<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 January 3, 1998
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 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.
18,678,146 Outstanding at February 6, 1998
- ----------------------------------------- -----------------------------------
Common Shares, voting, no par value
Page 1 of 20 pages
Exhibit Index at page 20
<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 periods ended
January 3, 1998 and December 28, 1996 3
Consolidated Statements of Cash Flows - Three month periods
ended January 3, 1998 and December 28, 1996 4
Consolidated Balance Sheets -
January 3, 1998, December 28, 1996, and September 30, 1997 5
Notes to Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-17
Part II. Other Information
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
</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
-----------------------------
January 3, December 28,
1998 1996
---- ----
<S> <C> <C>
Net sales $ 125.1 $ 100.2
Cost of sales 83.5 67.6
------ ------
Gross profit 41.6 32.6
------ ------
Advertising and promotion 10.3 9.8
Selling, general and administrative 31.9 25.3
Amortization of goodwill and other 2.7 2.2
intangibles
Other expense (income), net (0.3) 0.3
------- -------
Loss from operations (3.0) (5.0)
Interest expense 6.7 5.6
------- -------
Loss before income taxes (9.7) (10.6)
Income tax benefit (4.2) (4.6)
-------- --------
Net loss (5.5) (6.0)
Preferred stock dividends 2.4 2.4
------- -------
Loss applicable to common shareholders $ (7.9) $ (8.4)
======= =======
Loss per common share:
Basic $ (.42) $ (.45)
======= =======
Diluted $ (.42) $ (.45)
======= =======
Common shares used in loss per
common share computation 18.7 18.6
==== ====
</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>
Three Months Ended
--------------------------
January 3, December 28,
1998 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5.5) $ (6.0)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 8.1 7.4
Net change in certain components of
working capital (89.2) (64.6)
Net change in other assets and
liabilities and other adjustments (1.9) (0.7)
------ ------
Net cash used in operating activities (88.5) (63.9)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment, net (7.6) (1.2)
Acquisitions, net of cash acquired (88.8) -
------ ------
Net cash used in investing activities (96.4) (1.2)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving lines of credit and bank line of credit, net 194.4 62.9
Dividends on preferred stock (2.4) (2.4)
Other, net 0.4 (0.2)
------ ------
Net cash provided by financing activities 192.4 60.3
------ ------
Effect of exchange rate changes on cash (0.1) 0.1
------ ------
Net increase (decrease) in cash 7.4 (4.7)
Cash at beginning of period 13.0 10.6
------ ------
Cash at end of period $ 20.4 $ 5.9
====== ======
SUPPLEMENTAL CASH FLOW INFORMATION
Businesses Acquired:
Fair value of assets acquired $137.4
Liabilities assumed (27.5)
Debt issued 106.9
</TABLE>
See Notes to Consolidated Financial Statements
Page 4
<PAGE> 5
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in millions)
ASSETS
<TABLE>
<CAPTION>
January 3, December 28, September 30,
1998 1996 1997
---------- ------------ -------------
<S> <C> <C> <C>
Current Assets:
Cash $ 20.4 $ 5.9 $ 13.0
Accounts receivable, less allowances
of $6.5, $4.2 and $5.7, respectively 148.0 121.6 104.3
Inventories 210.4 195.5 146.1
Prepaid and other assets 22.7 22.3 22.4
------ ------ ------
Total current assets 401.5 345.3 285.8
----- ----- -----
Property, plant and equipment, net 168.7 136.1 146.1
Goodwill, net 278.8 178.9 215.6
Other intangibles, net 135.3 104.8 136.6
Other assets 4.0 13.6 3.5
------- ------ -------
Total Assets $ 988.3 $ 778.7 $ 787.6
===== ===== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving credit line and other short-term debt $ 93.7 $ 1.9 $ 1.5
Accounts payable 62.2 44.9 54.1
Accrued liabilities 65.7 44.1 57.8
Accrued taxes 21.9 13.0 25.9
------ ------ ------
Total current liabilities 243.5 103.9 139.3
----- ----- -----
Term debt, less current portion 324.5 286.4 219.8
Other liabilities 39.8 33.3 39.3
------ ------ ------
Total Liabilities 607.8 423.6 398.4
----- ----- -----
Commitments and Contingencies
Shareholders' Equity:
Class A Convertible Preferred Stock, no par value 177.3 177.3 177.3
Common shares, no par value per share, $.01 stated
value per share, issued 21.1 shares 0.2 0.2 0.2
Capital in excess of par value 207.9 207.6 207.8
Retained earnings 42.2 11.9 50.1
Cumulative foreign currency translation account (5.5) 1.5 (4.3)
Treasury stock, 2.4, 2.5, and 2.4 shares,
respectively, at cost (41.6) (43.4) (41.9)
------ ------ ------
Total Shareholders' Equity 380.5 355.1 389.2
----- ----- -----
Total Liabilities and Shareholders' Equity $ 988.3 $ 778.7 $ 787.6
===== ===== =====
</TABLE>
See Notes to Consolidated Financial Statements
Page 5
<PAGE> 6
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (all amounts are
in millions except per share data or as otherwise noted)
1. Summary of Significant Accounting Policies
------------------------------------------
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 European
Union, the Caribbean, South America, Southeast Asia, the Middle East,
Africa, Australia, New Zealand, Mexico, Japan, and several Latin American
Countries.
Organization and 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"), Miracle Holdings Limited
("Miracle Holdings"), and Levington Group Limited ("Levington"),
(collectively, the "Company"). All material intercompany transactions have
been eliminated.
