,000 $2,986,000 $2,383,000 $6,711,000
========= ========= ========= =========
Allowance for doubtful accounts $2,933,000 $2,033,000 $1,560,000 $3,406,000
========= ========= ========= =========
Other valuation and qualifying account:
Product guarantee $ 119,000 $ 920,000 $ 933,000 $ 106,000
========== ========== ========== ==========
</TABLE>
F-31
<PAGE>
THE SCOTTS COMPANY
Annual Report on Form 10-K
for the
Fiscal Year Ended September 30, 1995
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION LOCATION
NO.
2 Amended and Restated Incorporated herein
Agreement and Plan of by reference to the
Merger, dated as of Registrant's Current
May 19, 1995, among Report on Form 8-K
Stern's Miracle-Gro filed with the
Products, Inc., Stern's Securities and
Nurseries, Inc., Exchange Commission
Miracle-Gro Lawn (the "SEC") on
Products, Inc., June 2, 1995 (File
Miracle-Gro Products No. 0-19768)
Limited, Hagedorn [Exhibit 2(b)]
Partnership, L.P., the
general partners of
Hagedorn Partnership,
L.P., Horace Hagedorn,
Community Funds, Inc.,
and John Kenlon, the
Registrant, and ZYX
Corporation
3(a) Amended Articles of Incorporated herein
Incorporation of the by reference to the
Registrant as filed with Registrant's Annual
the Ohio Secretary of Report on Form 10-K
State on September 20, for the fiscal year
1994 ended September 30,
1994 (File
No. 0-19768)
[Exhibit 3(a)]
3(b) Certificate of Amendment Incorporated herein
by Shareholders to the by reference to the
Articles of Registrant's
Incorporation of the Quarterly Report on
Registrant as filed with Form 10-Q for the
the Ohio Secretary of fiscal quarter ended
State on May 4, 1995. April 1, 1995 (File
No. 0-19768)
[Exhibit 4(b)]
3(c) Regulations of the Incorporated herein
Registrant (reflecting by reference to the
amendments adopted by Registrant's
the shareholders of the Quarterly Report on
Registrant on April 6, Form 10-Q for the
1995) fiscal quarter ended
April 1, 1995 (File
No. 0-19768)
[Exhibit 4(c)]
4(a) Form of Series A Warrant Included in Exhibit
2(b) above
4(b) Form of Series B Warrant Included in Exhibit
2(b) above
4(c) Form of Series C Warrant Included in Exhibit
2(b) above
E-1
<PAGE>
EXHIBIT DESCRIPTION LOCATION
NO.
4(d) Fourth Amended and Incorporated herein by
Restated Credit reference to the
Agreement, dated as of Registrant's Quarterly
March 17, 1995, among Report on Form 10-Q
the Registrant, Chemical for the fiscal quarter
Bank, the lenders party ended April 1, 1995
thereto and Chemical (File No. 0-19768)
Bank, as agent [Exhibit 4(d)]
4(e) Subordinated Indenture, Incorporated herein by
dated as of June 1, reference to Scotts
1994, among The Scotts Delaware's
Company, a Delaware Registration Statement
Corporation ("Scotts on Form S-3 filed with
Delaware"), The the SEC on June 1,
O. M. Scott & Sons 1994 (Registration
Company ("OMS") and No. 33-53941)
Chemical Bank, as trustee [Exhibit 4(b)]
4(f) First Supplemental Incorporated herein by
Indenture, dated as of reference to Scotts
July 12, 1994, among Delaware's Current
Scotts Delaware, OMS and Report on Form 8-K
Chemical Bank, as trustee dated July 18, 1994
(File No. 0-19768)
[Exhibit 4.1]
4(g) Second Supplemental Incorporated herein by
Indenture, dated as of reference to the
September 20, 1994, Registrant's Annual
among the Registrant, Report on Form 10-K
OMS, Scotts Delaware and for the fiscal year
Chemical Bank, as trustee ended September 30,
1994 (File
No. 0-19768)
[Exhibit 4(i)]
4(h) Third Supplemental Incorporated herein by
Indenture, dated as of reference to the
September 30, 1994, Registrant's Annual
between the Registrant Report on Form 10-K
and Chemical Bank, as for the fiscal year
trustee ended September 30,
1994 (File
No. 0-19768)
[Exhibit 4(j)] ]
10(a) The Scotts Company Incorporated herein by
Employees' Pension Plan reference to the
Registrant's Annual Report on Form
10-K for the fiscal year ended
September 30, 1994 (File No.
