<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-11593
THE SCOTTS COMPANY
------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1199481
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14111 Scottslawn Road
Marysville, Ohio 43041
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(937) 644-0011
----------------------------------------------------
(Registrant's telephone number, including area code)
No change
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
18,597,147 Outstanding at May 7, 1997
- ----------------------------------- -------------------------------------
Common Shares, voting, no par value
Page 1 of 34 pages
Exhibit Index at page 23
<PAGE> 2
THE SCOTTS COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Operations - Three month and six
month periods ended March 29, 1997 and March 30, 1996 3
Consolidated Statements of Cash Flows - Six month periods
ended March 29, 1997 and March 30, 1996 4
Consolidated Balance Sheets -
March 29, 1997, March 30, 1996 and September 30, 1996 5
Notes to Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-20
Part II. Other Information
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit Index 23
</TABLE>
Page 2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ------------------------
March 29 March 30 March 29 March 30
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $346.2 $251.2 $446.4 $369.2
Cost of sales 207.8 163.5 275.4 244.7
------ ------ ------ ------
Gross profit 138.4 87.7 171.0 124.5
Selling, general and administrative 40.1 34.3 66.7 63.4
Advertising and promotion 35.0 21.7 43.5 31.0
Amortization of goodwill and other intangibles 2.7 2.2 4.9 4.4
Other expenses, net 3.2 2.4 3.5 4.6
------ ------ ------ ------
Income from operations 57.4 27.1 52.4 21.1
Interest expense 8.3 8.1 13.9 14.7
------ ------ ------ ------
Income before income taxes 49.1 19.0 38.5 6.4
Income taxes 21.2 8.4 16.6 2.9
------ ------ ------ ------
Net income 27.9 10.6 21.9 3.5
Preferred stock dividends 2.4 2.4 4.9 4.9
------ ------ ------ ------
Income (loss) applicable to common shareholders $ 25.5 $ 8.2 $ 17.0 $ (1.4)
====== ====== ====== ======
Income (loss) per common share (note 8) $ .95 $ .36 $ .75 $ (.08)
====== ======= ====== ======
Common shares used in per common
share computation 29.3 29.4 29.2 18.8
====== ======= ====== ======
</TABLE>
See Notes to Consolidated Financial Statements
Page 3
<PAGE> 4
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
March 29 March 30
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 21.9 $ 3.5
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 14.8 14.3
Equity in income of unconsolidated business (.1) (.4)
Postretirement benefits .1 .1
Net increase in certain components of
working capital (177.6) (162.8)
Net increase in other assets and
liabilities and other adjustments 2.3 2.0
------ ------
Net cash used in operating activities (138.6) (143.3)
----- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment, net (4.1) (8.3)
Acquisition of Miracle Holdings Limited (47.1) -
------ ------
Net cash used in investing activities (51.2) (8.3)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on term and other debt (.3) (.3)
Revolving lines of credit and bank line of credit, net 200.5 153.3
Issuance of Common Shares .4 5.1
Deferred financing costs incurred (.2) -
Dividends on preferred stock (4.9) (4.9)
------- ------
Net cash provided by financing activities 195.5 153.2
----- ------
Effect of exchange rate changes on cash (4.3) (.2)
------- ------
Net increase in cash 1.4 1.5
Cash at beginning of period 10.6 7.0
------ ------
Cash at end of period $ 12.0 $ 8.5
====== ======
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of amount capitalized $ 11.0 $ 12.2
Income taxes paid $ 1.9 $ 2.6
Business acquired:
Fair value of assets acquired $103.5
Liabilities assumed 45.3
Net cost for acquisition 58.2
</TABLE>
See Notes to Consolidated Financial Statements
Page 4
<PAGE> 5
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in millions)
<TABLE>
<CAPTION>
ASSETS
March 29 March 30 September 30
1997 1996 1996
--------- ------- -------
<S> <C> <C> <C>
Current Assets:
Cash $ 12.0 $ 8.5 $ 10.6
Accounts receivable, less allowances
of $6.2, $3.9, and $4.1, respectively 349.7 315.4 110.4
Inventories 188.3 187.4 148.8
Prepaid and other assets 22.4 21.9 22.1
--------- ------- -------
Total current assets 572.4 533.2 291.9
--------- ------- -------
Property, plant and equipment, net 134.8 147.4 139.5
Trademarks 85.9 88.1 87.0
Other intangibles 17.2 22.1 19.5
Goodwill 251.7 181.6 180.2
Other assets 2.1 15.8 13.6
--------- ------- -------
Total Assets $ 1,064.1 $ 988.2 $ 731.7
========= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving credit line $ 128.5 $ 100.9 $ 2.0
Current portion of term debt .1 .2 .2
Accounts payable 85.0 78.6 46.3
Accrued liabilities 77.0 46.7 42.6
Accrued taxes 37.5 21.1 19.7
--------- ------- -------
Total current liabilities 328.1 247.5 110.8
--------- ------- -------
Term debt, less current portion 324.4 324.5 223.1
Postretirement benefits other than pensions 27.2 27.3 27.2
Other liabilities 6.0 5.1 6.3
--------- ------- -------
Total Liabilities 685.7 604.4 367.4
--------- ------- -------
Commitments and Contingencies
Shareholders' Equity:
Class A Convertible Preferred Stock, no par value 177.3 177.3 177.3
Common Shares, $.01 stated value, issued 21.1
shares in 1997 and 1996 .2 .2 .2
Capital in excess of par value 207.6 207.7 207.7
Retained earnings 37.4 31.3 20.4
Cumulative foreign currency translation adjustments (1.1) 3.4 2.2
Treasury stock, 2.5 shares on March 29, 1997
and September 30, 1996, and 2.1 shares on
March 30, 1996, at cost (43.0) (36.1) (43.4)
--------- ------- -------
Total Shareholders' Equity 378.3 383.8 364.3
--------- ------- -------
Total Liabilities and Shareholders' Equity $ 1,064.1 $ 988.2 $ 731.7
========= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
Page 5
<PAGE> 6
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BASIS OF PRESENTATION
--------------------------------------
NATURE OF OPERATIONS
--------------------
The Scotts Company is engaged in the manufacture and sale of lawn care and
garden products. The Company's major customers include mass merchandisers,
home improvement centers, large hardware chains, independent hardware
stores, nurseries, garden centers, food and drug stores, golf courses,
professional sports stadiums, lawn and landscape service companies,
commercial nurseries and greenhouses, and specialty crop growers. The
Company's products are sold in the United States, Canada, the United
Kingdom, continental Europe, Southeast Asia, the Middle East, Africa,
Australia, New Zealand, and several Latin American countries. The
Company's business is highly seasonal with approximately 70% of sales
occurring in the second and third fiscal quarters.
BASIS OF PRESENTATION
---------------------
The consolidated financial statements include the accounts of The Scotts
Company ("Scotts") and its wholly-owned subsidiaries, Hyponex Corporation
("Hyponex"), Republic Tool and Manufacturing Corp. ("Republic"),
Scotts-Sierra Horticultural Products Company ("Sierra"), Scotts'
Miracle-Gro Products, Inc. ("Miracle-Gro"), and Miracle Holdings Limited
("Miracle Holdings") (collectively, the "Company"). All material
intercompany transactions have been eliminated.
The consolidated balance sheets as of March 29, 1997 and March 30, 1996,
the related consolidated statements of operations for the three and six
month periods ended March 29, 1997 and March 30, 1996 and the related
consolidated statements of cash flows for the six month periods ended
March 29, 1997 and March 30, 1996 are unaudited; however, in the opinion
of management, such financial statements contain all adjustments necessary
for the fair presentation of the Company's financial position and results
of operations. Interim results reflect all normal recurring adjustments
and are not necessarily indicative of results for a full year. The interim
financial statements and notes are presented as specified by Regulation
S-X of the Securities and Exchange Commission, and should be read in
conjunction with the financial statements and accompanying notes in
Scotts' fiscal 1996 Annual Report on Form 10-K.
USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying disclosures. The most significant of these
estimates are related to the allowance for doubtful accounts, inventory
valuation reserves, marketing promotional and consumer rebate liabilities,
income taxes and contingencies. Although these estimates are based on
management's best knowledge of current events and actions the Company may
undertake in the future, actual results ultimately may differ from the
estimates.
RECLASSIFICATION
----------------
Certain reclassifications have been made to the prior years' financial
statements to conform to fiscal 1997 classifications.
ADVERTISING COSTS
-----------------
In the quarter ended March 29, 1997, the Company changed its method of
accounting for advertising expenses in interim periods. The newly adopted
method assigns anticipated advertising costs to interim periods based on
projected sales of advertised product
Page 6
<PAGE> 7
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
categories and has been applied retroactive to the beginning of fiscal
1997 (October 1, 1996). This change impacts interim periods only; all
current year advertising costs will be expensed within the fiscal year.
Management believes this method of interim accounting for advertising
costs provides better matching of revenues and expenses in interim
periods, and is consistent with companies in the consumer packaged goods
industry.
This change in interim accounting had the effect of increasing advertising
expense for the first and second quarters of fiscal 1997, and for the six
months ended March 29, 1997 by $3.3 million, $4.6 million and $7.9
million, respectively. Net income for the first and second quarters of
fiscal 1997, and for the six months ended March 29, 1997 decreased by $1.9
million or $.10 per share, $2.6 million or $.09 per share and $4.5 million
or $.15 per share, respectively.
2. ACQUISITIONS
------------
Effective January 3, 1997, the Company acquired the approximately
two-thirds interest in Miracle Holdings which the Company did not already
own. Miracle Holdings owns Miracle Garden Care Limited, a manufacturer and
distributor of lawn and garden products in the United Kingdom.
The following pro forma results of operations give effect to the Miracle
Holdings acquisition as if it had occurred on October 1, 1995.