The consolidated balance sheets as of January 3, 1998 and December 28,
1996, and the related consolidated statements of operations and cash flows
for the three month periods ended January 3, 1998 and December 28, 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 1997 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, expected useful lives assigned to property, plant and
equipment and goodwill and other intangible assets, legal and
environmental accruals, post-retirement benefits, 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.
Advertising and Promotion
-------------------------
The Company advertises its branded products through national and regional
media, and through cooperative advertising programs with retailers.
Retailers are also offered pre-season stocking and in-store promotional
allowances. Certain products are also promoted with direct consumer rebate
programs. Costs for these advertising and promotional programs are
generally expensed ratably over the year in relation to revenues or
related performance measures.
Page 6
<PAGE> 7
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (all amounts are
in millions except per share data or as otherwise noted)
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 was applied
retroactive to the beginning of fiscal 1997 (October 1, 1996). The change
impacts interim periods only; all advertising costs are to 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 quarter of fiscal 1997 by $3.3. Net income for the
first quarter of fiscal 1997 decreased by $1.9 or $0.10 per share.
Reclassifications
-----------------
Certain reclassifications have been made in prior periods' financial
statements to conform to fiscal 1998 classifications.
2. Acquisitions
------------
Effective December 1997, the Company acquired for $93.7, including deal
costs and refinancing of assumed debt, all the shares of Levington, the
leading producer of consumer and professional lawn fertilizer and growing
media in the U.K. A final allocation of the purchase price to acquired net
assets is pending. The excess of the purchase price over the net book
value of acquired assets is currently recorded on the balance sheet as
goodwill.
Effective January 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 ("MGC"), a manufacturer
and distributor of lawn and garden products in the U.K.
The Levington and Miracle Holdings acquisitions were accounted for under
the purchase method of accounting. The following pro forma results of
operations give effect to the Levington and Miracle Holdings acquisitions
as if they had occurred October 1, 1996.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
January 3, December 28,
1998 1996
------ ------
<S> <C> <C>
Net sales $ 143.1 $ 136.7
======= =======
Net loss $ (4.7) $ (4.6)
======= =======
Basic and diluted loss per common share $ (.38) $ (.38)
======= =======
</TABLE>
The pro forma information does not purport to be indicative of actual
results of operations if the Levington and Miracle Holdings acquisitions
had occurred as of October 1, 1996, and is not intended to be indicative
of future results or trends.
3. Inventories
Inventories, net of provisions of $10.7, $9.9 and $11.8, respectively,
consisted of:
<TABLE>
<CAPTION>
January 3, December 28, September 30,
1998 1996 1997
---------- ------------ -------------
<S> <C> <C> <C>
Finished goods $ 159.0 $ 137.9 $ 102.8
Raw materials 51.4 57.6 43.3
------ ------ ------
$ 210.4 $ 195.5 $ 146.1
===== ===== =====
</TABLE>
Page 7
<PAGE> 8
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (all amounts are
in millions except per share data or as otherwise noted)
4. Long-Term Debt
--------------
<TABLE>
<CAPTION>
January 3, December 28, September 30,
1998 1996 1997
---------- ------------ -------------
<S> <C> <C> <C>
Revolving credit line $ 318.6 $ 188.7 $ 121.8
9 7/8% Senior Subordinated Notes
$100.0 face amount (net of
unamortized discount) 99.5 99.4 99.4
Capital lease obligations and other 0.1 0.2 0.1
------- ------- -------
418.2 288.3 221.3
Less current portions 93.7 1.9 1.5
------ ------- -------
$ 324.5 $ 286.4 $ 219.8
===== ===== =====
</TABLE>
Maturities of term debt and capital leases for the next five calendar
years are as follows:
<TABLE>
<S> <C>
1998 93.7
1999 0
2000 0
2001 225.0
2002 0
Thereafter 100.0
</TABLE>
5. Net Loss Per Common Share
-------------------------
Effective the first quarter of fiscal 1998, the Company adopted Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS
128"), which establishes standards for computing and presenting earnings
per share ("EPS"). FAS 128 requires the presentation of basic and diluted
EPS. Basic EPS is computed by dividing loss applicable to common
shareholders by the weighted average number of common shares outstanding
during the period.
The following table presents information necessary to calculate basic and
diluted loss per common share. For each period presented, basic and
diluted EPS are equal as common share equivalents (stock options, Class A
Convertible Preferred Stock and warrants) outstanding for each period were
anti-dilutive and thus not considered in the diluted loss per common share
calculations.
<TABLE>
<CAPTION>
Three Months Ended
------------------
January 3, December 28,
1998 1996
---------- ------------
<S> <C> <C>
Net loss $ (5.5) $ (6.0)
Preferred Stock dividends (2.4) (2.4)
------ ------
Loss applicable to common
shareholders $ (7.9) $ (8.4)
====== ======
Common shares used in loss
per common share computation 18.7 18.6
====== ======
Basic and diluted loss per common share $ (.42) $ (.45)
====== ======
</TABLE>
Page 8
<PAGE> 9
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (all amounts are
in millions except per share data or as otherwise noted)
6. 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.
OHIO ENVIRONMENTAL PROTECTION AGENCY
The Company has been assessing and, as required, addressing certain
environmental issues regarding the wastewater treatment plants currently
operating at the Marysville facility. After considering whether to upgrade
the existing treatment plants or to undertake to connect the facility's
wastewater system with the City of Marysville's municipal treatment
system, the Company is proceeding with plans to connect to the City's
system, subject to successful completion of pending annexation
proceedings. Additionally, the Company has been assessing, under Ohio's
new Voluntary Action Program ("VAP"), the possible remediation of several
discontinued on-site waste disposal areas dating back to the early
operations of its Marysville facility.
