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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended September 30, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______________ to ___________________
Commission file number 1-11593
The Scotts Company
(Exact name of registrant as specified in its charter)
Ohio 31-1199481
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
14111 Scottslawn Road, Marysville, Ohio 43041
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 513-644-0011
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
ON WHICH REGISTERED
9 7/8% Senior Subordinated Notes due August 1, 2004 New York Stock Exchange
Common Shares, Without Par Value (18,717,064 New York Stock Exchange
Common Shares outstanding at December 1, 1995)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of the
registrant at December 1, 1995 was $356,018,475.
This report contains 121 pages of which this is Page 1. The Index to
Exhibits begins at page 68.
PART I
ITEM 1. BUSINESS.
The Scotts Company ("Scotts"), through its wholly-owned subsidiaries,
Hyponex Corporation ("Hyponex"), Scotts-Sierra Horticultural Products Company
("Sierra"), Republic Tool and Manufacturing Corp. ("Republic"), Scotts'
Miracle-Gro Products, Inc. and their subsidiaries (collectively, the
"Company"), is one of the oldest and most widely recognized manufacturers of
products used to grow and maintain landscapes: lawns, gardens and golf
courses. In both the consumer and professional business groups, the Company's
Scotts(R) and Turf Builder(R) (for consumer lawn care), Miracle-Gro(R) and
Miracid(R) (for garden care), ProTurf(R) (for professional turf care) and
Osmocote(R) and Peters(R) (for commercial horticulture) brands command
market-leading shares more than double those of the next ranked competitors.
The Company's long history of technical innovation, its reputation for quality
and service and its effective marketing tailored to the needs of
do-it-yourselfers and professionals have enabled the Company to maintain
leadership in its markets while delivering consistent growth in sales and
operating income. Do-it-yourselfers and professionals purchase through
different distribution channels and have different information and product
needs. Accordingly, the Company has two business groups, Consumer and
Professional, to serve its domestic markets, as well as an International Group
to serve its markets outside of North America.
On May 19, 1995, pursuant to the Amended and Restated Agreement and Plan
of Merger, dated as of May 19, 1995, amending and restating the original
Agreement and Plan of Merger, dated as of January 26, 1995 (as so amended and
restated, the "Merger Agreement"), the Company acquired Stern's Miracle-Gro
Products, Inc. ("Miracle-Gro Products"), Miracle-Gro Products Limited
("Miracle-Gro UK"), Miracle-Gro Lawn Products, Inc. ("Miracle-Gro Lawn
Products") and the assets of Stern's Nurseries, Inc. ("Nurseries")
(collectively, the "Miracle-Gro Companies"). The acquisition was structured as
a merger of Scotts' wholly-owned subsidiary, ZYX Corporation ("Merger Sub")
into Miracle-Gro Products (the "Merger"), with Miracle-Gro Products surviving,
followed by stock transfers of all of the outstanding capital stock of
Miracle-Gro UK and Miracle-Gro Lawn Products to Miracle-Gro Products (the
"Subsequent Stock Transfers") and an asset transfer of all of the assets, but
none of the liabilities, of Nurseries to Miracle-Gro Products (the "Asset
Transfer" and, collectively with the Merger and the Subsequent Stock
Transfers, the "Merger Transactions"). Following the Merger Transactions,
Miracle-Gro Products was merged into its wholly-owned subsidiary, Scotts'
Miracle-Gro Products, Inc., which is the ultimate surviving corporation of the
Merger Transactions ("Scotts' Miracle-Gro"). Scotts' Miracle-Gro markets the
leading brands of garden plant foods, Miracle-Gro(R) and Miracid(R).
By operation of the Merger, each share of capital stock of Merger Sub
was converted into one share of the voting common stock of Miracle-Gro
Products, and the outstanding capital stock of Miracle-Gro Products was
converted into the right to receive Scotts' Class A Convertible Preferred
Stock (the "Convertible Preferred Stock") and warrants to acquire common
shares of Scotts (the "Warrants"), as described below. As a result of the
Merger Transactions, Scotts became the owner of all of the outstanding shares
of common stock of the surviving corporation, Miracle-Gro Products, and its
wholly-owned subsidiaries, Miracle-Gro UK and Miracle-Gro Lawn Products.
Prior to the Merger Transactions, the Miracle-Gro Companies were
privately held by: Horace Hagedorn, Chairman and Chief Executive Officer of
Miracle-Gro Products, individually; members of the Hagedorn family through
Hagedorn Partnership, L.P. (the "Hagedorn Partnership"); Community Funds,
Inc., a New York not-for-profit corporation (the "Charity"), as a result of a
charitable donation by Mr. Hagedorn on May 1, 1995; and John Kenlon, the
President of Scotts' Miracle-Gro.
As consideration for the Merger Transactions, Mr. Hagedorn, the Hagedorn
Partnership, the Charity and Mr. Kenlon received, in the aggregate,
$195,000,000 face amount of Convertible Preferred Stock, convertible at $19
per share (subject to adjustment) into approximately 35% of the total voting
power of Scotts, and Warrants to purchase, at prices ranging from $21 to $29
per share, an additional 3,000,000 common shares of Scotts, which, if
exercised, would enable them to exercise, together with the Convertible
Preferred Stock, approximately 42% of the total voting power of Scotts.
The closing of the Merger Transactions followed preliminary approval of
a consent order reached with the Federal Trade Commission ("FTC"), pursuant to
which the Company agreed to divest its Peters(R) U.S. consumer water-soluble
fertilizer ("CWSF") business, which had 1994 sales of $7.2 million. The sale
of the Peters(R) CWSF business closed on July 27, 1995. The Peters(R)
commercial business and U.S. consumer potting soil business remain with the
Company.
CONSUMER BUSINESS GROUP
PRODUCTS
The Company's consumer products include lawn fertilizers and lawn
fertilizer/control combination products, garden and indoor plant care
products, garden tools, potting soils and other organic products, grass seed
and lawn spreaders.
LAWN FERTILIZERS AND COMBINATION PRODUCTS. Among the Company's most
important consumer products are lawn fertilizers, such as Turf Builder(R), and
combination fertilizer/control products, such as Turf Builder Plus 2(R) and
Turf Builder Plus Halts(R). Typically, these are patented, homogeneous,
controlled-release products which provide complete controlled feeding for
consumers' lawns for up to two months without the risk of damage to the lawn
presented by less expensive non-controlled-release products. Many of the
Company's products are specially formulated for geographical differences and
some, such as Bonus(R) S (to control weeds in Southern grasses), are
distributed to limited areas. Most of the Company's lawn fertilizer and
combination products are sold in dry, granular form, although the Company also
sells a small amount of liquid lawn care products. In 1995, the Miracle-Gro
Companies also sold water soluble lawn food as Miracle-Gro(R) lawn food. Also
in 1995, the Miracle-Gro Companies completed a two year test marketing program
for a granular lawn product. A similar product, along with a combination weed
and feed lawn product, will be offered by the Company under the Miracle-Gro(R)
name nationwide for the 1996 season.
Management estimates that in fiscal 1995, the Company's share of the
U.S. do-it-yourself consumer lawn chemicals products market was approximately
49% (includes Miracle-Gro lawn products), more than double that of the second
leading brand.
GARDEN AND INDOOR PRODUCTS. With the completion of the Merger
Transactions in May 1995, the Company now sells a complete line of water
soluble fertilizers under the Miracle-Gro(R) brand name. These products are
primarily used for garden fertilizer application, but also can be used for
lawn care. The Company also produces and sells a line of boxed Scotts(R) Plant
Foods, garden and landscape fertilizers, indoor plant care products and
Osmocote(R) controlled-release garden fertilizers.
Scotts' Miracle-Gro markets and distributes throughout the United States
and Canada the leading line of water-soluble plant foods. These products are
designed to be dissolved in water, creating a dilute nutrient solution which
is poured over plants and rapidly absorbed by their roots and leaves.
Stern's Miracle-Gro(R) All-Purpose Water-Soluble Plant Food is the
Miracle-Gro Companies' leading product, accounting for approximately 60% of
sales in their last fiscal year. Other water-soluble plant foods in the
product line include Miracid(R) for acid loving plants, Miracle-Gro(R) for
Roses, and Miracle-Gro(R) for Tomatoes. The Miracle-Gro Companies also sell a
line of hose-end applicators for their water-soluble plant foods, the
Miracle-Gro No-Clog(R) Garden and Lawn Feeder line, which allow consumers to
apply water-soluble fertilizers to large areas quickly and easily with no
mixing or measuring required. The Miracle-Gro Companies also market a line of
products for houseplant use including Liquid Miracle-Gro(R), African Violet
Food, Plant Food Spikes and Leaf Shine.
Management estimates that in fiscal 1995, the Company's share of the
garden and indoor products market was approximately 38% (includes Miracle-Gro
products).
GARDEN TOOLS. The Company has a licensing agreement in place with Union
Tools, Inc. ("Union") under which Union, in return for the payment of
royalties, is granted the right to produce and market a line of garden tools
bearing the Scotts trademark. The Company also is a party to a licensing
agreement with American Lawn Mower Company ("American") under which American,
in return for the payment of royalties, is granted the right to produce and
market a line of push-type reel lawn mowers bearing the Scotts trademark. In
management's estimation, the Company did not have a material share of the
markets for these products in fiscal 1995.
ORGANIC PRODUCTS. The Company sells a broad line of organic products
under the Scotts(R), Hyponex(R), Peters(R) Professional(R) and other labels,
including retail potting soils, topsoil, peat, manures and mulches. Management
estimates that the Company's fiscal 1995 U.S. market share was approximately
50% in potting soils, and approximately 41% in other consumer organic
products.
GRASS SEED. High quality grass seed was the Company's first lawn
product. Today, the Company sells numerous varieties and blends of grass seed,
many of them proprietary, designed for different uses and geographies.
Management estimates that the Company's share of the U.S. consumer grass seed
market was approximately 24% in fiscal 1995.
LAWN SPREADERS. Because the Company's granular lawn care products
perform best when applied evenly and accurately, the Company sells a line of
spreaders specifically manufactured and developed for use with its products.
This line includes the SpeedyGreen(R) and EasyGreen(R) rotary spreaders, the
PrecisionGreen(R) and AccuGreen(R) drop spreaders, and the HandyGreen(R)
hand-held rotary spreader.
Since the acquisition of Republic in November, 1992, the Company has
continued to market both its line of Scotts(R) spreaders and Republic's E-Z
line of spreaders and to integrate the manufacture of its spreaders through
Republic. Management estimates that the Company's share of the U.S. market for
lawn spreaders was approximately 59% in fiscal 1995.
CONSUMER BUSINESS STRATEGY
The Company believes that it has achieved its leading position in the
do-it-yourself lawn care market on the basis of its sophisticated technology,
the superior quality and value of its products, the service it provides its
customers and its strong marketing programs. The Company will continue to
maintain and expand its market position by emphasizing these qualities and
taking advantage of the name and reputation of its many strong brands such as
Scotts(R), Miracle-Gro(R) and Hyponex(R). Through its Scotts(R), Peters(R) and
Hyponex(R) labels, the Company has also focused on increasing sales of its
higher margin organic products such as potting soils.
The Merger Transactions with the Miracle-Gro Companies position the
Company as the market leader in the lawn, garden and organics segment of the
growing lawn and garden market. Population trends indicate that the consumer
segment age of 40 and older, who represent the largest group of lawn and
garden product users, will grow by 30% from 1995 to 2010, a growth rate more
than twice that of the total population.
Drawing upon its strong research and development capabilities, the
Company intends to continue to develop and introduce new and innovative lawn
and garden products. The Company believes that its ability to introduce
successful new consumer products has been a key element in the Company's
growth. New consumer products in recent years include: PatchMaster(R) (1992),
a unique lawn repair product containing seed, Scotts Starter(R) fertilizer and
mulch; a Poly-S(R) lawn fertilizer line(1993), which utilizes Scotts
proprietary controlled-release technology to provide a lower priced product
offering versus the premium Turf Builder(R) line; new AccuGreen(R) and Speedy
Green(R) (1994) spreaders which are shipped and sold fully assembled; Scotts
planting soils (1994), a line of ready-to-use, value-added soils which help
simplify the do-it-yourself gardener's task and deliver superior growing
performance; Scotts Ultra Turf Builder(R) products (1995), a line of
fertilizer products for home use which draw upon the advanced technology of
the Company's golf course products; GRUBEX(TM) (1995), providing season-long
lawn protection against grubs; YardAll(TM) (1995), an extra large lawn and
garden cart; and flat-bottom, stand-up bags (1995) for soil products, lawn
fertilizers, plant food and grass seed, which improve merchandising for retail
customers.
The Company also seeks to capitalize upon the competitive advantages
stemming from its position as the leading nationwide supplier of a full line
of consumer lawn and garden products. The Company believes that this gives it
an advantage in selling to larger retailers, who value the efficiency of
dealing with a limited number of suppliers.
The Company has developed a program to take advantage of Hyponex's
composting expertise and the increasing concern about landfill capacity by
entering into agreements with municipalities and waste haulers to compost yard
waste. The Company now has twelve compost facilities. In addition to service
fees, the Company substitutes the resulting compost for a portion of the raw
materials in Hyponex and other Company products. Revenues in fiscal 1995 and
1994 from composting services were $7.2 million and $5.0 million,
respectively.
MARKETING AND PROMOTION
The Company employs a 100 person direct sales force and numerous
distributors for its consumer products to cover approximately 24,000 retail
outlets and headquarters of national, regional and local chains. Most
salespeople have college degrees and prior sales experience. In recent years,
the percentage of sales to mass merchandisers and large buying groups has
increased. The top ten accounts (which include three buying groups of
independent retailers) represented 66% of the Consumer Business Group sales in
fiscal 1994 and 70% in 1995.
At the same time, the Company continues to support its independent
retailers. Most importantly, the Company has developed a special line of
products, marketed under the Lawn Pro(R) name, which is sold by independent
retailers. These products include the 4-Step(TM) program, introduced in 1984,
which encourages consumers to purchase four products at one time (fertilizer
plus crabgrass preventer, fertilizer plus weed control, fertilizer plus insect
control and a special fertilizer for Fall application). The Company promotes
the 4-Step(TM) program as providing consumers with all their annual lawn care
needs for less than one-third of what a lawn care service would cost.
The Company believes the Lawn Pro line has helped maintain the loyalty
of the independent retailers in the face of increasing competition from mass
merchandisers.
The Company supports its sales efforts with extensive advertising and
promotional programs. Because of the importance of the Spring sales season in
the marketing of consumer lawn and garden products, the Company focuses its
consumer promotional efforts on this period. Through advertising and other
promotional efforts, the Company seeks to encourage consumers to make the bulk
of their lawn and garden purchases in the early Spring. The Company believes
that its early season promotions substantially moderate the risk to its
consumer sales posed by bad weekend weather.
In 1995, the Company introduced a promotional allowance to retailers.
This promotional allowance replaced the Company's point of sale fertilizer
rebates offered to consumers and is designed to provide retailers with the
ability to customize and differentiate promotions of Scotts products.
Consistent with its long-standing policy of encouraging retailers to
purchase products early, in 1995, the Company expanded a marketing program
which provides incentives to retailers to purchase a portion of their calendar
fourth quarter and 1996 fertilizer product requirements early, including
extended payment terms consistent with the anticipated pattern of sales to
consumers. Please see the discussion in "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Results of
Operations - Fiscal 1995 compared with fiscal 1994." The Company and retailers
view these types of programs as important to the production, distribution and
marketing of these seasonal products. Therefore, it is anticipated that such
programs will continue in future periods; however, management believes that
the level of such programs in the future will be below that of fiscal 1995.
An important part of the Company's sales effort is its national
toll-free consumer hotline, on which its "lawn consultants" answer questions
about the Company's products and give general lawn care advice to consumers.
The Company's lawn consultants responded to over 410,000 telephone and written
inquiries in fiscal 1995 and have handled over 2,900,000 calls since the
inception of the consumer hotline in 1972.
Backing up the Company's marketing effort is its well-known "No Quibble"
guarantee, instituted in 1958, which promises consumers a full refund if for
any reason they are not satisfied with the results after using the Company's
products. Refunds under this guarantee have consistently amounted to less than
0.3% of net sales on an annual basis.
Miracle-Gro products are sold through a direct sales force to certain
large retailers and also via lawn and garden wholesale distributors. The
percentage of sales to mass merchandisers, warehouse-type clubs and large
buying groups has increased in recent years. The top ten accounts (which
includes three wholesale distributors who resell to a variety of accounts)
represented 67% of the Miracle-Gro Companies' business in 1994 and 69% in
1995.
The Miracle-Gro(R) line of water-soluble plant foods can be found in
most retail outlets which sell garden fertilizer products. Major retailers
which carry Miracle-Gro(R) branded items include Wal-Mart, Home Depot, Kmart,
Target and Lowe's Stores. Warehouse-type clubs such as Sam's Club and Price
Costco also feature the products, as do nursery chains such as Frank's Nursery
and Crafts. Hardware cooperatives, such as Cotter and Co., Ace Hardware Corp.
and Servistar Hardware Stores, carry portions of the Miracle-Gro(R) line. The
houseplant items are also carried in stores with traditionally small garden
sections, such as supermarkets and drugstores.
COMPETITION
The consumer lawn and garden market is highly competitive. The most
significant competitors for the consumer lawn care business are lawn care
service companies. At least one of these, Tru Green Company, which also owns
the ChemLawn(R) lawn care service business, operates nationally and is
significantly larger than the Company. In the do-it-yourself segment, the
Company's products compete primarily against regional products and private
label products produced by various suppliers and sold by such companies as
Kmart Corporation. These products compete across the entire range of the
Company's product line. In addition, certain of the Company's products compete
against branded fertilizers, pesticides and combination products marketed by
such companies as Monsanto Company (Ortho(R) and Greensweep(R)), Lebanon
Chemical Corp. (Greenview(R)) and United Industries Corporation (Peters(R)
water soluble fertilizers for the consumer market).
Most competitors, with the exception of lawn care service companies,
sell their products at prices lower than those of the Company. The Company
competes primarily on the basis of its strong brand names, quality, value,
service and technological innovation. The Company's competitive position is
also supported by its national sales force, advertising campaigns and its
unconditional guarantee. There can be no assurance, however, that additional
competition from new or existing competitors will not erode the Company's
share of the consumer market or its profit margins.
The Miracle-Gro Companies' products, which are generally
non-proprietary, have competed primarily against regional brands and private
label products on both a regional and national basis. The Miracle-Gro
Companies have maintained their strong market position by virtue of an
extensive advertising campaign, and by the quality of their products. However,
there can be no assurance that expanded marketing efforts by existing
competitors, or new entrants, will not erode the business or profit margins of
the Miracle-Gro Companies.
BACKLOG
The majority of annual consumer product orders (other than organic
products which are normally ordered in season on an "as needed" basis) are
received from retailers during the months of October through April and are
shipped during the months of January through April. As of November 28, 1995,
orders on hand for retailers totaled approximately $62 million compared to
approximately $26 million on the same date in 1994. All such orders are
expected to be filled in fiscal 1996.
PROFESSIONAL BUSINESS GROUP
THE MARKET
The Company sells its professional products to golf courses, commercial
nurseries and greenhouses, schools and sportsfields, multi-family housing
complexes, business and industrial sites, lawn and landscape services and
specialty crop growers. In 1995, the Professional Business Group served such
high profile golf courses as Augusta National (Georgia), Cypress Point and
Pebble Beach (California), Desert Mountain (Arizona), Muirfield Village Golf
Club (Ohio), Oakmont Country Club (Pennsylvania), Colonial Country Club
(Texas) and Medinah Country Club (Illinois). Sports complexes such as Fenway
Park, Camden Yard, Wrigley Field, Yankee Stadium and the Rose Bowl are
professional customers, as are major commercial nursery/greenhouse operations
such as Monrovia, Hines and Imperial.
Golf courses and highly visible turf areas accounted for approximately
46% of the Company's professional sales in fiscal 1995. During 1995, the
Company sold products to approximately 53% of the over 14,500 golf courses in
North America, including 83 of GOLF DIGEST's top 100 U.S. courses. Management
estimates, based on an independent bi-annual market survey and other
information available to the Company, that the Company's leading share of the
North American golf course turf maintenance segment was approximately 20% in
1995.
According to the National Golf Foundation, approximately 200 new golf
courses have been constructed annually for the last three years. Management
believes that the increase in the number of courses, the concentration of the
growth in the West/South with a longer growing/maintenance season, the
increasing playing time requiring more course maintenance and the trend toward
more highly maintained courses will continue to contribute to sales growth in
the golf course business.
Horticulture sales accounted for approximately 45% of the Company's
professional sales in fiscal 1995. The Company sold products to thousands of
nursery, greenhouse and specialty crop growers through a network of over 100
horticultural distributors. On a full year basis, the Company estimates that
its leading share of the North American horticultural segment was
approximately 35% in 1995.
Management believes the increasing acceptance of controlled-release
fertilizers in horticultural/ agricultural applications due to performance
advantages and groundwater leaching concerns will contribute to an increase in
the annual sales growth rate in the horticulture segment.
In January 1994, a new business unit under the ProGrow(R) name was
created to better serve the large, but highly fragmented, lawn/landscape
service market, in addition to schools and sportsfields, multi-family housing
complexes and business/industrial sites. Many small service operators prefer
to purchase on an as-needed, "cash and carry" basis, so the Company is
establishing a network of distributors to extend local availability of its
professional products. By the end of fiscal 1995, there were over 90
distributor locations, with plans to add additional distributors in 1996 and
beyond. Management believes changing demographic factors such as increasing
time pressures, higher disposable income and an aging population will result
in an expanding service business.
PRODUCTS
The Company's professional products, marketed under such brand names as
ProTurf(R), ProGrow(R), Osmocote(R), Peters(R), Metro-Mix(R) and
Terra-Lite(R), include a broad line of sophisticated controlled-release
fertilizers, water soluble fertilizers, control products (herbicides,
insecticides, fungicides and growth regulators), wetting agents, organic
products, grass seed and application devices. The fertilizer lines utilize a
range of proprietary controlled-release fertilizer technologies, including
Polyform(R), Triaform(R), Poly-S(R), Osmocote(R) and ScottKote(R), and
proprietary water soluble fertilizer technologies, including Peters(R) and
Peters Excel(R). The Company applies these technologies to meet a wide range
of professional customer needs, ranging from quick release greenhouse
fertilizers to controlled-release fairway/greens fertilizers to extended
release nursery fertilizers that last up to a year or more.
The Company works very closely with basic pesticide manufacturers to
secure exclusive positions on advanced control chemistry which can be
formulated on granular carriers, including fertilizers, or liquid application.
In 1995, at least seven professional products featured exclusive control
technologies, including such products as the TGR(R) growth regulator line,
Turplex(R) bioinsecticide, Prograss(R) and Confront(R) herbicides.
Liquid-applied fertilizers and control products numbered 38 in 1995.
Application devices include both rotary and drop action spreaders. Over 20
proprietary grass seed varieties are part of the professional line. The Sierra
acquisition in December 1993 added an established line of soil-less mixes in
which controlled and water soluble fertilizers, wetting agents and control
products can be incorporated to customize potting media for nurseries and
greenhouses.