<TABLE>
<CAPTION>
(in millions, except per share amounts)
SIX MONTHS ENDED
--------------------------------------
March 29 March 30
1997 1996
------- --------
<S> <C> <C>
Net sales $ 457.2 $ 399.5
======= ========
Net income $ 22.5 $ 4.6
======= ========
Income (loss) per common share $ 0.77 $ (0.02)
======= =======
</TABLE>
Pro forma primary net income per common share for the six months ended is
calculated using the weighted average common shares outstanding at March
29, 1997 of 29.2 million and at March 30, 1996 of 18.8 million.
The pro forma information provided does not purport to be indicative of
actual results of operations if the Miracle Holdings Limited acquisition
had occurred as of October 1, 1995, and is not intended to be indicative
of future results or trends.
3. INVENTORIES
-----------
(in millions)
Inventories, net of provisions of $10.2, $6.9 and $8.7, consisted of:
<TABLE>
<CAPTION>
March 29 March 30 September 30
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Finished Goods $ 128.5 $ 122.8 $ 96.7
Raw Materials 59.8 64.6 52.1
-------- -------- --------
$ 188.3 $ 187.4 $ 148.8
======== ======== ========
</TABLE>
Page 7
<PAGE> 8
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
4. LONG-TERM DEBT
--------------
(in millions)
<TABLE>
<CAPTION>
March 29 March 30 September 30
1997 1996 1996
-------- -------- ---------
<S> <C> <C> <C>
Revolving Credit Line $ 353.5 $ 326.1 $ 125.7
9 7/8% Senior
Subordinated Notes
$100 million face
amount due 2004 99.4 99.3 99.4
Capital lease
obligations and other .1 .2 .2
-------- -------- ---------
453.0 425.6 225.3
Less current portions 128.6 101.1 2.2
-------- -------- ---------
$ 324.4 $ 324.5 $ 223.1
======== ======== ========
</TABLE>
Maturities of term debt for the next five calendar years are as follows:
<TABLE>
<S> <C>
1997 128.6
1998 0
1999 0
2000 225.0
2001 0
Thereafter 100.0
</TABLE>
On December 23, 1996, the Company entered into an amendment to the Fourth
Amended and Restated Credit Agreement with Chase Manhattan Bank and
various participating banks. The amendment provides, on an unsecured
basis, up to $425 million to the Company, which represents an increase of
$50 million to the revolving credit facility, and establishes a $100
million sub-tranche to be available in U. K. Pounds Sterling.
5. FOREIGN EXCHANGE INSTRUMENTS
----------------------------
The Company enters into forward foreign exchange contracts and purchases
currency options to hedge its exposure to fluctuations in foreign currency
exchange rates. These contracts generally involve the exchange of one
currency for a second currency at some future date. Counterparties to
these contracts are major financial institutions. Gains and losses on
these contracts generally offset gains and losses on the assets,
liabilities and transactions being hedged. Effective in the second quarter
of 1997, the Company significantly reduced this program.
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.
At March 29, 1997, the Company's European operations had foreign exchange
risk in various European currencies tied to the Dutch Guilder. These
currencies are the Belgian Franc, German Mark, Spanish Peseta, Italian
Lire, French Franc, British Pound, Australian Dollar and U. S. Dollar. The
Company's U. S. operations had foreign exchange rate risk in the Canadian
Dollar, the Dutch Guilder and the British Pound which are tied to the U.
S. Dollar. As of March 29, 1997, the Company had outstanding forward
foreign exchange contracts with a contract value of approximately $2.4
million. These contracts have maturity dates ranging from June 10, 1997 to
June 24, 1997.
Page 8
<PAGE> 9
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
6. ACCOUNTING ISSUES
-----------------
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," effective for financial
statements for fiscal years beginning after December 15, 1995. SFAS No.
123 provides for, but does not require, a fair value method of accounting
for stock-based compensation arrangements rather than the intrinsic value
method previously required. Alternatively, entities that retain the
intrinsic value method are required to disclose in the notes to the
financial statements pro forma net income and earnings per share
information as if the fair value method had been applied. The Company does
not intend to adopt the fair value method of SFAS No. 123; therefore, this
standard will not have a material effect on the Company's consolidated
financial statements.
7. OTHER EXPENSES, NET
-------------------
Other expenses, net consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
March 29 March 30 March 29 March 30
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Foreign currency $ - $ (0.2) $ 0.3 $ 0.1
Royalty (income) expense (1.1) (0.2) (1.1) (0.3)
Asset valuation charges 4.2 0.5 4.3 0.8
Restructuring/severance - 2.7 - 4.5
Equity in income of
unconsolidated businesses - 0.3 0.1 0.4
Other, net 0.1 (0.7) (0.1) (0.9)
------ ------ ------ ------
Total $ 3.2 $ 2.4 $ 3.5 $ 4.6
====== ====== ====== ======
</TABLE>
Page 9
<PAGE> 10
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. NET INCOME (LOSS) PER COMMON SHARE
----------------------------------
Net income (loss) per common share is based on the weighted average number
of common shares and common share equivalents (stock options, Class A
Convertible Preferred Stock and warrants) outstanding each period.
The following table presents information necessary to calculate income
(loss) per common share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ------------------
March 29 March 30 March 29 March 30
1997 1996 1997 1996
-------- -------- -------- ------
(in millions except per share
amounts)
<S> <C> <C> <C> <C>
Net income $ 27.9 $ 10.6 $ 21.9 $ 3.5
Class A Convertible Preferred
Stock dividend NA NA NA 4.9
---- ---- ---- ---
Income (loss) used in net
income (loss) per common
share calculation $ 27.9 $ 10.6 $ 21.9 $(1.4)
==== ==== ==== ===
Weighted average common
shares outstanding during
the period 18.6 18.9 18.6 18.8
Assuming conversion of Class A
Convertible Preferred Stock 10.3 10.3 10.3 NA
Assuming exercise of warrants - - - -
Assuming exercise of options
using the Treasury Stock
Method 0.4 0.2 0.3 NA
----- ----- ----- -----
Weighted average number of
common shares outstanding
as adjusted 29.3 29.4 29.2 18.8
==== ==== ==== ====
Income (loss) per common
share $ .95 $ .36 $ .75 $ (.08)
===== ===== ===== =====
</TABLE>
The shares of Class A Convertible Preferred Stock and stock options were
not considered in the earnings per share computation for the six months
ended March 30, 1996 because they were antidilutive for such period. Fully
diluted net income (loss) per common share is considered to be the same as
primary net income (loss) per common share.
Page 10
<PAGE> 11
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("FAS 128"). FAS 128 establishes standards for computing and presenting
earnings per share ("EPS"). FAS 128 replaces the presentation of primary
EPS with a presentation of basic EPS which excludes dilution and is
computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding during the period.
This statement also requires dual presentation of basic EPS and diluted
EPS on the face of the income statement for all periods presented. FAS 128
is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. The Company plans to adopt
FAS 128 in the first quarter of 1998 for the year ended September 30,
1998. If FAS 128 had been adopted at March 29, 1997, basic and diluted
earnings (loss) per share would be:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ------------------
March 29 March 30 March 29 March 30
1997 1996 1997 1996
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Basic earnings (loss) per share $ 1.37 $ .43 $ .92 $ (.08)
===== ===== ===== =====
Diluted earnings (loss) per share $ .95 $ .36 $ .75 $ (.08)
===== ===== ===== =====
</TABLE>
9. CONTINGENCIES
-------------
Management continually evaluates the Company's contingencies, including
various lawsuits and claims which arise in the normal course of business.
In the opinion of management, its assessment of contingencies is
reasonable and related reserves, in the aggregate, are adequate; however,
there can be no assurance that future quarterly or annual operating
results will not be materially affected by final resolution of these
matters. The following details are the more significant of the Company's
identified contingencies.
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. However, as a result of the joint and several liability of PRP's,
the Company may choose to participate in voluntary remediation efforts
which might occur at the site. Management does not believe any such
obligations would have a material adverse effect on the Company's results
of operations or financial condition.
In July 1990, the Philadelphia District of the Army Corps of Engineers
directed that peat harvesting operations be discontinued at Hyponex's
Lafayette, New Jersey facility, and the Company complied. In May 1992, the
Department of Justice in the U. S. District Court for the District of New
Jersey, filed suit seeking a permanent injunction against such harvesting
at that facility and civil penalties. The Philadelphia District of the
Corps has taken the position that peat harvesting activities there require
a permit under Section 404 of the Clean Water Act. If the Corps' position
is upheld, it is possible that further harvesting of peat from this
facility would be prohibited. The Company is defending this suit and is
asserting a right to recover its economic losses resulting from the
government's actions. Management does not believe that the outcome of this
case will have a material adverse effect on the Company's operations or
its financial condition. Furthermore, management believes the Company has
sufficient raw material supplies available such that service to customers
will not be adversely affected by continued closure of this peat
harvesting operation.
Page 11
<PAGE> 12
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On January 30, 1996, the United States Environmental Protection Agency
(the "U. S. EPA") served a Complaint and Notice of Opportunity for Hearing
upon Sierra's wholly-owned subsidiary, Scotts-Sierra Crop Protection
Company ("Crop Protection"). The Complaint alleged labeling violations
under the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA")
during 1992 and 1993 and proposed penalties totaling $785,000, the maximum
allowable under FIFRA according to management's calculations. On
February 11, 1997, the U.S. EPA's Motion for Accelerated Decision was
granted on the issue of liability, with the amount of the civil penalty to
be a resolved at hearing. Based upon Crop Protection's good faith
compliance actions and FIFRA's provisions for "gravity-based" penalty
reductions, management believes Crop Protection's maximum liability in
this action to be $200,000. The Company does not believe that the outcome
of this proceeding will have a material adverse effect on its financial
condition or results of operations.