In February 1997, the Company learned that the Ohio Environmental
Protection Agency ("OEPA") was referring certain matters relating to
environmental conditions at the Company's Marysville site, including the
existing wastewater treatment plants and the discontinued on-site waste
disposal areas, to the Ohio Attorney General's Office ("OAG").
Representatives from the OEPA, the OAG and the Company subsequently met on
several occasions, and continue to meet, to discuss these issues.
In June 1997, the Company received formal notice of an enforcement action
and draft Findings and Orders ("F&O") from the OEPA. The draft F&O
elaborated on the subject of the referral to the OAG alleging: potential
surface water violations relating to possible historical sediment
contamination possibly impacting water quality; inadequate treatment
capabilities of the Company's existing and currently permitted wastewater
treatment plants; and that the Marysville site is subject to corrective
action under the Resource Conservation Recovery Act ("RCRA"). In late July
1997, the Company received a draft judicial consent order from the OAG
which covers many of the same issues contained in the draft F&O including
RCRA corrective action.
In accordance with the Company's past efforts to enter into Ohio's VAP,
the Company submitted to the OEPA a "Demonstration of Sufficient Evidence
of VAP Eligibility Compliance" on July 8, 1997. Among other issues
contained in the VAP submission, was a description of the Company's
ongoing efforts to assess potential environmental impacts of the
discontinued on-site waste disposal areas as well as potential remediation
efforts. Pursuant to the statutes covering VAP, an eligible participant in
the program is not subject to State enforcement actions for those
environmental matters being addressed. On October 21, 1997, the Company
received a letter from the Director of the OEPA denying VAP eligibility
based upon the timeliness of and completeness of the submittal. The
Company has appealed the Director's action to the Environmental Review
Appeals Commission.
The Company is continuing to meet with the OAG and the OEPA in an effort
to negotiate an amicable resolution of these issues but is unable at this
stage to predict the outcome of the negotiations. The Company believes
that it has viable defenses to the State's enforcement action, including
that it had been proceeding under VAP to address certain environmental
issues, and will assert those defenses in any such action.
Page 9
<PAGE> 10
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (all amounts are
in millions except per share data or as otherwise noted)
The Company does not believe the ultimate outcome of any proceedings which
may result from the OEPA's referral of these matters to the OAG will have
a material adverse effect on the business or the financial condition of
the Company but is unable, at this stage, to predict the outcome of the
issues. Many of the issues raised by the State are already being
investigated and addressed by the Company during the normal course of
conducting business.
LAFAYETTE
In July 1990, the Philadelphia District of the U.S. Army Corps of
Engineers ("Corps") directed that peat harvesting operations be
discontinued at Hyponex's Lafayette, New Jersey facility, based on its
contention that peat harvesting and related activities result in the
"discharge of dredged or fill material into waters of the United States"
and therefore require a permit under Section 404 of the Clean Water Act.
In May 1992, the United States filed suit in the U.S. District Court for
the District of New Jersey seeking a permanent injunction against such
harvesting, and civil penalties in an unspecified amount. 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. The suit was placed in administrative suspense
during fiscal 1996 in order to allow the Company and the government an
opportunity to negotiate a settlement, and it remains suspended while the
parties develop, exchange and evaluate technical data. In July 1997, the
Company's wetlands consultant submitted to the government a draft
remediation plan. 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 materially adversely affected by continued closure of this
peat harvesting operation.
HERSHBERGER
In September 1991, the Company was identified by the OEPA as a Potentially
Responsible Party ("PRP") with respect to a site in Union County, Ohio
(the "Hershberger site") that has allegedly contained waste which included
hazardous substances whose transportation, treatment or disposal the
Company allegedly arranged. Pursuant to an Administrative Order with the
OEPA, the Company, together with four other PRPs identified to date,
investigated the extent of contamination in the Hershberger site. The
investigation confirmed that the site presents a low degree of risk and
that the hazardous substances identified are not compounds generally used
by the Company. However, due to the fact that the Company was originally
named as a PRP, and due to the potential joint and several liability of
PRPs, the Company has chosen to participate in an agreed voluntary
remedial action at the site. The workplan for the remedial action has been
approved by the OEPA. Such action is to consist of leachate collection and
treatment/disposal, landfill cap repair, landfill gas management, ground
water monitoring and institutional and engineering site controls. It is
expected that in fiscal 1998, the Company and the four other named PRPs
will execute an Administrative Order on Consent with the OEPA, by which
the named PRPs will fund the referenced remedial action. Management does
not believe that such obligations will have a material adverse effect on
the Company's results of operations or financial condition.
FIFRA
In January 1996, the United States 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 fiscal 1992 and 1993 and proposed
Page 10
<PAGE> 11
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (all amounts are
in millions except per share data or as otherwise noted)
penalties totaling $0.8, the maximum allowable under FIFRA according to
management's calculations. In February 1997, the United States EPA's
Motion for Accelerated Decision was granted on the issue of liability,
with the amount of the civil penalty to be resolved at hearing. The
hearing is scheduled for February 1998. Based upon Crop Protection's good
faith compliance actions and the United States EPA's position regarding
penalty reductions, management believes Crop Protection's liability in
this action is substantially less than the maximum. 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.