During 1995, the Company introduced 96 new professional products,
including Poly-S(R) and over-seeding line extensions, a line of fertilizers
for aquaculture, and controlled-release products for specialty agriculture
markets.
BUSINESS STRATEGY
The Company's Professional Business Group focuses its sales efforts on
the middle and high end of the professional market and generally does not
compete for sales of commodity products. Demand for the Company's professional
products is primarily driven by product quality, performance and technical
support. The Company seeks to meet these needs with a range of sophisticated,
specialized products that are sold by a professional, agronomically-trained
sales force.
A primary focus of the Professional Business Group's strategy is to
provide a continuing flow of innovative new products to its professional
customers. Products introduced since 1990 accounted for over 45% of the
Professional Business Group's net sales in fiscal 1995.
The Company intends to use its strong position in the golf course
segment to increase sales of Sierra(R) products to those users, and,
conversely, to expand the distribution of Scotts(R) nursery products in the
commercial horticultural segment in which Sierra has a strong position.
The Professional Business Group also is working to increase market
coverage by focusing on various professional market niches. In 1965, the
Company established its first specialized professional sales force, focusing
on golf courses. Since 1985, it has established separate sales forces and/or
sales managers for lawn and landscape services, sports fields, golf course
architects and construction companies, and the international market of the
Professional Business Group. In 1992, the Company introduced a fairway
application service for golf courses. This service has been expanded and is
now available in fourteen markets, with two new markets planned for 1996. In
1994, the ProGrow(R) business was launched to better serve lawn/landscape
services that purchase on an as-needed basis. In January 1995, Scotts entered
into a licensing agreement with a lawn care service company, Emerald Green
Lawn Service ("Emerald Green"), which allows Emerald Green to use the Scotts
name and logo in its marketing efforts. Emerald Green applies Scotts products
exclusively. Scotts has a 25% equity interest in Emerald Green.
MARKETING AND PROMOTION
The Professional Business Group's sales force consists of 127 territory
managers. Many territory managers are experienced former golf course
superintendents or nursery managers and most have degrees in agronomy,
horticulture or similar disciplines. Territory managers work closely with golf
course and sports field superintendents, turf and nursery managers, and other
landscape professionals. In addition to marketing the Company's products, the
Company's territory managers provide consultation, testing services, and
advice regarding maintenance practices, including individualized comprehensive
programs incorporating various products for use at specified times throughout
the year. The professional grower business is served primarily through an
extensive network of distributors, most with substantial experience in the
horticulture market, with territory managers spending the majority of their
time with growers.
To reach potential purchasers, the Company uses trade advertising and
direct mail, publishes newsletters, and sponsors seminars throughout the
country. In addition, the Company maintains a special toll-free hotline for
its professional customers. The professional customer service department
responded to over 45,000 telephone inquiries in fiscal 1995.
COMPETITION
In the professional turf and nursery market, the Company faces a broad
range of competition from numerous companies ranging in size from
multi-national chemical and fertilizer companies such as Monsanto and
DowElanco Company, to smaller specialized companies such as Lesco, Inc. and
Lebanon Chemical Corp., to local fertilizer manufacturers and blenders.
Portions of this market, such as fairway and rough fertilizers for golf
courses, are sometimes served by large agricultural fertilizer companies,
while other segments, such as fertilizers and pest controls for golf course
greens and high value nursery crops, are served by specialized,
research-oriented companies. In certain areas of the country, particularly
Florida, a number of companies have begun to offer turf care services,
including product application, to golf courses. In addition, the higher
margins available for sophisticated products to treat high value crops
continue to attract large and small chemical producers and formulators, some
of which have larger research departments and budgets than the Company. While
the Company believes that its reputation, turf and ornamental market focus,
expertise in product development and professional sales force will enable it
to continue to maintain and build its share of the professional market, there
can be no assurance that the Company's market share or margins will not be
eroded in the future by new or existing competitors.
BACKLOG
A large portion of professional product orders are received during the
months of August through November and are filled during the months of
September through November. As of September 30, 1995, orders on hand from
professional customers totaled approximately $9.9 million compared with $7.8
million on the same date in 1994. All such orders are expected to be filled in
fiscal 1996.
INTERNATIONAL
THE MARKET
The Company produces and sells its products in over sixty-five countries
to both consumer and professional markets. Growth potential exists in both
markets, and the Company has positioned itself to grow through both direct
sales and distributor arrangements.
Consumer lawn and garden products are sold under the Scotts(R) label in
Australia, Canada, the European Union, the Pacific Rim and New Zealand. In
addition, products bearing the Miracle-Gro(R) trademark are marketed in
Canada, the Caribbean and the United Kingdom (the "U.K."). The Company's
Hyponex(R) line of products is present in Japan as a result of a long-term
agreement with Hyponex Japan Corporation, Ltd.
Professional markets include both the turf and horticulture industries.
The Company currently markets its professional products in Australia, Canada,
the Caribbean, Eastern Europe, the European Union, Japan, Latin America,
Mexico, the Middle East, New Zealand, and South East Asia. Horticultural
products mainly carry the Scotts(R), Sierra(R), Peters(R) and Osmocote(R)
labels. Turf products primarily use the Scotts(R) trademark.
Miracle-Gro UK was formed by the Miracle-Gro Companies in 1990 as the
marketing arm for expansion into the U.K. Miracle-Gro UK operated in a venture
with the Garden and Professional Products Division of Imperial Chemical
Industries, Plc., which subsequently spun-off that business, along with
others, into a new company called Zeneca Garden Care ("Zeneca"). The venture
agreement provided for Zeneca to contract the packaging and distribution of
Miracle-Gro products in the U.K. in return for a share of the operating
profits. On December 31, 1994, the Garden and Professional Products Division
of Zeneca was sold to Miracle Garden Care Ltd. ("Miracle Garden Care"), a
wholly-owned subsidiary of Miracle Holdings Limited ("Miracle Holdings").
Miracle Holdings is a newly formed company established by Miracle-Gro UK and
certain institutional investors, each of which is an affiliate of either
Charterhouse plc or Advent International plc, for the purpose of pursuing the
lawn and garden care business in the U.K. and elsewhere. Miracle-Gro UK
received a 32.5% equity interest in Miracle Holdings in return for its
transfer to Miracle Holdings of Miracle-Gro's European business and the grant
to Miracle Garden Care, pursuant to the license agreement described below, of
rights to certain trademarks. In addition, Miracle-Gro UK was granted certain
rights to buy out substantially all of the equity stakes of the other
investors in Miracle Holdings at certain future times. The option to buy out
the other investors in Miracle Holdings now extends to the Company.
The territory covered by the licensing agreement between Miracle-Gro UK
and Miracle Garden Care covers all of Europe, including the U.K. and Ireland.
Exclusive rights to certain Miracle-Gro trademarks for this territory were
licensed to Miracle Garden Care under this agreement. The term of the license
period could range from five to twenty years and will be determined based upon
the joint venture's achievement of certain operating profit goals and upon
whether Miracle Garden Care elects to make a public offering of its stock.
Subsequent to the Merger Transactions, the territory in which Miracle Garden
Care has the right to sell Miracle-Gro branded products was limited to the
U.K. and Ireland, and Miracle Garden Care will have the right to manufacture
all such products sold in the rest of Europe.
Scotts' Miracle-Gro in the U.K. has leading positions in a number of
lawn and garden market categories. Products are sold by a direct sales force
to leading do-it-yourself and gardening retailers.
BUSINESS STRATEGY
An increasing portion of the Company's sales is derived from customers
in foreign countries, and, with the acquisition of Sierra in December 1993,
the Company has manufacturing and distribution operations in foreign
countries. The Company's managers travel abroad regularly to visit its
facilities, distributors and customers, and the Company's own employees manage
its affairs in most of Western Europe, Hungary, Poland, the U.K., Australia,
Singapore and Malaysia. The Company plans to expand its international business
in both the Consumer Business Group and the Professional Business Group. The
Company believes that the value, quality and confidence that are widely
associated with its brands domestically can be transferred to the global
market place.
The Company intends to continue to market its products internationally
through both direct sales and distributor arrangements. Any significant
changes in international economic conditions, expropriations, changes in
taxation and regulation by United States and/or foreign governments could have
a substantial effect upon the international business of the Company.
Management believes, however, that these risks are not unreasonable in view of
the opportunities for profit and growth available in foreign markets.
In addition, the Company's international earnings and cash flows are
subject to variations in currency exchange rates, which derive from sales and
purchases of the Company's products made in foreign currencies. In order to
minimize the impact of adverse exchange rate movements, the Company has
developed a program, approved by the Company's Board of Directors, to manage
and mitigate this risk. The risk management program is designed to minimize
impact on the cash value of the Company's foreign currency payables and
receivables, as well as the impact on earnings. To implement the program, in
January 1995 the Company entered into forward foreign exchange contracts and
purchased currency options to lessen this risk.
COMPETITION
The Company's international consumer business faces strong competition
in the garden center segment, particularly in Canada and the U.K. Competitors
in the U.K. include Fisons, Phostrogen, PBI and various local companies.
Competitors in Canada include Nu-Gro, So-Green and Vigoro. The Company has
historically responded to competition with superior products, well focused
market spending, excellent trade relationships, competitive prices and broad
distribution.
The international professional products market is very competitive
particularly in the controlled-release fertilizer segment. Numerous United
States and European companies are pursuing this segment internationally,
including Pursell Industries, Lesco, Lebanon, Vigoro, Noram, BASF, Helena,
Haifa Chemicals, Coron and private label companies. Historically, the
Company's response to competition in the professional markets has been to
adapt its technology to solving specific turf and horticultural problems which
are identified by developing close working relationships with key users.
Management believes the Company is well-positioned to obtain an
increased share of the international market, for several reasons. First, the
Company has a broad, diversified product line that allows it to sell products
to the varied world market segments of consumer, professional, turf,
horticulture and high value crops. The Company also has the capability to sell
worldwide through its extensive distributor network. Third, the Company's
continued investment in technology and new product development allows it to
compete effectively worldwide. In addition, the Company is able to take
advantage of economies of scale based on existing domestic and international
sales volume. Finally, the Company's ability to serve diverse market segments
on a worldwide basis enhances its ability to access new technology from major
chemical companies and research organizations. However, there can be no
assurance that the Company's market share or margins will not be eroded by new
or existing competitors.
MATTERS RELATING TO THE COMPANY GENERALLY
PATENTS, TRADEMARKS AND LICENSES
The "Scotts", "Miracle-Gro" and "Hyponex" brand names and logos, as well
as a number of product trademarks, including "Turf Builder", "Lawn Pro",
"ProTurf", "ProGrow", "Osmocote" and "Peters" are federally and
internationally registered and are considered material to the Company's
business. The Company regularly monitors its trademark registrations, which
are generally effective for ten years, so that it can renew those nearing
expiration. In 1989, the Company assigned rights to certain Hyponex(R)
trademarks to Hyponex Japan Corporation, Ltd. In December 1994, Miracle-Gro
licensed exclusive rights to certain Miracle-Gro trademarks in the U.K. and
Ireland to Miracle Garden Care for a term ranging from five to twenty years.
See " International - The Market".
As of September 30, 1995, the Company held over 100 patents on
processes, compositions, grasses, and mechanical spreaders and has several
additional patent applications pending. Patent protection generally extends
seventeen years, and many of the Company's patents extend well into the next
decade. The Company also holds exclusive and nonexclusive patent licenses from
certain chemical suppliers permitting the use and sale of patented pesticides.
RESEARCH AND DEVELOPMENT
The Company has a long history of innovation, and its research and
development successes can be measured in terms of sales of new products and by
the Company's patents. Most of the Company's fertilizer products, many of its
grasses and many of its mechanical devices are covered by one or more of over
100 U.S. and foreign patents owned by the Company.
The Company maintains a premier research and development organization
headquartered in the Dwight G. Scott Research Center in Marysville, Ohio. The
Company also operates three research field stations located in Florida, Texas
and Oregon. These field stations facilitate evaluation of products in a
variety of climatic conditions, an integral part of the Company's product
development, quality assurance and competitive product analysis programs.
Research to develop new and improved application devices is conducted at
Republic's manufacturing facility in Carlsbad, California. Taken together, the
research and development effort maintains a focus on superior agronomic
performance for lawn, turf and horticultural applications through products
which are cost effective and easy to use. The knowledge and concepts used to
formulate products for the professional turf and plant production markets are
also used to provide similar results for the do-it-yourself market. In
addition to the Marysville R&D organization, Scotts Europe, B.V. (Netherlands)
maintains an R&D facility devoted to the Osmocote(R) controlled release
fertilizer line produced in Heerlen, The Netherlands.
Since its introduction of the first home lawn fertilizer in 1928, the
Company has used its research and development strengths to build the
do-it-yourself market. Technology continues to be a Company hallmark. The
Company's introduction of the TGR(R) line in 1987 to control poa annua on golf
courses is an example. In 1992, the Company introduced Poly-S(R), a patented
proprietary controlled-release fertilizer technology. In 1993, ScottKote(R),
another controlled-release technology primarily for the nursery market, was
introduced. In addition, the Company has modified its Marysville facility to
utilize a new, patented production process which is expected to reduce costs
and improve product quality, while increasing production capacity. (See
"Production Facilities.") Since the Hyponex acquisition in 1988, the Company's
research and development organization has worked to improve the quality and
reduce the production cost of branded organic products, in particular potting
soils. One of the results of this effort was the introduction, in 1994, of a
line of value-added, premium quality potting soils and planting mixes under
the Scotts(R) brand.
Research has also been focused on durability, precision, and reduced
production costs of the Republic-produced spreaders. Recently, Republic
completely redesigned the major products within the Company's consumer
spreader line so that they are now completely preassembled and are distributed
and displayed using innovative packaging.
Sierra pioneered the use of controlled-release fertilizers for the
horticultural markets with the introduction of "Osmocote" in the 1960's. This
polymer-encapsulated technology has achieved a large share of the
horticultural markets due to its ability to meet the strict performance
requirements of professional growers. Scotts' and Sierra's research and
development efforts have been fully integrated and are focused on cost
reduction and product/process innovation. A new, multi-coated
controlled-release technology has been developed and a new production line is
nearing completion at the Company's Charleston, South Carolina plant.
During fiscal 1995, the Company developed new products in several
branded lines including Scotts(R) professional turf products, Osmocote(R)
controlled release fertilizer, Scotts(R) spreaders, Redi-Earth(R) potting
soil, Metro Mix(R) potting soil and Miracle Earth(TM) planting mix.
Combined Company research and development expenses were approximately
$11.0 million (1.5% of net sales) for 1995 including environmental and
regulatory expenses. This compares to $7.7 million (1.5% of net sales) and
$10.4 million (1.5% of net sales) for 1993 and 1994, respectively.
PRODUCTION FACILITIES
The manufacturing plants for consumer and professional fertilizer
products marketed under the Scotts(R) label are located in Marysville, Ohio.
In the first quarter of fiscal 1995, a new facility for producing Poly-S(R), a
proprietary controlled release fertilizer, opened and has operated at expected
production volumes. Continued demand for "Turf Builder" products resulted in
expanding the operations of these product lines from five days per week
operations to continuous operation in June of 1995. The Sierra(R) controlled
release fertilizers are produced in Charleston, South Carolina, Milpitas,
California and Heerlen, The Netherlands. At the Heerlen facility, expansion is
nearing completion to permit the blending of products which utilize both
Scotts and Sierra proprietary technology. The Company's Taylor Seed Packaging
Plant is located on a separate site in Marysville. Hyponex(R) organic products
are processed and packaged in over 22 locations throughout the United States.
The Company's lawn spreaders are produced at the Republic facility in
Carlsbad, California. Peters(R) water-soluble fertilizers are produced in
Allentown, Pennsylvania, and the potting soils are produced in Travelers Rest,
South Carolina and in Hope, Arkansas. With the sale of the Peters(R) CWSF
business, the Allentown facility is producing water soluble fertilizer
products for the buyer under a long-term supply agreement. On July 27, 1995,
the Company entered into a Long-Term Supply Agreement (the "Agreement") with
Peters Acquisition Co. ("PAC"), a wholly-owned subsidiary of Alljack & Company
and Celex Corporation ("Alljack"). The initial term of the Agreement is two
years (beginning August 27, 1995 and ending August 26, 1997). The term may be
extended and prices re-negotiated for an additional three years thereafter
solely at the option of PAC and may be extended thereafter for one year terms
by mutual agreement. The Agreement requires PAC to purchase from the Company
its entire requirements of Peters(R) CWSF products until September 30, 1996,
at a price based upon a negotiated formula which applies during the initial
term and any renewals. After September 30, 1996, PAC will purchase quantities
as desired and may develop independent sources of supply, as required by the
FTC. Pursuant to a subsequent stock and asset sale, PAC is now owned by
individuals associated with United Industries Corporation.
All of the Company's fertilizer production facilities recorded increased
volumes over the prior year. Resin used for producing Osmocote(R)
controlled-release fertilizer is manufactured at Sierra Sunpol Resins, a joint
venture company which is 97% owned by Sierra. The Company operates twelve
composting facilities where yard waste (grass clippings, leaves, and twigs) is
converted to raw materials for the Company's organic products. Nine of the
facilities are "stand-alone" facilities with the remainder being located at
existing organics products bagging facilities. Management believes that each
of its facilities is well-maintained and suitable for its purpose.
The Company's fertilizer processing and packaging facilities currently
operate seven days per week for three shifts. Steps continue to integrate
product manufacturing between the Scotts and Sierra manufacturing locations.
The Company's Marysville facilities were substantially modified during
fiscal 1992 and 1993. The Company replaced one of the existing fertilizer
production lines with a line utilizing a new, patented process which it
developed. In addition, the Company erected a new physical-blend facility and
added equipment to apply polymer coating to fertilizer materials.
During 1994, approximately $13 million was spent to erect a new
Poly-S(R) fertilizer plant, an investment made necessary by very strong
forecasted demand. Additionally, approximately $4.0 million was spent on
Sierra business needs.
CAPITAL EXPENDITURES
Capital expenditures totaled $33.4 million and $23.6 million for the
fiscal years ended September 30, 1994 and 1995, respectively. The Company
expects that capital expenditures during fiscal 1996 will total approximately
$28 million.
PURCHASING
The key ingredients in the Company's fertilizer and control products are
various commodity and specialty chemicals including vermiculite, phosphates,
urea, potash, herbicides, insecticides and fungicides. The Company obtains its
raw materials from various sources, which the Company presently considers to
be adequate. No one source is considered to be essential to either of the
Company's Consumer or Professional Business Groups, or to its business as a
whole. The Company has never experienced a significant interruption of supply.
Sierra purchases granular, homogeneous fertilizer substrates to be
coated, and the resins for coating. These resins are primarily supplied
domestically by Sierra SunPol Resins, a 97%-owned subsidiary of Sierra.
Sphagnum peat, peat humus, vermiculite, manure and bark constitute
Hyponex's most significant raw materials. At current production levels, the
Company estimates Hyponex's peat reserves to be sufficient for its near-term
needs in all locations except the Northeast. Regulatory activities by the Army
Corps of Engineers have prevented production at one peat harvesting facility
located in Lafayette, New Jersey. See "-Environmental and Regulatory
Considerations." To meet the demand previously filled by this facility, the
Company has been purchasing peat from other nearby producers. Bark products
are obtained from sawmills and other wood residue producers and manure is
obtained from a variety of sources, such as feed lots, race tracks and
mushroom growers. The Company is currently substituting composted yard waste
for some organic raw materials and is planning to expand this practice.
Raw materials for Republic include various engineered resins and metals,
all of which are available from a variety of vendors. Raw materials for
Scotts' Miracle-Gro include phosphates, urea and potash. The Company considers
its sources of supply for these materials to be adequate. All of the products
sold by Scotts' Miracle-Gro (other than those produced by Miracle Garden Care)
are produced under contract by independent fertilizer blending and packaging
companies.
DISTRIBUTION
The primary distribution centers for the Company's products are located
near the Company's headquarters in central Ohio. The Company's products are
shipped by rail and truck. While the majority of truck shipments are made by
contract carriers, a portion is made by the Company's own fleet of leased
trucks. Inventories are also maintained in field warehouses located in major
markets.
The products of Scotts' Miracle-Gro are warehoused and shipped from five
contract packagers located throughout the country. These contract packagers
ship full truckloads of product via common carrier to lawn and garden
distributors.
Most of Hyponex's organic products have low sales value per unit of
weight, making freight costs significant to profitability. Therefore, Hyponex
has located approximately twenty distribution locations near large
metropolitan areas in order to minimize shipping costs. Hyponex uses its own
fleet of approximately 70 trucks as well as contract haulers to transport its
products from distribution points to retail customers.
Sierra's products are produced at three fertilizer and two organic
manufacturing facilities located in the United States and one fertilizer
manufacturing facility located in Heerlen, The Netherlands. The majority of
shipments are via common carriers to nearby distributors' warehouses. A small
private trucking fleet is maintained at the organic facilities for direct
shipment of custom orders to customers. Inventories are also maintained in
field warehouses.
Republic-produced, Scotts(R) branded spreaders are shipped via common
carrier to regional warehouses serving the Company's retail network.
Republic's E-Z spreader line and its private label lines are sold
free-on-board (FOB) Carlsbad with transportation arranged by the customer.
SIGNIFICANT CUSTOMERS
Kmart Corporation and Home Depot represented approximately 14.4% and
13.1%, respectively, of the Company's sales in fiscal 1995 and 16.1% and
10.7%, respectively, of the Company's outstanding trade accounts receivable at
September 30, 1995, which reflects their significant position in the retail
lawn and garden market. The loss of either of these customers or a substantial
decrease in the amount of their purchases could have a material adverse effect
on the Company's business.
EMPLOYEES
The Company's corporate culture emphasizes employee participation in
management, comprehensive employee benefits and programs and profit sharing
plans. As of September 30, 1995, the Company employed approximately 2,300
full-time year-round workers including 130 located outside the United States.
Full-time workers average approximately 10 years employment with the Company
or its predecessors. During peak production periods, the Company engages as
many as 750 temporary employees. The Company's employees are not unionized,
with the exception of twenty-one of Sierra's employees at its Milpitas
facility, who are represented by the International Chemical Workers Union.
ENVIRONMENTAL AND REGULATORY CONSIDERATIONS
Federal, state and local laws and regulations relating to environmental
matters affect the Company in several ways. All products containing pesticides
must be registered with the United States Environmental Protection Agency
("United States EPA") (and in many cases, similar state and foreign agencies)
before they can be sold. The inability to obtain or the cancellation of any
such registration could have an adverse effect on the Company's business. The
severity of the effect would depend on which products were involved, whether
another product could be substituted and whether the Company's competitors
were similarly affected. The Company attempts to anticipate regulatory
developments and maintain registrations of, and access to, substitute
chemicals, but there can be no assurance that it will continue to be able to
avoid or minimize these risks. Fertilizer and organic products (including
manures) are also subject to state labeling regulations.