The Company has been assessing and, as necessary, addressing certain
environmental issues regarding the wastewater treatment plants currently
operating at its Marysville facility. Specifically, it has been
considering whether to upgrade the existing treatment plants or to attempt
to tie the facility's wastewater into the City of Marysville's municipal
treatment system. Additionally, the Company has been assessing, under
Ohio's new Voluntary Action Program, the possible remediation of several
discontinued on-site waste disposal areas dating back to the early
operations of its Marysville facility.
On February 11, 1997, the Company was informed that the Ohio EPA was
referring certain matters relating to the Company's wastewater treatment
plants and on-site disposal areas to the Ohio Attorney General's office.
Representatives from the Ohio EPA, the Ohio Attorney General's office and
the Company have had one meeting subsequent to February 11 to discuss
these issues. Although the Company has not yet been informed as to the
specific nature of any issues or the expected remedial response, all
parties have expressed an interest in reaching an amicable resolution.
The Company expects that a consent order will be negotiated with the
Ohio EPA.
The Company does not believe that any proceedings which may result from
the Ohio EPA's referral of these matters to the Ohio Attorney General will
be material to the business or financial condition of the Company but is
unable, at this early stage, to predict the outcome of these issues.
Page 12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the consolidated results of operations,
cash flows and financial position of the Company should be read in conjunction
with the Consolidated Financial Statements of the Company included elsewhere in
this report. The Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1996 includes additional information about the Company, its
operations, and its financial position, and should be read in conjunction with
this quarterly report on Form 10-Q.
RESULTS OF OPERATIONS
Before reviewing the details of the Company's second quarter and first six
months results, the reader should keep in mind the following matters.
In the quarter ended March 29, 1997, the Company changed its method of
accounting for advertising expenses in interim periods. The newly adopted method
assigns anticipated advertising costs to interim periods based on projected
sales of advertised product categories and has been applied retroactive to the
beginning of fiscal 1997 (October 1, 1996). This change impacts interim periods
only; all current year advertising costs will be expensed within the fiscal
year. Management believes this method of interim accounting for advertising
costs provides better matching of revenues and expenses in interim periods, and
is consistent with companies in the consumer packaged goods industry.
This change in interim accounting had the effect of increasing advertising
expense for the first and second quarters of fiscal 1997, and for the six months
ended March 29, 1997 by $3.3 million, $4.6 million and $7.9 million,
respectively. Net income for the first and second quarters of fiscal 1997, and
for the six months ended March 29, 1997 decreased by $1.9 million or $0.10 per
share, $2.6 million or $.09 per share and $4.5 million or $0.15 per share,
respectively.
Effective with the second quarter of fiscal 1997, The Scotts Company has made
several changes in its financial statement presentation. First, the Company has
reformatted its statement of operations as follows:
(1) Distribution expense is included in cost of sales;
(2) Selling, general and administrative expenses are combined (include
research and development); and
(3) Advertising and promotion expenses are shown separately.
Second, the business unit net sales breakdowns have been updated to include
Canadian net sales as part of the North American business units in which they
are managed. Canadian net sales had previously been disclosed as part of
International. Annual Canadian net sales have been approximately $10.0 million
or less historically.
Page 13
<PAGE> 14
THREE MONTHS ENDED MARCH 29, 1997 VERSUS THE THREE MONTHS ENDED MARCH 30, 1996
- ------------------------------------------------------------------------------
The following table sets forth the components of income and expense for the
second quarter and first six months of fiscal 1997 and 1996 on a
percentage-of-net sales basis:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ Period to ---------------- Period to
March 29 March 30 Period March 29 March 30 Period
1997 1996 % Change 1997 1996 % Change
------- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 37.8% 100.0% 100.0% 20.9%
Cost of sales 60.0 65.1 27.1 61.7 66.3 12.5
------ ------ ------ ------
Gross profit 40.0 34.9 57.8 38.3 33.7 37.3
Selling, general and
administrative 11.6 13.7 16.9 14.9 17.2 5.2
Advertising and promotion 10.1 8.6 61.3 9.7 8.4 40.3
Amortization of goodwill
and other intangibles 0.8 0.9 22.7 1.1 1.2 11.4
Other (income) expense 0.9 1.0 33.3 0.8 1.3 (23.9)
------- -------- ------- -------
Income from operations 16.6 10.8 111.8 11.7 5.7 148.3
Interest expense 2.4 3.2 2.5 3.1 4.0 (5.4)
------- ------- ------- -------
Income before taxes 14.2 7.6 158.4 8.6 1.7 501.6
Income taxes 6.1 3.3 152.4 3.7 0.8 472.4
------- ------- ------- -------
Net income 8.1 4.2 163.2% 4.9 0.9 525.7%
Preferred stock dividends 0.7 1.0 NM 1.1 1.3 NM
------- -------- ------- -------
Income (loss) applicable to
common shareholders 7.4% 3.3% NM 3.8% (0.4)% NM
======= ======= ======= ========
</TABLE>
The following table sets forth the sales by business unit for the second quarter
and first six months of fiscal 1997 and 1996 (in millions).
<TABLE>
<CAPTION>
% CHANGE V. % CHANGE V.
----------- -----------
Q2 1996 1996 First Half 1996 1996
1997 ACTUAL AS ADJUSTED 1997 ACTUAL AS ADJUSTED
---- ------ ------------ ---------- ------ -----------
(1) (1)
<S> <C> <C> <C> <C> <C> <C>
Consumer Lawns $ 152.5 63.1% 9.5% $ 185.9 30.6% 8.5%
Consumer Gardens 55.5 18.1 66.3 11.6
Organics 56.2 1.1 70.6 (0.8)
------ ------
Domestic consumer 264.2 34.7 9.2 322.8 18.2 6.9
----- -----
Professional 41.6 13.0 68.2 6.6
International 40.4 120.8 55.4 72.1
------ ------
Consolidated $ 346.2 37.8% 16.6% $ 446.4 20.9% 12.1%
===== =====
</TABLE>
(1)Reflects net sales adjustments of $45.8 million for the second quarter of
1996 and $29.0 million for the first six months of 1996 for the 1995 Consumer
Lawns early purchase program that encouraged retailers to build their
inventories well in advance of the second and third quarter of 1996.
Page 14
<PAGE> 15
THREE MONTHS ENDED MARCH 29, 1997 VERSUS THE THREE MONTHS ENDED MARCH 30, 1996
Net sales for the three months ended March 29, 1997 totaled $346.2 million, an
increase of $95.0 million or 37.8%. Management estimates that approximately
$45.8 million (19.9%) of this increase was due to the 1995 Consumer Lawns
retailer early purchase program that had the effect of depressing sales in the
second and third quarters of fiscal 1996. The January 3, 1997 acquisition of the
remaining two-thirds interest in Miracle Garden Care Limited ("MGC") increased
second quarter sales by $21.3 million or 8.4%. The remaining 9.5% increase in
second quarter 1997 sales was primarily attributable to sales volumes in
Consumer Gardens, Professional, Consumer Lawns, and International.
Consumer Lawns Group net sales increased $59.0 million or 63.1% to $152.5
million, primarily as a result of volume increases. Management estimates that
approximately $45.8 million (53.6%) of this quarterly sales increase is
attributable to the discontinuance of the 1995 early purchase program that
encouraged retailers to build their inventories well in advance of the second
and third quarters of 1996. After adjusting for this program change, management
estimates that the Consumer Lawns Group quarterly net sales increase was 9.5%.
Consumer Gardens Group net sales increased $8.5 million or 18.1% to $55.5
million. Consumer Gardens Group net sales increased primarily as a result of
volume, including the inclusion of grass seed into the Group's distribution
network starting in fiscal 1997. Organics Business Group net sales increased
$0.6 million or 1.1% to $56.2 million, in line with this group's focus on
profitability, not revenues. Professional Business Group net sales increased
$4.8 million or 13.0% to $41.6 million, as this Group's customers move more to
just-in-time inventory management. International Business Group net sales
increased $22.1 million or 120.8% to $40.4 million. MGC contributed $21.3
million of this net sales increase. Excluding the impact of MGC, International
Business Group net sales increased $0.8 million or 4.4%, with a volume
increase of approximately 17.5% largely offset by unfavorable exchange rate
movements that resulted in a 13.1% quarter-to-quarter reduction in International
net sales after translation to U.S. dollars.
Cost of sales were 60.0% of net sales for the three months ended March 29, 1997,
a 5.1 percentage point decrease compared to 65.1% in the same period of the
prior year. This improvement is attributable to the discontinuance of
promotional programs to drive out-of-season sales, the discontinuance of lower
margin professional and consumer products, and manufacturing and distribution
efficiencies.
Operating expenses increased $20.4 million or 33.7% to $81.0 million. Operating
expenses were 23.4% of net sales compared to 24.1% in the prior year. Selling,
general and administrative expenses increased $5.8 million or 16.9% to $40.1
million. This increase reflects the inclusion of MGC for the first time, and
higher salesforce and general management incentives in the current year,
partially offset by cost savings generated by restructuring efforts in 1996. As
a percentage of net sales, selling, general and administrative expenses
decreased from 13.7% to 11.6%.
Advertising and promotion expenses increased by $13.3 million or 61.3% to $35.0
million. As a percentage of net sales, advertising and promotion expenses
increased to 10.1% from 8.6%. Approximately $4.5 million (20.7%) of this
increase is attributable to the change in interim accounting for advertising, as
previously discussed. Exclusive of the change in interim accounting for
advertising, overall higher investment in media spending on brand building
increased this expense by approximately $2.7 million (12.4%). Trade promotions
related to the significant increase in second quarter consumer sales increased
approximately $3.0 million (13.8%). The inclusion of MGC accounted for the
remaining $3.0 million increase in advertising and promotion expense for the
quarter.