YEAR 2000
The Company has developed a long-term information systems strategy, one
aspect of which is to address exposures related to the impact on its
computer systems of the Year 2000 issues. Key financial information and
operational systems have been assessed and plans developed in order to
mitigate the Year 2000 issues. These plans include conversion of in-house
developed software and upgrades to purchased software. The Company is
currently in various stages of completing these conversions and upgrades:
some upgrades have already been made, while detailed conversion plans are
being developed. The Company has also engaged an outside consultant to
review the Company's plans for addressing the Year 2000 issues and to
assist in implementation. Management believes its plans will adequately
address the Year 2000 issues and does not currently anticipate a material
impact on the Company as a result of addressing these issues. However, if
such conversions and upgrades are not made, or are not timely completed,
the Year 2000 issues could have a material impact on the operations of the
Company.
7. New Accounting Standards
------------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information". Each standard is effective for financial statements
for fiscal years beginning after December 15, 1997.
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses). SFAS No. 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the
same prominence as other financial statements. Comprehensive income is
defined as the change in equity of a business enterprise during a period
from transactions and other events and circumstances from non-owner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. The
Company is evaluating this pronouncement and has not yet determined the
ultimate impact of this pronouncement on its future financial statements.
SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued
to shareholders. This statement defines business segments as components of
an enterprise about which separate financial information is available and
used internally for evaluating segment performance and decision making on
resource allocations. SFAS No. 131 requires reporting a measure of segment
profit or loss, certain specific revenue and expense items, and segment
assets; and other reporting about geographic and customer matters. The
Company plans to adopt SFAS No. 131 in the first quarter of fiscal 1999;
however, the Company believes that the business segments identified and
set forth in Note 14 to the Scotts' fiscal 1997 Annual Report on Form 10-K
are in substantial compliance with SFAS No. 131.
See Note 5 for discussion of SFAS No. 128.
8. Subsequent Events
-----------------
On February 13, 1998, the Company completed its acquisition of all of the
outstanding shares of Earthgro, Inc. for approximately $47.0, including
assumption of debt and estimated deal costs. Earthgro is a regional
organics company headquartered in Glastonbury, Connecticut, with
production facilities located in Maine, New Jersey, Pennsylvania,
Connecticut, Virginia and North Carolina.
Page 11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all amounts are in millions except per share data or as otherwise noted)
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. Scott's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997 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
The following table sets forth sales for the first quarter of fiscal 1998 and
1997:
<TABLE>
<CAPTION>
For the Three Months Ended
------------------------------- Period to
January 3, December 28, Period
1998 1996 % Change
------- -------- --------
<S> <C> <C> <C>
Consumer Lawns $ 30.4 $ 33.8 (10.1)%
Consumer Gardens 12.3 10.4 18.3
Consumer Organics 16.3 14.4 13.2
------ ------
Domestic Consumer 59.0 58.6 0.7
Professional 32.4 26.6 21.8
International 33.7 15.0 124.7
------ ------
Consolidated $ 125.1 $ 100.2 24.9%
===== =====
</TABLE>
The following table sets forth the components of income and expense for the
first quarter of fiscal 1998 and 1997 on a percent-of-sales basis:
<TABLE>
<CAPTION>
For the Three Months Ended
------------------------------ Period to
January 3, December 28, Period
1998 1996 % Change
------- -------- --------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 24.9%
Cost of sales 66.7 67.5 23.5
------ ------
Gross profit 33.3 32.5 27.6
Operating expenses:
Advertising and promotion 8.2 9.8 5.1
Selling, general and administrative 25.5 25.2 26.1
Amortization of goodwill and other intangibles 2.2 2.2 22.7
Other expenses (income), net (0.2) 0.3 nm
------- -------
Loss from operations (2.4) (5.0) 40.0
Interest expense 5.4 5.6 19.6
------- -------
Loss before income taxes (7.8) (10.6) (8.5)
Income tax benefit (3.4) (4.6) (8.7)
------- -------
Net loss (4.4) (6.0) (8.3)
Preferred stock dividends 1.9 2.4 nm
------- -------
Loss applicable to common shareholders (6.3)% (8.4)% nm
======= =======
</TABLE>
Page 12
<PAGE> 13
Three Months Ended January 3, 1998 versus the Three Months Ended December 28,
- -----------------------------------------------------------------------------
1996
- ----
Net sales for the three months ended January 3, 1998 totaled $125.1, an increase
of $24.9 or 24.9% over prior year. On a pro forma basis, assuming Levington and
the remaining two-thirds interest in Miracle Holdings were acquired at the
beginning of fiscal 1997, sales for the first quarter of fiscal 1998 would have
been $143.1, an increase of $6.4 or 4.7% over pro forma sales for the first
quarter of fiscal 1997. Excluding the effects of currency translation, pro forma
sales would have been 5.7% higher than the first quarter of the prior year.
Consumer segment sales totaled $59.0, an increase of 0.7% over prior year. The
flat results reflect the offsetting of increases in the Consumer Gardens (18.3%)
and Consumer Organics (13.2%) operating groups with a decrease in sales for the
Consumer Lawns group (10.1%). Growth in sales for the Consumer Gardens group
stems from increased demand for both Miracle-Gro(R) and Osmocote(R) products,
while the change in the Consumer Organics group reflects increased sales of
value-added products carrying the Scotts(R) and Miracle-Gro(R) brand names. The
decrease in Consumer Lawns sales was driven by an effort to provide customers
with products at times which more closely match their buying needs. This shift
in pre-season buying patterns out of the first quarter is expected to benefit
sales recorded during the second quarter of fiscal 1998.
Professional segment sales increased 21.8% to $32.4 in the first quarter of
fiscal 1998. The increase in Professional sales was largely driven by an
objective similar to that sought by the Consumer Lawns Group. By more closely
matching product sales with consumer needs, sales which historically would have
been reflected in the fourth quarter of fiscal 1997 were shifted into the first
quarter of fiscal 1998.
