1
As filed with the Securities and Exchange Commission on March 15, 1995
Registration No. 33-57595
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3
to
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
------------
THE SCOTTS COMPANY
(Exact name of Registrant as specified in its charter)
OHIO 2875 31-1199481
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
14111 SCOTTSLAWN ROAD, MARYSVILLE, OHIO 43041, (513) 644-0011
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
------------
CRAIG D. WALLEY
14111 SCOTTSLAWN ROAD
MARYSVILLE, OHIO 43041
(513) 644-0011
(Name, address, including zip code, and telephone
number, including area code of agent for service)
COPIES TO:
G. ROBERT LUCAS, II J. MICHAEL SCHELL
VORYS, SATER, SEYMOUR AND PEASE SKADDEN, ARPS, SLATE, MEAGHER & FLOM
52 EAST GAY STREET, P.O. BOX 1008 919 THIRD AVENUE
COLUMBUS, OHIO 43216-1008 NEW YORK, NEW YORK 10022
------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after the effective date of this
Registration Statement as the Registrant shall determine.
If the only securities being registered on this Form are being offered
in connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box:
------------
2
Cross Reference Sheet pursuant to Rule 404(a)
of the Securities Act of 1933, as amended, and Item 501(b)
of Regulation S-K, showing the location in
the Proxy Statement/Prospectus
of the Information required by Part I of Form S-4.
S-4 Item Number and Caption Location in Proxy Statement/Prospectus
--------------------------- --------------------------------------
A. Information about the Transaction
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus..... Facing Page of Registration Statement; Cross Reference
Sheet; Outside Front Cover Page of Proxy
Statement/Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus ........................ Available Information; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information .............. Summary
4. Terms of the Transaction.................... Summary; The Merger Transactions ; The Agreement;
Proposed Amendment to Article FOURTH of the Amended
Articles of Incorporation; Proposed Amendments to
Section 2.02 of the Code of Regulations; Proposed
Amendment to Section 6.01 of the Code of Regulations;
Protection Against Non-Negotiated Takeovers;
Description of the Capital Stock of the Company; The
Warrants; Description of the Capital Stock of the Miracle-
Gro Companies; Comparison of Shareholder Rights
5. Pro Forma Financial Information ........... Index to Financial Statements
6. Material Contacts with the Company Being
Acquired .................................. The Merger Transactions; The Agreement; Election of
Directors
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters ........................ *
8. Interests of Named Experts and Counsel .... Experts
3
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities ............................... *
B. Information About the Registrant
10. Information With Respect to S-3
Registrants .............................. Summary; Information About the Company; Index to
Financial Statements
11. Incorporation of Certain Information by
Reference ................................ *
12. Information With Respect to S-2 or S-3
Registrants .............................. *
13. Incorporation of Certain Information by
Reference ................................ *
14. Information With Respect to Registrants
Other Than S-3 or S-2 Registrants......... *
C. Information About the Company Being Acquired
15. Information With Respect to S-3
Companies ................................ *
16. Information With Respect to S-2 or S-3
Companies ................................ *
17. Information With Respect to Companies
Other Than S-2 or S-3 Companies .......... Summary; Information about the Miracle-Gro Companies;
Index to Financial Statements
D. Voting and Management Information
18. Information if Proxies, Consents or
Authorization Are to be Solicited......... Cover Page of Proxy Statement/Prospectus; Summary; The
Annual Meeting; The Merger Transactions; The
Agreement; Proposal to Approve Acquisition of One-
Third or More but Less Than a Majority of the Voting
Power of the Company; Proposed Amendment to
Article Fourth of the Amended Articles of
Incorporation; Proposed Amendment to Adopt New Article
Ninth of the Amended Articles of Incorporation;
Proposed Amendments to Section 2.02 of the Code of
Regulations; Proposed Amendment to Section 6.01 of the
Code of Regulations; Election of Directors;
Dissenters' Rights
4
19. Information if Proxies, Consents or
Authorizations Are Not to be Solicited,
or in Exchange Offer ..................... *
- -------------
* Omitted because not required, inapplicable or answer is negative.
5
THE SCOTTS COMPANY
14111 Scottslawn Road
Marysville, Ohio 43041
March 16, 1995
Dear Fellow Shareholders:
The Annual Meeting of the Shareholders (the "Annual Meeting") of The Scotts
Company, an Ohio corporation (the "Company"), will be held at 10:00 a.m., local
time, on Thursday, April 6, 1995, at the Stouffer Dublin Hotel, 600 Metro Place
North, Dublin, Ohio 43017. In light of the proposed transactions described
below, this is a momentous Annual Meeting for the Company, and we therefore
strongly encourage you to exercise your right to vote.
As you may know, the Company has entered into an Agreement and Plan of Merger
(the "Agreement") with Stern's Miracle-Gro Products, Inc., Stern's Nurseries,
Inc., Miracle-Gro Lawn Products Inc. and Miracle-Gro Products Limited, related
corporations which market and distribute the country's leading brand of water-
soluble plant food for the consumer market (the "Miracle-Gro Companies"), and
with the shareholders of the Miracle-Gro Companies (the "Miracle-Gro
Shareholders"). Under the Agreement, the Miracle-Gro Companies will become
wholly-owned by the Company (the "Merger Transactions"), and the Miracle-Gro
Shareholders will receive 195,000 shares of newly created Class A Convertible
Preferred Stock of the Company, which will enable them to exercise, as a group,
approximately 35% of the voting power of the Company, and warrants to purchase
an additional 3,000,000 Common Shares of the Company, which, if exercised,
would enable them to exercise, together with the Class A Convertible Preferred
Stock, approximately 42% of the total voting power of the Company.
The Company's management and its Board of Directors believe that the Merger
Transactions will benefit our shareholders and strengthen the Company. There
are five principal benefits that the Company's management and the Board believe
the Company will derive from the Merger Transactions. These are described in
the Proxy Statement/Prospectus (see "THE MERGER TRANSACTIONS - Reasons for the
Merger Transactions"). Briefly, we believe the Merger Transactions should:
- - BRING TOGETHER TWO OF THE STRONGEST BRANDS -- SCOTTS(R) AND MIRACLE-GRO(R) --
IN THE LAWN AND GARDEN INDUSTRY.
- - CREATE A MORE PROFITABLE, FASTER GROWING COMPANY.