Amortization of goodwill and other intangibles increased as a result of the
inclusion of MGC.
Page 15
<PAGE> 16
Other expense, net for the second quarter of 1997 includes approximately $4.2
million of charges related to various productive assets which are pending sale
or whose values are impaired as a result of changes in management's plans and
business conditions. These charges were partially offset by royalty income from
new and ongoing agreements that license the use of the Scotts(R) logo. The
second quarter of 1996 included $2.7 million in severance charges and $0.5
million asset valuation adjustments.
Primarily as a result of higher sales volumes, improved manufacturing and
distribution efficiencies, and other cost improvements, income from operations
increased by $30.3 million or 111.8% to $57.4 million. Income from operations
increased to 16.6% from 10.8% on a percentage of sales basis.
Interest expense increased $0.2 million or 2.5%. Excluding the impact of MGC
related borrowings, interest expense decreased by approximately $1.3 million or
16.1%, principally due to a $71.9 million reduction in average borrowings for
the second quarter compared to the same period last year. MGC related interest
expense was approximately $1.5 million for the quarter, reflecting both
acquisition debt and seasonal working capital requirements.
The Company's effective tax rate was 43.2% compared to 44.2% in the prior year.
During the second quarter of fiscal 1997, the Company reported net income of
$27.9 million or $0.95 per common share compared with prior year net income of
$10.6 million or $0.36 per common share. The quarterly improvement reflects the
positive impact of the change in retailer selling programs for the Consumer
Lawns group. Other favorable factors influencing this quarters' results
of operations include sales volume increases, improved manufacturing and
distribution efficiencies, ongoing cost control efforts, lower average
borrowings and the full consolidation of MGC's results. These positive factors
were partially offset by the change in interim accounting for advertising and
the higher investment in brand building the Company is making during fiscal
1997.
SIX MONTHS ENDED MARCH 29, 1997 VERSUS SIX MONTHS ENDED MARCH 30, 1996
Net sales for the six months ended March 29, 1997 totaled $446.4 million, an
increase of $77.2 million or 20.9%. Management estimates that approximately
$29.0 million (8.3%) of this increase was due to the 1995 Consumer Lawns
retailer early purchase program that had the effect of depressing sales in the
second and third quarters of 1996. The January 3, 1997 acquisition of the
remaining two-thirds interest in MGC increased net sales of the first six months
by $21.3 million or 5.8%. The remaining 6.8% increase in net sales for the first
six months of fiscal 1997 was primarily attributable to volume gains in Consumer
Gardens, Consumer Lawns, Professional and International.
Consumer Lawns Group net sales increased $43.5 million or 30.6% to $185.9
million, primarily as a result of volume increases. Management estimates that
approximately $29.0 million (22.1%) of this six months sales increase is
attributable to the discontinuance of the 1995 early purchase program. After
adjusting for this program change, management estimates that the Consumer Lawns
Group six month's net sales increase was 8.5%. Consumer Gardens Group net sales
increased $6.9 million or 11.6% to $66.3 million. Gardens group net sales
increased primarily as a result of volume, including the inclusion of grass seed
into their distribution network starting in fiscal 1997. Organics Business Group
net sales decreased $0.6 million or 0.8% to $70.6 million, in line with this
Group's focus on profitability, not revenues. Professional Business Group net
sales increased $4.2 million or 6.6% to $68.2 million, as this Group's customers
move more to just-in-time inventory management. International Business Group net
sales increased $23.2 million or 72.1% to $55.4 million. MGC contributed $21.3
million of this net sales increase. Excluding the impact of MGC, International
Business Group net sales increased $1.9 million or 5.9%, with sales volumes up
approximately 15.9%, largely offset by unfavorable exchange rate movements that
resulted in a 10.0% year-to-date reduction in International sales after
translation to U.S. dollars.
Page 16
<PAGE> 17
Cost of sales were 61.7% of net sales for the six months ended March 29, 1997, a
4.6 percentage point decrease compared to 66.3% in the same period of the prior
year. This improvement is attributable to the discontinuance of promotional
programs to drive out-of-season sales, the discontinuance of lower margin
professional and consumer products, and manufacturing and distribution
efficiencies.
Operating expenses increased $15.2 million or 14.7% to $118.6 million. Operating
expenses were 26.6% of net sales compared to 28.0% in the prior year. Selling,
general and administrative expenses increased $3.3 million or 5.2% to $66.7
million. This increase reflects the inclusion of MGC for the first time, and
higher salesforce and general management incentives in the current year,
partially offset by cost savings generated by restructuring efforts in 1996. As
a percentage of sales, selling, general and administrative expenses decreased
from 17.2% to 14.9%.
Advertising and promotion expenses increased by $12.5 million or 40.3% to $43.5
million. As a percentage of net sales, advertising and promotion expenses
increased to 9.7% from 8.4%. Approximately $7.8 million (25.2%) of this increase
is attributable to the change in interim accounting for advertising, as
previously discussed. Exclusive of the change in interim accounting for
advertising, overall higher investment in media spending on brand building
increased this expense by approximately $2.4 million (7.7%). The inclusion of
MGC increased year-to-date advertising and promotion expenses by $3.0 million.
Trade promotions decreased $0.7 million reflecting the Company's move toward
"pull" advertising and away from "push" retailer promotions. The Company
believes retailer promotions and cooperative advertising are an integral part of
the consumer lawn and garden business, but to a lesser extent than that
practiced in prior years.
Amortization of goodwill and other intangibles increased as a result of the
inclusion of MGC.
Other expense, net for the first six months of 1997 includes approximately $4.3
million of charges related to various productive assets which are pending sale
or whose values are impaired as a result of changes in management plans and
business conditions. These charges were partially offset by royalty income from
new and ongoing agreements that license the use of the Scotts(R) logo. The first
six months of fiscal 1996 included $4.5 million of severance charges and $0.8
million of asset valuation adjustments.
Primarily as a result of higher sales volumes, improved manufacturing and
distribution efficiencies, and other cost improvements, income from operations
increased by $31.3 million or 148.3% to $52.4 million. Income from operations
increased to 11.7% from 5.7% on a percentage of sales basis.
Interest expense decreased $0.8 million or 5.4% for the six months ended March
29, 1997. Excluding MGC related borrowings, interest expense decreased by
approximately $2.3 million or 15.7%, principally due to a $66.9 million
reduction in average borrowings for the first six months compared to the same
period last year. MGC related interest expense was approximately $1.5 million,
reflecting both acquisition debt and seasonal working capital requirements.
The Company's effective tax rate was 43.2% compared to 45.3% in the prior year.
During the first six months of fiscal 1997, the Company reported net income of
$21.9 million or $0.75 per common share compared with prior year net income of
$3.5 million or a loss of $0.08 per common share, after considering preferred
stock dividends. The year-to-date improvement reflects the positive impact of
the change in retailer selling programs for the Consumer Lawns Group. Other
favorable factors influencing year-to-date results of operations include sales
volume increases, improved manufacturing and distribution efficiencies, ongoing
cost control efforts, lower average borrowings and full consolidation of MGC's
results. These positive factors were partially offset by the change in interim
accounting for advertising and the higher investment in brand building the
Company is making during fiscal 1997.
Page 17
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities totaled $138.6 million for the six month
period ended March 29, 1997 compared to $143.3 million in the prior year. The
seasonal nature of the Company's operations results in a significant increase in
working capital (primarily inventory and accounts receivable) during the first
and second fiscal quarters. The third fiscal quarter is a significant period for
collecting accounts receivable. The lower level of cash used in operating
activities for the first six months of 1997 is principally due to higher net
income and better working capital management, partially offset by the seasonal
working capital needs of MGC.
Cash used in investing activities totaled $51.2 million compared to $8.3 million
in the prior year. This increase is attributable to the acquisition of the
remaining two-thirds interest in MGC for approximately $47.1 million effective
January 3, 1997. The Company estimates that fiscal 1997 capital investments will
be $20 million to $25 million compared to $18.2 million in the prior year. These
capital investments will be financed with cash provided by operations and
utilization of available credit facilities. The largest project will be an
approximately $9.0 million expansion of the Marysville distribution facility,
estimated to generate annual distribution expense savings of at least $1.5
million beginning in fiscal 1998. The Company's Fourth Amended and Restated
Credit Agreement (the "Credit Agreement") restricts annual capital investments
to $50 million.
Financing activities provided $195.5 million for the six month period ended
March 29, 1997 compared to $153.2 million in the prior year. Financing
activities are principally supported by the Company's Credit Agreement. The
higher level of incremental borrowings in the first six months of fiscal 1997
compared to the prior year is a result of the MGC transaction, partially offset
by lower working capital requirements and year-to-date capital investment.
Total debt increased by $227.7 million compared with debt at September 30, 1996
and increased by $27.4 million compared with total debt at March 30, 1996. The
increase as compared to September 30, 1996 was to support increased working
capital, capital expenditures, and the MGC acquisition. The increase compared to
March 30, 1996 is attributable to positive cash flow generated in fiscal 1996
and lower working capital requirements in fiscal 1997, offset by the borrowings
associated with the MGC acquisition and MGC's seasonal borrowing requirements.
Shareholders' equity as of March 29, 1997 was $378.3 million, a $14.0 million
increase compared to September 30, 1996 and a $5.5 million decrease compared to
March 30, 1996. The increase compared to September 30, 1996 was due to the net
income of $21.9 million, Convertible Preferred Stock dividends of $4.9 million,
an unfavorable change in the cumulative foreign currency adjustment of $3.3
million and net treasury stock activity of $0.4 million. The decrease compared
to March 30, 1996 was due to the net income for the twelve month period ended
March 29, 1997 of $15.9 million offset by Convertible Preferred Stock dividends
of $9.8 million, net treasury stock purchases of $7.0 million and an unfavorable
change in the cumulative foreign currency adjustment of $4.5 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 in December 1996. The most recent amendment provides for
an increase in the available line-of-credit from $375 million to $425 million,
and provides that up to the equivalent of $100 million of the available credit
may be borrowed in U.K. Pounds Sterling.