0-19768) [Exhibit 10(a)]
10(b) First Amendment to The Incorporated herein by
Scotts Company reference to the
Employees' Pension Plan Registrant's Annual
dated April 18, 1995 Report on Form 10-K
for the fiscal year
ended September 30,
1995 (File
No. 1-11593)
[Exhibit 10(b)]
10(c) Second Amendment to The Incorporated herein by
Scotts Company reference to the
Associates' [Employees'] Registrant's Annual
Pension Plan dated Report on Form 10-K
December 5, 1995 and for the fiscal year
effective as of ended September 30,
December 31, 1995 1995 (File
No. 1-11593)
[Exhibit 10(c)]
10(d) Second Restatement of Incorporated herein by
The Scotts Company reference to the
Profit Sharing and Registrant's Annual
Savings Plan Report on Form 10-K
for the fiscal year
ended September 30,
1994 (File
No. 0-19768)
[Exhibit 10(b)]
E-2
<PAGE>
EXHIBIT DESCRIPTION LOCATION
NO.
10(e) First Amendment to the Incorporated herein
Second Restatement of The by reference to the
Scotts Company Profit Registrant's Annual
Sharing and Savings Plan Report on Form 10-K
effective as of July 1, for the fiscal year
1995 ended September 30,
1995 (File
No. 1-11593)
[Exhibit 10(e)]
10(f) Second Amendment to the Incorporated herein
Second Restatement of The by reference to the
Scotts Company Profit Registrant's Annual
Sharing and Savings Plan Report on Form 10-K
dated December 5, 1995 for the fiscal year
and effective as of ended September 30,
December 31, 1995 1995 (File
No. 1-11593)
[Exhibit 10(f)]
10(g) Supplemental Incorporated herein
Indemnification by reference to
Agreement, dated as of Scotts Delaware's
November 10, 1988, Current Report on
between RSL Holding Form 8-K dated
Company, Inc. and OMS November 9, 1988
Acquisition Corp. (File No. 33-18713)
("Hyponex') [Exhibit 2(d)]
10(h) Tax Administration Incorporated herein
Agreement, dated by reference to
November 10, 1988, Scotts Delaware's
between RSL Holding Annual Report on
Company, Inc. and Hyponex Form 10-K for the
fiscal year ended
September 30, 1988
(File No. 33-18713)
[Exhibit 10(rr)]
10(i) Employment Agreement, Incorporated herein
dated as of October 21, by reference to
1991, between the Scotts Delaware's
Registrant (as successor Annual Report on
to OMS) and Theodore J. Form 10-K for the
Host fiscal year ended
September 30, 1993
(File No. 0-19768)
[Exhibit 10(g)]
10(j) Stock Option Plan and Incorporated herein
Agreement, dated as of by reference to the
January 9, 1992, between Registrant's Annual
the Registrant (as Report on Form 10-K
successor to Scotts for the fiscal year
Delaware) and ended September 30,
Theodore J. Host 1994 (File
No. 0-19768)
[Exhibit 10(f)]
10(k) The O. M. Scott & Sons Incorporated herein
Company Excess Benefit by reference to
Plan effective October 1, Scotts Delaware's
1993 Annual Report on
Form 10-K for the
fiscal year ended
September 30, 1993
(File No. 0-19768)
[Exhibit 10(h)]
10(l) The Scotts Company 1992 Incorporated herein
Long Term Incentive Plan by reference to
Scotts Delaware's Registration
Statement on Form S-8 filed with
the SEC on March 26, 1993
(Registration No. 33-60056)
[Exhibit 4(f)]
10(m) The Scotts Company 1995 Incorporated herein
Executive Annual by reference to the
Incentive Plan Registrant's Annual
Report on Form 10-K
for the fiscal year
ended September 30,
1995 (File
No. 1-11593)
[Exhibit 10(m)]
E-3
<PAGE>
EXHIBIT DESCRIPTION LOCATION
NO.