- - OPEN NEW INTERNATIONAL MARKET OPPORTUNITIES.
- - SUBSTANTIALLY INCREASE FREE CASH FLOW.
- - ENHANCE THE COMPANY'S BALANCE SHEET AND ITS CREDIT-WORTHINESS.
6
Of course, as in any business transaction, there can be no assurance
that these expectations will be fulfilled.
Smith Barney Inc., the Company's financial advisor, has rendered an
opinion to the Board of Directors to the effect that, as of the date of its
opinion, the consideration to be paid by the Company with respect to the Merger
Transactions is fair, from a financial point of view, to the Company.
The consummation of the Merger Transactions is conditioned on, among
other things, the approval of certain matters to be considered at the Annual
Meeting. First, the acquisition by the Miracle-Gro Shareholders, as a group, of
one-third or more but less than a majority of the voting power of the Company
(Proposal No. 1) must be approved in accordance with the provisions of Section
1701.831 of the Ohio General Corporation Law. Second, the proposal to amend
Article FOURTH of the Amended Articles of Incorporation to, among other things,
authorize the Class A Convertible Preferred Stock (Proposal No. 2) must be
approved by the holders of two-thirds of the outstanding Common Shares.
Finally, the proposals to amend Section 2.02 of the Code of Regulations to
create a classified Board (Proposal No. 4) and to limit the authority of the
directors to increase the number of directors (Proposal No. 5) must be approved
by the holders of a majority of the outstanding Common Shares.
Your Board of Directors believes that the Merger Transactions are in
the best interests of the Company and its shareholders and that they will
further the Company's long-term objective of maximizing shareholder value. The
Board has unanimously approved the Merger Transactions and recommends that you
vote FOR Proposal Nos. 1, 2, 4 and 5 in order that the Merger Transactions may
be consummated.
In addition to approving Proposal Nos. 1, 2, 4 and 5, which are
conditions precedent to the Merger Transactions, you will be asked to consider
and vote upon an amendment to the Company's Amended Articles of Incorporation
which would modify the procedure for adopting future amendments to the Amended
Articles of Incorporation (Proposal No. 3); an amendment to Section 6.01 of the
Code of Regulations to increase to two- thirds the vote required to amend
Sections 1.02, 2.02 and 6.01 of the Code of Regulations (Proposal No. 6); and
the election of nine directors (Proposal No. 7). Your Board of Directors
recommends that you vote FOR each of these proposals.
The enclosed Notice of Annual Meeting and Proxy Statement/Prospectus
contains detailed information about the Merger Transactions and the matters to
be voted upon at the Annual Meeting. Please give this material your careful
attention.
7
On behalf of the Board of Directors and management, we cordially invite
you to attend the Annual Meeting. Whether or not you plan to attend the Annual
Meeting, the prompt return of your proxy in the enclosed return envelope will
save the Company additional expenses of solicitation and will help ensure that
as many shares as possible are represented.
Sincerely,
Tadd C. Seitz Theodore J. Host
Chairman and Chief Executive Officer President and Chief Operating Officer
8
[Scotts Logo]
THE SCOTTS COMPANY
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held Thursday, April 6, 1995
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the
"Annual Meeting") of The Scotts Company, an Ohio corporation (the "Company"),
will be held at the Stouffer Dublin Hotel, 600 Metro Place North, Dublin, Ohio
43017, on Thursday, April 6, 1995 at 10:00 a.m., local time, for the following
purposes:
1. To consider and vote upon the acquisition of one-third or more but
less than a majority of the voting power of the Company by the shareholders of
Stern's Miracle-Gro Products, Inc., a New Jersey corporation ("Miracle-Gro"),
Stern's Nurseries, Inc., a New York corporation ("Nurseries"), Miracle-Gro Lawn
Products, Inc., a Delaware corporation ("Miracle-Gro Delaware"), and
Miracle-Gro Products Limited, a New York corporation ("Miracle-Gro UK"),
(Miracle-Gro, Nurseries, Miracle-Gro Delaware and Miracle-Gro UK are referred
to collectively as the "Miracle-Gro Companies" and the shareholders of the
Miracle-Gro Companies are referred to as the "Miracle-Gro Shareholders") in
connection with the merger transactions involving the Miracle-Gro Companies and
the Company.
2. To consider and act upon a proposal to amend Article FOURTH of the
Amended Articles of Incorporation of the Company to increase the authorized
number of Common Shares from 35,000,000 shares to 50,000,000 shares and to
authorize a class of 195,000 voting preferred shares designated Class A
Convertible Preferred Stock.
3. To consider and act upon a proposal to amend the Amended Articles of
Incorporation of the Company to add a new Article NINTH - a procedure for
further amending the Amended Articles of Incorporation.
4. To consider and act upon a proposal to amend Subparagraphs (A) and
(B) of Section 2.02 of the Code of Regulations of the Company in order, among
other things, to fix the number of directors at nine persons, divided into
three classes consisting of three directors each, with one class to serve
initially for a term of one year and thereafter for terms of three years, one
class to serve initially for a term of two years and thereafter for terms of
three years and one class to serve for a term of three years and thereafter for
terms of three years.
5. To consider and act upon a proposal to amend Subparagraph (C) of
Section 2.02 of the Code of Regulations of the Company in order to eliminate
the authority of the directors to increase the number of directors beyond
twelve directors.
6. To consider and act upon a proposal to amend Section 6.01 of the
Code of Regulations of the Company to increase to two-thirds the vote to amend
Sections 1.02, 2.02 (if Proposal No. 4 is adopted) and 6.01 of the Code of
Regulations.
9
7. To elect three directors for terms of one year, to elect three
directors for terms of two years and to elect three directors for terms of
three years (or, if Proposal No. 4 is not adopted, to elect nine directors to
serve until the next Annual Meeting of Shareholders).
8. To transact such other business as may properly come before the
Annual Meeting or any adjournment or adjournments thereof.
The close of business on February 17, 1995, has been fixed by the Board
of Directors of the Company as the record date for determining the shareholders
entitled to notice of, and to vote at, the Annual Meeting. A list of
shareholders eligible to vote at the Annual Meeting will be available for
inspection at the Annual Meeting and, during business hours from March 16,
1995 to the date of the Annual Meeting, at the Company's headquarters at the
address set forth below and at the law offices of Vorys, Sater, Seymour and
Pease, 52 East Gay Street, Columbus, Ohio 43215.