The Company has foreign exchange rate risk related to International operations
and cash flows.
The Company enters into forward foreign exchange contracts and purchases
currency options to hedge its exposure to fluctuations in foreign currency
exchange rates. These contracts generally involve the exchange of one currency
for a second currency at some future date. Counterparties to these contracts are
major financial institutions. Gains and losses on these contracts generally
offset gains and losses on the assets, liabilities and transactions being
hedged. Effective in the second quarter of 1997, the Company significantly
reduced this program.
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.
Page 18
<PAGE> 19
As of March 29, 1997, the Company's European operations had foreign exchange
risk in various European currencies tied to the Dutch Guilder. These currencies
include the Belgian Franc, German Mark, Spanish Peseta, French Franc, British
Pound, Italian Lire, and the Australian Dollar and U.S. Dollar. The Company's
U.S. operations had foreign exchange rate risk in the Canadian Dollar, Dutch
Guilder and the British Pound which are tied to the U.S. Dollar. As of March 29,
1997, there were outstanding forward foreign exchange contracts with a value of
approximately $2.4 million. These contracts had maturity dates ranging from June
10, 1997 to June 24, 1997.
In the opinion of the Company's management, cash flows from operations and
capital resources will be sufficient to meet debt service and working capital
needs during the 1997 fiscal year.
INFLATION
The Company is subject to the effect of changing prices. The Company has,
however, generally been able to pass along inflationary increases in its costs
by increasing the prices of its products.
ENVIRONMENTAL MATTERS
The Company is subject to local, state, federal and foreign environmental
protection laws and regulations with respect to its business operations and
believes it is operating in substantial compliance with, or taking action aimed
at ensuring compliance with, such laws and regulations. The Company is involved
in several environmental related legal actions with various governmental
agencies. While it is difficult to quantify the potential financial impact of
actions involving environmental matters, particularly remediation costs at waste
disposal sites and future capital expenditures for environmental control
equipment, in the opinion of management, the ultimate liability arising from
such environmental matters, taking into account established reserves, should not
have a material adverse effect on the Company's financial position; however,
there can be no assurance that future quarterly or annual operating results will
not be materially affected by the resolution of these matters. Additional
information on environmental matters affecting the Company is provided in Note 9
to the Company's Consolidated Financial Statements and in the Annual Report on
Form 10-K to the Securities and Exchange Commission for the year ended September
30, 1996 under the "Business" and "Legal Proceedings" sections.
ACCOUNTING ISSUES
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation", effective for financial statements
for fiscal years beginning after December 15, 1995. SFAS No. 123 provides for,
but does not require, a fair value method of accounting for stock-based
compensation arrangements rather than the intrinsic value method previously
required. Alternatively, entities that retain the intrinsic value method are
required to disclose in the notes to the financial statements pro forma net
income and earnings per share information as if the fair value method had been
applied. The Company does not intend to adopt the fair value method of SFAS No.
123; therefore, this standard will not have a material effect on the Company's
consolidated financial statements.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). FAS
128 establishes standards for computing and presenting earnings per share
("EPS"). FAS 128 replaces the presentation of primary EPS with a presentation of
basic EPS which excludes dilution and is computed by dividing income available
to common shareholders by the weighted-average number of common shares
outstanding during the period. This statement also requires dual presentation of
basic EPS and diluted EPS on the face of the income statement for all periods
presented. FAS 128 is effective for financial statements issued for periods
ending after December 15, 1997,
Page 19
<PAGE> 20
including interim periods. The Company plans to adopt FAS 128 in the first
quarter of 1998 for the year ended September 30, 1998. If FAS 128 had been
adopted at March 29, 1997, basic and diluted earnings (loss) per share would be:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ------------------
MARCH 29 MARCH 30 MARCH 29 MARCH 30
1997 1996 1997 1996
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Basic earnings (loss) per share $ 1.37 $ .43 $ .92 $ (.08)
====== ======= ======= =======
Diluted earnings (loss) per share $ .95 $ .36 $ .75 $ (.08)
====== ======= ======= =======
</TABLE>
RECENT DEVELOPMENTS
On January 3, 1997, the Company acquired the approximately two-thirds interest
in Miracle Holdings Limited ("Miracle Holdings") which the Company did not
already own. Miracle Holdings owns MGC Limited, a manufacturer
and distributor of lawn and garden products in the United Kingdom.
OUTLOOK FOR THE REMAINDER OF 1997
Looking forward to the remaining six months of fiscal 1997, management expects a
continuation of the return to profitability demonstrated in the first six months
of the year. The primary factors contributing to 1997's improvement over 1996
include the discontinuance of the Consumer Lawns Group's retailer early purchase
program; alignment of the business groups to provide better focus on, and
accountability for, performance; and the positive impacts of fiscal 1996
restructuring efforts. However, these changes, along with inherent risks of a
seasonal business, present several challenges for 1997.
As noted in previous reports, the Consumer Lawns Business Group's marketing
strategy has been refocused on consumer directed, "pull" advertising and less on
retailer directed, "push" promotional programs heavily relied upon in recent
years. Management believes results for the first six months of fiscal 1997
indicate general marketplace acceptance of this strategy. However, weather
conditions in North America and in Northern Europe have a significant impact on
the quarterly timing of sales of the Company's products, especially in the
spring selling season. After adjustment for the 1995 early purchase program, the
Company has historically generated 66% to 68% of its annual revenues in its
second and third fiscal quarters. Management expects this relationship to become
slightly more pronounced with the change in the consumer lawns marketing and
promotional programs, and the trend in both its consumer and professional
markets toward "just-in-time" product purchasing.
Management expects 1997 gross profit margins to continue to show improvement
over 1996 as a result of the recovery of the relatively higher margin consumer
lawns business, higher volumes increasing manufacturing distribution
efficiencies, and the discontinuance of certain lower margin products. In the
last quarter of 1997, the Company plans to change over to plastic packaging for
its key consumer lawns products and update the technology of one of its key
manufacturing lines. These planned changes, along with the general direction
toward simplifying its product lines, may put temporary downward pressure on
gross profit margins during the transition period as new processes start up and
old products are phased out.
The Company expects a lower effective tax rate in 1997 in the range of 42%
to 44%, principally as a result of the anticipated return to profitability.
The Company has made and will make certain forward-looking statements in this
quarterly report and in other contexts regarding future economic performance
and finances, plans and objectives of management, among others. In some cases,
information regarding certain important factors that could cause actual results
to differ materially from any such forward-looking statement appear together
with such statement. Furthermore, the following factors, in addition to other
possible factors not listed, could affect the company's actual results and
cause such results to differ materially from those expressed in
forward-looking statements. These factors include weather conditions in North
America and in Northern Europe which have a significant impact on timing of
sales in the spring selling season and overall annual sales; continued
marketplace acceptance of the Company's Consumer Lawns and Gardens Group's
"pull" advertising marketing strategies, especially in the Consumer Lawn's
Group which refocused its general marketing strategy beginning in fiscal 1996;
competition among lawn and garden product producers supplying the consumer and
professional markets, both domestically and internationally; competition
between retail outlets selling lawn and garden products produced by the
Company; public perceptions regarding the safety of products produced and
supplied by the Company; continued changes in economic conditions; risks
inherent to international development; and other factors set forth in the
Company's letters to shareholders and analysts, press releases and filings with
the Securities and Exchange Commission.
Page 20
<PAGE> 21
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
On January 16, 1997, Pursell and the Company settled two lawsuits
pursuant to a confidential Settlement Agreement and Release (the
"Settlement Agreement"). Under the terms of the Settlement Agreement,
both actions have been dismissed with prejudice. Full and complete
releases were exchanged by the parties, and the Company granted to
Pursell a fully paid-up, non-exclusive license under the Company's
Poly-S patents.
The Company has been assessing and, as necessary, addressing certain
environmental issues regarding the wastewater treatment plants
currently operating at its Marysville facility. Specifically, it has
been considering whether to upgrade the existing treatment plants or to
attempt to tie the facility's wastewater into the City of Marysville's
municipal treatment system. Additionally, the Company has been
assessing, under Ohio's new Voluntary Action Program, the possible
remediation of several discontinued on-site waste disposal areas dating
back to the early operations of its Marysville facility.
On February 11, 1997, the Company was informed that the Ohio EPA was
referring certain matters relating to the Company's wastewater
treatment plants and on-site disposal areas to the Ohio Attorney
General's office. Representatives from the Ohio EPA, the Ohio Attorney
General's office and the Company have had one meeting subsequent to
February 11 to discuss these issues. Although the Company has not yet
been informed as to the specific nature of any issues or the expected
remedial response, all parties have expressed an interest in reaching
an amicable resolution. The Company expects that a consent order will
be negotiated with the Ohio EPA.
The Company does not believe that any proceedings which may result from
the Ohio EPA's referral of these matters to the Ohio Attorney General
will be material to the business or financial condition of the Company
but is unable, at this early stage, to predict the outcome of these
issues.
Item 4 - Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company (the "Annual
Meeting") was held in Columbus, Ohio on March 12, 1997.