International segment sales increased to $33.7, or 124.7%, in the first quarter
of fiscal 1998. On a pro forma basis, assuming Levington and the remaining
two-thirds interest in Miracle Holdings were acquired at the beginning of fiscal
1997, sales for the first quarter of fiscal 1998 would have been $51.7, an
increase of 0.4% over pro forma sales for the first quarter of fiscal 1997.
Excluding the effects of currency translation, pro forma sales would have been
3.1% higher than the first quarter of the prior year.
Gross margin increased to 33.3% of sales in the first quarter of fiscal 1998, a
0.8% improvement compared to 32.5% in the prior year. This increase is primarily
due to the International acquisitions. Excluding such acquisitions, gross margin
would have decreased 0.6%, primarily due to product mix in European businesses
and start-up costs incurred subsequent to the upgrade of certain domestic
manufacturing lines.
Advertising and promotion expenses increased by $0.5, or 5.1%, to $10.3 for the
first quarter of 1998. The impact of international acquisitions on advertising
expense in the first quarter of fiscal 1998 ($3.3) more than offset a decrease
in advertising and promotions primarily resulting from the shift in consumer
pre-season buying patterns experienced by the Consumer Lawns Group. Overall, the
Company is committed to maintain, or somewhat increase, advertising levels for
fiscal 1998 in comparison to fiscal 1997, and promotional expense will likely
increase due to anticipated higher sales volumes.
Selling, general and administrative expenses increased $6.6, or 26.1%, to $31.9.
As a percentage of sales, selling, general and administrative expense increased
to 25.5% from 25.2% in the prior year. Excluding the international acquisitions,
selling, general and administrative expenses increased approximately $2.6,
primarily due to incremental incentives associated with the first quarter of
fiscal 1998 sales level, as well as costs associated with Year 2000 issues and
other system infrastructure improvements.
Amortization of goodwill and other intangibles increased $0.5, or 22.7%, as a
result of the inclusion of Levington and Miracle Holdings in the first quarter
of fiscal 1998.
Page 13
<PAGE> 14
Other expense (income), increased favorably by $0.6 primarily due to royalty
agreements in place in the first quarter of fiscal 1998 which did not exist in
the prior year.
Primarily as a result of the Levington and Miracle Holdings acquisitions, loss
from operations improved to $3.0 in the first quarter of fiscal 1998, compared
to $5.0 in the prior year. On a pro forma basis, income from operations would
have been a loss of $0.5 in the first quarter of 1998, compared to income of
$0.4 in the prior year.
Interest expense increased $1.1, or 19.6% in the first quarter of 1998.
Excluding borrowings associated with the Levington and Miracle Holdings
acquisitions, interest expense decreased approximately $1.1, primarily due to a
$50.3 reduction in average borrowings for the quarter.
The Company's effective tax rate was 43.2% in both the first quarter of 1998 and
1997. The Company's effective tax rate is slightly higher than statutory rates
due to non-tax deductible amortization of goodwill and certain intangibles in
the U.S.
During the first quarter of fiscal 1998, the Company reported a net loss of
$5.5, or $.42 per common share, compared with a net loss of $6.0, or $.45 per
common share, for the first quarter of fiscal 1997. Had Levington and Miracle
Holdings been fully consolidated in both the first quarter of fiscal 1998 and
1997, the net loss on a pro forma basis would have been $4.7 in fiscal 1998
compared to $4.6 for fiscal 1997, with a loss per common share of $.38 in both
periods.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities totaled $88.5 for the three month period ended
January 3, 1998 compared to $63.9 in the prior year. The seasonal nature of the
Company's operations results in a significant increase in certain components of
working capital (primarily inventory and accounts receivable) during the first
and second quarters. The third fiscal quarter is a significant period for
collecting accounts receivable. The higher level of cash used in operating
activities for the first quarter of fiscal 1998 is attributable to the increased
build of inventory levels needed to cover expected sales, as well as cash
required for operations acquired subsequent to December 1996.
Cash used in investing activities totaled $96.4 compared to $1.2 in the prior
year. This increase is primarily attributable to cash used for the acquisition
of Levington of approximately $88.8, net of cash acquired. Capital investments
were $7.6 in the first quarter of fiscal 1998, a $6.4 increase in comparison to
the prior year. This increase is primarily attributable to the completion of the
warehouse facility and the installation of new packaging lines, both in
Marysville, as well as the acquisition of additional warehousing space in the
Netherlands.
Financing activities provided $192.4 for the first quarter of fiscal 1998
compared to $60.3 in the prior year. Financing activities are principally
supported by the Company's Credit Agreement. Approximately $106.1 of the
increase from the prior year relates to financing the Levington acquisition. On
a net basis, approximately $88.8 of the borrowings were used to purchase the
shares of Levington and refinance Levington's existing debt instruments. The
remainder of the Levington-related borrowings were used to satisfy certain
escrow arrangements which management believes will be eliminated in the second
quarter, as well as working capital requirements. Other borrowings of $86.3 were
primarily a result of working capital requirements.
Total debt was $418.2 as of January 3, 1998, an increase of $196.9 compared with
debt at September 30, 1997 and an increase of $129.9 compared with debt levels
at December 28, 1996. Borrowings associated with the Levington acquisition were
approximately $106.1 at January 3, 1998. The remaining increase compared to
September 30, 1997 is primarily due to higher working capital requirements as
well as capital expenditures. Borrowings associated with Miracle Holdings
(acquisition funding net of subsequent cash flow) were approximately $68.8 at
January 3, 1998. The remaining $45.0 decrease compared to December 28, 1996 is
attributable to the Company's strong fiscal 1997 operating cash flows.