You are cordially invited to attend the Annual Meeting. Whether or not
you plan to attend the Annual Meeting, you may insure your representation by
completing, signing, dating and promptly returning the enclosed proxy card. A
return envelope, which requires no postage if mailed in the United States, has
been provided for your use. If you attend the Annual Meeting and inform the
Secretary of the Company in writing that you wish to vote your shares in
person, your proxy will not be used.
By Order of the Board of Directors
Craig D. Walley,
Vice President and Secretary
The Scotts Company
14111 Scottslawn Road
Marysville, Ohio 43041
March 16, 1995
10
[Scotts Logo]
THE SCOTTS COMPANY
14111 Scottslawn Road
Marysville, Ohio 43041
PROXY STATEMENT PROSPECTUS
FOR FOR 195,000 SHARES OF CLASS A CONVERTIBLE
ANNUAL MEETING OF SHAREHOLDERS PREFERRED STOCK AND WARRANTS TO PURCHASE
THURSDAY, APRIL 6, 1995 3,000,000 COMMON SHARES, AND THE COMMON SHARES
ISSUABLE IN RESPECT THEREOF
This Proxy Statement/Prospectus is furnished in connection with the
solicitation on behalf of the Board of Directors of The Scotts Company, an Ohio
corporation (the "Company"), of proxies for use at the Annual Meeting of
Shareholders (the "Annual Meeting") to be held at the Stouffer Dublin Hotel, 600
Metro Place North, Dublin, Ohio 43017, on Thursday, April 6, 1995, at 10:00
a.m., local time, and at any adjournment or adjournments thereof, for the
purposes set forth in the accompanying Notice of Annual Meeting of Shareholders.
This Proxy Statement/Prospectus also constitutes the prospectus of the
Company relating to 195,000 shares of Class A Convertible Preferred Stock and
Warrants to purchase 3,000,000 Common Shares, without par value (and the Common
Shares issuable on the conversion or exercise thereof), to be issued by the
Company in accordance with the terms of the Agreement and Plan of Merger, dated
as of January 26, 1995 (the "Agreement"), described in this Proxy
Statement/Prospectus and attached hereto as Appendix I, by and among the
Company, ZYX Corporation, a wholly-owned subsidiary of the Company ("Merger
Subsidiary"), Stern's Miracle-Gro Products, Inc., a New Jersey corporation
("Miracle-Gro"), Stern's Nurseries, Inc., a New York corporation ("Nurseries"),
Miracle-Gro Lawn Products, Inc., a Delaware corporation ("Miracle-Gro
Delaware"), Miracle-Gro Products Limited, a New York corporation registered in
the United Kingdom ("Miracle-Gro UK," and collectively with Miracle-Gro,
Nurseries and Miracle-Gro Delaware, the "Miracle-Gro Companies"), and the
shareholders of the Miracle-Gro Companies (the "Miracle-Gro Shareholders").
Each share of Class A Convertible Preferred Stock will be convertible at
any time into approximately 52.6 Common Shares of the Company, subject to
adjustment upon the occurrence of certain events, and will be entitled to a
number of votes equal to the number of Common Shares into which it is
convertible. Each such share will earn dividends at the rate of $50 per year
and will be entitled to a liquidation preference of $1,000 plus accumulated
unpaid dividends. The Class A Convertible Preferred Stock will be subject to
redemption at any time after five years from the date of issuance for $1,000 per
share plus accumulated unpaid dividends. See "DESCRIPTION OF THE CAPITAL STOCK
OF THE COMPANY - Class A Convertible Preferred Stock."
The Warrants will be exercisable for eight and one-half years for the
purchase of 1,000,000 Common Shares at $21 per share, 1,000,000 Common Shares at
$25 per share and 1,000,000 Common Shares at $29 per share, in each case subject
to adjustment upon the occurrence of certain events. See "THE WARRANTS."
This Proxy Statement/Prospectus and the accompanying proxy card are
first being mailed on or about March 16, 1995, to all shareholders of the
Company. Only holders of record of the Company's Common Shares at the close of
business on February 17, 1995 (the "Record Date"), will be entitled to vote at
the Annual Meeting.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is March , 1995.
11
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices located at Citicorp Center, 500 West Madison, 14th Floor, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048. Copies of such material can also be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, material filed by the Company can be inspected
at the offices of The NASDAQ Stock Market and the New York Stock Exchange.
The Company has filed with the Commission a registration statement on
Form S-4 (herein, together with any amendments, supplements and exhibits,
referred to as the "Registration Statement") under the Securities Act of 1933,
as amended (the "Securities Act"), with respect to the securities to be issued
pursuant to the Agreement. This Proxy Statement/Prospectus does not contain
all of the information set forth in the Registration Statement, certain parts
of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement. Such additional information may be obtained from the
Commission's principal office in Washington, D.C. Statements contained in this
Proxy Statement/Prospectus as to the contents of any contract or other document
referred to herein disclose all material terms of such contracts and other
documents but are not necessarily complete, and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference.
The Miracle-Gro Companies are not subject to the informational
requirements of the Exchange Act.