In addition, the use of certain pesticide and fertilizer products is
regulated by various local, state, federal and foreign environmental and
public health agencies. These regulations may include requirements that only
certified or professional users apply the product or that certain products be
used only on certain types of locations (such as "not for use on sod farms or
golf courses"), may require users to post notices on properties to which
products have been or will be applied, may require notification of individuals
in the vicinity that products will be applied in the future or may ban the use
of certain ingredients. The Company has been successful in complying with
these regulations. Compliance with such regulations and the obtaining of
registrations does not assure, however, that the Company's products will not
cause injury to the environment or to people under all circumstances.
State and federal authorities generally require Hyponex to obtain
permits (sometimes on an annual basis) in order to harvest peat and to
discharge water run-off or water pumped from peat deposits. The state permits
typically specify the condition in which the property must be left after the
peat is fully harvested, with the residual use typically being natural wetland
habitats combined with open water areas. Hyponex is generally required by
these permits to limit its harvesting and to restore the property consistent
with the intended residual use. In some locations, Hyponex has been required
to create water retention ponds to control the sediment content of discharged
water.
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.
State, federal and local agencies regulate the disposal, handling and
storage of waste and air and water discharges from Company facilities. During
fiscal 1995, the Company had approximately $538,000 in environmental capital
expenditures and $332,000 in other environmental expenses, compared with
approximately $100,000 in environmental capital expenditures and $300,000 in
other environmental expenses in fiscal 1994. The Company has budgeted $500,000
in environmental capital expenditures and $350,000 in other environmental
expenses for fiscal 1996.
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 PRPs identified
to date, investigated the extent of contamination in the Hershberger site. The
results of the investigation were that the site presents a low degree of risk
and that the chemical compounds which contribute to the risk are not compounds
used by the Company. Accordingly, the Company has elected not to participate
in any remediation which might be required at the site. As a result of the
joint and several liability of PRPs, the Company might possibly be subject to
financial participation in the costs of the remediation plan, if any. However,
management does not believe any such obligations would have a significant
adverse effect on the Company's results of operations or financial condition.
Sierra is a PRP in connection with the Lorentz Barrel and Drum Superfund
Site in California, as a result of its predecessor having shipped barrels to
Lorentz for reconditioning or sale between 1967 and 1972. Many other companies
are participating in the remediation of this site, and issues relating to the
allocation of the costs have been resolved with the Company being identified
as a de minimis contributor. The Company settled this matter by means of a
one-time payment totalling $1,000 to the United States EPA and the State of
California. In addition, Sierra is a defendant in a private cost-recovery
action relating to the Novak Sanitary Landfill, located near Allentown,
Pennsylvania. By agreement with W. R. Grace-Conn., Sierra's liability is
limited to a maximum of $200,000 with respect to this site. The Company's
management does not believe that the outcome of these proceedings will in the
aggregate have a material adverse effect on its financial condition or results
of operations.
Sierra is subject to potential fines in connection with certain EPA
labeling violations under the Federal Insecticide, Fungicide and Rodenticide
Act ("FIFRA"). The fines for such violations are based upon formulas as stated
in FIFRA. As determined by these formulas, Sierra's maximum exposure for the
violations is approximately $810,000. The formulas allow for certain
reductions of the fines based upon achievable levels of compliance. Based upon
anticipated levels of compliance, management estimates Sierra's liability to
be no more than $200,000, which has been accrued in the financial statements.
ITEM 2. PROPERTIES.
The Company has fee or leasehold interests in approximately sixty (60)
facilities.
The Company owns approximately 843 acres in two locations at its
Marysville, Ohio headquarters. It owns three research facilities in Apopka,
Florida; Cleveland, Texas; and Gervais, Oregon. The Company leases one
fertilizer warehouse in Ohio.
Republic leases its twenty (20) acre spreader facility in Carlsbad,
California.
The Company's twenty-two (22) organics facilities are located
nationwide in nineteen states. All are owned by the Company. Most facilities
include production lines, warehouses and offices. Five sites also include
composting facilities.
The Company has nine stand-alone composting facilities. Four of these
sites are leased and are located in California, Indiana, Ohio and Illinois.
Five sites are utilized through agreements with the municipalities of
Greensboro, North Carolina; Shreveport, Louisiana; Spokane, Washington;
Independent Hill, Virginia; and Balls Ford, Virginia.
The Company owns two Sierra manufacturing facilities in Fairfield,
California and Heerlen, The Netherlands. It leases three Sierra manufacturing
facilities in Allentown, Pennsylvania; Milpitas, California; and North
Charleston, South Carolina.
The Company leases the land upon which Scotts' Miracle-Gro
headquarters is located.
It is the opinion of the Company's management that its facilities are
adequate to serve their intended purposes at this time and that its property
leasing arrangements are stable. Please also see the discussion of the
Company's production facilities in "ITEM 1. BUSINESS - Matters Relating to the
Company Generally -- Production Facilities" above, which discussion is
incorporated herein by this reference. As discussed in "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS IN OPERATIONS
Challenges for 1996," the Company plans to make investments in manufacturing
plant in 1996 to increase capacity in the summer months.
ITEM 3. LEGAL PROCEEDINGS.
As noted in the discussion of "Environmental and Regulatory
Considerations" in ITEM 1. BUSINESS, the Company is defending a suit filed by
the United States Department of Justice which seeks civil penalties and a
permanent injunction against peat harvesting at Hyponex's Lafayette, New
Jersey facility. The Company has asserted a right to recover its economic
losses resulting from the government's actions. The Company also is involved
in several other environmental matters, as set forth above in "Environmental
and Regulatory Considerations". Management does not believe the outcome of
these matters will have a material adverse effect on the Company's operations
or its financial condition.
The Company is involved in other lawsuits and claims which arise in
the normal course of its business. In the opinion of management, these claims
individually and in the aggregate are not expected to result in an adverse
effect on the Company's financial position or operations.
During 1993 and 1994, Miracle-Gro Products discussed with Pursell
Industries, Inc. ("Pursell") the feasibility of forming a joint venture to
produce and market a line of slow-release lawn food, and in October 1993,
signed a non-binding "heads of agreement". After the Merger was announced,
Pursell demanded that Miracle-Gro Products reimburse it for monies allegedly
spent by Pursell in connection with the proposed project. Because Miracle-Gro
Products does not believe that any such monies are due or that any such joint
venture ever was formed, on February 10, 1995, it instituted an action in the
Supreme Court of the State of New York, STERN'S MIRACLE-GRO PRODUCTS, INC. V.
PURSELL INDUSTRIES, INC., Index No. 95-004131 (Nassau Co.) (the "New York
Action"), seeking declarations that, among other things, Miracle-Gro Products
owed no monies to Pursell relating to the proposed project and that no joint
venture was formed. Pursell moved to dismiss the New York Action in favor of
the Alabama action described below, which motion was granted August 7, 1995.
On March 2, 1995, Pursell instituted an action in the United States
District Court for the Northern District of Alabama, PURSELL INDUSTRIES, INC.
V. STERN'S MIRACLE-GRO PRODUCTS, INC., CV-95-C-0524-S (the "Alabama Action"),
alleging, among other things, that a joint venture was formed, that
Miracle-Gro Products breached an alleged joint venture contract, committed
fraud, and breached an alleged fiduciary duty owed Pursell by not informing
Pursell of negotiations concerning the Merger. On December 18, 1995, Pursell
filed an amended complaint in the Alabama Action in which Scotts was named as
an additional party defendant. In the amended complaint, Pursell alleges,
among other things, that Miracle-Gro Products (now Scotts' Miracle-Gro)
breached an alleged joint venture contract, committed fraud, and breached an
alleged fiduciary duty owed Pursell by not informing Pursell of negotiations
concerning the Merger and by allegedly misappropriating a business opportunity
growing out of an alleged fiduciary relationship between Pursell and
Miracle-Gro Products (now Scotts' Miracle-Gro); that Scotts intentionally
interfered with the alleged business relationship between Pursell and
Miracle-Gro Products (now Scotts' Miracle-Gro); that Miracle-Gro Products (now
Scotts' Miraclo-Gro) willfully, maliciously and wrongfully disclosed to Scotts
allegedly confidential, proprietary, trade secret information of Pursell in
alleged violation of the Alabama Trade Secrets Act; that Scotts and
Miracle-Gro Products (now Scotts' Miracle-Gro) have engaged in allegedly false
and misleading advertising detrimental to Pursell in alleged violation of the
Lanham Act; and that Scotts and Miracle-Gro Products have allegedly
misappropriated Pursell's trade dress in alleged violation of the Lanham Act.
The Alabama Action seeks compensatory damages in excess of $10 million,
punitive damages of $20 million, treble damages as allowed by law and
injunctive relief with respect to the advertising and trade dress allegations.
The Company does not believe that the Alabama Action has any merit and intends
to vigorously defend that action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of the security holders
during the fourth quarter of the fiscal year covered by this Report.
EXECUTIVE OFFICERS OF REGISTRANT
The executive officers of Scotts, their positions and, as of November
30, 1995, their ages and years with Scotts (and its predecessors) are set
forth below.
Years with
the Company
(and its
Name Age Position(s) Held Predecessors)
Tadd C. Seitz 54 Director and Chairman of the 23
Board
Theodore J. Host 50 Director, President and 4
Chief Executive Officer
Paul D. Yeager 57 Executive Vice President and 21
Chief Financial Officer
James Hagedorn 40 Director and Senior Vice 8
President, Consumer Garden
Group
Ronald E. Justice 50 Senior Vice President, 4 months
Operations
Michael P. Kelty 45 Senior Vice President, 16
Professional Business Group
J. Blaine McKinney 52 Senior Vice President, 3
Consumer Sales
James L. Rogula 62 Senior Vice President, 10 months
Consumer Business Group
Bernard R. Ford 52 Vice President, Asia-Pacific 17
and
Latin America
Lawrence M. McCartney 55 Vice President, 21
Information Systems
John A. Neal 55 Vice President, 4
Research and Development
Lisle J. Smith 39 Vice President, 8
Administration and Planning
Robert A. Stern 53 Vice President, 13
Human Resources
L. Robert Stohler 54 Vice President, International 1 month
Craig D. Walley 52 Vice President, Corporate 10
Communications, General
Counsel and Secretary
Executive officers serve at the discretion of the Board of Directors
(and in the case of Mr. James Hagedorn, Mr. Host, Mr. Neal and Mr. Smith,
pursuant to employment agreements).
The business experience of each of the persons listed above during the
past five years is as follows:
Mr. Seitz has been Chairman of the Board of Scotts since 1991. Mr.
Seitz was the Chief Executive Officer of Scotts from 1987 to April 1995. He
was also President of Scotts' main operating subsidiary from 1983 until 1991.
Mr. Host has been President of Scotts since October 1991, and was
named Chief Executive Officer in April 1995. Mr. Host was also Chief Operating
Officer of Scotts from October 1991 to April 1995. From 1990 to 1991, he was
Senior Vice President, Marketing for Coca-Cola USA.
Mr. Yeager has been an Executive Vice President of Scotts since 1991
and a Vice President and the Chief Financial Officer of Scotts and its
predecessors since 1980. He was first Assistant Comptroller and then
Comptroller of Scotts' predecessor from 1974 to 1980.
Mr. Hagedorn was named Senior Vice President, Consumer Garden Group,
of Scotts in May 1995. He was Executive Vice President from 1989 until
consummation of the Merger in May 1995, of Miracle-Gro Products. He has been
Executive Vice President of Scotts' Miracle-Gro since May 1995. Mr. Hagedorn
is also a member of the Board of Directors of Miracle Holdings and Miracle
Garden Care, both U.K. companies. He was previously an officer and an F-16
pilot in the United States Air Force. He is a board member of several
not-for-profit corporations, including: The Farms for City Kids Foundation,
Clark Botanic Garden, Children's House and North Shore University Hospital.
James Hagedorn is the son of Horace Hagedorn, a director of Scotts.
Mr. Justice was named Senior Vice President, Operations, of Scotts in
July 1995. From 1992 to 1995, he was Vice President of Operations for
Continental Baking, a producer of bread and cake bakery products and a
subsidiary of Ralston Purina Company. From 1991 to 1992, he served as Vice
President of Engineering for Frito-Lay, a snack food producer and a subsidiary
of Pepsico, Inc. From 1988 to 1991, he was Vice President of Manufacturing for
its Central Division.
Dr. Kelty was named Senior Vice President, Professional Business
Group, of Scotts in July 1995. Dr. Kelty has been Senior Vice President,
Technology and Operations, of Scotts since 1994. From 1988 to 1994, he served
first as Director, then as Vice President, of Research and Development of
Scotts. Prior to that, Dr. Kelty was the Director of Advanced Technology,
Research of Scotts, and from 1983 to 1987 he was Director, Chemical Technology
Development, of Scotts and its predecessors.
Mr. McKinney has been a Senior Vice President in the Consumer Business
Group, and Consumer Sales, of Scotts since 1992. From 1990 to 1992, he was
Vice President of Marketing and Sales of Salov, N.A., a manufacturer of
consumer products. From 1989 to 1990, he was Director of Sales of Rickett &
Colman, Ltd., a consumer products company.
Mr. Rogula was named Senior Vice President, Consumer Business Group, of
Scotts in January 1995. From May 1990 until the time he joined the Company, he
was President of The American Candy Company, a producer of non-chocolate
candies. From January 1990 to May 1990, he was an independent business
consultant.
Mr. Ford has been a Vice President of Scotts since 1987. Mr. Ford
currently holds the position of Vice President, Asia-Pacific and Latin
America. Other positions that Mr. Ford has held with Scotts and its
predecessors include Vice President, Strategy and Business Development,
Director of Market Development, Director of Export Marketing Services and
Director of Marketing.
Mr. McCartney has been Vice President, Information Systems, of Scotts
since 1989. He joined the predecessor of Scotts in 1974 as Systems and
Programming Manager, and was Director, Information Systems, of Scotts and its
predecessors from 1976 until 1989. Mr. McCartney resigned from his position as
an executive officer of Scotts effective December 31, 1995.
Dr. Neal has been Vice President, Research and Development, of Scotts
since July 1995. From 1992 until the time he joined Scotts in 1994, he was
Vice President of Research and Development for Grace-Sierra Horticultural
Products Company (now Sierra). From 1987 to 1992, he was Manager of Research
and Development for the Western Chemicals and Industrial Resins, West,
divisions of Georgia Pacific Corporation, a forest products company.
Mr. Smith has been Vice President, Administration and Planning, of
Scotts since 1994. He served as Chief Financial Officer of Grace-Sierra
Horticultural Products Company (now Sierra) from 1991 until the time he joined
Scotts in 1993, and as Treasurer and Controller of that corporation from 1987
to 1991.
Mr. Stern has been Vice President, Human Resources, of Scotts and its
predecessors since 1984.
Mr. Stohler was named Vice President, International, of Scotts in
November 1995. From 1994 to 1995, he was President of Rubbermaid Europe S.A.,
a marketer of plastic housewares, toys, office supplies and janitorial and
food service products. From 1992 to 1994, he was Vice President and Chief
Financial Officer of Synthes (U.S.A.), a marketer and manufacturer of implants
and surgical instruments for orthopedic health care. From 1979 to 1991, he
held various positions with S. C. Johnson Wax, a packager of consumer goods,
institutional products and specialty chemicals, including most recently as
Director, Planning and Finance, Worldwide Innochem.
Mr. Walley has been General Counsel and Secretary of Scotts and its
predecessors since 1986. He was also named Vice President, Corporate
Communications, of Scotts in 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common shares of Scotts have traded in the NASDAQ National Market
System, under the symbol "SCTT". On December 14, 1995, Scotts filed an
application to list its common shares for trading on the New York Stock
Exchange ("NYSE"). The common shares will be traded on the NYSE under the
symbol "SMG" beginning on December 29, 1995.
SALES PRICES
HIGH LOW
FISCAL 1994
1st quarter $20 1/8 $16
2nd quarter 20 18
3rd quarter 19 7/8 16 1/4
4th quarter 17 15 1/4
FISCAL 1995
1st quarter 16 14 3/4
2nd quarter 19 3/8 15 7/8
3rd quarter 23 18 1/8
4th quarter 23 7/8 20 3/4
Scotts has not paid dividends on the common shares in the past and
does not presently plan to pay dividends on the common shares. It is presently
anticipated that earnings will be retained and reinvested to support the
growth of the Company's business. The payment of any future dividends on
common shares will be determined by the Board of Directors of Scotts in light
of conditions then existing, including the Company's earnings, financial
condition and capital requirements, restrictions in financing agreements,
business conditions and other factors.
As of December 1, 1995, Scotts estimates there were approximately
6,500 shareholders including holders of record and Scotts' estimate of
beneficial holders.
Page 21
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY
THE SCOTTS COMPANY AND SUBSIDIARIES
For the fiscal year ended September 30
(in thousands except share data) 1991 1992 1993(1) 1994(2) 1995(3)
==== ==== ====== ====== ======
Consolidated Statement of Income Data(4)
Net sales ................................. $ 388,120 $ 413,558 $ 466,043 $ 606,339 $ 732,837
Cost of sales ............................. 207,956 213,133 244,218 319,730 394,369
------------ ------------ ------------ ------------ -----------
Gross profit .............................. 180,164 200,425 221,825 286,609 338,468
------------ ------------ ------------ ------------ -----------
Operating expenses:
Marketing .............................. 57,489 66,245 74,579 100,106 125,757
Distribution ........................... 57,056 61,051 67,377 84,407 104,513
General and administrative ............. 22,985 24,759 27,688 30,189 28,672
Research and development ............... 5,247 6,205 7,700 10,352 10,970
Other expenses, net .................... 2,000 20 660 2,283 1,560
------------ ------------ ------------ ------------ -----------
Total operating expenses ............... 144,777 158,280 178,004 227,337 271,472
------------ ------------ ------------ ------------ -----------
Income from operations .................... 35,387 42,145 43,821 59,272 66,996
Interest expense .......................... 30,932 15,942 8,454 17,450 26,320
------------ ------------ ------------ ------------ -----------
Income before income taxes, extraordinary
items and cumulative effect of
accounting changes ..................... 4,455 26,203 35,367 41,822 40,676
Income taxes .............................. 2,720 11,124 14,320 17,947 15,593
------------ ------------ ------------ ------------ -----------
Income before extraordinary items
and cumulative effect of accounting
changes ................................ 1,735 15,079 21,047 23,875 25,083
Extraordinary items:
Loss on early extinguishment of debt,
net of tax ............................. -- (4,186) -- (992)
Utilization of net operating loss
carryforwards .......................... 2,581 4,699 -- -- --
Cumulative effect of changes in
accounting for postretirement benefits,
net of tax and income taxes ............ -- -- (13,157) -- --
-------
Net income ................................ $ 4,316 $ 15,592 $ 7,890 $ 22,883 $ 25,083
============ ============ ============ ============ ===========
Net income per common share:(5)
Income before extraordinary items and
cumulative effect of accounting changes $ 0.15 $ 0.84 $ 1.07 $ 1.27 $ 1.11
Extraordinary items:
Loss on early extinguishment of debt,
net of tax ............................. -- (0.23) -- (0.05) --
Utilization of net operating loss
carryforwards .......................... 0.21 0.26 -- -- --
Cumulative effect of changes in accounting
for postretirement benefits, net of tax
and income taxes ....................... -- -- (0.67) -- --
-----
Net income per common share ............ $ 0.36 $ 0.87 $ 0.40 $ 1.22 $ 1.11
============ ============ ============ ============ ===========
Common shares used in net income per common
share computation ...................... 11,832,651 18,014,151 19,687,013 18,784,729 22,616,685
Consolidated Balance Sheet Data (4)
Working capital ........................... $ 21,260 $ 54,795 $ 88,526 $ 140,566 $ 229,725
Capital investment ........................ 8,818 19,896 15,158 33,402 23,606
Property, plant and equipment, net ........ 79,903 89,070 98,791 140,105 148,754
Total assets .............................. 260,729 268,021 321,590 528,584 807,350
Term debt, including current portion ...... 182,954 31,897 92,524 223,885 272,446
Total shareholders' equity (deficit) ...... (9,961) 175,929 143,013 168,160 383,517
- -------------------------------------
(1) Includes Republic from November 1992
(2) Includes Sierra from December 16, 1993
(3) Includes Miracle-Gro Companies from May 19, 1995
(4) Certain amounts have been reclassified to conform to 1995 presentation;
these changes did not impact net income.
(5) Net income (loss) per common share for fiscal 1991 has been restated to
eliminate the effect of accretion to redemption value of redeemable
common stock to be comparable with fiscal 1992. All per share amounts for
fiscal 1991 have been adjusted for the January 1992 reverse stock split,
in which every 2.2 shares of old Class A Common Stock were exchanged for
one share of new Class A Common Stock.
Page 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company included elsewhere in this
Report.
RESULTS OF OPERATIONS
FISCAL 1995 COMPARED WITH FISCAL 1994.
Net sales increased to $732.8 million, up approximately 20.9%,
primarily due to increased sales volume (14.5%) of which 5.2% resulted from a
marketing program incentivizing retailers to purchase their calendar fourth
quarter and 1996 spring requirements early while deferring payment to 1996.
The increase in actual net sales also reflects the inclusion of Sierra for the
full year in 1995 (3.4%) and Miracle-Gro from the merger date of May 19, 1995
(3.0%). On a pro forma basis, including net sales of Sierra and Miracle-Gro
from October 1, 1993, net sales increased by $95.0 million or 13.1% to $821.2
million.
Consumer Business Group net sales increased 21.6% to $501.9 million.
This increase resulted primarily from increased sales volume (16.3%, of which
7.0% resulted from the retailer incentive program discussed above) and the
inclusion of net sales of Miracle-Gro (5.3%). Sales to the Company's top ten
accounts (excluding Miracle-Gro sales) were up 27.4% over the prior year. Net
sales increases in lawn fertilizers and organics and to a lesser extent,
increases in seed and spreader sales were partially offset by the
unavailability of some fertilizer products as a result of production problems
which caused sales orders to be postponed to the first fiscal quarter of 1996.
Professional Business Group sales of $161.3 million increased by 11.1%,
primarily due to the inclusion of net sales for a full year of Sierra in 1995
(8.0%) and an increased demand for horticulture products (3.1%). International
sales increased by 43.7% to $69.6 million due to gains in these markets
combined with the positive impact resulting from the sale of Scotts products
in the Company's international distribution network (19.7%), the inclusion of
Sierra net sales for the full year (16.9%) and favorable exchange rates
(7.1%).
Cost of sales represented 53.8% of net sales, a 1.1% increase compared
to 52.7% of net sales last year. The increase resulted from higher prices for
urea, the source of nitrogen in most of the Company's fertilizer products,
increased sales of lower margin U.S. produced products internationally,
increased sales in lower margin domestic products, and to a lesser extent,
pricing incentives to major retailers.
Operating expenses increased approximately 19.4% which was
proportional to the sales increase. Marketing expense increased 25.6% due to
increased promotional allowances to retailers, a higher proportion of
International sales which carry a higher ratio of marketing cost to sales, and
higher sales force incentives. Distribution expense increased 23.8% as a
result of higher sales volume, higher warehousing and storage costs as a
result of increased inventory levels, higher freight rates and a higher
proportion of the sales growth in lower value per pound products. These
increases were partially offset by a 5% decline in general and administrative
expense as a result of synergies achieved from the integration of Sierra, cost
controls and reduced management incentives. In addition, the completion of the
divestiture of the Peters U.S. consumer water soluble fertilizer business
resulted in a decrease of "other expenses, net", of approximately $4.2
million. This gain was partially offset by incremental intangible and goodwill
amortization from acquisitions and the Company's portion of the loss from
Miracle Garden Care.