Page 14
<PAGE> 15
Shareholders' equity as of January 3, 1998 was $380.5 representing a $8.7
decrease compared to September 30, 1997 and a $25.4 increase compared to
December 28, 1996. The decrease compared to September 30, 1997 is attributable
to a net loss of $5.5, Convertible Preferred Stock dividends of $2.4, an
unfavorable change in cumulative foreign currency translation of $1.2 and
favorable treasury stock activity of $0.4. The increase compared to December 28,
1996 is attributable to net income for the twelve month period ended January 3,
1998 of $40.0, Convertible preferred stock dividends of $9.8, unfavorable
changes in cumulative foreign currency translation of $6.9 and favorable
treasury stock activity of $2.1.
The Company has foreign exchange risk related to international operations and
cash flows. The Company has historically entered into forward foreign exchange
contracts and purchased currency options to hedge its exposure to fluctuations
in foreign currency exchange rates. The Company is currently in the process of
reassessing its foreign exchange policy in light of actions taken internally to
reduce such exposures.
As of January 3, 1998, the Company's European operations had foreign exchange
risk in various European currencies tied to the Dutch Guilder. These currencies
include the Belgian Franc, Spanish Peseta, French Franc, British Pound, Italian
Lire, Australian Dollar and the U.S. Dollar. The Company's U.S. operations had
foreign exchange rate risk in the Canadian Dollar, Dutch Guilder and the British
Pound which are tied to the U.S. Dollar.
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 fiscal 1998.
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 6
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, 1997 under the "Business - Environmental and Regulatory Considerations"
section.
YEAR 2000
The Company has developed a long-term information systems strategy, one aspect
of which is to address exposures related to the impact on its computer systems
of the Year 2000 issues. Key financial, information and operational systems have
been assessed and plans developed in order to mitigate the Year 2000 issues.
These plans include conversion of in-house developed software and upgrades to
purchased software. The Company is currently in various stages of completing
these conversions and upgrades: some upgrades have already been made, while
detailed conversion plans are being developed. The Company has also engaged an
outside consultant to review the Company's plans for addressing the Year 2000
issues and to assist in implementation. Management believes its plans will
adequately address the Year 2000 issues and does not currently anticipate a
material impact on the Company as a result of addressing these issues. However,
if such conversions and upgrades are not made, or are not timely completed, the
Year 2000 issues could have a material impact on the operations of the Company.
Page 15
<PAGE> 16
RECENT DEVELOPMENTS
On February 13, 1998, the Company completed its acquisition of all of the
outstanding shares of Earthgro, Inc. for approximately $47.0 including
assumption of debt and estimated deal costs. Earthgro is a regional organics
company headquartered in Glastonbury, Connecticut, with production facilities
located in Maine, New Jersey, Pennsylvania, Connecticut, Virginia and North
Carolina.
On February 2, 1998, the Company acquired an 80% interest in Sanford
Scientific, Inc. ("SSI") a leading research company in the rapidly advancing
field of genetic engineering of plants. SSI holds the exclusive license to use
biolistic ("gene gun") technology in the commercial development of genetically
transformed grasses, flowers and plants.
MANAGEMENT'S OUTLOOK FOR THE REMAINDER OF 1998
The strong financial results of fiscal 1997 represent the base year in the
Company's long-term strategy for profitable growth. Although still relatively
early in fiscal 1998, management believes the Company is on course towards
fulfilling the following tenets which it established as part of its strategic
plan:
(1) Promote and capitalize on the strengths of the Scotts(R), Miracle-Gro(R)
and Hyponex(R) industry-leading brands. This involves a commitment to our
investors and retail partners that we will support these brands through
advertising and promotion unequaled in the lawn and garden consumables
market. In the Professional categories of our business, it signifies a
commitment to our customers to provide value and an integral element in
their long-term success;
(2) A commitment to continuously study and improve our knowledge of the market,
the consumer and the competition;
(3) Simplification of our product lines and business processes, to focus on
those that deliver value, evaluate marginal ones and eliminate those that
lack future prospects; and
(4) Achieve world leadership in operations, leveraging technology and know-how
to deliver outstanding customer service and quality.
The acquisitions of Levington, Earthgro and SSI are symbolic of the Company's
intention to consider acquisition opportunities in related or new markets.
Within the Company's four-year strategic plan, management has established
challenging, but realistic, financial goals, including:
(1) Sales growth of 6% to 8% in core businesses;
(2) An aggregate operating margin improvement of at least 2% over the next
four years; and
(3) Minimum compounded annual EPS growth of 15%.
FORWARD-LOOKING STATEMENTS
- --------------------------
The Company has made and will make certain forward-looking statements in its
Annual Report, Form 10-Q and in other contexts relating to future growth and
profitability targets, and strategies designed to increase total shareholder
value. The Private Securities Litigation Reform Act of 1995 (the "Act") provides
a "safe harbor" for forward-looking statements to encourage companies to provide
prospective information, so long as those statements are identified as
forward-looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those discussed in the forward-looking statements. The Company
desires to take advantage of the "safe harbor" provisions of the Act.
These forward-looking statements represent challenging goals for the Company,
and the achievement thereof is subject to a variety of risks and assumptions.