12
TABLE OF CONTENTS
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Date, Time and Place of Annual Meeting of Shareholders
of the Company . . . . . . . . . . . . . . . . . . . .3
Record Date; Shareholders Entitled to Vote. . . . . . . .3
Purpose of Annual Meeting of Shareholders of the Company.3
Parties to the Merger Transactions. . . . . . . . . . . .3
Terms of the Proposed Merger Transactions . . . . . . . .3
Effect of the Proposed Merger Transactions. . . . . . . .4
Recommendation of the Board of Directors. . . . . . . . .4
Reasons for the Merger Transactions . . . . . . . . . . .4
Opinion of Financial Advisor. . . . . . . . . . . . . . .5
Vote Required . . . . . . . . . . . . . . . . . . . . . .5
Regulatory Matters. . . . . . . . . . . . . . . . . . . .6
Dissenters' Rights. . . . . . . . . . . . . . . . . . . .6
Certain Federal Income Tax Consequences . . . . . . . . .6
The Company's Summary Historical Financial Data . . . . .7
The Miracle-Gro Companies Summary Historical Combined
Financial Data . . . . . . . . . . . . . . . . . . . . 8
The Company's Summary Unaudited Preliminary Pro Forma
Consolidated Financial Data. . . . . . . . . . . . . . 9
THE ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . 10
General . . . . . . . . . . . . . . . . . . . . . . . . 10
Matters to be Considered at the Annual Meeting. . . . . 10
Voting at the Meeting; Record Date. . . . . . . . . . . 10
THE MERGER TRANSACTIONS . . . . . . . . . . . . . . . . . . 11
Background of the Merger Transactions . . . . . . . . . 11
Effect of the Proposed Merger Transactions. . . . . . . 12
Reasons for the Merger Transactions . . . . . . . . . . 11
Opinion of Financial Advisor. . . . . . . . . . . . . . 13
Federal Income Tax Consequences . . . . . . . . . . . . 16
Antitrust Considerations. . . . . . . . . . . . . . . . 17
Accounting Treatment. . . . . . . . . . . . . . . . . . 17
THE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . 17
Terms of the Agreement. . . . . . . . . . . . . . . . . 17
Representations and Warranties. . . . . . . . . . . . . 18
Covenants . . . . . . . . . . . . . . . . . . . . . . . 18
Standstill Provisions . . . . . . . . . . . . . . . . . 19
Conditions. . . . . . . . . . . . . . . . . . . . . . . 21
Waivers and Amendments. . . . . . . . . . . . . . . . . 22
Termination . . . . . . . . . . . . . . . . . . . . . . 22
Indemnification . . . . . . . . . . . . . . . . . . . . 22
Expenses. . . . . . . . . . . . . . . . . . . . . . . . 22
PROPOSAL TO APPROVE ACQUISITION OF ONE-THIRD OR MORE
BUT LESS THAN A MAJORITY OF THE VOTING POWER OF THE
COMPANY . . . . . . . . . . . . . . . . . . . . . . . . 23
Effect of Approval of Acquisition . . . . . . . . . . . 23
Recommendation and Vote . . . . . . . . . . . . . . . . 24
PROPOSED AMENDMENT TO ARTICLE FOURTH OF THE
AMENDED ARTICLES OF INCORPORATION . . . . . . . . . . . 24
Proposed Amendment. . . . . . . . . . . . . . . . . . . 24
Effect of Adoption of Amendment . . . . . . . . . . . . 25
Recommendation and Vote . . . . . . . . . . . . . . . . 25
i
13
PROPOSED AMENDMENT TO ADOPT NEW ARTICLE NINTH OF THE
AMENDED ARTICLES OF INCORPORATION . . . . . . . . . . . 26
Proposed Amendment. . . . . . . . . . . . . . . . . . . 26
Effect of Adoption of Amendment . . . . . . . . . . . . 26
Recommendation and Vote . . . . . . . . . . . . . . . . 26
PROPOSED AMENDMENTS TO SECTION 2.02 OF THE CODE OF
REGULATIONS . . . . . . . . . . . . . . . . . . . . . . 26
Proposed Amendments to Subparagraphs (A) and (B)
(Proposal No. 4) . . . . . . . . . . . . . . . . . . 26
Proposed Amendment to Subparagraph (C) (Proposal No. 5) 27
Effect of Adoption of Amendment . . . . . . . . . . . . 27
Recommendation and Vote . . . . . . . . . . . . . . . . 27
PROPOSED AMENDMENT TO SECTION 6.01 OF THE CODE OF
REGULATIONS . . . . . . . . . . . . . . . . . . . . . . 28
Proposed Amendment. . . . . . . . . . . . . . . . . . . 28
Effect of Adoption of Amendment . . . . . . . . . . . . 28
Recommendation and Vote . . . . . . . . . . . . . . . . 28
PROTECTION AGAINST NON-NEGOTIATED TAKEOVERS . . . . . . . . 29
ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . . 31
Nominees for Election . . . . . . . . . . . . . . . . . 31
Recommendation and Vote . . . . . . . . . . . . . . . . 33
Miracle-Gro Directors . . . . . . . . . . . . . . . . . 33
Beneficial Ownership of Common Shares . . . . . . . . . 34
Executive Officers. . . . . . . . . . . . . . . . . . . 37
Performance Graph . . . . . . . . . . . . . . . . . . . 39
Report of the Compensation Committee. . . . . . . . . . 40
Executive Compensation. . . . . . . . . . . . . . . . . 43
Certain Matters Pertaining to the Board of Directors. . 47
DESCRIPTION OF THE CAPITAL STOCK OF THE COMPANY . . . . . . 48
Common Shares . . . . . . . . . . . . . . . . . . . . . 49
Class A Convertible Preferred Stock . . . . . . . . . . 49
THE WARRANTS. . ..... . . . . . . . . . . . . . . . . . . . 50
DESCRIPTION OF CAPITAL STOCK OF THE MIRACLE-GRO COMPANIES . 50
COMPARISON OF SHAREHOLDER RIGHTS . . . . . . . . . . . . . 51
Mergers and Consolidations. . . . . . . . . . . . . . . 51
Other Corporate Transactions. . . . . . . . . . . . . . 51
Protections against Non-Negotiated Takeovers. . . . . . 52
Special Meetings. . . . . . . . . . . . . . . . . . . . 52
Class Voting. . . . . . . . . . . . . . . . . . . . . . 52
Removal of Directors and Filling of Vacancies . . . . . 52
Amendment to the Articles . . . . . . . . . . . . . . . 52
Appraisal Rights. . . . . . . . . . . . . . . . . . . . 52
Dividends . . . . . . . . . . . . . . . . . . . . . . . 53
Repurchases . . . . . . . . . . . . . . . . . . . . . . 53
Director and Officer Liability and Indemnification. . . 53
ii
14
INFORMATION ABOUT THE COMPANY . . . . . . . . . . . . . . . 55
Business. . . . . . . . . . . . . . . . . . . . . . . . 55
Properties. . . . . . . . . . . . . . . . . . . . . . . 66
Legal Proceedings . . . . . . . . . . . . . . . . . . . 66
Market for the Company's Common Shares And Related
Shareholder Matters . . . . . . . . . . . . . . . . . 66
Selected Financial Data . . . . . . . . . . . . . . . . 67
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 70
RECENT DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . 74
New Credit Facility . . . . . . . . . . . . . . . . . . 74
INFORMATION ABOUT THE MIRACLE-GRO COMPANIES . . . . . . . . 75