Interest expense increased 50.8%. The increase was caused by higher
interest rates on the floating-rate bank debt and the 9 7/8% Senior
Subordinated Notes due August 1, 2004 (the "Notes") compared with the floating
rate bank debt the Notes replaced (32.6%), a full year outstanding of the
borrowings to fund the Sierra acquisition (8.1%) and an increase in borrowing
levels (10.1%) principally to support higher working capital requirements and
capital expenditures.
The Company's effective tax rate decreased from 42.9% to 38.3% in
1995. This decrease results primarily from the tax treatment of the Peters
disposition (3%) and resolution of prior year tax contingencies (3.9%) offset
by an increase in nondeductible amortization of intangible assets (1.3%).
Net income of $25.1 million increased by $2.2 million from 1994. Among
the significant items impacting 1995 results were increased revenues from new
and existing marketing programs, the gain from the divestiture of the Peters
U.S. consumer water soluble fertilizer business, the lower effective tax rate,
and the higher cost of urea, each as discussed more fully above and an
extraordinary charge of $1.0 million in 1994 for the early extinguishment of
debt.
FISCAL 1994 COMPARED WITH FISCAL 1993.
Net sales of $606.3 million increased by $140.3 million or 30.1%,
primarily due to increased volume, of which 4.3% resulted from a marketing
program incentivizing retailers to purchase their calendar fourth quarter and
1995 spring requirements early while deferring payment to 1995. The increase
included $105.6 million of sales from Sierra, which was acquired by the
Company on December 16, 1993.
Consumer Business Group sales of $419.6 million increased by $49.4
million or 13.3%. The growth was principally derived from increased volume to
major retailers, with sales to the Company's top ten accounts up 16% over the
prior year, and from sales for Sierra which accounted for $21.3 million of the
increase. Professional Business Group sales of $181.7 million increased by
$88.0 million or 93.9%. The increase was principally due to sales of Sierra
which accounted for $84.3 million of the increase.
On a proforma basis, including Sierra sales assuming that the acquisition
had occurred on October 1, 1992, sales increased by 7.1% for the 1994 year.
Cost of sales at 52.7% of net sales showed a slight increase from
52.4% of net sales in fiscal 1993. The increase reflected a higher proportion
of spreader sales, which have lower margins.
Operating expenses of $227.3 million increased by $49.3 million or
27.7%. The increase was caused, in significant part, by the inclusion of
Sierra operating expenses in fiscal 1994. The increase was also caused, to a
lesser degree, by increased freight costs due to higher sales volume and by
higher marketing costs which reflected increased spending for national
advertising and promotion programs. The increase was partly offset by reduced
general and administrative expenses, exclusive of Sierra expenses, for fiscal
1994.
Interest expense of $17.5 million increased by $9.0 million
principally due to an increase in borrowing levels resulting from the
acquisition of Sierra in December 1993. The increase was also caused, to a
lesser degree, by the issuance of the Notes (see "Liquidity and Capital
Resources" below) which bear a higher fixed interest rate than the term debt
prepaid with their net proceeds.
Net income of $22.9 million increased by $15.0 million from $7.9
million in fiscal 1993. The increase was primarily attributable to a
non-recurring charge in fiscal 1993 of $13.2 million, net of tax, for the
cumulative effect of accounting changes. Among significant items impacting
1994 results were increased interest expense and a $1.0 million non-recurring
charge, net of tax, for financing costs related to the prepayment of term
debt.
LIQUIDITY AND CAPITAL RESOURCES
Current assets of $349.2 million increased by $98.9 million compared
with September 30, 1994. The increase was partly attributable to the inclusion
of Miracle-Gro current assets in fiscal 1995 which amounted to $22.9 million.
The increase was also caused by higher receivables associated with
year-to-year sales increases in the latter four months of fiscal 1995 and to
higher inventory levels.
Current liabilities of $119.4 million increased by $9.8 million
compared with September 30, 1994. The increase was attributable to the
inclusion of Miracle-Gro's current liabilities which amounted to $13 million
and higher levels of trade payables reflecting business growth. These items
were offset by a decrease in short-term debt due to the terms of the Fourth
Amended and Restated Credit Agreement (the "Credit Agreement") dated March 17,
1995, which requires the Company to reduce revolving credit borrowing to no
more than $225 million for 30 consecutive days each year as compared to $30
million prior to the amendment.
Capital expenditures totaled approximately $23.6 million and $33.4
million for the fiscal years ended September 30, 1995 and 1994, respectively,
and are expected to be approximately $28.0 million in fiscal 1996. The key
capital project in fiscal 1994 was an investment of approximately $13.0
million in a new production facility for Scotts' Poly-S(R) controlled-release
fertilizers. The Credit Agreement restricts the amount the Company may spend
on capital expenditures to $50 million per year for fiscal 1995 and each year
thereafter. These expenditures will be financed with cash provided by
operations and utilization of available credit facilities.
Long-term debt increased by $51.9 million compared with September 30,
1994, of which $26.7 million was attributable to the change in terms of
borrowings under the Credit Agreement discussed above. The remaining increase
in borrowings was to support increased working capital and capital
expenditures.
Shareholders' equity increased by $215.4 million compared with
September 30, 1994. This increase was primarily due to the issuance of
Convertible Preferred Stock with a fair market value of $177.3 million and
Warrants with a fair market value of $14.4 million in the merger with
Miracle-Gro, as discussed in footnote number 2 to the Company's Consolidated
Financial Statements. The remaining change in shareholders' equity was a
result of net income of $25.1 million, and the change in the cumulative
foreign currency adjustment of $2.0 million, partially offset by Convertible
Preferred Stock dividends of $3.6 million.
The primary sources of liquidity for the Company are funds generated
by operations and borrowings under the Company's Credit Agreement. The Credit
Agreement was amended and restated in March 1995. As amended, the Credit
Agreement is unsecured and provides up to $375 million through March 31, 2000,
and does not contain a term loan facility. Additional information on the
Credit Agreement is described in footnote number 7 to the Company's
Consolidated Financial Statements.
The Company has foreign exchange rate risk related to international
earnings and cash flows. During fiscal 1995, a management program was designed
to minimize the exposure to adverse currency impacts on the cash value of the
Company's non-local currency receivables and payables, as well as the
associated earnings impact. Beginning in January 1995, the Company has entered
into forward foreign exchange contracts and purchase currency options tied to
the economic value of receivables and payables and expected cash flows
denominated in non-local foreign currencies. Management anticipates that these
financial instruments will act as an effective hedge against the potential
adverse impact of exchange rate fluctuations on the Company's results of
operations, financial condition and liquidity. It is recognized, however, that
the program will minimize but not completely eliminate the Company's exposure
to adverse currency movements.
As of September 30, 1995, the Company's European operations had
foreign exchange risk in various European currencies tied to the Dutch
guilder. These currencies include the Australian Dollar, Belgian Franc, German
Mark, Spanish Peseta, French Franc, British Pound and the U.S. Dollar. The
Company's U.S. operations had foreign exchange rate risk in the Canadian
Dollar, Dutch Guilder and the British Pound which are tied to the U.S. Dollar.
As of September 30, 1995, outstanding foreign exchange forward contracts had a
contract value of approximately $25.1 million. These contracts had maturity
dates ranging from October 3, 1995 to October 31, 1995.
The merger with Miracle-Gro and its affiliated companies is described
in footnote number 2 to the Company's Consolidated Financial Statements. Any
additional working capital needs resulting from this transaction are expected
to be financed through funds generated from operations or available under the
Credit Agreement.
In the opinion of the Company's management, cash flows from operations
and capital resources will be sufficient to meet future debt service and
working capital needs during the 1996 fiscal year.
INFLATION
The Company is subject to the effects of changing prices. The Company
has, however, generally been able to pass along inflationary increases in its
costs by increasing the prices of its products.
ACCOUNTING ISSUES
In March 1995, the Financial Accounting Standards Board ("the Board")
issued Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long Lived Assets and for Long Lived Assets
to be Disposed of" which establishes accounting standards for the impairment
of long lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used for long lived assets and certain
identifiable intangibles to be disposed of. The Company's current policies are
in accordance with SFAS No. 121.
In December 1995, the Board issued SFAS No. 123 "Accounting for
Stock-Based Compensation", which changes the measurement, recognition and
disclosure standards for stock-based compensation. Management is currently
evaluating the provisions of SFAS No. 123 and at this time the effect of
adopting SFAS No. 123 on the results of operations and the method of
disclosure has not been determined.
CHALLENGES FOR 1996
Looking forward to 1996, management expects that increasing prices for
urea will continue to put downward pressure on gross margins. In addition,
certain non-recurring items which lowered the effective tax rate in 1995 will
not impact 1996 which is expected to result in an increase in the effective
income tax rate to approximately 43%. Planned investments in manufacturing
plant are expected to increase capacity in the summer months. Finally, the
Company expects a charge to first quarter 1996 earnings for costs related to
planned reductions in personnel.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and other information required by this Item
are contained in the financial statements, the footnotes thereto and the
schedules listed in the Index to Consolidated Financial Statements and
Financial Statement Schedules on page F-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information regarding executive officers required by Item 401 of
Regulation S-K is included in Part I hereof following Item 4.
Pursuant to the Code of Regulations of Scotts, the Board of Directors
has set the authorized number of directors at twelve (12). Four directors hold
office for terms expiring 1996, four directors hold office for terms expiring
in 1997, and four directors hold office for terms expiring in 1998. The
election of each class of directors is a separate election. Pursuant to the
terms of the Merger Agreement, the former shareholders of Miracle-Gro
Products, through their representative (the "Miracle-Gro Representative"),
designated Messrs. James Hagedorn, John Kenlon and Horace Hagedorn as Board
members. Until the earlier of the fifth anniversary of the effective date of
the Merger (May 19, 2000) (the "Standstill Period") and such time as the
former Miracle-Gro Products shareholders no longer beneficially own at least
19% of the voting stock of Scotts, the Miracle-Gro Representative will
continue to be entitled to designate one person to be nominated for election
as a director in the class whose term expires in any year. Directors hold
office until the next annual meeting of shareholders of Scotts to elect
members of the class whose term has expired, and until their successors are
duly elected and qualified, or until their earlier death, resignation or
removal. All of the directors were first appointed or elected at the various
dates set forth below and have been elected annually since their respective
appointments.
The following information with respect to the principal occupation or
employment, other affiliations and business experience of each director during
the last five years has been furnished to Scotts by each director. Except
where indicated, each director has had the same principal occupation for the
last five years.
INFORMATION CONCERNING DIRECTORS AS OF DECEMBER 1, 1995:
CLASS 1. DIRECTORS (TERM EXPIRING 1996):
James Hagedorn, age 40
Senior Vice President, Consumer Garden Group, of Scotts
since May 1995 and Director of Scotts since 1995
Mr. Hagedorn was Executive Vice President from 1989 until consummation of
the Merger in May 1995 of Miracle-Gro Products. Mr. Hagedorn has been
Executive Vice President of Scotts' Miracle-Gro since May 1995. Mr. Hagedorn
also serves on the boards of Miracle Holdings and Miracle Garden Care, both
U.K. companies. He was previously an officer and an F-16 pilot in the United
States Air Force. He is a board member of several not-for-profit corporations,
including: The Farms for City Kids Foundation, Clark Botanic Garden,
Children's House and North Shore University Hospital. James Hagedorn is the
son of Horace Hagedorn.
Theodore J. Host, age 50
President of Scotts since 1991, Chief Executive Officer of
Scotts since April 1995 and Director of Scotts since 1991
Mr. Host was Chief Operating Officer of Scotts from October 1991 to April
1995. Prior to joining Scotts, Mr. Host was Senior Vice President, Marketing
with Coca-Cola USA from 1990 to 1991.
Karen Gordon Mills, age 42
Director of Scotts since 1994
Ms. Mills is President of MMP Group, Inc., a management company that
monitors equity investments and provides consulting and investment banking
services. From 1983 to 1993, she served as Managing Director at E.S. Jacobs
and Company and as Chief Operating Officer of its Industrial Group. Ms. Mills
is currently on the boards of Triangle Pacific Corp., Armor All Products, Inc.
and Arrow Electronics, Inc.
CLASS 1. DIRECTORS (TERM EXPIRING 1996): continued
Tadd C. Seitz, age 54
Chairman of the Board of Scotts since 1991, and Director
of Scotts since 1987
Mr. Seitz was the Chief Executive Officer of Scotts from 1987 to April
1995. He was also President of Scotts' main operating subsidiary from 1983
until 1991. Mr. Seitz has been employed by Scotts and its predecessors for
twenty-three years. Mr. Seitz also serves as a director of Holophane
Corporation.
CLASS 2. DIRECTORS (TERM EXPIRING 1997):
James B Beard, age 60
Director of Scotts since 1989
Dr. Beard is Professor Emeritus of Turfgrass Physiology and Ecology at
Texas A&M University where he served from 1975 to 1992. He has been President
and Chief Scientist at the International Sports Turf Institute since July
1992. Dr. Beard is the author of six books and over 500 scientific articles on
turfgrass science and is an active lecturer and consultant both nationally and
internationally. He is a Fellow of the American Association of the Advancement
of Science and was the first President of the International Turfgrass Society.
John Kenlon, age 64
Director of Scotts since 1995
Mr. Kenlon was named Chief Operating Officer and President of Scotts'
Miracle-Gro in May 1995. Mr. Kenlon was the President of Miracle-Gro Products
from December 1985 until the consummation of the Merger in May 1995. Mr.
Kenlon began his association with the Miracle-Gro Companies in 1960.
John M. Sullivan, age 60
Director of Scotts since 1994
Mr. Sullivan was Chairman of the Board from 1987 to 1993, and President
and Chief Executive Officer from 1984 to 1993, of Prince Holdings, Inc., a
corporation which, through its subsidiaries, manufactures sporting goods.
Since his retirement from Prince Holdings, Inc. and its subsidiaries in 1993,
Mr. Sullivan has served as an independent director for various corporations,
none of which, other than Scotts, is registered under or subject to the
requirements of the Securities Exchange Act of 1934 or the Investment Company
Act of 1940.
L. Jack Van Fossen, age 58
Director of Scotts since 1993
Mr. Van Fossen was Chief Executive Officer and President of Red Roof
Inns., Inc., an owner and operator of motels, from May 1991 to June 1995.
Since July 1988, Mr. Van Fossen has also served as President of Nessoff
Corporation, a privately owned investment company.
Mr. Van Fossen also serves as a director of Cardinal Health, Inc.
CLASS 3. DIRECTORS (TERM EXPIRING 1998):
John S. Chamberlin, age 67
Director of Scotts since 1989
Since 1988, Mr. Chamberlin has served as an advisor for investment firms.
In 1990 and 1991, he was Chief Executive Officer of N.J. Publishing, Inc. He
has been Senior Advisor to Mancuso & Co. since 1990, Chairman of Life Fitness
Co. since 1992, Chairman of WNS, Inc. since 1993, and a director of
Healthsouth Corporation since 1993.
CLASS 3. DIRECTORS (TERM EXPIRING 1998): continued
Joseph P. Flannery, age 63
Director of Scotts since 1987
Mr. Flannery was a consultant to Clayton, Dubilier & Rice, Inc. from
September 1988 to December 1990. Mr. Flannery has been President, Chief
Executive Officer and Chairman of the Board of Directors of Uniroyal Holding,
Inc. since 1986. Mr. Flannery is also a director of Ingersoll Rand Company,
Kmart Corporation, Newmont Mining, Newmont Gold Company, Arvin Industries,
Inc., and APS Holding Corporation.
Horace Hagedorn, age 80
Vice Chairman of the Board and Director of Scotts since
1995
Mr. Hagedorn was named Chairman and Chief Executive Officer of Scotts'
Miracle-Gro in May 1995. Mr. Hagedorn founded Miracle-Gro Products in 1950 and
served as Chief Executive Officer of Miracle-Gro Products from 1985 until the
consummation of the Merger in May 1995. Horace Hagedorn is the father of James
Hagedorn. His philanthropic interests include the "Miracle-Gro Kids" program,
in which 50 needy fifth grade children are fully sponsored through a four-year
college scholarship. He serves as a Trustee on the boards of the North Shore
University Hospital and the Institute for Community Development, both in
Manhasset, New York, and the board of the Buckley Country Day School in
Roslyn, New York. Mr. Hagedorn's recognitions include the "Man of the Year"
award from the National Lawn and Garden Distributors Association, and the
Distinguished Service Medal from the Garden Writers of America Association. He
was elected New York Regional Area "Entrepreneur of the Year" in 1993.
Donald A. Sherman, age 44
Director of Scotts since 1988
Mr. Sherman has been President of Waterfield Mortgage Company in Fort
Wayne, Indiana, since 1989. He also serves as a director of Union Acceptance
Corporation.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows, for the fiscal years ended September 30,
1995, 1994 and 1993, compensation awarded or paid to, or earned by, each
person serving as Scotts' Chief Executive Officer during the 1995 fiscal year
and the three other most highly compensated executive officers of Scotts.
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Awards
Securities
Underlying
Name and Fiscal Salary Bonus Options/ All Other
PRINCIPAL POSITION Year ($) ($) SARS(#) (1) Compensation($)
- ------------------ ---- --- --- ----------- ---------------
Tadd C. Seitz:
Chairman of the .......................... 1995 $379,500 $ 0 173,367 $ 3,383(2)
Board and Chief .......................... 1994 $362,500 $228,965 129,447 $ 3,270(2)
Executive Officer (3) .................... 1993 $341,725 $189,780 85,019 $ 3,270(2)
Theodore J. Host:
President, Chief ......................... 1995 $355,750 $ 0 110,857 $115,234(4)
Executive Officer ........................ 1994 $307,833 $196,650 82,567 $ 3,270(2)
and Chief Operating ...................... 1993 $283,750 $162,963 53,108 $ 3,270(2)
Officer (5)
Paul D. Yeager:
Executive Vice ........................... 1995 $212,025 $ 0 35,253 $ 3,383(2)
President and Chief ...................... 1994 $202,250 $125,000 25,342 $ 3,270(2)
Financial Officer ........................ 1993 $192,750 $115,103 18,739 $ 3,270(2)
J. Blaine McKinney:
Senior Vice President, ................... 1995 $199,533 $ 0 35,819 $ 3,383(2)
Consumer Business ........................ 1994 $191,667 $105,000 31,658 $ 1,907(2)
Group .................................... 1993 $177,333 $ 87,365 35,409 $ 0
Michael P. Kelty:
Senior Vice President, ................... 1995 $175,917 $ 0 22,859 $ 3,383(2)
Professional Business .................... 1994 $156,917 $ 59,719 8,025 $ 3,270(2)
Group .................................... 1993 $138,000 $ 58,158 3,835 $ 3,270(2)
------- --------
(1) These numbers represent options for common shares granted pursuant to
Scotts' 1992 Long Term Incentive Plan. See the table under "OPTION GRANTS
IN LAST FISCAL YEAR" for more detailed information on such options.
(2) Includes contributions made by the Company to The Scotts Company Profit
Sharing and Savings Plan.
(3) Mr. Seitz resigned as Chief Executive Officer of Scotts effective as of
April 6, 1995. He continues to serve as Chairman of the Board.
(4) Includes contribution in the amount of $3,383 made by the Company to The
Scotts Company Profit Sharing and Savings Plan and the amount of $111,851
paid to cover Mr. Host's tax liability with respect to his purchase of
45,454 common shares in January 1992 at a price of $9.90 per share in
connection with his entering into of an Employment Agreement with the
Company.
(5) Mr. Host became Chief Executive Officer of Scotts effective as of April
6, 1995. He had been Chief Operating Officer from October 1991 until
April 6, 1995. He continues to serve as President.
GRANTS OF OPTIONS
The following table sets forth information concerning individual
grants of options made during the 1995 fiscal year to each of the executive
officers named in the Summary Compensation Table. Scotts has never granted
stock appreciation rights.
OPTION GRANTS IN LAST FISCAL YEAR
% of Potential Realizable
Number of Total Value at Assumed
Securities Options Annual Rates of Stock
Underlying Granted to Exercise Price Appreciation
Options Employees in Price Expiration For Option
Name Granted(#) Fiscal ($/Share) Date Term(1)
Year 5%($) 10%($)
------ ----------- ---------
Tadd C. Seitz........ 87,840(2)(3) 13.10% $15.50 9/30/04 $856,396 $2,170,263
41,607(3)(4) 6.20% $16.25 11/03/02 $322,506 $ 773,474
43,920(3)(5) 13.90% $17.25 9/30/03 $412,696 $1,017,135
Theodore J. Host..... 56,580(2)(3) 12.90% $15.50 9/30/04 $551,627 $1,397,922
25,987(3)(4) 3.90% $16.25 11/03/02 $201,432 $ 483,098
28,290(3)(5) 4.20% $17.25 9/30/03 $268,889 $ 662,707
Paul D. Yeager....... 18,000(2)(3) 2.70% $15.50 9/30/04 $175,491 $ 444,726
9,163(3)(4) 1.40% $16.25 11/03/02 $ 71,025 $ 170,340
8,090(3)(5) 1.20% $17.25 9/30/03 $ 76,893 $ 189,512
J. Blaine McKinney... 15,000(2)(3) 2.20% $15.50 9/30/04 $146,243 $ 370,605
9,979(3)(4) 1.50% $16.25 11/03/02 $ 77,350 $ 185,510
10,840(3)(5) 1.60% $17.25 9/30/03 $103,031 $ 253,932
Michael P. Kelty..... 15,000(2)(3) 2.20% $15.50 9/30/04 $146,243 $ 370,605
3,829(3)(4) 0.60% $16.25 11/03/02 $ 29,680 $ 71,181
4,030(3)(5) 1.30% $17.25 9/30/03 $ 38,304 $ 94,405
- --------------------
(1) The amounts reflected in this table represent certain assumed rates of
appreciation only. Actual realized values, if any, on option exercises
will be dependent on the actual appreciation of the common shares of
Scotts over the term of the options. There can be no assurances that the
Potential Realizable Values reflected in this table will be achieved.
(2) These options were granted under Scotts' 1992 Long Term Incentive Plan
and become exercisable in three approximately equal installments on each
of the first three anniversaries of the date of grant, subject to the
right of the Compensation and Organization Committee of Scotts' Board of
Directors to accelerate the exercisability of such options in its
discretion.