These forward-looking statements include, but are not limited to, information
regarding the future economic performance and financial condition of the
Company, the plans and objectives of the Company's management, and the Company's
assumptions regarding such performance and plans. Therefore, it is possible that
the Company's future actual financial results may differ materially from those
expressed in these forward-looking statements due to a variety of factors,
including:
- Weather conditions in North America and Europe which have a
significant impact on the timing of sales in the Spring selling
season and overall annual sales;
- Continued marketplace acceptance of the Company's Consumer Lawns
and Consumer Gardens groups' "pull" advertising marketing
strategies, particularly in the Consumer Lawns group which
refocused its general marketing strategy beginning in fiscal 1996;
Page 16
<PAGE> 17
- The Company's ability to maintain profit margins on its products,
to produce its products on a timely basis, and to maintain and
develop additional production capacity as necessary to meet
demand;
- Competition among lawn and garden care product producers supplying
the consumer and professional markets, both in North America and
Europe;
- Competition between and the recent consolidation within the retail
outlets selling lawn and garden care products produced by the
Company;
- Public perceptions regarding the safety of the products produced
and marketed by the Company;
- Inherent risks of international development, including currency
exchange rates, economic conditions and regulatory and cultural
difficulties or delays in the Company's development outside the
United States;
- Changes in economic conditions in the United States and the impact
of changes in interest rates; and
- The ability of the Company to improve its processes and business
practices to keep pace with the economic, competitive and
technological environment, including successfully addressing the
Year 2000 issues.
- The ability to successfully integrate the operations of acquired
companies.
Page 17
<PAGE> 18
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
See Footnote 6 to the Consolidated Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index at page 20 for a list of the exhibits included
herewith.
(b) The Company filed a Current Report on Form 8-K on December 29, 1997
relating to the acquisition of Levington Group Limited on December
12, 1997. No financial statements or pro forma financial
information was required to be filed therewith.
Page 18
<PAGE> 19
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
----------------------- -----------------------------------
Jean H. Mordo
Executive Vice President
Chief Financial Officer
Principal Accounting Officer
Page 19
<PAGE> 20
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 19
<PAGE> 21
THE SCOTTS COMPANY
QUARTERLY REPORT ON FORM 10-Q FOR
FISCAL QUARTER ENDED JANUARY 3, 1998
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
------ ----------- ------
<S> <C> <C>
2 Agreement for the Sale and Purchase of Levington Incorporated herein by
Group Limited, dated December 12, 1997, between reference to the
Scotts Holdings Limited, as Purchaser, and registrant's Current Report
Prudential Nominees Limited PAC Account; on Form 8-K dated
Prudential Nominees Limited PSPS Account; December 29, 1997 (File
Prudential Nominees Limited USV Account; No. 1-11593) [Exhibit 2]
Prudential Nominees Limited BMV Account;
Prudential Nominees Limited Holborn Account;
Prutec Limited; The Sears Pension Plan by The
Chase Manhattan Bank NA; HSBC Equity Limited;
Candover Investments plc; Candover Trustees
Limited; Candover Partners Limited as General
Partner of Candover 1991 Lead Investors Limited
Partner; Candover Partners Limited as General
Partner of Candover 1991 UK Limited Partnership;
Candover Partners Limited as General Partner of
Candover 1991 US Limited Partnership; 3i Group
plc; NatWest Ventures Investments Limited; Philip
Parry; Mrs. L. Parry; Philip Parry and Lynne Parry
as trustees of the Parry Trust; N. W. Gibbs; Mrs.
A. Gibbs; N. W. Gibbs and A. Gibbs as trustees of
the Gibbs Trusts; P. J. Elsdon; Mrs. B. Elsdon;
P. J. Elsdon and B. Elsdon as trustees of the
Elsdon Trust; and Fairmount Trustee Services
Limited as trustee for the time being of the
Levington Unapproved Pension Fund, as Sellers
10 The Scotts Company 1996 Stock Option Plan (as
amended through December 11, 1997)*
27 Financial Data Schedule*
</TABLE>
*Filed herewith
Page 20
<PAGE> 1
THE SCOTTS COMPANY
1996 STOCK OPTION PLAN
(REFLECTS AMENDMENTS THROUGH DECEMBER 11, 1997)
<PAGE> 2
THE SCOTTS COMPANY
1996 STOCK OPTION PLAN
(REFLECTS AMENDMENTS THROUGH DECEMBER 11, 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 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
<PAGE> 3
(iv) the purchase of Stock pursuant to any tender or exchange
offer made by any "person," including a "group" (as such terms are used
in Sections 13(d) and l4(d)(2) of the Act), other than the Company, any
of its Subsidiaries, or an employee benefit plan of the Company or of
any of its Subsidiaries, for more than 49% of the Stock of the Company.
(f) "Change in Control Price" means the highest price per share of
Stock offered in conjunction with any transaction resulting in a Change in
Control (as determined in good faith by the Committee if any part of the offered
price is payable other than in cash) or, in the case of a Change in Control
occurring solely by reason of a change in the composition of the Board, the
highest Fair Market Value of the Stock on any of the 30 trading days immediately
preceding the date on which a Change in Control occurs.
(g) "Code" means the Internal Revenue Code of 1986, as amended.
(h) "Committee" means the Compensation and Organization Committee of
the Board which shall have the meaning ascribed to a "compensation committee" in
Section 1.162-27(c)(4) of the final regulations promulgated under Section 162(m)
of the Code and which shall consist of three or more members, each of whom shall
be (i) a person from time to time permitted by the rules promulgated under
Section 16 of the Act in order for grants of Awards to be exempt transactions
under said Section 16 and (ii) receiving remuneration in no other capacity than
as a director, except as permitted under Section 1.162-27(e)(3) of the final
regulations promulgated under Section 162(m) of the Code and the rulings
thereunder.
(i) "Company" means The Scotts Company, an Ohio corporation, and any
successor thereto.
(j) "Director Option" means a Nonstatutory Stock Option granted to each
Eligible Director pursuant to Section 6.6 without any action by the Board or the
Committee.