Business of The Miracle-Gro Companies . . . . . . . . . 75
Market Price of and Dividends on Common Stock of the
Miracle-Gro Companies . . . . . . . . . . . . . . . . . 76
Selected Financial Data . . . . . . . . . . . . . . . . 77
Management's Discussion and Analysis of Financial
Condition and Results of Operation . . . . . . . . . 78
DISSENTERS' RIGHTS . . . . . . . . . . . . . . . . . . . . . 81
VALIDITY OF SHARES OF CLASS A CONVERTIBLE PREFERRED SHARES . 81
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . 81
INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . 81
SHAREHOLDER PROPOSALS FOR 1996 ANNUAL MEETING . . . . . . . 81
OTHER BUSINESS . . . . . . . . . . . . . . . . . . . . . . . 81
ANNUAL REPORT . . . . . . . . . . . . . . . . . . . . . . . 82
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . F-1
Appendix I Agreement and Plan of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
Appendix II Opinion of Financial Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1
Appendix III Acquiring Person Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . .III-1
Appendix IV Proposed Amended Article FOURTH of the Amended Articles of Incorporation . . . . . IV-1
Appendix V Proposed Article NINTH of the Amended Articles of Incorporation . . . . . . . . . V-1
Appendix VI Proposed Amended Subparagraphs (A), (B) and (C) of
Section 2.02 of the Code of Regulations . . . . . . . . . . . . . . . . . . . VI-1
Appendix VII Proposed Amended Section 6.01 of the Code of Regulations . . . . . . . . . . . . . VII-1
iii
15
SUMMARY
The following summary is not intended to be complete and is qualified
in its entirety by reference to more detailed information contained elsewhere
in this Proxy Statement/Prospectus and the Appendices. Shareholders are urged
to read this Proxy Statement/Prospectus and the Appendices hereto in their
entirety.
DATE, TIME AND PLACE OF ANNUAL MEETING OF SHAREHOLDERS OF THE COMPANY
The Annual Meeting of Shareholders of the Company will be held on
Thursday, April 6, 1995, at 10:00 a.m., local time, at the Stouffer Dublin
Hotel, 600 Metro Place North, Dublin, Ohio 43017.
RECORD DATE; SHAREHOLDERS ENTITLED TO VOTE
Only holders of record of Common Shares of the Company at the close of
business on the Record Date, February 17, 1995, will be entitled to notice of
and to vote at the Annual Meeting. On the Record Date, there were 18,677,064
Common Shares outstanding, each of which will be entitled to one vote on each
matter properly submitted for vote to the Company's shareholders at the Annual
Meeting. See "THE ANNUAL MEETING - Voting at the Meeting; Record Date."
PURPOSE OF ANNUAL MEETING OF SHAREHOLDERS OF THE COMPANY
The purpose of the Annual Meeting will be to consider and vote on
proposals to: (1) approve the acquisition of one-third or more but less than a
majority of the voting power of the Company by the Miracle-Gro Shareholders, as
a group, (2) amend Article FOURTH of the Amended Articles of Incorporation, (3)
adopt Article NINTH of the Amended Articles of Incorporation, (4) amend
Sections 2.02 and 6.01 of the Code of Regulations, (5) elect directors and (6)
transact such other business as may properly come before the Annual Meeting.
PARTIES TO THE MERGER TRANSACTIONS
The Company is the country's leading producer and marketer of consumer
do-it-yourself lawn care and professional golf course turf care products. The
principal executive offices of the Company are located at 14111 Scottslawn
Road, Marysville, Ohio 43041, telephone (513) 644-0011.
Miracle-Gro markets and distributes the country's leading brand of
water-soluble plant food for the consumer market. The principal executive
offices of Miracle-Gro are located at 800 Port Washington Boulevard, Port
Washington, New York 11050, telephone (516) 883-6550.
TERMS OF THE PROPOSED MERGER TRANSACTIONS
Pursuant to the terms of the Agreement, (1) Merger Subsidiary will be
merged with and into Miracle-Gro, whereupon Miracle-Gro will be the surviving
corporation and a wholly-owned subsidiary of the Company (the "Merger"); (2)
immediately thereafter, (x) Nurseries will transfer all of its assets,
including but not limited to all of its intellectual property rights, but none
of its liabilities, to Miracle-Gro (the "Asset Transfer") and (y) Miracle-Gro
Delaware and Miracle-Gro UK will each merge with and into Miracle-Gro (the
"Subsequent Mergers" and, together with the Merger and the Asset Transfer, the
"Merger Transactions"); and (3) immediately thereafter, Miracle-Gro will be
merged with and into another wholly-owned Ohio subsidiary of Miracle-Gro ("New
Miracle-Gro"), which will be the ultimate surviving corporation under the name
"Scotts' Miracle-Gro Products, Inc." (the "Reincorporation"). The Agreement
provides that, prior to the consummation of the Merger Transactions, the
Miracle-Gro Companies shall distribute $22 million to the Miracle-Gro
Shareholders, which amount represents the estimated earnings of the Miracle-Gro
Companies from October 1, 1994 through the expected closing date of the Merger
Transactions, although there can be no assurance as to the amount of actual
earnings. Such distribution is consistent with historical distribution
practices of the Miracle-Gro Companies. If the actual earnings of the
Miracle-Gro Companies from October 1, 1994 through the date of the Merger
Transactions exceed $22 million, the combined equity of the Miracle-Gro
Companies will increase. Conversely, if the actual earnings of the Miracle-Gro
Companies during this period is less than $22 million, the combined equity of
the Miracle-Gro Companies will decrease.
3
16
A copy of the Agreement is attached hereto as Appendix I and is incorporated
herein by reference. See "THE AGREEMENT - Terms of the Agreement."
The consummation of the Merger Transactions is conditioned on, among
other things, the approval by the Company's shareholders at the Annual Meeting
of (i) the acquisition by the Miracle-Gro Shareholders of one-third or more but
less than a majority of the voting power of the Company (the "Acquisition") in
accordance with Section 1701.831 of the Ohio General Corporation Law (the
"GCL"); (ii) the proposal to amend Article FOURTH to create the Class A
Convertible Preferred Stock; and (iii) the amendment of Section 2.02 of the
Code of Regulations as described herein.