The result of the vote of the shareholders for each of the matters
submitted to the shareholders at the Annual Meeting is as follows:
A. The proposal to elect four directors for terms of three years
each:
<TABLE>
<CAPTION>
NOMINEE VOTES FOR WITHHELD NOT VOTED
------- --------- -------- ---------
<S> <C> <C> <C>
James B Beard 25,855,642 227,565
John Kenlon 25,854,492 228,715
John M. Sullivan 25,852,492 230,715
L. Jack Van Fossen 25,833,084 250,123
</TABLE>
Each of the nominees was elected. The other Directors whose terms of
office continue after the Annual Meeting are John S. Chamberlin, Joseph
P. Flannery, Horace Hagedorn, Donald A. Sherman, Charles M. Berger,
James Hagedorn, Karen G. Mills, and Tadd C. Seitz.
B. The proposal to increase the number of common shares available
under The Scotts Company 1996 Stock Option Plan to 3,000,000
common shares:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON VOTES
--- ------- ------- ----------------
<S> <C> <C> <C> <C>
21,446,166 1,554,806 279,126 2,803,109
</TABLE>
The proposal was approved.
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index at page 23 for a list of the exhibits included
herewith.
(b) On January 28, 1997, Scotts filed a Form 8-K to report under "Item
5 Other Events" the acquisition of the approximately two-thirds
interest in Miracle Holdings Limited which the Company did not
already own. No financial statements were required to be filed.
Page 21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE SCOTTS COMPANY
Date ____________________________ /S/JEAN H. MORDO
------------------------------
Executive Vice President
Chief Financial Officer
Principal Accounting Officer
Page 22
<PAGE> 23
THE SCOTTS COMPANY
QUARTERLY REPORT ON FORM 10-Q FOR
FISCAL QUARTER ENDED March 29, 1997
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
NUMBER DESCRIPTION NUMBER
------ ----------- ------
<S> <C> <C>
10(a) The Scotts Company 1996 24-32
Stock Option Plan
(as amended through March 12, 1997)
18 Letter regarding change in accounting principles 33
27 Financial Data Schedule 34
</TABLE>
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<PAGE> 1
THE SCOTTS COMPANY
1996 STOCK OPTION PLAN
(REFLECTS AMENDMENTS THROUGH MARCH 12, 1997)
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<PAGE> 2
THE SCOTTS COMPANY
1996 STOCK OPTION PLAN
(REFLECTS AMENDMENTS THROUGH MARCH 12, 1997)
SECTION l.
PURPOSE
The purpose of the Plan is to foster and promote the long-term
financial success of the Company and materially increase shareholder value by
(a) encouraging and providing for the acquisition of an ownership interest in
the Company by Employees and Eligible Directors, and (b) enabling the Company to
attract and retain the services of an outstanding management team upon whose
judgment, interest, and special effort the successful conduct of its operations
is largely dependent.
SECTION 2.
DEFINITIONS
2.1 DEFINITIONS. Whenever used herein, the following terms shall
have the respective meanings set forth below:
(a) "Act" means the Securities Exchange Act of 1934, as amended.
(b) "Award" means any Option.
(c) "Board" means the Board of Directors of the Company.
(d) "Cause" means (i) the willful failure by a Participant to
perform substantially his duties as an Employee of the Company (other than due
to physical or mental illness) after reasonable notice to the Participant of
such failure, (ii) the Participant's engaging in serious misconduct that is
injurious to the Company or any Subsidiary, (iii) the Participant's having been
convicted of, or entered a plea of nolo contendere to, a crime that constitutes
a felony or (iv) the breach by the Participant of any written covenant or
agreement with the Company or any Subsidiary not to disclose any information
pertaining to the Company or any Subsidiary or not to compete or interfere with
the Company or any Subsidiary.
(e) "Change in Control" means the occurrence of any of the
following events:
(i) the members of the Board at the beginning of any
consecutive twenty-four calendar month period (the "Incumbent
Directors") cease for any reason other than due to death to constitute
at least a majority of the members of the Board, provided that any
director whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the
members of the Board then still in office who were members of the Board
at the beginning of such twenty-four calendar month period, shall be
treated as an Incumbent Director; or
(ii) any "person," including a "group" (as such terms are used
in Sections 13(d) and 14(d)(2) of the Act, but excluding the Company,
any of its Subsidiaries, or any employee benefit plan of the Company or
of any of its Subsidiaries,) is or becomes the "beneficial owner" (as
defined in Rule 13(d)(3) under the Act), directly or indirectly, of
securities of the Company representing more than 49% of the combined
voting power of the Company's then outstanding securities; or
(iii) the shareholders of the Company shall approve a
definitive agreement (1) for the merger or other business combination
of the Company with or into another corporation, a majority of the
directors
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<PAGE> 3
of which were not directors of the Company immediately prior to the
merger and in which the shareholders of the Company immediately prior
to the effective date of such merger own less than 50% of the voting
power in such corporation; or (2) for the sale or other disposition of
all or substantially all of the assets of the Company; or
(iv) the purchase of Stock pursuant to any tender or exchange
offer made by any "person," including a "group" (as such terms are used
in Sections 13(d) and 14(d)(2) of the Act), other than the Company, any
of its Subsidiaries, or an employee benefit plan of the Company or of
any of its Subsidiaries, for more than 49% of the Stock of the Company.
(f) "Change in Control Price" means the highest price per share of
Stock offered in conjunction with any transaction resulting in a Change in
Control (as determined in good faith by the Committee if any part of the offered
price is payable other than in cash) or, in the case of a Change in Control
occurring solely by reason of a change in the composition of the Board, the
highest Fair Market Value of the Stock on any of the 30 trading days immediately
preceding the date on which a Change in Control occurs.
(g) "Code" means the Internal Revenue Code of 1986, as amended.
(h) "Committee" means the Compensation and Organization Committee
of the Board which shall have the meaning ascribed to a "compensation committee"
in Section 1.162-27(c)(4) of the final regulations promulgated under Section
162(m) of the Code and which shall consist of three or more members, each of
whom shall be (i) a person from time to time permitted by the rules promulgated
under Section 16 of the Act in order for grants of Awards to be exempt
transactions under said Section 16 and (ii) receiving remuneration in no other
capacity than as a director, except as permitted under Section 1.162-27(e)(3) of
the final regulations promulgated under Section 162(m) of the Code and the
rulings thereunder.
(i) "Company" means The Scotts Company, an Ohio corporation, and
any successor thereto.
(j) "Director Option" means a Nonstatutory Stock Option granted
to each Eligible Director pursuant to Section 6.7 without any action by the
Board or the Committee.
(k) "Disability" means the inability of the Participant to perform
his duties for a period of at least six months due to a physical or medical
infirmity. Notwithstanding the foregoing, with respect to Incentive Stock
Options, the term "Disability" shall be defined as such term is defined in
Section 22(e)(3) of the Code.
(l) "Eligible Director" means, on any date, a person who is
serving as a member of the Board and who is not an Employee.
(m) "Employee" means any officer or other key executive and
management employee of the Company or of any of its Subsidiaries.
(n) "Fair Market Value" means, on any date, the closing price of
the Stock as reported on the New York Stock Exchange (or on such other
recognized market or quotation system on which the trading prices of the Stock
are traded or quoted at the relevant time) on such date. In the event that there
are no Stock transactions reported on the New York Stock Exchange (or such other
market or system) on such date, Fair Market Value shall mean the closing price
on the immediately preceding date on which Stock transactions were so reported.
(o) "Option" means the right to purchase Stock at a stated price
for a specified period of time. For purposes of the Plan, an Option may be
either (i) an "Incentive Stock Option" (ISO) within the meaning of Section 422
of the Code or (ii) a "Nonstatutory Stock Option" (NSO) which does not qualify
for treatment as an "Incentive Stock Option."
(p) "Participant" means any Employee designated by the Committee
to participate in the Plan.
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(q) "Plan" means The Scotts Company 1996 Stock Option Plan, as in
effect from time to time.
(r) "Retirement" means termination of a Participant's employment
on or after the normal retirement date or, with the Committee's approval, on or
after any early retirement date established under any retirement plan maintained
by the Company or a Subsidiary in which the Participant participates.
(s) "Stock" means the Common Shares, without par value, of the
Company.
(t) "Subsidiary" means any corporation or partnership in which the
Company owns, directly or indirectly, 50% or more of the total combined voting
power of all classes of stock of such corporation or of the capital interest or
profits interest of such partnership.
2.2 GENDER AND NUMBER. Except when otherwise indicated by the
context, words in the masculine gender used in the Plan shall include the
feminine gender, the singular shall include the plural, and the plural shall
include the singular.
SECTION 3.
ELIGIBILITY AND PARTICIPATION
Except as otherwise provided in Section 6.7, the only persons eligible
to participate in the Plan shall be those Employees selected by the Committee as
Participants.
SECTION 4.
POWERS OF THE COMMITTEE
4.l POWER TO GRANT. The Committee shall determine the Participants to
whom Awards shall be granted, the type or types of Awards to be granted and the
terms and conditions of any and all such Awards. The Committee may establish
different terms and conditions for different types of Awards, for different
Participants receiving the same type of Award and for the same Participant for
each Award such Participant may receive, whether or not granted at different
times.
4.2 ADMINISTRATION. The Committee shall be responsible for the
administration of the Plan. The Committee, by majority action thereof, is
authorized to prescribe, amend, and rescind rules and regulations relating to
the Plan, to provide for conditions deemed necessary or advisable to protect the
interests of the Company, and to make all other determinations (including,
without limitation, whether a Participant has incurred a Disability) necessary
or advisable for the administration and interpretation of the Plan in order to
carry out its provisions and purposes. Determinations, interpretations, or other
actions made or taken by the Committee pursuant to the provisions of the Plan
shall be final, binding, and conclusive for all purposes and upon all persons.
SECTION 5.