(k) "Disability" means the inability of the Participant to perform his
duties for a period of at least six months due to a physical or medical
infirmity. Notwithstanding the foregoing, with respect to Incentive Stock
Options, the term "Disability" shall be defined as such term is defined in
Section 22(e)(3) of the Code.
(l) "Eligible Director" means, on any date, a person who is serving as
a member of the Board and who is not an Employee.
(m) "Employee" means any officer or other key executive and management
employee of the Company or of any of its Subsidiaries.
(n) "Fair Market Value" means, on any date, the closing price of the
Stock as reported on the New York Stock Exchange (or on such other recognized
market or quotation system on which the trading prices of the Stock are traded
or quoted at the relevant time) on such date. In the event that there are no
Stock transactions reported on the New York Stock Exchange (or such other market
or system) on such date, Fair Market Value shall mean the closing price on the
immediately preceding date on which Stock transactions were so reported.
(o) "Option" means the right to purchase Stock at a stated price for a
specified period of time. For purposes of the Plan, an Option may be either (i)
an "Incentive Stock Option" (ISO) within the meaning of Section 422 of the Code
or (ii) a "Nonstatutory Stock Option" (NSO) which does not qualify for treatment
as an "Incentive Stock Option."
(p) "Participant" means any Employee designated by the Committee to
participate in the Plan.
(q) "Plan" means The Scotts Company 1996 Stock Option Plan, as in
effect from time to time.
(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.
<PAGE> 4
(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 6.6, 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.
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
<PAGE> 5
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 6.6.
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 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
<PAGE> 6
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 who
is not a member of a Board committee 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. An Eligible Director who is a member of
one or more Board committees, shall receive a grant of 5,500 shares. An Eligible
Director who chairs one or more Board committees shall receive a grant of 6,000
shares. 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 6.3.
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.
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.
<PAGE> 7
SECTION 8.
CHANGE IN CONTROL
8.l ACCELERATED VESTING AND PAYMENT. Subject to the provisions of
Section 8.2 below, in the event of a Change in Control, each Option (excluding
any Director Option) shall be cancelled in exchange for a payment in cash of an
amount equal to the excess of the Change in Control Price over the exercise
price for such Option.
8.2 ALTERNATIVE AWARDS. Notwithstanding Section 8.l, no cancellation or
cash settlement or other payment shall occur with respect to any Award or any
class of Awards if the Committee reasonably determines in good faith prior to
the occurrence of a Change in Control that such Award or Awards shall be honored
or assumed, or new rights substituted therefor (such honored, assumed or
substituted award hereinafter called an "Alternative Award"), by a Participant's
employer (or the parent or a subsidiary of such employer) immediately following
the Change in Control, provided that any such Alternative Award must:
(i) be based on stock which is traded on an established securities
market, or which will be so traded within 60 days of the Change in Control;
(ii) provide such Participant (or each Participant in a class of
Participants) with rights and entitlements substantially equivalent to or better
than the rights, terms and conditions applicable under such Award, including,
but not limited to, an identical or better exercise or vesting schedule and
identical or better timing and methods of payment;
(iii) have substantially equivalent economic value to such Award
(determined at the time of the Change in Control); and
(iv) have terms and conditions which provide that in the event that the
Participant's employment is involuntarily terminated or constructively
terminated, any conditions on a Participant's rights under, or any restrictions
on transfer or exercisability applicable to, each such Alternative Award shall
be waived or shall lapse, as the case may be.
For this purpose, a constructive termination shall mean a termination
by a Participant following a material reduction in the Participant's
compensation, a material reduction in the Participant's responsibilities or the
relocation of the Participant's principal place of employment to another
location, in each case without the Participant's written consent.
8.3 DIRECTOR OPTIONS. Upon a Change in Control, each Director Option
granted to an Eligible Director shall be cancelled in exchange for a payment in
cash of an amount equal to the excess of the Change in Control Price over the
exercise price for such Director Option unless (i) the Stock remains traded on
an established securities market following the Change in Control and (ii) such
Eligible Director remains on the Board following the Change in Control.
8.4 OPTIONS GRANTED WITHIN SIX MONTHS OF THE CHANGE IN CONTROL. If any
Option (including a Director Option) granted within six months of the date on
which a Change in Control occurs (i) is held by a person subject to the
reporting requirements of Section 16(a) of the Act and (ii) is to be cashed out
pursuant to Section 8.1 or 8.3, such cash out shall not occur unless and until,
in the opinion of the Company's counsel, such cash out could occur without such
reporting person being potentially subject to liability under Section 16(b) of
the Act by reason of such cash out.
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
<PAGE> 8
(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.
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.
<PAGE> 9
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.
<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 JANUARY 3, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JAN-03-1998
<CASH> 20,400
<SECURITIES> 0
<RECEIVABLES> 154,000
<ALLOWANCES> 6,500
<INVENTORY> 210,400
<CURRENT-ASSETS> 401,500
<PP&E> 276,700
<DEPRECIATION> (108,000)
<TOTAL-ASSETS> 988,300
<CURRENT-LIABILITIES> 243,500
<BONDS> 0
0
177,300
<COMMON> 200
<OTHER-SE> 203,000
<TOTAL-LIABILITY-AND-EQUITY> 988,300
<SALES> 125,100
<TOTAL-REVENUES> 125,100
<CGS> 83,500
<TOTAL-COSTS> 44,900
<OTHER-EXPENSES> (300)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,700
<INCOME-PRETAX> (9,700)
<INCOME-TAX> (4,200)
<INCOME-CONTINUING> (5,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,500)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)
</TABLE>