10(n) Letter of understanding, Incorporated herein
dated October 11, 1993, by reference to the
regarding terms of Registrant's Annual
employment of Report on Form 10-K
John A. Neal by the for the fiscal year
Registrant ended September 30,
1995 (File
No. 1-11593)
[Exhibit 10(n)]
10(o) Letter of understanding, Incorporated herein
dated October 11, 1993, by reference to the
regarding terms of Registrant's Annual
employment of Report on Form 10-K
Lisle J. Smith by the for the fiscal year
Registrant ended September 30,
1995 (File
No. 1-11593)
[Exhibit 10(o)]
10(p) Employment Agreement, Incorporated herein
dated as of May 19, 1995, by reference to the
between the Registrant Registrant's Annual
and James Hagedorn Report on Form 10-K
for the fiscal year
ended September 30,
1995 (File
No. 1-11593)
[Exhibit 10(p)]
11(a) Computation of Net Income Page 60
Per Common Share
21 Subsidiaries of the Incorporated herein
Registrant by reference to the
Registrant's Annual Report on
Form 10-K for the fiscal year
ended September 30, 1995 (File
No. 1-11593) [Exhibit 21]
23 Consent of Independent Page 61
Accountants
27 Financial Data Schedule Page 62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By
Tadd C. Seitz
Chairman of the Board, Interim
President and Chief Executive Officer
Dated ____________________, 1996
E-4
<PAGE>
Exhibit 11(a)
THE SCOTTS COMPANY
Computation of Net Income Per Common Share
(in thousands except share amounts)
For The Three Months Ended For The Year Ended
-------------------------- ------------------
September September September September
30, 1994 30, 1995 30, 1994 30, 1995
--------- --------- --------- ---------
Net income for computing net
income per common share:
Income before extraordinary
items ......................... $ 3,014 $ 135 $ 23,875 $22,356
Extraordinary items:
Loss on early
extinguishment of debt,
net of tax ................. (992) (992)
------- ------- ---------- -------
Net income ....................... 2,022 135 22,883 22,356
Preferred stock
dividend (1) ............... -- (2,437) -- --
------- ------- ---------- -------
Net income (loss) applicable
to common shares .............. $ 2,022 (2,302) 22,883 22,356
======= ======= ========== =======
Net income (loss) per common ..... $ .16 $ (.12) $ 1.27 $ 0.99
share:
Income before extraordinary
items
Extraordinary items:
Loss on extinguishment of
debt, net of tax .............. (.05) -- (.05) --
--------- -------- ---------- -------
Net income (loss) per common
share ......................... $ .11 $ (.12) $ 1.22 $ 0.99
======= ======= ========== =======
Computation of Weighted Average Number
of Common Shares Outstanding
For The Three Months Ended For The Year Ended
-------------------------- ------------------
September September September September
30, 1994 30, 1995 30, 1994 30, 1995
--------- --------- --------- ---------
Weighted average common shares
outstanding during the 18,667,064 18,678,382 18,662,998 18,669,894
period
Assuming conversion of 3,706,140
preferred stock
Assuming exercise of options
using the
Treasury Stock Method 60,647 416,146 121,731 230,126
Assuming exercise of warrants
using the
Treasury Stock Method
42,102 10,525
------ ------
Weighted average number of
common 18,727,711 19,136,630 18,784,729 22,616,685
shares outstanding as ========== ========== ========== ==========
adjusted
Fully diluted weighted average common shares outstanding were not
materially different than primary weighted average common shares
outstanding for the periods presented.
(1) The convertible preferred stock is considered to be a common
stock equivalent since its effective yield is less than 66 2/3%
of the average Aa corporate bond yield. For the Three Months
Ended September 30, 1995 computation of Net Income per Common
Share, conversion of the convertible preferred stock is
antidilutive.
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
The Scotts Company on Form S-8 (File Nos. 33-47073 and 33-60056) of our report
dated November 15, 1995 on our audits of the consolidated financial statements
and our report dated November 15, 1995 on our audits of the financial
statement schedules of The Scotts Company as of September 30, 1994 and 1995
and for the years ended September 30, 1993, 1994 and 1995, which reports are
included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Columbus, Ohio
December 29, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME OF THE SCOTTS COMPANY AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K FOR THE YEAR ENDED
SEPTEMBER 30, 1995.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 7,028
<SECURITIES> 0
<RECEIVABLES> 176,525
<ALLOWANCES> 0
<INVENTORY> 143,953
<CURRENT-ASSETS> 350,860
<PP&E> 231,219
<DEPRECIATION> 82,465
<TOTAL-ASSETS> 809,045
<CURRENT-LIABILITIES> 123,862
<BONDS> 0
0
177,255
<COMMON> 211
<OTHER-SE> 203,324
<TOTAL-LIABILITY-AND-EQUITY> 809,045
<SALES> 732,837
<TOTAL-REVENUES> 737,140
<CGS> 394,369
<TOTAL-COSTS> 668,703
<OTHER-EXPENSES> 5,863
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,320
<INCOME-PRETAX> 36,254
<INCOME-TAX> 13,898
<INCOME-CONTINUING> 22,356
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,356
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.99
</TABLE>