STOCK SUBJECT TO PLAN
5.1 NUMBER. Subject to the provisions of Section 5.3, the number of
shares of Stock subject to Awards under the Plan may not exceed 3,000,000 shares
of Stock. Subject to the provisions of Section 5.3, no Employee shall receive
Awards for more than 150,000 shares of Stock over any one-year period. For this
purpose, to the extent that any Award is cancelled (as described in Section
1.162-27(e)(2)(vi)(B) of the final regulations promulgated under Section 162(m)
of the Code), such cancelled Award shall continue to be counted against the
maximum number of shares of Stock for which Awards may be granted to an Employee
under the Plan. The shares of Stock to be delivered under the Plan may consist,
in whole or in part, of treasury Stock or authorized but unissued Stock, not
reserved for any other purpose.
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5.2 CANCELLED, TERMINATED, OR FORFEITED AWARDS. Except as provided in
Section 5.1, any shares of Stock subject to an Award which for any reason is
cancelled, terminated or otherwise settled without the issuance of any Stock
shall again be available for Awards under the Plan.
5.3 ADJUSTMENT IN CAPITALIZATION. In the event of any Stock dividend or
Stock split, recapitalization (including, without limitation, the payment of an
extraordinary dividend), merger, consolidation, combination, spin-off,
distribution of assets to shareholders, exchange of shares, or other similar
corporate change, the aggregate number of shares of Stock available for Awards
under Section 5.1 or subject to outstanding Awards and the respective prices
and/or limitations applicable to outstanding Awards may be appropriately
adjusted by the Committee, whose determination shall be conclusive. If, pursuant
to the preceding sentence, an adjustment is made to the number of shares subject
to outstanding Options held by Participants a corresponding adjustment shall be
made to the number of shares subject to outstanding Director Options and if an
adjustment is made to the number of shares of Stock authorized for issuance
under the Plan, a corresponding adjustment shall be made to the number of shares
subject to each Director Option thereafter granted pursuant to Section 6.7.
SECTION 6.
OPTIONS
6.1 GRANT OF OPTIONS. Options may be granted to Participants at such
time or times as shall be determined by the Committee. Options granted under the
Plan may be of two types: (i) Incentive Stock Options and (ii) Nonstatutory
Stock Options. The Committee shall have complete discretion in determining the
number of Options, if any, to be granted to a Participant. Without limiting the
foregoing, the Committee may grant Options containing provisions for the
issuance to the Participant, upon exercise of such Option and payment of the
exercise price therefor with previously owned shares of Stock, of an additional
Option for the number of shares so delivered, having such other terms and
conditions not inconsistent with the Plan as the Committee shall determine. Each
Option shall be evidenced by an Option agreement that shall specify the type of
Option granted, the exercise price, the duration of the Option, the number of
shares of Stock to which the Option pertains, and such other terms and
conditions not inconsistent with the Plan as the Committee shall determine.
6.2 OPTION PRICE. Nonstatutory Stock Options and Incentive Stock
Options granted pursuant to the Plan shall have an exercise price which is not
less than the Fair Market Value of the Stock on the date the Option is granted.
To the extent that an Incentive Stock Option is granted to a Participant who
owns (actually or constructively under the provisions of Section 424(d) of the
Code) Stock possessing more than 10% of the total combined voting power of all
classes of Stock of the Company or of any Subsidiary, such Incentive Stock
Option shall have an exercise price which is not less than 110% of the Fair
Market Value on the date the Option is granted.
6.3 EXERCISE OF OPTIONS. Options awarded to a Participant under the
Plan shall be exercisable at such times and shall be subject to such
restrictions and conditions including the performance of a minimum period of
service, as the Committee may impose, either at or after the time of grant of
such Options; provided, however, that if the Committee does not specify another
exercise schedule at the time of grant, each Option shall become exercisable in
three approximately equal installments on each of the first three anniversaries
of the date of grant, subject to the Committee's right to accelerate the
exercisability of such Option in its discretion. Notwithstanding the foregoing,
no Option shall be exercisable for more than 10 years after the date on which it
is granted; provided, however, in the case of an Incentive Stock Option granted
to a Participant who owns (actually or constructively under the provisions of
Section 424(d) of the Code) Stock possessing more than 10% of total combined
voting power of all classes of Stock of the Company or any Subsidiary, such
Incentive Stock Option shall not be exercisable for more than 5 years after the
date on which it is granted.
6.4 PAYMENT. The Committee shall establish procedures governing the
exercise of Options, which shall require that written notice of exercise be
given and that the Option price be paid in full in cash or equivalents,
including by personal check, at the time of exercise or pursuant to any
arrangement that the Committee shall approve. The Committee may, in its
discretion, permit a Participant to make payment in Stock already owned by him,
valued at its Fair Market Value on the date of exercise, as partial or full
payment of the exercise price. As soon
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as practicable after receipt of a written exercise notice and full payment of
the exercise price, the Company shall deliver to the Participant a certificate
or certificates representing the acquired shares of Stock.
6.5 INCENTIVE STOCK OPTIONS. Notwithstanding anything in the Plan to
the contrary, no term of this Plan relating to Incentive Stock Options shall be
interpreted, amended or altered, nor shall any discretion or authority granted
under the Plan be so exercised, so as to disqualify the Plan under Section 422
of the Code, or, without the consent of any Participant affected thereby, to
cause any Incentive Stock Option previously granted to fail to qualify for the
Federal income tax treatment afforded under Section 421 of the Code. Further,
the aggregate Fair Market Value (determined as of the time an Incentive Stock
Option is granted) of the Stock with respect to which Incentive Stock Options
are exercisable for the first time by any Participant during any calendar year
(under all option plans of the Company and all Subsidiaries of the Company)
shall not exceed $100,000.
6.6 DIRECTOR OPTIONS. Notwithstanding anything else contained herein to
the contrary, on the first business day following the date of each annual
meeting of shareholders during the term of the Plan, each Eligible Director
shall receive a Director Option to purchase 5,000 shares of Stock at an exercise
price per share equal to the Fair Market Value of the Stock on the date of
grant. Each Director Option shall be exercisable six months after the date of
grant and shall remain exercisable until the earlier to occur of (i) the tenth
anniversary of the date of grant or (ii) the first anniversary of the date the
Eligible Director ceases to be a member of the Board, except that if the
Eligible Director ceases to be a member of the Board after having been convicted
of, or pled guilty or nolo contendere to, a felony, his Director Options shall
be cancelled on the date he ceases to be a director. An Eligible Director may
exercise a Director Option in the manner described in Section 6.4.
SECTION 7.
TERMINATION OF EMPLOYMENT
7.1 TERMINATION OF EMPLOYMENT DUE TO RETIREMENT. Unless otherwise
determined by the Committee at the time of grant, in the event a Participant's
employment terminates by reason of Retirement, any Options granted to such
Participant which are then outstanding (whether or not exercisable prior to the
date of such termination) may be exercised at any time prior to the expiration
of the term of the Options or within five (5) years (or such shorter period as
the Committee shall determine at the time of grant) following the Participant's
termination of employment, whichever period is shorter. Notwithstanding any
provision contained herein, with respect to any Incentive Stock Option, a
Participant who terminates his employment by reason of Retirement may exercise
such Incentive Stock Option at any time prior to the expiration of the term of
the Option or within three (3) months following the Participant's termination of
employment, whichever period is shorter.
7.2 TERMINATION OF EMPLOYMENT DUE TO DEATH OR DISABILITY. Unless
otherwise determined by the Committee at the time of grant, in the event a
Participant's employment terminates by reason of death or Disability, any
Options granted to such Participant which are then outstanding (whether or not
exercisable prior to the date of such termination) may be exercised by the
Participant or the Participant's designated beneficiary, and if none is named,
in accordance with Section 10.2, at any time prior to the expiration date of the
term of the Options or within five (5) years (or such shorter period as the
Committee shall determine at the time of grant) following the Participant's
termination of employment, whichever period is shorter. Notwithstanding any
provision contained herein, with respect to any Incentive Stock Option, a
Participant whose employment terminates by reason of death or Disability may
exercise (or his designated beneficiary may exercise, in the case of death) such
Incentive Stock Option at any time prior to the expiration of the term of the
Option or within one (1) year following the Participant's termination of
employment, whichever period is shorter.
7.3 TERMINATION OF EMPLOYMENT FOR CAUSE. Unless otherwise determined by
the Committee at the time of grant, in the event a Participant's employment is
terminated for Cause, any Options granted to such Participant which are then
outstanding (whether or not exercisable prior to the date of such termination)
shall be forfeited.
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7.4 TERMINATION OF EMPLOYMENT FOR ANY OTHER REASON. Unless otherwise
determined by the Committee at or after the time of grant, in the event the
employment of the Participant shall terminate for any reason other than one
described in Section 7.1, 7.2 or 7.3, any Options granted to such Participant
which are exercisable at the date of the Participant's termination of employment
shall remain exercisable until the earlier to occur of (i) the expiration of the
term of such Options or (ii) the thirtieth day following the Participant's
termination of employment, whichever period is shorter.
SECTION 8.
CHANGE IN CONTROL
8.l ACCELERATED VESTING AND PAYMENT. Subject to the provisions of
Section 8.2 below, in the event of a Change in Control, each Option (excluding
any Director Option) shall be cancelled in exchange for a payment in cash of an
amount equal to the excess of the Change in Control Price over the exercise
price for such Option.
8.2 ALTERNATIVE AWARDS. Notwithstanding Section 8.l, no cancellation or
cash settlement or other payment shall occur with respect to any Award or any
class of Awards if the Committee reasonably determines in good faith prior to
the occurrence of a Change in Control that such Award or Awards shall be honored
or assumed, or new rights substituted therefor (such honored, assumed or
substituted award hereinafter called an "Alternative Award"), by a Participant's
employer (or the parent or a subsidiary of such employer) immediately following
the Change in Control, provided that any such Alternative Award must:
(i) be based on stock which is traded on an established securities
market, or which will be so traded within 60 days of the Change in Control;
(ii) provide such Participant (or each Participant in a class of
Participants) with rights and entitlements substantially equivalent to or better
than the rights, terms and conditions applicable under such Award, including,
but not limited to, an identical or better exercise or vesting schedule and
identical or better timing and methods of payment;
(iii) have substantially equivalent economic value to such Award
(determined at the time of the Change in Control); and
(iv) have terms and conditions which provide that in the event that the
Participant's employment is involuntarily terminated or constructively
terminated, any conditions on a Participant's rights under, or any restrictions
on transfer or exercisability applicable to, each such Alternative Award shall
be waived or shall lapse, as the case may be.