EFFECT OF THE PROPOSED MERGER TRANSACTIONS
In connection with the Merger Transactions, the Miracle-Gro
Shareholders, as a group, will receive 195,000 shares of Class A Convertible
Preferred Stock of the Company, having approximately 35% of the voting power of
the Company, and Warrants to purchase an additional 3,000,000 Common Shares of
the Company, which, if exercised, would enable them to exercise, together with
the Class A Convertible Preferred Stock, approximately 42% of the voting power
of the Company. As a result, the Miracle-Gro Shareholders, voting together,
would be able to block any matter requiring the affirmative vote of two-thirds
of the voting power of the Company. A two-thirds vote is required to effect a
merger or consolidation, combination or majority share acquisition, sale or
other disposition of all or substantially all of the assets or dissolution of
the Company, and may be required to amend the Articles of Incorporation of the
Company. See "PROPOSED AMENDMENT TO ADOPT NEW ARTICLE NINTH OF THE AMENDED
ARTICLES OF INCORPORATION." If Proposal No. 6 is adopted, a two-thirds vote
would also be required to amend certain provisions of the Company's Code of
Regulations. See "PROPOSED AMENDMENT TO SECTON 6.01 OF THE CODE OF REGULATIONS."
The Agreement provides that the Miracle-Gro Shareholders shall be
entitled to designate three directors (one in each of the newly created
classes) to sit on the newly expanded twelve person Board of Directors. In
addition, the Agreement provides for certain voting rights of and certain
voting restrictions on the Miracle-Gro Shareholders and limits the ability of
the Miracle-Gro Shareholders to acquire additional Voting Stock of the Company
or to transfer the Class A Convertible Preferred Stock, the Warrants or the
underlying Common Shares. These provisions may have a significant effect on
the management and day-to-day operations of the Company and are more fully
described herein under "THE AGREEMENT - Standstill Provisions."
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has unanimously approved the
Merger Transactions, the Reincorporation and the Acquisition pursuant to the
terms of the Agreement, believes that the Merger Transactions, the
Reincorporation and the Acquisition are in the best interests of the Company
and its shareholders and recommends that the shareholders vote FOR the approval
of the Acquisition. See "THE MERGER TRANSACTIONS - Background of the Merger
Transactions" and "- Reasons for the Merger Transactions." Prior to making
this recommendation, the Board of Directors carefully analyzed, with the
assistance of its financial advisor, the value of Miracle-Gro's business and
the consideration proposed to be paid by the Company. The Board recognized
that Miracle-Gro has few tangible assets but significant intangible assets
in the form of trademarks and tradenames. The Board concluded that
Miracle-Gro's business performance, prospects and widespread brand recognition
among consumers justify the consideration proposed to be paid. See "THE
MERGER TRANSACTIONS - Reasons for the Merger Transactions" and "- Opinion of
Financial Advisor."
The last sale price of the Company's Common Shares on January 25, 1995,
the day before the Board approved the Merger Transactions, as reported on
NASDAQ, was $16.25.
The Board of Directors of the Company also has unanimously approved
each of the other matters described in this Proxy Statement/Prospectus and
recommends that the shareholders vote FOR (i) the amendment to Article FOURTH
of the Amended Articles of Incorporation, (ii) the adoption of Article NINTH of
the Amended Articles of Incorporation and (iii) the amendments to Sections 2.02
and 6.01 of the Code of Regulations. See "PROPOSED AMENDMENT TO ARTICLE FOURTH
OF THE AMENDED ARTICLES OF INCORPORATION," "PROPOSED AMENDMENT TO ADOPT NEW
ARTICLE NINTH OF THE AMENDED ARTICLES OF INCORPORATION," "PROPOSED AMENDMENTS
TO SECTION 2.02 OF THE CODE OF REGULATIONS" and "PROPOSED AMENDMENT TO SECTION
6.01 OF THE CODE OF REGULATIONS."
REASONS FOR THE MERGER TRANSACTIONS
The Company's management and the Board of Directors believe that the
Merger Transactions will benefit the Company's shareholders and strengthen the
Company. There are five principal benefits that the Company's management and
the Board expect the Company to derive from the Merger Transactions:
First, the Merger Transactions WILL BRING TOGETHER TWO OF THE STRONGEST
BRANDS -- SCOTTS(R) AND MIRACLE-GRO(R) -- IN THE LAWN AND GARDEN INDUSTRY and
should establish the Company as a strong branded packaged-goods marketer.
Second, the combination SHOULD CREATE A MORE PROFITABLE, FASTER GROWING
COMPANY. Sales of the Miracle-Gro Companies have, over the last five years,
grown at greater than a 13% annual rate and net income has increased at more
than a 16% annual rate - both higher than the Company's annual growth rates for
the comparable period. Therefore, assuming that Miracle-Gro's growth rates can
be sustained, the combination of the companies should accelerate the growth of
the Company's sales and profits. While the Company's management, after
reviewing the plans of the Miracle-Gro Companies and discussing them with their
management, believes these rates of growth to be sustainable, there can be no
assurance that these expectations will be realized.
Third, the combination of these companies SHOULD OPEN NEW INTERNATIONAL
MARKET OPPORTUNITIES. Since its introduction in the United Kingdom five years
ago, Miracle-Gro(R) has become the leading brand of garden plant food in that
market. Miracle-Gro UK, which will become part of New Miracle-Gro in the Merger
Transactions, owns a 32.5% equity interest in Miracle Holdings Limited
("Miracle Holdings"), a newly-created entity which sells Miracle-Gro(R) products
in the United Kingdom, as well as a number of other leading brands of garden
care products formerly manufactured by ICI Zeneca. See "INFORMATION ABOUT THE
MIRACLE-GRO COMPANIES - Business of the Miracle-Gro Companies." Miracle
Holdings is a holding company which holds Miracle Garden Care, Ltd., the
successor to the businesses of two companies which had 1994 sales aggregating
over $50 million. In addition, Miracle-Gro UK has the option to increase its
percentage ownership from 32.5% to approximately 98% of the equity of Miracle
Holdings, initially for (pound)35 million. Whether or not that option is
exercised, the Company's management believes that the combination of
Miracle-Gro's proven consumer acceptance in the United Kingdom, and the
acceptance of the
4
17
Company's products, including Osmocote(R), in the commercial market in Europe
should give the combined companies the financial and management resources to
accelerate their growth outside of North America.