(3) In the event of a "change in control" (as defined in the 1992 Long Term
Incentive Plan), each option will be canceled in exchange for a payment
in cash of an amount equal to the excess of the highest price paid (or
offered) for common shares during the preceding 30 trading days over the
exercise price for such option. Notwithstanding the foregoing, if the
Compensation and Organization Committee determines that the holder of the
option will receive a new award (or have his prior award honored) in a
manner which preserves its value and eliminates the risk that the value
of the award will be forfeited due to an involuntary termination, no
settlement will occur as a result of a change in control. In the event of
termination of employment by reason of retirement, long term disability
or death, the options may thereafter be exercised in full for a period of
5 years, subject to the stated term of the options. The options are
forfeited if the holder's employment is terminated for cause. In the
event an option holder's employment is terminated for any reason other
than retirement, long term disability, death or cause, any exercisable
options held by him at the date of termination may be exercised for a
period of 30 days.
(4) These options (or a percent thereof) were originally to be earned under
the 1992 Long Term Incentive Plan based upon the Company's performance
during the 1995 fiscal year. However, on December 13, 1994, the Scotts'
Board of Directors approved its Compensation and Organization Committee's
recommendation to grant 100% of the common shares subject to these
options as of September 30, 1994.
(5) These options (or a percent thereof) were originally to be earned under
the 1992 Long Term Incentive Plan based upon the Company's performance
during the 1996 fiscal year. However, on December 13, 1994, Scotts' Board
of Directors approved its Compensation and Organization Committee's
recommendation to grant 100% of the common shares subject to these
options as of September 30, 1994.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to unexercised
options held as of the end of the 1995 fiscal year by each of the executive
officers named in the Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number
of Securities Number of Securities Underlying Value of Unexercised
Underlying Unexercised Options at In-the-Money
Options Value FY-END (#) OPTIONS AT FY-END($)(1)
---------------------------------------------------------------
Name Exercised Realized($) Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------
Tadd C. Seitz 0 - 127,389 216,524 $733,770 $1,264,758
Theodore J. Host 0 - 216,222 138,384 $2,126,785 $ 808,291
Paul D. Yeager 0 - 27,538 43,706 $ 159,089 $ 256,788
J. Blaine McKinney 0 - 40,666 51,380 $ 235,299 $ 295,040
Michael P. Kelty 0 - 11,722 26,825 $ 67,523 $ 162,129
- ------------------------------------
(1) "Value of Unexercised In-the-Money Options at FY-End" is based upon the
fair market value of Scotts' common shares on September 30, 1995
($22.125) less the exercise price of in-the-money options at the end of
the 1995 Fiscal Year.
PENSION PLANS
Scotts maintains a tax-qualified non-contributory defined benefit
pension plan (the "Pension Plan"). All employees of Scotts and its
subsidiaries (except for Hyponex, Sierra, Republic, and their respective
subsidiaries) are eligible to participate upon meeting certain age and service
requirements. The following table shows the estimated annual benefits
(assuming payment made in the form of a single life annuity) payable upon
retirement at normal retirement age (65 years of age) to an employee in
specified compensation and years of service classifications.1
- -------------------
(1) The Internal Revenue Code of 1986, as amended (the "Code"), places
certain limitations on the annual pension benefits which can be paid from
the Pension Plan. Such limitations are not reflected in the table. This
table reflects the total aggregate benefits payable annually upon
retirement under both the Pension Plan and The O.M. Scott & Sons Company
Excess Benefit Plan (which has been assumed by and is maintained by
Scotts) (the "Excess Benefit Plan"), which is discussed below. The
Pension Plan and the Excess Benefit Plan require an offset of 1.25% of
the Social Security primary insurance amount ("PIA") for each year of
service and such amount has been deducted from the figures in the table.
The PIA used in developing the figures in the table is $13,764.00. Thus,
the offset is $5,161.50 for a person with 30 years of service. The
maximum possible offset is $6,882.00 for a person with 40 years of
service.
- -----------------------------------------------
PENSION PLANS TABLE
Annualized
Average YEARS OF SERVICE
Final Pay ----------------------------------------------------------------
10 15 20 25 30
- --------------------------------------------------------------------------------
$ 100,000 $13,201.50 $19,802.25 $26,403.00 $33,003.75 $39,604.50
250,000 35,701.50 53,552.25 71,403.00 89,253.75 107,104.50
500,000 73,201.50 109,802.25 146,403.00 183,003.75 219,604.50
750,000 110,701.50 166,052.25 221,403.00 276,753.75 332,104.50
1,000,000 148,201.50 222,302.25 296,403.00 370,503.75 444,604.50
1,250,000 185,701.50 278,552.25 371,403.00 464,253.75 557,104.50
Monthly benefits under the Pension Plan upon normal retirement (age
65) are based upon an employee's average final pay and years of service, and
are reduced by 1.25% of the employee's PIA times the number of years of such
employee's service. Average final pay is the average of the 60 highest
consecutive months' compensation during the 120 months prior to retirement.
Pay includes all earnings and a portion of sales incentive payments,
management incentive payments and executive incentive payments, but does not
include earnings in connection with foreign service, the value of a company
car, separation or other special allowances and commissions. Additional
provisions for early retirement are included.
At September 30, 1995, the credited years of service (including
certain prior service with ITT Corporation, from whom Scotts' predecessor was
acquired in 1986) and the 1995 annual covered compensation for purposes of the
Pension Plan and the Excess Benefit Plan of the five executive officers of
Scotts named in the Summary Compensation Table were as follows:
Covered
Years Of Service Compensation
Mr. Seitz 19 years 9 months $377,000
Mr. Host 3 years 11 months $368,750
Mr. Yeager 26 years 1 month $207,050
Mr. McKinney 3 years 4 months $194,433
Mr. Kelty 16 years 3 months $175,167
Effective October 1, 1993, the Excess Benefit Plan was established.
The Excess Benefit Plan provides additional benefits to participants in the
Pension Plan whose benefits are reduced by limitations imposed under Sections
415 and 401(a)(17) of the Code. Under the Excess Benefit Plan, executive
officers and certain key employees will receive, at the same time and in the
same form as benefits paid under the Pension Plan, additional monthly benefits
in an amount which, when added to the benefits paid to the participant under
the Pension Plan, will equal the benefit amount such participant would have
earned but for the limitations imposed by the Code to the extent such
limitations apply.
COMPENSATION OF DIRECTORS
Each director of Scotts, other than any director employed by Scotts,
receives a $25,000 annual retainer for Board and committee meetings plus all
reasonable travel and other expenses of attending such meetings.
Directors, other than those employed by the Company (the "Nonemployee
Directors"), receive an annual grant on the first business day following the
date of each annual meeting of shareholders of options to purchase 4,000
common shares at an exercise price equal to the fair market value on the date
of the grant. Options granted to Nonemployee Directors become exercisable six
months after the date of grant and remain exercisable until the earlier to
occur of (i) the tenth anniversary of the date of grant or (ii) the first
anniversary of the date the Nonemployee Director ceases to be a member of
Scotts' Board of Directors.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company entered into an Employment Agreement with Mr. Host
effective October 1991 (the "Host Agreement") providing for his continued
employment as President and Chief Operating Officer of the Company until
December 1996 at an annual base salary of at least $270,000 per year, plus
incentive bonus under The Scotts Company Executive Incentive Plan.
In connection with the entering into of his Employment Agreement,
pursuant to a Stock Option Plan and Agreement dated as of January 9, 1992, Mr.
Host was granted options, which vested one-third on the date of grant and
one-third on each of the first and second anniversaries of his date of
employment, to purchase 136,364 common shares at a purchase price of $9.90 per
share. These options expire on January 8, 2002; provided, however, that if Mr.
Host's active employment with Scotts and its subsidiaries is terminated for
cause, these options will be forfeited.
If Mr. Host's employment is terminated by reason of his death or
disability, by the Company without "cause" (as defined in the Host Agreement)
or by Mr. Host for "good reason" (as defined in the Host Agreement), he will
be entitled to have his base salary continued at the rate then in effect until
the first anniversary of his date of termination and to receive a pro rata
amount of the incentive compensation he would have otherwise received. If Mr.
Host terminates his employment for other than "good reason," he will be
entitled to receive his base salary through the date of termination and a pro
rata amount of the incentive compensation he would have otherwise received. If
Mr. Host's employment is terminated by the Company for "cause," he will be
entitled to receive his base salary through the date of termination.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
The following table furnishes certain information as of December 1,
1995 (except as otherwise noted), as to the common shares beneficially owned
by each of the directors of Scotts, by each of the executive officers of
Scotts named in the Summary Compensation Table and by all directors and
executive officers of Scotts as a group, and, to Scotts' knowledge, by the
only persons beneficially owning more than 5% of the outstanding common
shares.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP (1)
Common Shares Which
Can Be Acquired
Upon Conversion of
Convertible
Preferred Stock or
Upon Exercise of
Common Shares Options or Warrants
Name Of Presently Held Exercisable Within Percent Of
Beneficial Owner 60 Days Total Class (2)
---------------- ------- ----- ---------
James B Beard............... 16,727 12,000 28,727 (3)
John S. Chamberlin.......... 22,727 12,000 34,727 (3)
Common Shares Which
Can Be Acquired
Upon Conversion of
Convertible
Preferred Stock or
Upon Exercise of
Common Shares Options or Warrants
Name of Presently Held Exercisable Within Percent of
Beneficial owner 60 days Total class (2)
---------------- ------- ----- ---------
Joseph P. Flannery.......... 10,000 12,000 22,000 (3)
Horace Hagedorn............. 0 526(4) 526 (3)
James Hagedorn.............. 0 13,262,631(5) 13,262,631 41.5%(5)
Theodore J. Host (6)........ 45,454(7) 279,166 324,620 1.7%
Michael P. Kelty (6)........ 62,909(8) 23,173 86,082 (3)
John Kenlon................. 0 234,642(9) 234,642 1.2%(9)
J. Blaine McKinney (6)...... 1,100 67,592 68,692 (3)
Karen Gordon Mills.......... 0 4,000 4,000 (3)
Tadd C. Seitz (6)........... 272,204(10)9) 226,793 498,997 2.6%
Donald A. Sherman........... 22,727 12,000 34,727 (3)
John M. Sullivan............ 1,000 8,000 9,000 (3)
L. Jack Van Fossen.......... 1,200 8,000 9,200 (3)
Paul D. Yeager (6).......... 115,885(11) 48,457 164,342 (3)
All directors and
executive officers as a
group (23 persons).......... 860,338(12) 14,077,001 14,937,339 45.5%
Hagedorn Partnership, L.P... 0 13,262,631(13) 13,262,631 41.5%(13)
800 Port Washington Blvd.
Port Washington, NY 11050
- ---------------
(1) Unless otherwise indicated, the beneficial owner has sole voting and
dispositive power as to all common shares reflected in the table.
(2) The percent of class is based upon the sum of (i) 18,717,064 common
shares outstanding on December 1, 1995, and (ii) the number of common
shares as to which the named person has the right to acquire beneficial
ownership upon conversion of Convertible Preferred Stock or upon the
exercise of options or warrants exercisable within 60 days of September
30, 1995.
(3) Represents ownership of less than 1% of the outstanding common shares of
Scotts.
(4) Mr. Hagedorn owns (beneficially and of record) 10 shares of Convertible
Preferred Stock (less than 1% of such class) which are convertible into
526 common shares. Mr. Hagedorn is the father of the general partners of
Hagedorn Partnership, L.P., a Delaware limited partnership (the "Hagedorn
Partnership"), but is not himself a partner of, and does not have sole or
shared voting or dispositive power with respect to any of the Convertible
Preferred Stock or Warrants held by, the Hagedorn Partnership. See note
(13) below.
(5) Mr. Hagedorn is a general partner in the Hagedorn Partnership and has
shared voting and dispositive power with respect to the Convertible
Preferred Stock and Warrants held by the Hagedorn Partnership. See note
(13) below.
(6) Executive officer of Scotts named in the Summary Compensation Table.
(7) Includes 45,454 common shares which were issued to Mr. Host at the time
of his employment by the Company and which are pledged to Bank One, N.A.
(8) Includes 22,727 common shares owned by Dr. Kelty's wife.
(9) Mr. Kenlon beneficially owns 4,332 shares of Convertible Preferred Stock
(2.2% of such class), which are convertible into 228,000 common shares,
and Warrants to purchase 6,642 common shares. Mr. Kenlon's children
beneficially own Warrants to purchase an additional 15,000 common shares,
for which Mr. Kenlon disclaims beneficial ownership. The Hagedorn
Partnership has the right to vote all of the Scotts' securities held by
Mr. Kenlon and his children, and has a right of first refusal with
respect to such securities. See note (13) below.
(10) Includes 20,000 common shares owned by Mr. Seitz' wife.
(11) Includes 100 common shares held by each of Mr. Yeager's wife and his two
daughters who share his home.
(12) See notes (4), (5) and (7) through (11) above and note (13) below. Also
includes common shares held by the respective spouses of executive
officers of Scotts and by their children who live with them.
(13) The Hagedorn Partnership owns (beneficially and of record) 190,658 shares
of Convertible Preferred Stock (97.8% of such class), which are
convertible into 10,034,631 common shares, and Warrants to purchase
2,933,358 common shares, and has the right to vote, and a right of first
refusal with respect to, the Scotts' securities held by Mr. Kenlon and
his children. See note (9) above. The general partners of the Hagedorn
Partnership are Mr. James Hagedorn, Katherine Hagedorn Littlefield, Paul
Hagedorn, Peter Hagedorn, Robert Hagedorn and Susan Hagedorn, each of
whom is a child of Mr. Horace Hagedorn and a former shareholder of
Miracle-Gro Products. Community Funds, Inc., a New York not-for-profit
corporation, is a limited partner in the Hagedorn Partnership.
The Merger Agreement provides for certain voting rights of, and
certain voting restrictions on, the holders of the Convertible Preferred
Stock and the Warrants (collectively, including the general and limited
partners of the Hagedorn Partnership, the "Miracle-Gro Shareholders").
The Merger Agreement also limits the ability of the Miracle-Gro
Shareholders to acquire additional voting securities of Scotts or to
transfer the Convertible Preferred Stock or the Warrants. See "-Voting
Restrictions on the Miracle-Gro Shareholders" and "-Standstill
Restrictions on the Miracle-Gro Shareholders" below.
VOTING RESTRICTIONS ON THE MIRACLE-GRO SHAREHOLDERS
The Merger Agreement provides that until the earlier of the end of the
Standstill Period and such time as the Miracle-Gro Shareholders cease to own
at least 19% of Scotts' Voting Stock (as that term is defined in the Merger
Agreement), the Miracle-Gro Shareholders will be required to vote their shares
of Convertible Preferred Stock and common shares (i) for Scotts' nominees to
the Board of Directors, in accordance with the recommendation of the Board of
Directors' Nominating Committee and (ii) on all matters to be voted on by
holders of Voting Stock, in accordance with the recommendation of the Board of
Directors, except with respect to a proposal as to which shareholder approval
is required under the Ohio General Corporation Law relating to (a) the
acquisition of Voting Stock of Scotts, (b) a merger or consolidation, (c) a
sale of all or substantially all of the assets of Scotts, (d) a
recapitalization of Scotts or (e) an amendment to Scotts' Amended Articles of
Incorporation or Code of Regulations which would materially adversely affect
the rights of the Miracle-Gro Shareholders. Scotts has agreed that, without
the prior consent of the Shareholder Representative (as that term is defined
in the Merger Agreement), it shall not (x) issue Voting Stock (or Voting Stock
equivalents) constituting in the aggregate more than 12.5% of total voting
power of the outstanding Voting Stock (the "Total Voting Power") (other than
pursuant to employee benefit plans in the ordinary course of business) or (y)
in a single transaction or series of related transactions, make any
acquisition or disposition of assets which would require disclosure pursuant
to Item 2 of Form 8-K under the Securities Exchange Act of 1934 (the "Exchange
Act"); provided, however, that if five-sixths of the Board of Directors
determine that it is in the best interests of Scotts to make an acquisition
pursuant to clause (y), such acquisition may be made without the consent of
the Shareholder Representative. In addition, during the Standstill Period, the
Miracle-Gro Shareholders will be limited in their ability to enter into any
voting trust agreement without Scotts' consent or to solicit proxies or become
participants in any election contest (as such terms are used in Rule 14a-11 of
Regulation 14A under the Exchange Act) relating to the election of directors
of Scotts. Following the Standstill Period or such time as the Miracle-Gro
Shareholders cease to own at least 19% of the Voting Stock, the voting
restrictions provided in the Merger Agreement will expire.
STANDSTILL RESTRICTIONS ON THE MIRACLE-GRO SHAREHOLDERS
The Merger Agreement provides that during the Standstill Period, the
Miracle-Gro Shareholders may not acquire or agree to acquire, directly or
indirectly, beneficial ownership of Voting Stock representing more than 43% of
Total Voting Power (the "Standstill Percentage"). For purposes of calculating
beneficial ownership of Voting Stock against the Standstill Percentage, common
shares underlying unexercised Warrants or any subsequently granted employee
stock options will not be included. However, the terms of the Warrants provide
that, if exercised during the Standstill Period and to the extent that such
exercise would increase the aggregate beneficial ownership of the Miracle-Gro
Shareholders to more than 43% of Total Voting Power, such exercise may only be
for cash and not for common shares. To the extent that a recapitalization of
Scotts or a common share repurchase program by Scotts increases the aggregate
beneficial ownership of the Miracle-Gro Shareholders to an amount in excess of
44% of the Total Voting Power, the Miracle-Gro Shareholders will be required
to divest themselves of sufficient shares of Voting Stock to fall within the
44% of Total Voting Power limit. Scotts has agreed that it will use reasonable
efforts to ensure that employee stock options are funded with common shares
repurchased in the open market rather than with newly-issued common shares.
The Miracle-Gro Shareholders have agreed that, after the Standstill
Period, they will not acquire, directly or indirectly, beneficial ownership of
Voting Stock representing more than 49% of the Total Voting Power except
pursuant to a tender offer for 100% of the Total Voting Power, which tender
offer is conditioned upon the receipt of at least 50% of the Voting Stock
beneficially owned by shareholders of Scotts other than the Miracle-Gro
Shareholders and their affiliates and associates.
RESTRICTIONS ON TRANSFERS
During the Standstill Period, the Merger Agreement provides that no
Miracle-Gro Shareholder may transfer any common shares obtained upon
conversion of the Convertible Preferred Stock or exercise of the Warrants,
except (i) to Scotts or any person approved by Scotts; (ii) to a Permitted
Transferee (as that term is defined in the Merger Agreement) who agrees in
writing to abide by the provisions of the Merger Agreement; (iii) pursuant to
a merger or consolidation of Scotts or a plan of liquidation which has been
approved by Scotts' Board of Directors; (iv) in a bona fide public offering
registered under the Securities Act of 1933 (the "Securities Act") and
designed to prevent any person or group from acquiring beneficial ownership of
3% or more of the Total Voting Power; (v) subject to Scotts' right of first
offer, pursuant to Rule 145 or Rule 144A under the Securities Act, provided
that such sale would not knowingly result in any person or group's acquiring
beneficial ownership of 3% or more of the Total Voting Power and all such
sales by the Miracle-Gro Shareholders within the preceding three months would
not exceed, in the aggregate, the greatest of the limits set forth in Rule
144(e)(1) under the Securities Act; (vi) in response to a tender offer made by
or on behalf of Scotts or with the approval of Scotts' Board of Directors; or
(vii) subject to Scotts' right of first offer, in any other transfer which
would not to the best knowledge of the transferring Miracle-Gro Shareholder
result in any person or group's acquiring beneficial ownership of 3% or more
of the Total Voting Power.
Neither the Convertible Preferred Stock nor, during the Standstill
Period, the Warrants may be transferred except (i) to Scotts or any person or
group approved by Scotts; (ii) to a Permitted Transferee who agrees in writing
to abide by the provisions of the Merger Agreement; (iii) pursuant to a merger
or consolidation of Scotts or a plan of liquidation of Scotts; or (iv) with
respect to Convertible Preferred Stock representing no more than 15% of the
outstanding common shares on a fully diluted basis or any number of Warrants:
(A) subject to Scotts' right of first offer, pursuant to Rule 145 or Rule 144A
under the Securities Act, provided that such sale would not knowingly result
in any person or group's acquiring beneficial ownership of 3% or more of the
Total Voting Power and all such sales by the Miracle-Gro Shareholders within
the preceding three months would not exceed, in the aggregate, the greatest of
the limits set forth in Rule 144(e)(1) under the Securities Act; or (B)
subject to Scotts' right of first offer, in any other transfer which would
not, to the best knowledge of the transferring Miracle-Gro Shareholder, result
in any person or group's acquiring beneficial ownership of 3% or more of the
Total Voting Power. For purposes of clauses (A) and (B) only, Scotts' right of
first offer with respect to shares of Convertible Preferred Stock would be at
a price equal to (x) the aggregate Market Price (as that term is defined in
the Merger Agreement) of the common shares into which such shares of
Convertible Preferred Stock could be converted at the time of the applicable
transfer notice multiplied by (y) 105%.
Following the Standstill Period, the Warrants and the common shares
underlying the Warrants and the Convertible Preferred Stock will be freely
transferable, subject to the requirements of the Securities Act and applicable
law.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Please see the discussion of the consideration received by Mr. Horace
Hagedorn, Mr. James Hagedorn and Mr. John Kenlon in the Merger Transactions in
ITEM 1. BUSINESS above, which discussion is incorporated herein by this
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(A) DOCUMENTS FILED AS PART OF THIS REPORT
1 & 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES:
The response to this portion of Item 14 is submitted as a separate
section of this Annual Report on Form 10-K. Reference is made to "Index to
Consolidated Financial Statements and Financial Statement Schedules" beginning
at Page F-1 (page 42 as sequentially numbered).