For this purpose, a constructive termination shall mean a termination
by a Participant following a material reduction in the Participant's
compensation, a material reduction in the Participant's responsibilities or the
relocation of the Participant's principal place of employment to another
location, in each case without the Participant's written consent.
8.3 DIRECTOR OPTIONS. Upon a Change in Control, each Director Option
granted to an Eligible Director shall be cancelled in exchange for a payment in
cash of an amount equal to the excess of the Change in Control Price over the
exercise price for such Director Option unless (i) the Stock remains traded on
an established securities market following the Change in Control and (ii) such
Eligible Director remains on the Board following the Change in Control.
8.4 OPTIONS GRANTED WITHIN SIX MONTHS OF THE CHANGE IN CONTROL. If any
Option (including a Director Option) granted within six months of the date on
which a Change in Control occurs (i) is held by a person subject to the
reporting requirements of Section 16(a) of the Act and (ii) is to be cashed out
pursuant to Section 8.1 or 8.3, such cash out shall not occur unless and until,
in the opinion of the Company's counsel, such cash out could
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occur without such reporting person being potentially subject to liability under
Section 16(b) of the Act by reason of such cash out.
SECTION 9.
AMENDMENT, MODIFICATION, AND TERMINATION OF PLAN
The Board or the Committee may at any time terminate or suspend the
Plan, and from time to time may amend or modify the Plan; provided, however,
that no amendment may be made to Section 6.6 or any other provision of the Plan
relating to Director Options within six months of the last date on which any
such provision was amended. Any such amendment, termination or suspension may be
made without the approval of the shareholders of the Company except as such
shareholder approval may be required (a) to satisfy the requirements of Rule
16b-3 under the Act, or any successor rule or regulation, (b) to satisfy
applicable requirements of the Code or (c) to satisfy applicable requirements of
any securities exchange on which are listed any of the Company's equity
securities. No amendment of the Plan shall result in any Committee member's
losing his status as a "disinterested person" as defined in Rule 16b-3 under the
Act, or any successor rule or regulation, with respect to any employee benefit
plan of the Company or result in the Plan's losing its status as a plan
satisfying the requirements of said Rule 16b-3. No amendment, modification, or
termination of the Plan shall in any manner adversely affect any Award therefore
granted under the Plan, without the consent of the Participant.
SECTION 10
MISCELLANEOUS PROVISIONS
10.1 NONTRANSFERABILITY OF AWARDS. No Awards granted under the Plan may
be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution. All rights with
respect to Awards granted to a Participant under the Plan shall be exercisable
during his lifetime only by such Participant and all rights with respect to any
Director Options granted to an Eligible Director shall be exercisable during his
lifetime only by such Eligible Director.
10.2 BENEFICIARY DESIGNATION. Each Participant and each Eligible
Director under the Plan may from time to time name any beneficiary or
beneficiaries (who may be named contingently or successively) to whom any
benefit under the Plan is to be paid or by whom any right under the Plan is to
be exercised in case of his death. Each designation shall revoke all prior
designations by the same Participant or Eligible Director, shall be in a form
prescribed by the Committee, and shall be effective only when filed in writing
with the Committee. In the absence of any such designation, benefits remaining
unpaid at the Participant's death shall be paid to or exercised by his surviving
spouse, if any, or otherwise to or by his estate and Director Options
outstanding at the Eligible Director's death shall be exercised by his surviving
spouse, if any, or otherwise by his estate.
10.3 NO GUARANTEE OF EMPLOYMENT OR PARTICIPATION. Nothing in the Plan
shall interfere with or limit in any way the right of the Company or any
Subsidiary to terminate any Participant's employment at any time, nor confer
upon any Participant any right to continue in the employ of the Company or any
Subsidiary. No Employee shall have a right to be selected as a Participant, or,
having been so selected, to receive any future Awards. Nothing in the Plan shall
confer upon an Eligible Director a right to continue to serve on the Board or to
be nominated for reelection to the Board.
10.4 TAX WITHHOLDING. The Company shall have the power to withhold, or
require a Participant or Eligible Director to remit to the Company, an amount
sufficient to satisfy Federal, State, and local withholding tax requirements on
any Award under the Plan, and the Company may defer payment of cash or issuance
of Stock until such requirements are satisfied. The Committee may, in its
discretion, permit a Participant to elect, subject to such conditions as the
Committee shall impose, (i) to have shares of Stock otherwise issuable under the
Plan withheld by the Company or (ii) to deliver to the Company previously
acquired shares of Stock having a Fair Market Value sufficient to satisfy all or
part of the Participant's estimated total Federal, state, and local tax
obligation associated with the transaction.
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10.5 INDEMNIFICATION. Each person who is or shall have been a member of
the Committee or of the Board shall be indemnified and held harmless by the
Company against and from any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by him in connection with or resulting from
any claim, action, suit, or proceeding to which he may be made a party or in
which he may be involved by reason of any action taken or failure to act under
the Plan and against and from any and all amounts paid by him in settlement
thereof, with the Company's approval, or paid by him in satisfaction of any
judgment in any such action, suit, or proceeding against him, provided he shall
give the Company an opportunity, at its own expense, to handle and defend the
same before he undertakes to handle and defend it on his own behalf. The
foregoing right of indemnification shall not be exclusive and shall be
independent of any other rights of indemnification to which such persons may be
entitled under the Company's Articles of Incorporation or Code of Regulations,
by contract, as a matter of law, or otherwise.
10.6 NO LIMITATION ON COMPENSATION. Nothing in the Plan shall be
construed to limit the right of the Company to establish other plans or to pay
compensation to its Employees or directors, in cash or property, in a manner
which is not expressly authorized under the Plan.
10.7 REQUIREMENTS OF LAW. The granting of Awards and the issuance of
shares of Stock shall be subject to all applicable laws, rules, and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required. Notwithstanding the foregoing, no Stock shall be
issued under the Plan unless the Company is satisfied that such issuance will be
in compliance with applicable federal and state securities laws. Certificates
for Stock delivered under the Plan may be subject to such stock transfer orders
and other restrictions as the Committee may deem advisable under the rules,
regulations and other requirements of the Securities and Exchange Commission,
any stock exchange upon which the Stock is then listed or traded, the Nasdaq
National Market or any applicable federal or state securities law. The Committee
may cause a legend or legends to be placed on any such certificates to make
appropriate reference to such restrictions.
10.8 TERM OF PLAN. The Plan shall be effective upon its adoption by the
Committee, subject to approval by the Board and approval by the affirmative vote
of the holders of a majority of the shares of voting stock present in person or
represented by proxy at the 1996 Annual Meeting of Shareholders. The Plan shall
continue in effect, unless sooner terminated pursuant to Section 9, until the
tenth anniversary of the date on which it is adopted by the Board.
10.9 GOVERNING LAW. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Ohio.
10.10 NO IMPACT ON BENEFITS. Plan Awards are not compensation for
purposes of calculating an Employee's rights under any employee benefit plan.
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Exhibit 18
May 12, 1997
Mr. Jean H. Mordo
Executive Vice President and Chief Financial Officer
The Scotts Company and Subsidiaries
14111 Scottslawn Road
Marysville, Ohio 43041
Dear Mr. Mordo:
We are providing this letter to you for inclusion as an exhibit to your Form
10-Q filing pursuant to Item 601 of Regulation S-K.
We have read management's justification for the changes in accounting from the
method of expensing advertising costs as incurred to the method of assigning
anticipated advertising costs to interim periods as a percentage of sales
throughout the fiscal year based on projected sales of advertised product
categories contained in the Company's Form 10-Q for the quarter ended March 29,
1997. Based on our reading of the data and discussions with Company officials of
the business judgment and business planning factors relating to the change, we
believe management's justification to be reasonable. Accordingly, in reliance on
management's determination as regards elements of business judgment and business
planning, we concur that the newly adopted accounting principle described above
is preferable in the Company's circumstances to the method previously applied.
We have not audited any financial statements of The Scotts Company, as of any
date or for any period subsequent to September 30, 1996, nor have we audited
the application of the change in accounting principle disclosed in Form 10-Q of
The Scotts Company for the periods ended March 29, 1997; accordingly, our
comments are subject to revision on completion of an audit of the financial
statements that include the accounting change.
Coopers & Lybrand L.L.P.
Columbus, Ohio
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF THE
SCOTTS COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FORM 10-Q
FOR THE QUARTER ENDED MARCH 30, 1997.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-29-1997
<CASH> 12
<SECURITIES> 0
<RECEIVABLES> 356
<ALLOWANCES> 6
<INVENTORY> 188
<CURRENT-ASSETS> 572
<PP&E> 235
<DEPRECIATION> 101
<TOTAL-ASSETS> 1,064
<CURRENT-LIABILITIES> 328
<BONDS> 0
<COMMON> 1
0
177
<OTHER-SE> 201
<TOTAL-LIABILITY-AND-EQUITY> 1,064
<SALES> 446
<TOTAL-REVENUES> 448
<CGS> 275
<TOTAL-COSTS> 398
<OTHER-EXPENSES> 4
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> 39
<INCOME-TAX> 17
<INCOME-CONTINUING> 22
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22
<EPS-PRIMARY> 1
<EPS-DILUTED> 1
</TABLE>