Fourth, the Miracle-Gro Companies' profitability, and the fact that
they require very little capital (other than seasonal borrowings), should
result in SUBSTANTIALLY INCREASED FREE CASH FLOW for the Company. While the
Company has not yet decided what uses it will make of any such cash, the
Company plans to consider some or all of the following: investment in the
business, including research and development, capital expenditures, paying down
debt, a Common Share buyback and a Common Share dividend.
Finally, the combination of the Company and the Miracle-Gro Companies
should result in the ENHANCEMENT OF THE COMPANY'S BALANCE SHEET. Since the
Miracle-Gro Companies have relatively little debt, key financial ratios -- and
therefore the Company's credit-worthiness -- will be improved on a pro forma
basis as a result of the Merger Transactions.
Of course, as in any business transaction, there can be no assurance
that the Company's expectations will be realized.
OPINION OF FINANCIAL ADVISOR
On January 23, 1995, Smith Barney Inc. ("Smith Barney"), the Company's
financial advisor, delivered its oral opinion (which was subsequently confirmed
in writing as of January 26, 1995) to the effect that the consideration
proposed to be paid in the Merger Transactions by the Company is fair, from a
financial point of view, to the Company. The full text of the written opinion,
which sets forth the assumptions made, procedures followed, matters considered
and scope of the review by Smith Barney in rendering its opinion, is attached
hereto as Appendix II and should be read in its entirety. See "THE MERGER
TRANSACTIONS - Opinion of Financial Advisor" for information regarding, among
other things, the selection of Smith Barney and its compensation in connection
with the Merger Transactions.
VOTE REQUIRED
The consummation of the Merger Transactions is conditioned on, among
other things, the approval of certain matters to be considered at the Annual
Meeting. The shareholders of the Company must approve the Acquisition because,
immediately thereafter, the Miracle-Gro Shareholders will exercise in excess of
one-third of the voting power of the Company. The GCL provides that any
"control share acquisition" of a public company must be submitted to the
Company's shareholders. The GCL defines a control share acquisition to include
an acquisition of the Company's shares which would give the acquiring person
voting power falling within one of the following three categories: (a)
one-fifth or more but less than one-third of the voting power, (b) one-third or
more but less than a majority of the voting power, and (c) a majority or more
of the voting power. For the Acquisition to be approved, the affirmative vote
of the holders of a majority of the voting power of the Company represented at
a meeting at which a quorum is present and the affirmative vote of the holders
of a majority of the portion of such voting power excluding "Interested Shares"
is required. "Interested Shares" are defined by the GCL to include shares held
by the Acquiring Person (i.e., the Miracle-Gro Shareholders), shares held by an
officer of the Company elected or appointed by the Board of Directors, shares
held by employees of the Company who are also directors and certain shares
purchased after a control share acquisition is announced. As indicated
elsewhere in this Proxy Statement/Prospectus, officers and directors as a group
own approximately 9% of the Company's outstanding Common Shares. The
Miracle-Gro Shareholders do not currently own any Common Shares of the Company.
See "PROPOSAL TO APPROVE ACQUISITION OF ONE-THIRD OR MORE BUT LESS THAN A
MAJORITY OF THE VOTING POWER OF THE COMPANY - Recommendation and Vote."
In addition, the proposed amendment to the Amended Articles of
Incorporation to authorize the Class A Convertible Preferred Stock must be
approved by the holders of two-thirds of the outstanding Common Shares. See
"PROPOSED AMENDMENT TO ARTICLE FOURTH OF THE AMENDED ARTICLES OF INCORPORATION -
5
18
Recommendation and Vote." The proposed amendments to Section 2.02 of the Code
of Regulations must be adopted by the affirmative vote of the holders of a
majority of the voting power of the Company. See "PROPOSED AMENDMENTS TO
SECTION 2.02 OF THE CODE OF REGULATIONS - Recommendation and Vote."
REGULATORY MATTERS
The Merger Transactions are subject to the applicable provisions of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules
and regulations thereunder (the "HSR Act").
The Company and the Miracle-Gro Companies filed the information and
material required under the HSR Act with the Antitrust Division of the
Department of Justice (the "Antitrust Division") and the Federal Trade
Commission (the "FTC") on January 31, 1995. A request for further information
and documentary material was received from the FTC on March 2, 1995. The
respective waiting periods under the HSR Act will expire twenty days after
substantial compliance by the Company and the Miracle-Gro Companies with the
request unless such waiting periods are earlier terminated by the FTC or unless
the parties agree to extend such waiting periods. The Company and the
Miracle-Gro Companies expect to file their respective information as promptly
as practicable. The Merger Transactions cannot be consummated until the
expiration or termination of the HSR Act waiting periods. See "THE MERGER
TRANSACTIONS -- Antitrust Considerations."
DISSENTERS' RIGHTS
Shareholders of the Company have no dissenters' rights with respect to
the Merger Transactions, the Reincorporation, the Acquisition or any other
matter to be considered at the Annual Meeting.
The Miracle-Gro Shareholders have unanimously approved the Merger
Transactions. Therefore, none of the Miracle-Gro Shareholders has any
dissenters' rights with respect to the Merger Transactions.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
No gain or loss will be recognized by the Company or the Company's
shareholders for federal income tax purposes as a result of the Merger
Transactions. With respect to the Miracle-Gro Shareholders, the consummation
of the Merger Transactions is conditioned, among other things, upon the receipt
of an opinion of Skadden, Arps, Slate, Meagher & Flom, special counsel to the
Miracle-Gro Companies, to the effect that each of the Merger and the Subsequent
Mergers should constitute a tax-free reorganization pursuant to Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code"). See "THE MERGER
TRANSACTIONS - Federal Income Tax Consequences."
6
19
THE COMPANY'S SUMMARY HISTORICAL FINANCIAL DATA
The following summary historical financial data should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto as of September 30, 1993 and 1994 and for the three years ended
September 30, 1994 included elsewhere herein. The summary historical financial
data as of January 1, 1994 and December 31, 1994 and for the three months then
ended, respectively, are derived from unaudited consolidated financial
statements included elsewhere herein. Such unaudited consolidated financial
statements have been prepared on the same basis as the Company's Consolidated
Financial Statements, and the Company's management believes that such unaudited
consolidated financial statements contain all adjustments necessary for a fair
presentation of the financial information presented (consisting only of normal
recurring adjustments). Interim results are not necessarily indicative of
results for the full year. The summary historical consolidated financial data
should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto and "INFORMATION ABOUT THE COMPANY -- Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein.