3. EXHIBITS:
Exhibits filed with this Annual Report on Form 10-K are attached
hereto. For a list of such exhibits, see "Index to Exhibits" beginning at page
E-1 (page 68 as sequentially numbered). The following table provides certain
information concerning executive compensation plans and arrangements required
to be filed as exhibits to this Annual Report on Form 10-K.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
EXHIBIT NO. DESCRIPTION LOCATION
10(a) The Scotts Company Incorporated herein by
Employees' Pension reference to Scotts' Annual
Plan Report on Form 10-K for the
fiscal year ended
September 30, 1994 (File
No. 0-19768) [Exhibit 10(a)]
10(b) First Amendment to Pages 72 and 73
The Scotts Company
Employees' Pension
Plan dated April 18,
1995
10(c) Second Amendment to Pages 74 through 78 The Scotts
Company Associates' [Employees'] Pension Plan dated
December 5, 1995 and effective as of December 31,
1995
10(d) Second Restatement Incorporated herein by
of The Scotts reference to Scotts' Annual
Company Profit Report on Form 10-K for the
Sharing and Savings fiscal year ended
Plan September 30, 1994 (File
No. 0-19768) [Exhibit 10(b)]
10(e) First Amendment to Pages 79 through 82
the Second
Restatement of The
Scotts Company
Profits Sharing and
Savings Plan
effective as of
July 1, 1995
10(f) Second Amendment to Pages 83 through 88
the Second
Restatement of The
Scotts Company
Profit Sharing and
Savings Plan dated
December 5, 1995 and
effective as of
December 31, 1995
10(i) Employment Incorporated herein by
Agreement, dated as reference to the Annual
of October 21, 1991, Report on Form 10-K for the
between Scotts (as fiscal year ended September
successor to The 30, 1993 of The Scotts
O.M. Scott & Sons Company, a Delaware
Company ("OMS")) and corporation ("Scotts
Theodore J. Host Delaware") (File
No. 0-19768) [Exhibit 10(g)]
10(j) Stock Option Plan Incorporated herein by
and Agreement, dated reference to Scotts' Annual
as of January 9, Report on Form 10-K for the
1992, between Scotts fiscal year ended
(as successor to September 30, 1994 (File
Scotts Delaware) and No. 0-19768) [Exhibit 10(f)]
Theodore J. Host
10(k) The O.M. Scott & Incorporated herein by
Sons Company Excess reference to Scotts
Benefit Plan, Delaware's Annual Report on
effective October 1, Form 10-K for the fiscal
1993 year ended September 30,
1993 (File No. 0-19768)
[Exhibit 10(h)]
10(l) The Scotts Company Incorporated herein by
1992 Long Term reference to Scotts
Incentive Plan Delaware's Registration
Statement on Form S-8 filed
on March 26, 1993
(Registration No. 33-60056)
[Exhibit 4(f)]
10(m) The Scotts Company Pages 89 through 95
1995 Executive
Annual Incentive Plan
10(n) Letter of Pages 96 through 99
understanding, dated
October 11, 1993,
regarding terms of
employment of
John A. Neal by
Scotts
10(o) Letter of Pages 100 through 103
understanding, dated
October 11, 1993,
regarding terms of
employment of
Lisle J. Smith by
Scotts
10(p) Employment Pages 104 through 116
Agreement, dated as
of May 19, 1995,
between Scotts and
James Hagedorn
(B) REPORTS ON FORM 8-K
On August 2, 1995, Scotts filed a Form 8-K/A to include the financial
statements specified by Rules 3-05 and 11-01 of Regulation S-X and Items 7(a)
and 7(b) of Form 8-K in connection with the Merger Transactions with the
Miracle-Gro Companies.
(C) EXHIBITS
See Item 14(a) (3) above.
(D) FINANCIAL STATEMENT SCHEDULES
The response to this portion of Item 14 is submitted as a separate section
of this Annual Report on Form 10-K. Reference is made to "Index to
Consolidated Financial Statements and Financial Statement Schedules" beginning
at page F-1 (page 42 as sequentially numbered).
Page 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE SCOTTS COMPANY
Dated December 13, 1995 By /S/ THEODORE J. HOST
Theodore J. Host
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities
and on the dates indicated.
SIGNATURE TITLE DATE
/s/ James B Beard Director
- -----------------------------------
James B Beard December 13, 1995
/s/ John S. Chamberlin Director
- -----------------------------------
John S. Chamberlin December 13, 1995
/s/ Joseph P. Flannery Director
- -----------------------------------
Joseph P. Flannery December 13, 1995
/s/ Horace Hagedorn Vice Chairman/
- ----------------------------------- Director
Horace Hagedorn December 13, 1995
/s/ James Hagedorn Senior Vice President/
- ----------------------------------- Director
James Hagedorn December 13, 1995
/s/ John Kenlon Director
- ----------------------------------- December 13, 1995
John Kenlon
/s/ Theodore J. Host President/Chief Executive
- ----------------------------------- Executive Officer/Director
Theodore J. Host December 13, 1995
/s/ Karen Gordon Mills Director
- -----------------------------------
Karen Gordon Mills December 13, 1995
/s/ Tadd C. Seitz Chairman of the Board/
- ----------------------------------- Director
Tadd C. Seitz December 13, 1995
/s/ Donald A. Sherman Director
- -----------------------------------
Donald A. Sherman December 13, 1995
/s/ John M. Sullivan Director
- -----------------------------------
John M. Sullivan December 13, 1995
Director
- ----------------------------------- December __, 1995
L. Jack Van Fossen
/s/ Paul D. Yeager Executive Vice President/
- ----------------------------------- Chief Financial Officer/
Paul D. Yeager Principal Accounting December 13, 1995
Officer
THE SCOTTS COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(Items 8 and 14(a))
Form 10-K
Annual Report
Data submitted herewith:
Consolidated Financial Statements of The Scotts Company and Subsidiaries:
Report of Independent Accountants F-2
Consolidated Statements of Income for the years ended
September 30, 1993, 1994 and 1995 F-3
Consolidated Statements of Cash Flows for the years ended
September 30, 1993, 1994 and 1995 F-4
Consolidated Balance Sheets at September 30, 1994 and 1995 F-5
Consolidated Statements of Changes in Shareholders' Equity
for the years ended September 30, 1993, 1994 and 1995 F-6
Notes to Consolidated Financial Statements F-7 - F-22
Schedules Supporting the Consolidated Financial Statements:
Report of Independent Accountants on Financial Statement F-23
Schedules
II - Valuation and Qualifying Accounts F-24 - F-26
Schedules other than those listed above are omitted since they are not
required or are not applicable, or the required information is shown in the
consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of
Directors of The Scotts Company
We have audited the accompanying consolidated balance sheets of The Scotts
Company and Subsidiaries as of September 30, 1994 and 1995, and the related
consolidated statements of income, cash flows and changes in shareholders'
equity for each of the three years in the period ended September 30, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Scotts
Company and Subsidiaries as of September 30, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1995, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L. L. P.
Columbus, Ohio
November 15, 1995
THE SCOTTS COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
for the years ended September 30, 1993, 1994 and 1995
(in thousands except per share amounts)
1993 1994 1995
==== ==== ====
Net sales ........................................ $ 466,043 $ 606,339 $732,837
Cost of sales .................................... 244,218 319,730 394,369
--------- --------- --------
Gross profit ..................................... 221,825 286,609 338,468
--------- --------- --------
Marketing ........................................ 74,579 100,106 125,757
Distribution ..................................... 67,377 84,407 104,513
General and administrative ....................... 27,688 30,189 28,672
Research and development ......................... 7,700 10,352 10,970
Other expenses, net .............................. 660 2,283 1,560
--------- --------- --------
Income from operations ........................... 43,821 59,272 66,996
Interest expense ................................. 8,454 17,450 26,320
--------- --------- --------
Income before taxes, extraordinary item and
cumulative effect of accounting changes ...... 35,367 41,822 40,676
Income taxes ..................................... 14,320 17,947 15,593
--------- --------- --------
Income before extraordinary item and
cumulative effect of accounting changes ...... 21,047 23,875 25,083
Extraordinary Item:
Loss on early extinguishment of debt, net of tax -- (992) --
Cumulative effect of changes in accounting for
postretirement benefits, net of tax and income . (13,157) -- --
taxes
--------- --------- --------
Net income ....................................... $ 7,890 $ 22,883 $ 25,083
========= ========= ========
Net income per common share:
Income before extraordinary item and
cumulative effect of accounting changes .. $ 1.07 $ 1.27 $ 1.11
Extraordinary item:
Loss on early extinguishment of debt,
net of tax ............................. -- (.05) --
Cumulative effect of changes in accounting for
postretirement benefits, net of tax and
income taxes ............................... (.67) -- --
--------- --------- --------
Net income per common share .................. $ .40 $ 1.22 $ 1.11
========= ========= ========
Common shares used in net income per common share 19,687 18,785 22,617
computation ====== ====== ======
See Notes to Consolidated Financial Statements.
THE SCOTTS COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended September 30, 1993, 1994 and 1995
1993 1994 1995
==== ==== ====
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................... $ 7,890 $ 22,883 $ 25,083
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation ................................ 12,278 13,375 16,056
Amortization ................................ 5,866 8,562 9,599
Extraordinary loss on early extinguishment .. -- 992 --
of debt
Cumulative effect of change in accounting for
postretirement benefits ................. 24,280 -- --
Postretirement benefits ..................... 2,366 368 145
Deferred income taxes ....................... (12,740) 5,378 (901)
Loss/(gain) on sale of equipment ............ 94 29 (55)
Gain on Peters divestiture .................. (4,227)
Equity in loss of unconsolidated businesses . 1,216
Provision for losses on accounts receivable . 1,409 1,974 1,533
Other ....................................... 748 234 (309)
Changes in assets and liabilities:
Accounts receivable ..................... (10,002) (33,846) (36,661)
Inventories ............................. (11,147) (10,406) (22,984)
Prepaid and other current assets ........ (393) (2,065) (2,119)
Accounts payable ........................ (2,390) 6,400 12,049
Accrued liabilities ..................... 1,630 6,220 5,145
Other assets and liabilities ............ 4,784 (10,231) 906
--------- --------- ---------
Net cash provided by operating ...... 24,673 9,867 4,476
activities
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in plant and equipment ................... (15,158) (33,402) (23,606)
Investment in affiliate ............................. (250)
Acquisitions, net of cash acquired .................. (16,366) (117,107) --
Cash acquired in merger with Miracle-Gro ............ 6,449
Proceeds from sale of equipment ..................... 194 384 718
Proceeds from Peters divestiture .................... 9,966
--------- --------- ---------
Net cash used in investing activities (31,330) (150,125) (6,723)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under term debt ......................... 70,000 289,215 --
Payments on term and other debt ..................... (640) (166,844) (27,127)
Net (payments) borrowings under revolving credit .... (18,238) 30,500 27,402
Net (payments) borrowings under bank line of credit . (953) 1,211 (1,819)
Deferred financing cost incurred .................... (628) (5,139) (486)
(Purchase) Issuance of Common Shares ................ (41,441) 160 436
Dividends on Class A Convertible Preferred Stock .... -- -- (1,122)
--------- --------- ---------
--------- --------- ---------
Net cash provided by(used in) ...... 8,100 149,103 (2,716)
financing activities
--------- --------- ---------
Effect of exchange rate changes on cash ................. -- (473) 1,296
--------- --------- ---------
Net increase (decrease) in cash ......................... 1,443 8,372 (3,667)
Cash, beginning of period ............................... 880 2,323 10,695
--------- --------- ---------
Cash, end of period ..................................... $ 2,323 $ 10,695 $ 7,028
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest (net of amount capitalized) ................ $ 6,169 $ 10,965 $ 23,808
Income taxes paid ................................... 11,500 20,144 11,339
Businesses acquired:
Fair value of assets acquired ................... 23,799 143,520 235,564
Liabilities assumed ............................. (7,433) (26,413) (39,875)
Net cash paid for acquisition ................... 16,366 117,107 --
Class A Convertible Preferred Stock issued ...... 177,255
Warrants issued ................................. 14,434
Dividends declared not paid ......................... 2,437
See Notes to Consolidated Financial Statements
THE SCOTTS COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1994 and 1995
(in thousands)
ASSETS
1994 1995
---------- ---------
Current Assets:
Cash .................................................... $ 10,695 $ 7,028
Accounts receivable, less allowance
of $2,933 in 1994 and $3,406 in 1995 ................. 115,772 176,525
Inventories, net ........................................ 106,636 143,953
Prepaid and other assets ................................ 17,151 21,659
--------- ---------
Total current assets ................................ 250,254 349,165
--------- ---------
Property, plant and equipment, net .......................... 140,105 148,754
Trademarks, net ............................................. -- 89,250
Other intangibles, net ...................................... 28,880 24,421
Goodwill .................................................... 104,578 179,988
Other assets ................................................ 4,767 15,772
--------- ---------
Total Assets
$ 528,584 $ 807,350
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving credit line ................................... $ 23,416 $ 97
Current portion of term debt ............................ 3,755 421
Accounts payable ........................................ 46,967 63,207
Accrued liabilities ..................................... 31,167 36,987
Accrued taxes ........................................... 4,383 18,728
--------- ---------
Total current liabilities ........................... 109,688 119,440
--------- ---------
Term debt, less current portion ............................. 220,130 272,025
Postretirement benefits other than pensions ................. 27,014 27,159
Other liabilities ........................................... 3,592 5,209
--------- ---------
Total Liabilities ................................... 360,424 423,833
--------- ---------
Commitments and Contingencies
Shareholders' Equity:
Class A Convertible Preferred Stock, no par value ....... -- 177,255
Common shares, no par value, issued 21,082 shares in 1994 211 211
and 1995
Capital in excess of par value .......................... 193,450 207,551
Retained earnings ....................................... 13,875 35,399
Cumulative translation adjustments ...................... 2,065 4,082
Treasury stock, 2,415 shares in 1994 and 2,388 shares in (41,441) (40,981)
1995, at cost
--------- ---------
Total Shareholders' Equity .......................... 168,160 383,517
--------- ---------
Total Liabilities and Shareholders' Equity
$ 528,584 $ 807,350
========= =========
See Notes to Consolidated Financial Statements
THE SCOTTS COMPANY AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity for the
years ended September 30, 1993, 1994 and 1995
(in thousands)
Convertible Class A Capital in Retained Cumulative Total
Preferred Stock Common Shares excess of Earnings/ Treasury Stock Translation Shareholders'
Shares Amount Shares Amount Par Value (Deficit) Shares Amount Gain(Loss) Equity/(Deficit)
Balance, September 30, 1992 21,073 $211 $192,604 $(16,898) $ 12 $175,929
Net income 7,890 7,890
Amortization of unearned
compensation 24 24
Options outstanding 635 635
Foreign currency translation
adjustment (24) (24)
Purchase of common shares (2,415) $(41,441) (41,441)
------ -------- -------
Balance, September 30, 1993 21,073 211 193,263 (9,008) (2,415) (41,441) (12) 143,013
Net income 22,883 22,883
Foreign currency translation
adjustment 2,077 2,077
Amortization of unearned
compensation 27 27
Issuance of common shares 9 160 160
- --- ---
Balance, September 30, 1994 21,082 211 193,450 13,875 (2,415) (41,441) 2,065 168,160
Issuance of common shares
held in treasury (24) (27) 460 436
Net income 25,083 25,083
Dividends (3,559) (3,559)
Amortization of unearned
compensation 24 24
Foreign currency translation
adjustment 2,017 2,017
Issuance of Class A
Convertible Preferred Stock 195 $177,255 177,255
Issuance of warrants 14,434 14,434
Options outstanding (333) (333)
---- ----
Balance, September 30, 1995 195 $177,255 21,082 $211 $207,551 $35,399 (2,388) $(40,981) $4,082 $383,517
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
On September 20, 1994, the shareholders voted to reincorporate Scotts from
Delaware to Ohio. As a result of the reincorporation, The Scotts Company,
a Delaware corporation, merged into The Scotts Company ("Scotts Ohio"), an
Ohio corporation. Immediately following the consummation of the merger,
The O. M. Scott & Sons Company was merged into Scotts Ohio. The Scotts
Company ("Scotts") and its wholly-owned subsidiaries, Hyponex Corporation
("Hyponex"), Republic Tool and Manufacturing Corp. ("Republic"),
Scotts-Sierra Horticultural Products Company ("Sierra") and Scotts'
Miracle-Gro Products, Inc. ("Miracle-Gro"), (collectively, the "Company"),
are engaged in the manufacture and sale of lawn care and garden products.
All material intercompany transactions have been eliminated.
INVENTORIES
Inventories are principally stated at the lower of cost or market,
determined by the FIFO method; certain inventories of Hyponex (primarily
organic products) are accounted for by the LIFO method. At September 30,
1994 and 1995, approximately 31% and 25% of inventories, respectively, are
valued at the lower of LIFO cost or market. Inventories include the cost
of raw materials, labor and manufacturing overhead.
The Company makes provisions for obsolete or slow-moving inventories as
necessary to properly reflect inventory value. Inventories, net of
provisions of $6,108,000 and $6,711,000 as of September 30, 1994 and 1995,
respectively, consisted of:
(in thousands) 1994 1995
---- ----
Finished Goods ....................... $ 55,102 $ 72,551
Raw Materials ........................ 52,639 71,624
--------- ---------
FIFO Cost ............................ 107,741 144,175
LIFO Reserve ......................... (1,105) (222)
--------- ---------
$ 106,636 $ 143,953
========= =========
REVENUE RECOGNITION
Revenue generally is recognized when products are shipped. For certain
large multi-location customers, revenue is recognized when products are
shipped to intermediate locations and ownership is acknowledged by the
customer.
ADVERTISING AND CONSUMER GUARANTEE
The Company has a cooperative advertising program with retailers whereby
the Company reimburses retailers for the qualifying portion of their
advertising costs. Such advertising allowances are based on the timing of
orders and deliveries. Retailers are also offered allowances for promotion
of Scotts' products in the retail store. The Company provides for the cost
of these programs in the period the sales to retailers occur. All other
advertising costs are expensed as incurred.
The Company accrues amounts for product non-performance claims by
consumers under the Company's product guarantee program. The provision is
determined by applying an experience rate to sales in the period the
related products are shipped to retailers.
INVESTMENTS IN UNCONSOLIDATED BUSINESSES
The Company's investments in affiliated companies which are not majority
owned or controlled are accounted for using the equity method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including significant improvements, are
stated at cost. Expenditures for maintenance and repairs are charged to
operating expenses as incurred. When properties are retired, or otherwise
disposed of, the cost of the asset and the related accumulated
depreciation are removed from the accounts.
Depletion of applicable land is computed on the units-of-production
method. Depreciation of other property, plant and equipment is provided on
the straight-line method and is based on the estimated useful economic
lives of the assets as follows:
Land improvements 10-25 years
Buildings 10-40 years
Machinery and equipment 3-15 years
Furniture and fixtures 6-10 years
Property, plant and equipment at September 30, 1994 and 1995 consisted of
the following:
(in thousands)
1994 1995
---- ----
Land and improvements ........................ $ 21,856 $ 27,796
Buildings .................................... 41,313 45,032
Machinery and equipment ...................... 111,639 136,213
Furniture and fixtures ....................... 8,861 10,262
Construction in progress ..................... 24,340 11,916
-------- --------
208,009 231,219
Less accumulated depreciation ................ 67,904 82,465
-------- --------
$140,105 $148,754
Property subject to capital leases in the amount of $1,270,000 and
$264,000 (net of accumulated amortization of $2,303,000 in 1994 and $2,042,000
in 1995) has been included in machinery and equipment at September 30, 1994
and 1995, respectively.
The Company capitalized interest costs of $321,000 in fiscal 1994 and
$194,000 in fiscal 1995 as part of the cost of major asset construction
projects.
RESEARCH AND DEVELOPMENT
Significant costs are incurred each year in connection with research and
development programs that are expected to contribute operating profits in
future years. All costs associated with research and development are
charged to expense as incurred.
INTANGIBLE ASSETS
Goodwill arising from business acquisitions is amortized over 40 years on
a straight-line basis. Other intangible assets consist primarily of
patents and debt issuance costs. Debt issuance costs are being amortized
over the terms of the various agreements. Patents and trademarks are being
amortized on a straight-line basis over periods varying from 7 to 40
years. Accumulated amortization at September 30, 1994 and 1995 was
$42,438,000 and $52,182,000, respectively.
During the year ended September 30, 1994, the Company incurred $5.1
million of debt issuance costs related to the issuance of Term Debt and 9
7/8% Senior Subordinated Notes and recognized an extraordinary charge of
$992,000, net of income taxes of $662,000, for unamortized debt issuance
costs in connection with certain debt prepayments. During the year ended
September 30, 1995, the Company incurred approximately $500,000 of debt
issuance costs related to its Fourth Amended and Restated Credit
Agreement.
Company management periodically assesses the recoverability of goodwill,
trademarks and other intangible assets by determining whether the
amortization of such assets over the remaining lives can be recovered
through projected undiscounted net cash flows generated by such assets. In
1995, goodwill was reduced by $3,485,000 related to the disposition of the
Peters U.S. consumer water-soluble fertilizer business.
FOREIGN CURRENCY
The Company enters into forward foreign exchange and currency options
contracts to hedge its exposure to fluctuation in foreign currency
exchange rates. These contracts generally involve the exchange of one
currency for a second currency at some future date. Counterparties to
these contracts are major financial institutions. Gains and losses on
these contracts generally offset gains and losses on the assets,
liabilities and transactions being hedged.
Realized and unrealized foreign exchange gains and losses are recognized
and offset foreign exchange gains or losses on the underlying exposures.
Unrealized gains and losses that are designated and effective as hedges on
such transactions are deferred and recognized in income in the same period
as the hedged transactions. The net unrealized gain deferred totaled
$2,000 at September 30, 1995.
At September 30, 1995, the Company's European operations had foreign
exchange risk in various European currencies tied to the Dutch guilder.
These currencies are the Australian Dollar, Belgian Franc, German Mark,
Spanish Peseta, French Franc, British Pound and the U.S. Dollar. The
Company's U.S. operations have foreign exchange rate risk in the Canadian
Dollar, the Dutch Guilder and the British Pound which are tied to the U.S.
Dollar. As of September 30, 1995, the Company had outstanding forward
foreign exchange contracts with a contract value of approximately
$25,100,000. These contracts have maturity dates ranging from October 3,
1995 to October 31, 1995.
All assets and liabilities in the balance sheets of foreign subsidiaries
whose functional currency is other than the U.S. dollar are translated
into United States dollar equivalents at year-end exchange rates.
Translation gains and losses are accumulated as a separate component of
shareholders' equity. Income and expense items are translated at average
monthly exchange rates. Cumulative foreign currency translation gain was
$2,065,000 and $4,082,000 as of September 30, 1994 and 1995, respectively.
Foreign currency transaction gains and losses are included in determining
net income. In fiscal 1993, 1994 and 1995, the Company recorded foreign
currency transaction losses in other expenses of $196,000, $491,000 and
$944,000, respectively. The cash flows related to these gains and losses
are classified in the statement of cash flows, as part of cash flows from
operating activities.
INCOME TAXES
The Company uses the liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of
the assets and liabilities using enacted tax rates.
U.S. federal and state income taxes and foreign taxes are provided
currently on the undistributed earnings of foreign subsidiaries, giving
recognition to current tax rates and applicable foreign tax credits.
NET INCOME PER COMMON SHARE
Net income per common share is based on the weighted-average number of
common shares and common share equivalents (stock options, convertible
preferred stock and warrants) outstanding each period.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to fiscal 1995 classifications.
2. MERGERS AND ACQUISITIONS
REPUBLIC
Effective November 19, 1992, the Company acquired Republic headquartered
in Carlsbad, California. Republic designs, develops, manufactures and
markets lawn and garden equipment with the substantial majority of its
revenue derived from the sale of its products to mass merchandisers, home
centers and garden outlets in the United States. The purchase price of
approximately $16,366,000 was financed under the Company's revolving
credit agreement.
The acquisition was accounted for using the purchase method. Accordingly,
the purchase price was allocated among the assets acquired and liabilities
assumed based on their estimated fair values at the date of acquisition.
The excess of purchase price over the estimated fair values of the net
assets acquired ("goodwill") of approximately $6,400,000 is being
amortized on a straight-line basis over 40 years.
Republic's results of operations have been included in the Company's
Consolidated Statements of Income since November 19, 1992. As such, the
Company's fiscal 1993 pro forma results of operations are not materially
different from actual results and are therefore not presented.
SIERRA
Effective December 16, 1993, the Company completed the acquisition of
Grace-Sierra Horticultural Products Company (all further references to
Grace-Sierra, now known as Scotts-Sierra Horticultural Products Company,
will be made as "Sierra") for an aggregate purchase price of approximately
$121,221,000, including transaction costs of $1,221,000. Additionally, the
Company incurred $2,261,000 of deferred financing fees related to its
financing of the acquisition. Sierra is a leading international
manufacturer and marketer of specialty fertilizers and related products
for the nursery, greenhouse, golf course and consumer markets. Sierra
manufactures controlled-release fertilizers in the United States and the
Netherlands, as well as water-soluble fertilizers and specialty organics
in the United States. Approximately one-quarter of Sierra's net sales are
derived from European and other international markets; approximately
one-quarter of Sierra's assets are internationally based. The purchase
price was financed under an amendment to the Company's revolving credit
agreement, whereby term debt commitments available thereunder were
increased to $195,000,000.
The acquisition was accounted for using the purchase method. Accordingly,
the purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. The excess of purchase price over the estimated fair value of
the net assets acquired ("goodwill") of approximately $65,755,000 is being
amortized on a straight-line basis over 40 years. Sierra's results of
operations have been included in the Consolidated Statements of Income
from the acquisition date.
MIRACLE-GRO
Effective May 19, 1995, the Company completed the merger transactions with
Stern's Miracle-Gro Products, Inc. ("Miracle-Gro Products") and affiliated
companies (the "Miracle-Gro Companies") for an aggregate purchase price of
approximately $195,689,000. The consideration was comprised of
$195,000,000 face amount of Class A Convertible Preferred Stock of Scotts
with a fair value of $177,255,000, warrants to purchase 3,000,000 common
shares of Scotts with a fair value of $14,434,000 and $4,000,000 of
estimated transaction costs. The Preferred Stock has a dividend yield of
5.0% and is convertible into common shares of Scotts at $19.00 per share.
The warrants are exercisable for 1,000,000 common shares at $21.00 per
share, 1,000,000 common shares at $25.00 per share and 1,000,000 common
shares at $29.00 per share. The fair value of the warrants has been
included in capital in excess of par value in the Company's September 30,
1995 balance sheet.
The Miracle-Gro Companies are engaged in the marketing and distribution of
plant foods and lawn and garden products primarily in the United States
and Canada and Europe. On December 31, 1994, Miracle-Gro Products Limited
("MG Limited"), a subsidiary of Miracle-Gro, entered into an agreement to
exchange its equipment and a license for distribution of Miracle-Gro
products in certain areas of Europe for a 32.5% equity interest in a U.K.
based garden products company. The initial period of the license is five
years and may be extended up to twenty years from January 1, 1995, under
certain circumstances set forth in the license agreement. MG Limited is
entitled to annual royalties for the first five years of the license.
The Federal Trade Commission ("FTC"), in granting permission for the
acquisition of the Miracle-Gro Companies, required that the Company divest
its Peters line of consumer water soluble fertilizers. See Note 3.
The merger transactions have been accounted for using the purchase method.
Accordingly, the purchase price has been allocated to the assets acquired
and liabilities assumed based on their estimated fair values at the date
of the acquisition. The excess of purchase price over the estimated fair
values of the net assets acquired ("goodwill") of approximately
$82,182,000 and trademarks of $90,000,000 are being amortized on a
straight-line basis over 40 years. The Miracle-Gro Companies results of
operations have been included in the Consolidated Statements of Income
from the acquisition date of May 19, 1995.
The following pro forma results of operations give effect to the above
Sierra acquisition as if it had occurred on October 1, 1992 and the
Miracle-Gro Companies acquisition as if it had occurred on October 1,
1993.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
YEAR ENDED SEPTEMBER 30
1994 1995
Net sales $726,231 $821,189
======= =======
Income before extraordinary
item and cumulative effect
of accounting changes $ 36,607 $ 35,670
======== ========
Net income $ 35,615 $ 35,670
======== ========
Income per common share
before extraordinary item
and cumulative effect of
accounting changes $ 1.26 $ 1.22
========== =========
Net income per common share $ 1.23 $ 1.22
========== ==========
On a pro forma basis, The Miracle-Gro Companies contributed net sales of
$99,066,000 and $110,225,000, net income of $12,839,000 and $13,026,000
and net income (loss) per common share of $(.01) and $.02 for the years
ended September 30, 1994 and 1995, respectively. For purposes of computing
net income per common share, the Class A Convertible Preferred Stock is
considered a common share equivalent. Pro forma primary net income per
common share for the years ended September 30, 1994 and 1995 are
calculated using the weighted average common shares outstanding for Scotts
of 18,785,000 and 22,617,000, respectively, and the common shares that
would have been issued assuming conversion of Class A Convertible
Preferred Stock at the beginning of the year to 10,263,000 common shares.
The computation of pro forma primary net income per common share assuming
reduction of net income for preferred dividends and no conversion of Class
A Convertible Preferred Stock was anti-dilutive.
The pro forma information provided does not purport to be indicative of
actual results of operations if the Sierra acquisition had occurred as of
October 1, 1992 and the Miracle-Gro Companies acquisition had occurred as
of October 1, 1993, and is not intended to be indicative of future results
or trends.
3. PETERS DIVESTITURE
On July 28, 1995, the Company divested its Peters line of U.S. consumer
water-soluble fertilizers for approximately $9,966,000. The gain on the
divestiture was approximately $4,200,000. In connection with this
transaction, the Company has entered into a supply agreement through
August 26, 1997 in which the Company will produce all product requirements
for the buyer at cost plus an agreed upon profit percentage. The
transaction is pursuant to a FTC consent order which the Company entered
into in connection with its merger transactions with the Miracle-Gro
Companies.
4. OTHER EXPENSES
Other expenses consisted of the following for the years ended September
30:
(in thousands)
1993 1994 1995
---- ---- ----
Foreign currency loss ................... $ 196 $ 168 $ 337
Royalty income .......................... (980) (1,726) (857)
Amortization ............................ 1,625 3,888 5,309
Gain on Peters divestiture .............. (4,227)
Equity in loss of unconsolidated
businesses .......................... 1,216
Other ................................... (181) (47) (218)
------- ------- -------
Total ................................... $ 660 $ 2,283 $ 1,560
======= ======= =======
5. PENSION
Scotts Ohio, Sierra and Scotts' Miracle-Gro have defined benefit pension
plans covering substantially all full-time associates who have completed
one year of eligible service and reached the age of 21. The benefits under
these plans are based on years of service and the associates' average
final compensation for the Scotts Ohio plan and for Sierra salaried
employees and stated amounts for Sierra hourly employees. The Company's
funding policy, consistent with statutory requirements and tax
considerations, is based on actuarial computations using the Projected
Unit Credit method.
The following table sets forth the plans' funded status and the related
amounts recognized in the Consolidated Balance Sheets.
(in thousands)
September 30,
1994 1995
---- ---------------
Over- Under-
funded funded
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
Vested benefits $(29,768) $(31,436) $(1,593)
Nonvested benefits (5,093) (5,241) (496)
Additional obligation for
projected compensation
increases (5,919) (6,669) (130)
------ ------ ----
Projected benefit obligation for
service rendered to date (40,780) (43,346) (2,219)
Plan assets at fair value, primarily
corporate bonds, U.S. bonds and 38,901 40,287 1,468
cash equivalents ------ ------ -----
Plan assets less than projected benefit
obligations (1,879) (3,059) (751)
Unrecognized net asset being amortized
over 11 1/2 years (234) (297) 16
Unrecognized net loss 4,137 5,197 148
----- ----- ---
Prepaid pension costs $ 2,024 $1,841 $ (587)
======== ====== =======
Pension cost includes the following components:
YEAR ENDED SEPTEMBER 30,
(in thousands) 1993 1994 1995
---- ---- ----
Service cost ......................... $ 1,571 $ 1,685 $ 1,732
Interest cost ........................ 2,628 2,968 3,280
Actual return on plan assets ......... (2,774) (3,092) (5,104)
Net amortization and deferral ........ (18) (53) 2,046
------- ------- -------
Net pension cost ................. $ 1,407 $ 1,508 $ 1,954
======= ======= =======
The weighted average settlement rate used in determining the actuarial
present value of the projected benefit obligation was 8% as of September
30, 1993, 1994 and 1995. Future compensation was assumed to increase 4%
annually for fiscal 1993, 1994 and 1995. The expected long-term rate of
return on plan assets was 9% in fiscal 1993, 1994 and 1995.
The Company has a non-qualified supplemental pension plan covering certain
employees, which provides for incremental pension payments from the
Company's funds so that total pension payments equal amounts that would
have been payable from the Company's pension plans if it were not for
limitations imposed by income tax regulations. The projected benefit
obligation relating to this unfunded plan totaled $1,498,000 and
$1,240,000 at September 30, 1994 and 1995, respectively. Pension expense
for the plan was $171,000 and $445,000 in 1994 and 1995, respectively.
6. ASSOCIATE BENEFITS
The Company provides comprehensive major medical benefits to some of its
retired associates and their dependents. Substantially all of the
Company's associates become eligible for these benefits if they retire at
age 55 or older with more than ten years of service. The plan requires
certain minimum contributions from retired associates and includes
provisions to limit the overall cost increases the Company is required to
cover. The Company funds its portion of retiree medical benefits on a
pay-as-you-go basis.
Effective October 1, 1992, the Company changed its method of accounting
for postretirement benefit costs other than pensions by adopting SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." The Company elected to immediately recognize the cumulative
effect of the change in accounting which resulted in a charge of
$14,932,000, net of income taxes, of $9,348,000, or $.76 per share. In
addition to the cumulative effect, the Company's retiree medical costs
applying the new accounting method increased $1,437,000, net of income
taxes, of $929,000, or $.07 per share, during fiscal 1993 as a result of
the change in accounting. Prior to October 1, 1993, the Company effected
several changes in plan provisions, primarily related to current and
ultimate levels of retiree and dependent contributions. Current retirees
will be entitled to benefits existing prior to these plan changes. These
plan changes resulted in a reduction in unrecognized prior service cost,
which is being amortized over future years.
Net periodic postretirement benefit costs for fiscal 1994 and 1995
included the following components:
1994 1995
---- ----
(in thousands)
Service cost - benefits attributed to
associate service during the year $419 $428
service during the year
Interest cost on accumulated
postretirement benefit obligation 1,276 1,446
Amortization of prior service costs and
gains from changes in assumptions (921) (904)
---- ----
Net periodic postretirement
benefit cost $774 $970
==== ====
The following table sets forth the retiree medical plan status reconciled
to the amount included in the Consolidated Balance Sheets, as of September
30, 1994 and 1995.
1994 1995
---- ----
(in thousands)
Accumulated postretirement benefit
obligation:
Retirees ....................................... $ 7,136 $ 10,034
Fully eligible active plan participants ........ 437 395
Other active plan participants ................. 8,789 9,071
------- --------
Total accumulated postretirement
benefit obligation ............................. 16,362 19,500
Unrecognized prior service cost .................... 8,590 7,686
Unrecognized gain (loss) from
changes in assumptions ......................... 2,062 (27)
------- --------
Accrued postretirement benefit cost ................ $27,014 $ 27,159
======= ========
The discount rates used in determining the accumulated postretirement
benefit obligation were 8.5% and 8.0% in 1994 and 1995, respectively. For
measurement purposes, a 14% annual rate of increase in per capita cost of
covered retiree medical benefits was assumed for fiscal 1994 and a 12%
annual rate for 1995; the rate was assumed to decrease gradually to 5.5%
through the year 2014 and remain at that level thereafter. A 1% increase
in the health care cost trend rate assumptions would increase the
accumulated postretirement benefit obligation as of September 30, 1994 and
1995 by $957,000 and $1,072,000, respectively.
Both Scotts Ohio and Hyponex have defined contribution profit sharing
plans. Both plans provide for associates to become participants following
one year of service. The Hyponex plan also requires associates to have
reached the age of 21 for participation. The plans provide for annual
contributions which are entirely at the discretion of the respective Board
of Directors.
Contributions are allocated among the participants employed as of the last
day of the calendar year, based upon participants' earnings. Each
participant's share of the annual contributions vest according to the
provisions of the plans. The Company has provided a profit sharing
provision for the plans of $1,993,000, $2,097,000 and $1,498,000 for
fiscal 1993, 1994 and 1995, respectively. The Company's policy is to
deposit the contributions with the trustee in the following year.
Sierra has a savings and investment plan ("401K Plan") for certain
salaried U.S. employees. Participants may make voluntary contributions to
the plan between 2% and 16% of their compensation. Sierra contributes the
lesser of 50% of each participant's contribution or 3% of each
participant's compensation. Sierra's contribution for 1994 and 1995 were
$99,000 and $70,000, respectively.
The Company is self-insured for certain health benefits up to $200,000 per
occurrence per individual. The cost of such benefits is recognized as
expense in the period the claim occurred. This cost was $6,662,000,
$6,177,000 and $7,861,000 in 1993, 1994 and 1995, respectively. The
Company is self-insured for State of Ohio workers compensation up to
$500,000 per claim. The cost for workers compensation was $268,000,
$297,000 and $331,000 in 1993, 1994 and 1995, respectively. Claims in
excess of stated limits of liability and claims for workers compensation
outside of the State of Ohio are insured with commercial carriers. The
Company had an accrued vacation liability of $4,903,000 and $4,791,000 at
September 30, 1994 and 1995, respectively.
In November 1992, the Financial Accounting Standards Board issued SFAS No.
112, "Employers' Accounting for Postemployment Benefits", which changes
the prevalent method of accounting for benefits provided after employment
but before retirement. Adoption of this standard in the first quarter of
fiscal 1995 had no material effect on the financial statements.
7. DEBT
(in thousands)
1994 1995
---- ----
Revolving credit line ............................ $ 53,416 $172,597
9 7/8% Senior Subordinated Notes $100
million face amount............................ 99,221 99,307
face amount
Term loan ........................................ 93,598 --
Capital lease obligations and other .............. 1,066 639
-------- --------
247,301 272,543
Less current portions ............................ 27,171 518
-------- --------
$220,130 $272,025
======== ========
Maturities of term debt for the next five years are as follows:
(in thousands)
1996 $518
1997 140
1998 78
1999 -
2000 and thereafter 272,500
On March 17, 1995, the Company entered into the Fourth Amended and
Restated Credit Agreement ("Agreement") with Chemical Bank ("Chemical")
and various participating banks. The Agreement provides, on an unsecured
basis, up to $375 million to the Company, comprised of an uncommitted
advance facility and a committed revolving credit facility through the
scheduled termination date of March 31, 2000. The Agreement contains a
requirement limiting the maximum amount borrowed to $225 million for a
minimum of 30 consecutive days each fiscal year.
Interest pursuant to the commercial paper/competitive advance facility is
determined by auction. Interest pursuant to the revolving credit facility
is at a floating rate initially equal, at the Company's option, to the
Alternate Base Rate as defined in the Agreement without additional margin
or the Eurodollar Rate as defined in the Agreement plus a margin of .3125%
per annum, which margin may be decreased to .25% or increased up to .625%
based on the changes in the unsecured debt ratings of the Company.
Applicable interest rates for the various borrowing facilities ranged from
5.9% to 6.2% at September 30, 1995. The Agreement provides for the payment
of an annual administration fee of $100,000 and a facility fee of .1875%
per annum, which fee may be reduced to .15% or increased up to .375% based
on the unsecured debt ratings of the Company.
The Agreement contains certain financial and operating covenants,
including maintenance of interest coverage ratios, maintenance of
consolidated net worth, and restrictions on additional indebtedness and
capital expenditures. Dividends and stock repurchases are restricted only
in the event of default. The Company was in compliance with all required
covenants at September 30, 1995.
At September 30, 1995, the Company had available an unsecured $2,000,000
line of credit with a bank, which is renewable annually, of which
$1,916,000 and $97,000 was outstanding at September 30, 1994 and 1995,
respectively.
On July 19, 1994, the Company issued $100,000,000 9 7/8% Senior
Subordinated Notes. Net proceeds were $96,354,000, after original issue
discount of $788,000 and expenses of $2,858,000. The Notes are subject to
redemption, at the option of the Company, in whole or in part at any time
on or after August 1, 1999 at a declining premium to par until 2001 and at
par thereafter and are not subject to sinking fund requirements. The fair
market value of the 9 7/8% Senior Subordinated Notes, estimated based on
the quoted market prices for same or similar issues was approximately
$107,203,000 at September 30, 1995.
8. SHAREHOLDERS' EQUITY
STOCK
(in thousands)
1994 1995
---- ----
Class A Convertible Preferred Stock, no par value:
Authorized None 195,000 shares
Issued None 195,000 shares
Common shares, no par value
Authorized 35,000 shares 50,000 shares
Issued 21,082 shares 21,082 shares
On February 23, 1993, the Company purchased all of the shares of Class A
Common Stock held by a fund managed by Clayton, Dubilier & Rice, Inc. In
aggregate, 2,414,895 shares of Class A Common Stock were purchased for
approximately $41,441,000, including transaction costs. As a result of
this transaction, 18,667,064 and 18,693,934 Common Shares were outstanding
as of September 30, 1994 and 1995, respectively.
Effective with the Miracle-Gro Companies merger transactions, $195,000,000
face amount of Class A Convertible Preferred Stock was issued as part of
the purchase price. This Preferred Stock is convertible into 10,263,158
common shares at $19.00 per common share. Additionally, warrants to
purchase 3,000,000 common shares of Scotts were issued as part of the
purchase price. The warrants are exercisable for 1,000,000 common shares
at $21.00 per share, 1,000,000 common shares at $25.00 per share and
1,000,000 common shares at $29.00 per share. The exercise term for the
warrants expires September 2003. The fair value of the warrants has been
included in capital in excess of par value in the Company's September 30,
1995 balance sheet.
The Class A Convertible Preferred Stock has certain voting restrictions
and limits on the ability of the shareholders to acquire additional voting
securities of the Company. The Class A Convertible Preferred Stock is
subject to redemption five years from the date of issuance.
Both the Class A Convertible Preferred Stock and the warrants have limits
on transferability.
On November 4, 1992, Scotts adopted The Scotts Company 1992 Long Term
Incentive Plan (the "Plan"). The Plan was approved by the shareholders at
Scotts' annual meeting on February 25, 1993. Under the Plan, stock
options, stock appreciation rights and performance share awards may be
granted to officers and other key employees of the Company. The Plan also
provides for Board members, who are neither employees of the Company nor
associated with Clayton, Dubilier & Rice, Inc., to receive stock options.
The maximum number of common shares that may be issued under the Plan is
1,700,000, plus the number of shares surrendered to exercise options
(other than director options) granted under the Plan, up to a maximum of
1,000,000 surrendered shares.
In addition, pursuant to various employment agreements, the Company
granted 300,000 stock options in fiscal 1993.
Aggregate stock option activity consists of the following:
YEAR ENDED SEPTEMBER 30,
1993 1994 1995
---- ---- ----
Options outstanding at October 1 136,364 586,289 1,364,589
Options granted 449,925 942,354 435,420
Options exercised - (8,529) (26,870)
Options canceled - (155,525) (111,014)
--------------- ---------- -----------
Options outstanding at September 30 586,289 1,364,589 1,662,125
======= ========= =========
Options exercisable at September 30 90,910 204,422 575,938
=========== ============ ============
Option prices per share:
Granted $16.25-$18.75 $17.25-$19.375 $15.50-$21.375
====== ====== ====== ======= ====== =======
Exercised - $18.75 $16.25
====== ======
During fiscal 1993 and 1994, 128,880 and 117,220, respectively, of
performance share awards were granted. These awards entitle the grantee to
receive shares or, at the grantee's election, the equivalent value in cash
or stock options, subject to stock ownership requirements. These awards
are conditioned on the attainment of certain performance and other
objectives established by the Compensation and Organization Committee of
Scotts' Board of Directors.
Compensation for certain stock options results from the difference between
the grant price and market price at the date of grant, and is recognized
over the vesting period of the options. Compensation for performance share
awards is initially measured at the grant date based upon the current
market value of the common shares, with adjustments made quarterly for
market price fluctuations. The Company recognized compensation expense for
stock options and performance share awards of $635,000 and $0 in fiscal
1993 and 1994, respectively. In 1995, the Plan was amended to cancel
outstanding performance share awards. Previously recognized compensation
of $300,000 was recognized as a reduction of compensation expense.
Pursuant to an employment agreement, an officer of Scotts purchased 45,454
common shares at a purchase price of $9.90 per share in January 1992. The
Company has recognized $118,000 of unearned compensation equivalent to the
difference between the fair market value and the purchase price of the
common shares as a charge to capital in excess of par value. This unearned
compensation is being amortized on a straight line basis over the period
of the employment agreement.
A significant portion of the price paid by certain officers and management
associates is financed by a major bank. The Company has guaranteed the
full and prompt payment of debt outstanding by management investors to
purchase common shares of approximately $230,000, $140,000 and $-0- at
September 30, 1993, 1994 and 1995, respectively.
In December 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" which changes the
measurement, recognition and disclosure standards for stock-based
compensation. Management is currently evaluating the provisions of SFAS
No. 123 and at this time, the effect of adopting SFAS No. 123 on the
results of operations and the method of disclosure has not been
determined.
9. NET INCOME PER COMMON SHARE
Net income per common share is based on the weighted average number of
common shares and common share equivalents (stock options, convertible
preferred stock and warrants) outstanding each period.
The following table presents information necessary to calculate net income
per common share for fiscal years ended September 30, 1993, 1994 and 1995.
YEAR ENDED SEPTEMBER 30,
(in thousands) 1993 1994 1995
---- ---- ----
Common shares outstanding
Weighted average outstanding ............ 19,607 18,663 18,670
Common share equivalents .................. 80 122 3,947
------- ------- ------
Adjusted outstanding ...................... 19,687 18,785 22,617
------- ------- ------
Net income
Net income before extraordinary
items and cumulative effect of
accounting changes ..................... $ 1.07 $ 1.27 $ 1.11
Extraordinary Items
Loss on early extinguishment
of debt, net of tax .................... -- (0.05) --
Cumulative effect of changes
in accounting for
postretirement
benefits, net of tax and income
taxes .................................. (0.67) -- --
------- ------- ------
Net income per common share ............... $ 0.40 $ 1.22 $ 1.11
------- ------- ------
For 1993, 1994 and 1995, fully diluted net income per common share is
considered to be the same as primary net income per common share as it was
not materially different than primary net income per common share.
10. INCOME TAXES
The Company adopted SFAS No. 109 effective October 1, 1992, resulting in a
benefit of $1,775,000 being reported as a cumulative effect of accounting
change in the fiscal 1993 Consolidated Statement of Income. Assets
recorded in prior business combinations net-of-tax were adjusted to
pre-tax amounts, resulting in recognition of $1,501,000 of deferred tax
liabilities at the date of adoption.
The provision for income taxes consists of the following:
(in thousands) YEAR ENDED SEPTEMBER 30,
1993 1994 1995
---- ---- ----
Currently Payable:
Federal ................... $ 14,537 $ 7,400 $ 9,373
State ..................... 1,400 2,131 2,634
Foreign ................... -- 2,376 4,487
Deferred:
Federal ................... (11,694) 4,290 (724)
State ..................... (1,046) 1,088 (177)
-------- ------- --------
Income Tax Expense ............ $ 3,197 $17,285 $ 15,593
======== ======= ========
Income tax expense is included in the financial statements as follows:
(in thousands)
Operations $14,320 $17,947 $15,593
Cumulative effect of change in
accounting principle (11,123) - -
Extraordinary items - (662) -
----------- -------- ----------
Income Tax Expense $ 3,197 $17,285 $15,593
======== ======= =======
Deferred income taxes for fiscal 1994 and 1995 reflect the impact of
differences between the amounts of assets and liabilities for financial
reporting purposes and such amounts as determined by tax regulations.
The components of the net deferred tax asset (liability) are as follows:
(in thousands) SEPTEMBER 30,
-------------
1994 1995
---- ----
ASSETS
Accounts receivable ........................ $ 987 $ 1,024
Inventory .................................. 1,816 3,453
Accrued expenses ........................... 7,649 7,486
Postretirement benefits .................... 10,576 10,633
Other ...................................... 4,166 4,776
-------- --------
Gross deferred tax assets .................. $ 25,194 $ 27,372
-------- --------
LIABILITIES
Property and equipment ..................... (16,511) (18,288)
Taxes on repatriated foreign
earnings ................................ (500) --
Gross deferred tax liabilities ............. (17,011) (18,288)
-------- --------
Net asset .................................. $ 8,183 $ 9,084
======== ========
The net current and non-current components of deferred income taxes
recognized in the Consolidated Balance Sheets at September 30 are:
(in thousands) 1994 1995
---- ----
Net current asset .............................. $ 10,452 $ 12,868
Net non-current asset (liability) .............. (2,269) (3,784)
-------- --------
Net asset ...................................... $ 8,183 $ 9,084
======== ========
A reconciliation of the Federal corporate income tax rate and the
effective tax rate on income before income taxes is summarized below:
YEAR ENDED SEPTEMBER 30,
1993 1994 1995
---- ---- ----
Statutory income tax rate ................... 35.0% 35.0% 35.0%
Pension amortization ........................ 0.7 0.1 0.1
Peters sale ................................. - - (3.0)
Goodwill amortization and other
permanent differences
resulting ................................... 4.7 2.1 3.4
from purchase accounting
State taxes, net of federal ................. 3.4 5.6 4.4
benefit
Reversal of previous tax
contingencies ........................... - - (3.9)
Other ....................................... (3.3) 0.1 2.3
---- --- ---
Effective income tax rate ............... 40.5% 42.9% 38.3%
==== ==== ====
The Company acquired certain tax credit carryforwards in connection with
its acquisition of Sierra. Net operating loss carryforwards in the U.S.
total $2,965,000 and expire through 2007. Net operating loss carryforwards
in foreign jurisdictions total $1,059,000 and expire through 2000. The use
of these acquired carryforwards is subject to limitations imposed by the
Internal Revenue Code.
11. LEASES
The Company leases buildings, land and equipment under various
noncancellable lease agreements for periods of two to six years. The lease
agreements generally provide that the Company pay taxes, insurance and
maintenance expenses related to the leased assets. Certain lease
agreements contain purchase options. At September 30, 1995, future minimum
lease payments were as follows:
Year Ending Capital Operating
September 30, Leases Leases Total
(In Thousands)
1996 $481 $10,106 $10,587
1997 168 9,146 9,314
1998 72 6,608 6,680
1999 -- 4,151 4,151
2000 and thereafter -- 3,155 3,155
---- ------- -------
Total minimum 721 $33,166 $33,887
lease payments ======= =======
Less: Amount
representing
interest 82
--
Present value
of net minimum
lease payments $639
====
The Company also leases transportation and production equipment under
various one-year operating leases, which provide for the extension of the
initial term on a monthly or annual basis. Total rental expenses for
operating leases were $9,125,000, $12,914,000 and $14,660,000 for fiscal
1993, 1994 and 1995, respectively.
12. COMMITMENTS AND CONTINGENCIES
Seed production agreements obligate the Company to make future purchases
based on estimated yields. Seed purchases under production agreements for
fiscal 1993, 1994 and 1995 were approximately $9,281,000, $6,508,000 and
$6,934,903, respectively. At September 30, 1995, estimated annual seed
purchase commitments were as follows:
Year Ending
SEPTEMBER 30,
(IN THOUSANDS)
1996 $12,310
1997 5,780
1998 3,868
1999 1,706
The Company had a contractual commitment to purchase neem-based
bioinsecticide. The commitment was a multi-year, take or pay arrangement.
The Company was relieved of the take or pay commitment during fiscal 1995
and reduced material costs by $1,137,500 representing liabilities related
to this contract.
Sierra has a supply agreement through 2000, subject to renewal thereafter,
under which Sierra is required to purchase, at prices determined by
formulas, 100% of its requirements for vermiculite.
The Company is involved in various lawsuits and claims which arise in the
normal course of business. In the opinion of management, these claims
individually and in the aggregate are not expected to result in a material
adverse effect on the Company's financial position or results of
operations, however, there can be no assurance that future quarterly or
annual operating results will not be materially affected by final
resolution of these matters. The following details the more significant of
these matters.
In September, 1991, the Company was identified by the Ohio Environmental
Protection Agency (the "Ohio EPA") as a Potentially Responsible Party
("PRP") with respect to a site in Union County, Ohio (the "Hershberger
site") that has allegedly been contaminated by hazardous substances whose
transportation, treatment or disposal the Company allegedly arranged.
Pursuant to a consent order with the Ohio EPA, the Company, together with
four other PRP's identified to date, investigated the extent of
contamination in the Hershberger site. The results of the investigation
were that the site presents a low degree of risk and that the chemical
compounds which contribute to the risk are not compounds used by the
Company. Accordingly, the Company has elected not to participate in any
remediation which might be required at the site. As a result of the joint
and several liability of PRPs, the Company might possibly be subject to
financial participation in the costs of the remediation plan, if any.
However, management does not believe any such obligations would have a
significant adverse effect on the Company's results of operations or
financial conditions.
In July 1990, the Philadelphia district of the Army Corps of Engineers
directed that peat harvesting operations be discontinued at Hyponex's
Lafayette, New Jersey facility, and the Company complied. In May 1992, the
Department of Justice in the U.S. District Court for the District of New
Jersey, filed suit seeking a permanent injunction against such harvesting
at that facility and civil penalties. The Philadelphia District of the
Corps has taken the position that peat harvesting activities there require
a permit under Section 404 of the Clean Water Act. If the Corps' position
is upheld, it is possible that further harvesting of peat from this
facility would be prohibited. The Company is defending this suit and is
asserting a right to recover its economic losses resulting from the
government's actions. Management does not believe that the outcome of this
case will have a material adverse effect on the Company's operations or
its financial condition. Furthermore, management believes the Company has
sufficient raw material supplies available such that service to customers
will not be adversely affected by continued closure of this peat
harvesting operation.
Sierra is a PRP in connection with the Lorentz Barrel and Drum Superfund
Site in California, as a result of its predecessor having shipped barrels
to Lorentz for reconditioning or sale between 1967 and 1972. Many other
companies are participating in the remediation of this site, and issues
relating to the allocation of the costs have been resolved with the
Company being identified as a de minimis contributor. The Company settled
this matter by means of a one-time payment totalling $1,000 to the United
States EPA and the State of California. In addition, Sierra is a defendant
in a private cost-recovery action relating to the Novak Sanitary Landfill,
located near Allentown, Pennsylvania. By agreement with W. R. Grace-Conn.,
Sierra's liability is limited to a maximum of $200,000 with respect to
this site. The Company's management does not believe that the outcome of
these proceedings will in the aggregate have a material adverse effect on
its financial condition or results of operations.
Sierra is subject to potential fines in connection with certain EPA
labeling violations under the Federal Insecticide, Fungicide and
Rodenticide Act ("FIFRA"). The fines for such violations are based upon
formulas as stated in FIFRA. As determined by these formulas, Sierra's
maximum exposure for the violations is approximately $810,000. The
formulas allow for certain reductions of the fines based upon achievable
levels of compliance. Based upon anticipated levels of compliance,
management estimates Sierra's liability to be $200,000, which has been
accrued in the financial statements.
During 1993 and 1994, Miracle-Gro Products discussed with Pursell
Industries, Inc. ("Pursell") the feasibility of forming a joint venture to
produce and market a line of slow-release lawn food, and in October, 1993,
signed a non-binding heads of agreement. After the merger transactions
were announced, Pursell demanded that Miracle-Gro Products reimburse it
for monies allegedly spent by Pursell in connection with the proposed
project. Because Miracle-Gro Products does not believe that any such
monies are due or that any such joint venture ever was formed, on February
10, 1995, it instituted an action in the Supreme Court of the State of New
York, STERN'S MIRACLE-GRO PRODUCTS, INC. V. PURSELL INDUSTRIES, INC.,
Index No. 95-004131 (Nassau Co.) (the "New York Action"), seeking
declarations that, among other things, Miracle-Gro Products owed no monies
to Pursell relating to the proposed project and that no joint venture was
formed. Pursell moved to dismiss the New York Action in favor of the
Alabama action described below, which motion was granted August 7, 1995.
On March 2, 1995, Pursell instituted an action in the United States
District Court for the Northern District of Alabama, PURSELL INDUSTRIES,
INC. V. STERN'S MIRACLE-GRO PRODUCTS, INC., CV-95-C-0524-S (the "Alabama
Action"), alleging, among other things, that a joint venture was formed,
that Miracle-Gro Products breached an alleged joint venture contract,
committed fraud, and breached an alleged fiduciary duty owed Pursell by
not informing Pursell of negotiations concerning the merger transactions.
On December 18, 1995, Pursell filed an amended complaint in the Alabama
Action in which Scotts was named as an additional party defendant. The
amended complaint contains a number of allegations and seeks compensatory
damages in excess of $10 million, punitive damages of $20 million, treble
damages as allowed by law and injunctive relief with respect to the
advertising and trade dress allegations. The Company does not believe that
the amended complaint has any merit and intends to vigorously defend that
action.
13. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of trade accounts
receivable. The Company sells its consumer products to a wide variety of
retailers, including mass merchandisers, home centers, independent
hardware stores, nurseries, garden outlets, warehouse clubs and local and
regional chains. Professional products are sold to golf courses, schools
and sports fields, nurseries, lawn care service companies and growers of
specialty agriculture crops.
In 1993 and 1994, two customers accounted for 18.0% and 9.3% and 15.1%
and 9.5% of consolidated net sales, respectively. In 1995, three
customers account for 14.4%, 13.1%, and 5.9% of consolidated net sales.
No other customer accounted for more than 5% of consolidated net sales.
As of September 30, 1995, three accounts comprised 16.1% and 10.7% and
2.4% of outstanding trade accounts receivable. The Company performs a
credit review before extending credit to a customer. The Company
establishes its allowances for doubtful accounts based on factors
surrounding the credit risk of specific customers, historical trends and
other information.
14. RELATED PARTIES
Clayton, Dubilier & Rice, Inc., a private investment firm in which a
director of the Company is an owner, was paid $125,000 in 1993 by the
Company for financial advisory and management consulting services. These
services ceased effective with the Class A Common Stock purchase
described in Note 8.
As part of the merger transactions with the Miracle-Gro Companies, the
Company assumed debt of which $1,600,000 was payable to the Hagedorn
Family Fund. This amount has since been repaid.
15. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations for fiscal 1994 and 1995 (in thousands except share data):
Fiscal 1994 January 1 April 2 July 2 Sept. 30 Full Year
Net sales .............. $ 68,326 $207,424 $200,915 $129,674 $606,339
Gross profit ........... 30,962 98,324 96,376 60,947 286,609
Income (loss) before
extraordinary items .. (1,557) 13,013 9,405 3,014 23,875
Net income (loss) ...... (1,557) 13,013 9,405 2,022 22,883
Net income (loss) per
common share:
Income (loss) before
extraordinary item . (.08) .69 .50 .16 1.27
Net income (loss) per .. (.08) .69 .50 .11 1.22
common share
Common shares used in
net income per
common share computation 18,659 18,890 18,811 18,728 18,785
Net sales .............. $ 98,019 $236,092 $229,028 $169,698 $732,837
Gross profit ........... 44,499 112,202 108,513 73,254 338,468
Net income (loss)(1) ... (4,598) 13,793 13,026 2,862 25,083
Net income (loss) per
common share(1) ...... (.25) .73 .55 .02 1.11
Common shares used in
net income per
common share ....... 18,667 18,820 23,580 19,137 22,617
computation
(1) Net income (loss) for each of the first three quarters of fiscal 1995
have been restated to reflect a change in the timing of expense
recognition related to a promotional allowance offered to retailers
introduced for the first time in fiscal 1995. The impact is on timing of
marketing promotional expense recognition in the first three quarters of
the fiscal year and did not impact full year net income. The impact by
quarters is as follows: increased the loss for the quarter ended December
31, 1994 by $1,460 or $.08 per share; decreased net income for the
quarter ended April 1, 1995 by $1,021 or $.06 per share; and increased
net income for the quarter ended July 1, 1995 by $2,481 or $.10 per
share.
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Shareholders and Board of
Directors of The Scotts Company
Our report on the consolidated financial statements of The Scotts Company is
included on page F-2 of this Form 10-K. In connection with our audits of such
financial statements, we have also audited the financial statement schedules
listed in the index on page F-1 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the consolidated financial statements taken as a
whole, present fairly, in all material respects, the information required to
be included therein.
Coopers & Lybrand L. L. P.
Columbus, Ohio
November 15, 1995
THE SCOTTS COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the year ended September 30, 1993
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Balance at Additions charged to Deduction Balance at
beginning of period costs and expenses from reserves end of period
CLASSIFICATION
Valuation and qualifying accounts deducted from the assets to which they
apply:
Inventory reserve .................................. $3,159,000 $ 829,000 $ 177,000 $3,811,000
========== ========== ========== ==========
Allowance for doubtful accounts .................... $2,110,000 $1,409,000 $1,008,000 $2,511,000
========== ========== ========== ==========
Other valuation and qualifying account:
Product guarantee .................................. $ 200,000 $ 620,000 $ 690,000 $ 130,000
========== ========== ========== ==========
THE SCOTTS COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the year ended September 30, 1994
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Balance at Additions charged to Deduction Balance at
beginning of period costs and expenses from reserves end of period
CLASSIFICATION
Valuation and qualifying accounts deducted from the assets to which they
apply:
Inventory reserve .................................. $3,811,000 $2,987,000 $ 690,000 $6,108,000
========== ========== ========== ==========
Allowance for doubtful accounts .................... $2,511,000 $1,974,000 $1,552,000 $2,933,000
========== ========== ========== ==========
Other valuation and qualifying account:
Product guarantee .................................. $ 130,000 $ 778,000 $ 789,000 $ 119,000
========== ========== ========== ==========
THE SCOTTS COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the year ended September 30, 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Balance at Additions charged to Deduction Balance at
beginning of period costs and expenses from reserves end of period
CLASSIFICATION
Valuation and qualifying accounts deducted from the assets to which they
apply:
Inventory reserve .................................. $6,108,000 $2,986,000 $2,383,000 $6,711,000
========== ========== ========== ==========
Allowance for doubtful accounts .................... $2,933,000 $2,033,000 $1,560,000 $3,406,000
========== ========== ========== ==========
Other valuation and qualifying account:
Product guarantee .................................. $ 119,000 $ 920,000 $ 933,000 $ 106,000
========== ========== ========== ==========
THE SCOTTS COMPANY
Annual Report on Form 10-K
for the
Fiscal Year Ended September 30, 1995
INDEX TO EXHIBITS
Exhibit No. Description Location
2 Amended and Incorporated herein by
Restated reference to the
Agreement and Registration Statement on
Plan of Merger, Form S-4 of the
dated as of May Registrant filed with the
19, 1995, among Securities and Exchange
Stern's Commission (the "SEC") on
Miracle-Gro February 4, 1995
Products, Inc., (Registration No.
Stern's 33-57595) (Exhibit 2)
Nurseries, Inc., Miracle-Gro Lawn Products, Inc.,
Miracle-Gro Products Limited, Hagedorn Partnership,
L.P., the general partners of Hagedorn Partnership,
L.P., Horace Hagedorn, Community Funds, Inc., and John
Kenlon, the Registrant, and ZYX Corporation
2(b) Amendment No. 1, Incorporated herein by
dated as of reference to the
May 19, 1995, Registrant's Current
among the Report on Form 8-K filed
Miracle-Gro with the SEC on June 2,
Constituent 1995 (File
Companies, the No. 0-19768)
Miracle-Gro [Exhibit 2(b)]
Shareholders,
the Registrant,
ZYX Corporation,
Hagedorn
Partnership,
L.P. and
Community Funds,
Inc.
3(a) Amended Articles Incorporated herein by
of Incorporation reference to the
of the Registrant's Annual
Registrant as Report on Form 10-K for
filed with the the fiscal year ended
Ohio Secretary September 30, 1994 (File
of State on No. 0-19768)
September 20, [Exhibit 3(a)]
1994
3(b) Certificate of Incorporated herein by
Amendment by reference to the
Shareholders to Registrant's Quarterly
the Articles of Report on Form 10-Q for
Incorporation of the fiscal quarter ended
the Registrant April 1, 1995 (File
as filed with No. 0-19768)
the Ohio [Exhibit 4(b)]
Secretary of
State on May 4,
1995.
3(c) Regulations of Incorporated herein by
the Registrant reference to the
(reflecting Registrant's Quarterly
amendments Report on Form 10-Q for
adopted by the the fiscal quarter ended
shareholders of April 1, 1995 (File
the Registrant No. 0-19768)
on April 6, 1995) [Exhibit 4(c)]
4(a) Form of Series A Included in Exhibit 2(b)
Warrant above
4(b) Form of Series B Included in Exhibit 2(b)
Warrant above
4(c) Form of Series C Included in Exhibit 2(b)
Warrant above
4(d) Fourth Amended Incorporated herein by
and Restated reference to the
Credit Registrant's Quarterly
Agreement, dated Report on Form 10-Q for
as of March 17, the fiscal quarter ended
1995, among the April 1, 1995 (File
Registrant, No. 0-19768)
Chemical Bank, [Exhibit 4(d)]
the lenders
party thereto
and Chemical
Bank, as agent
4(e) Subordinated Incorporated herein by
Indenture, dated reference to Scotts
as of June 1, Delaware's Registration
1994, among The Statement on Form S-3
Scotts Company, filed with the SEC on
a Delaware June 1, 1994
Corporation (Registration
("Scotts No. 33-53941)
Delaware"), The [Exhibit 4(b)]
O. M. Scott &
Sons Company
("OMS") and
Chemical Bank,
as trustee
4(f) First Incorporated herein by
Supplemental reference to Scotts
Indenture, dated Delaware's Current Report
as of July 12, on Form 8-K dated
1994, among July 18, 1994 (File
Scotts Delaware, No. 0-19768) [Exhibit 4.1]
OMS and Chemical
Bank, as trustee
4(g) Second Incorporated herein by
Supplemental reference to the
Indenture, dated Registrant's Annual
as of Report on Form 10-K for
September 20, the fiscal year ended
1994, among the September 30, 1994 (File
Registrant, OMS, No. 0-19768)
Scotts Delaware [Exhibit 4(i)]
and Chemical
Bank, as trustee
4(h) Third Incorporated herein by
Supplemental reference to the
Indenture, dated Registrant's Annual
as of Report on Form 10-K for
September 30, the fiscal year ended
1994, between September 30, 1994 (File
the Registrant No. 0-19768)
and Chemical [Exhibit 4(j)] ]
Bank, as trustee
10(a) The Scotts Incorporated herein by
Company reference to the
Registrant's Annual Report on Form
10-K for the fiscal year ended
September 30, 1994 (File No.
0-19768) [Exhibit 10(a)]
10(b) First Amendment Pages 72 and 73
to The Scotts
Company
Associates'
Pension Plan
dated April 18,
1995
10(c) Second Amendment Pages 74 through 78
to The Scotts
Company
Associates'
Pension Plan
dated
December 5, 1995
and effective as
of December 31,
1995
10(d) Second Incorporated herein by
Restatement of reference to the
The Scotts Registrant's Annual
Company Profit Report on Form 10-K for
Sharing and the fiscal year ended
Savings Plan September 30, 1994 (File
No. 0-19768)
[Exhibit 10(b)]
10(e) First Amendment Pages 79 through 82
to the Second
Restatement of
The Scotts
Company Profit
Sharing and
Savings Plan
effective as of
July 1, 1995
10(f) Second Amendment Pages 83 through 88
to the Second
Restatement of
The Scotts
Company Profit
Sharing and
Savings Plan
dated
December 5, 1995
and effective as
of December 31,
1995
10(g) Supplemental Incorporated herein by
Indemnification reference to Scotts
Agreement, dated Delaware's Current
as of Report on Form 8-K dated
November 10, November 9, 1988 (File
1988, between No. 33-18713)
RSL Holding [Exhibit 2(d)]
Company, Inc.
and OMS
Acquisition
Corp. ("Hyponex')
10(h) Tax Incorporated herein by
Administration reference to Scotts
Agreement, dated Delaware's Annual Report
November 10, on Form 10-K for the
1988, between fiscal year ended
RSL Holding September 30, 1988 (File
Company, Inc. No. 33-18713)
and Hyponex [Exhibit 10(rr)]
10(i) Employment Incorporated herein by
Agreement, dated reference to Scotts
as of Delaware's Annual Report
October 21, on Form 10-K for the
1991, between fiscal year ended
the Registrant September 30, 1993 (File
(as successor to No. 0-19768)
OMS) and [Exhibit 10(g)]
Theodore J. Host
10(j) Stock Option Incorporated herein by
Plan and reference to the
Agreement, dated Registrant's Annual
as of January 9, Report on Form 10-K for
1992, between the fiscal year ended
the Registrant September 30, 1994 (File
(as successor to No. 0-19768)
Scotts Delaware) [Exhibit 10(f)]
and
Theodore J. Host
10(k) The O. M. Scott Incorporated herein by
& Sons Company reference to Scotts
Excess Benefit Delaware's Annual Report
Plan effective on Form 10-K for the
October 1, 1993 fiscal year ended
September 30, 1993 (File
No. 0-19768)
[Exhibit 10(h)]
10(l) The Scotts Incorporated herein by
Company 1992 reference to Scotts
Long Term Delaware's Registration
Incentive Plan Statement on Form S-8
filed with the SEC on
March 26, 1993
(Registration
No. 33-60056)
[Exhibit 4(f)]
10(m) The Scotts Pages 89 through 95
Company 1995
Executive Annual
Incentive Plan
10(n) Letter of Page 96 through 99
understanding,
dated
October 11,
1993,
regarding
terms of
employment of
John A. Neal
by the
Registrant
10(o) Letter of Pages 100 through 103
understanding,
dated
October 11,
1993,
regarding
terms of
employment of
Lisle J. Smith
by the
Registrant
10(p) Employment Pages 104 through 116
Agreement, dated
as of May 19,
1995, between the
Registrant and
James Hagedorn
11(a) Computation of Page 117
Net Income Per
Common Share
21 Subsidiaries Pages 118 and 119
of the
Registrant
23 Consent of Page 120
Independent
Accountants
27 Financial Data Page 121
Schedule