FISCAL YEAR ENDED SEPTEMBER 30, THREE MONTHS ENDED
---------------------------------------------------- ---------------------------
1990 1991 1992 1993(1) 1994(2) 1/1/94(2) 12/31/94
-------- -------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
STATEMENT OF INCOME DATA:
Net sales............................. $350,441 $388,120 $413,558 $466,043 $606,339 $ 68,326 $ 98,019
Gross profit.......................... 163,638 180,164 200,425 221,825 286,609 30,962 44,499
Total operating expenses.............. 135,868 144,777 158,280 178,004 227,337 30,939 44,169
Income from operations................ 27,770 35,387 42,145 43,821 59,272 23 330
Interest expense...................... 34,531 30,932 15,942 8,454 17,450 2,640 5,694
Income (loss) before income taxes,
extraordinary items and cumulative
effect of accounting changes........ (6,761) 4,455 26,203 35,367 41,822 (2,617) (5,364)
Income taxes.......................... 143 2,720 11,124 14,320 17,947 (1,060) (2,226)
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 (loss)..................... (6,904) 4,316 15,592 7,890 22,883 (1,557) (3,138)
Net income (loss) per share........... $ (0.58) $ 0.36 $ 0.87 $ 0.40 $ 1.22 $ (0.08) $ (0.17)
OTHER HISTORICAL DATA:
Depreciation and amortization......... $ 20,474 $ 17,785 $ 15,848 $ 18,144 $ 21,937 $ 4,603 $ 5,801
Capital investment.................... 8,494 8,818 19,896 15,158 33,402 4,985 5,012
Ratio of earnings to fixed charges and
preferred stock dividends(3)........ (4) 1.14x 2.40x 4.08x 2.89x (5) (6)
Book value per share(7)............... $ (0.49) $ (0.39) $ 8.35 $ 7.66 $ 9.01 $ 7.58 $ 8.84
BALANCE SHEET DATA (END OF PERIOD):
Working capital....................... $ 18,230 $ 21,260 $ 54,795 $ 88,526 $140,566 $ 112,717 $ 135,427
Total assets.......................... 270,429 260,729 268,021 321,590 528,584 508,742 576,618
Long-term debt, including current
portion............................. 192,915 182,954 31,897 92,524 223,885 226,084 223,158
Total shareholders' equity
(deficit)........................... (12,677) (9,961) 175,929 143,013 168,160 141,371 165,061
7
20
- ---------------
(1) Includes Republic Tool & Manufacturing Corp. from November 19, 1992.
(2) Includes Scotts-Sierra Horticultural Products Company ("Sierra") from
December 17, 1993.
(3) The ratio of earnings to fixed charges is computed by dividing (a) the sum
of (i) income from operations before income taxes, extraordinary items and
the cumulative effect of accounting changes and (ii) fixed charges by (b)
fixed charges. Fixed charges consist of interest on all indebtedness
(including amortization of deferred financing costs), capitalized interest
and the estimated interest component of operating leases (assumed to be
one-third of total rental expense). The ratio of earnings to fixed charges
and preferred stock dividends does not include preferred stock dividends, as
the Company has not had preferred stock outstanding for the periods
presented.
(4) Reflects a deficiency of earnings to fixed charges of $6.8 million.
(5) Reflects a deficiency of earnings to fixed charges of $2.6 million.
(6) Reflects a deficiency of earnings to fixed charges of $5.4 million.
(7) Book value per share is computed by dividing the number of Common Shares
outstanding at the end of the period into total shareholders' equity
(deficit) at the end of the period.
THE MIRACLE-GRO COMPANIES
SUMMARY HISTORICAL COMBINED FINANCIAL DATA
The following summary historical combined financial data should be read in
conjunction with the Miracle-Gro Companies' Combined Financial Statements and
Notes thereto as of September 30, 1993 and 1994 and for the three years ended
September 30, 1994 included elsewhere herein. The summary historical combined
financial data as of December 31, 1993 and 1994 and for the three months then
ended, respectively, are derived from unaudited combined financial statements
included elsewhere herein. Such unaudited combined financial statements
have been prepared on the same basis as the Miracle-Gro Companies' Combined
Financial Statements, and Miracle-Gro's management believes that such unaudited
combined financial statements contain all adjustments necessary for a fair
presentation of the financial information presented (consisting only of normal
recurring adjustments). Interim results are not necessarily indicative of
results for the full year. The summary historical combined financial data
should be read in conjunction with the Miracle-Gro Companies' Combined
Financial Statements and Notes thereto and "INFORMATION ABOUT THE MIRACLE-GRO
COMPANIES -- Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere herein.
FISCAL YEAR ENDED SEPTEMBER 30, THREE MONTHS ENDED
------------------------------------------------ DECEMBER 31,
1990 1991 1992 1993 1994 ------------------------
------- ------- ------- ------- -------- 1993 1994
----------- -----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
STATEMENT OF INCOME DATA(1):
Net sales................................ $62,655 $72,494 $93,147 $92,779 $107,421 $14,078 $15,255
Gross profit............................. 29,812 35,480 46,499 45,946 55,166 7,054 7,553
Total operating expenses................. 16,848 17,768 21,607 22,435 25,642 3,376 4,808
Income from operations................... 12,964 17,712 24,892 23,511 29,524 3,678 2,745
Interest (income) expense, net........... (304) (155) 77 312 125 (1) 3
Income before income taxes............... 13,268 17,867 24,815 23,199 29,399 3,679 2,742
Income taxes............................. 165 284 732 527 490 120 149
Net income............................... 13,103 17,583 24,083 22,672 28,909 3,559 2,593
OTHER HISTORICAL DATA:
Depreciation and amortization............ $ 184 $ 222 $ 236 $ 244 $ 377 $ 53 $ 108
Capital investment....................... 343 362 194 413 914 237 113
BALANCE SHEET DATA (END OF PERIOD):
Working capital.......................... $17,159 $19,984 $26,200 $24,272 $ 30,694 $18,629 $18,745
Total assets............................. 21,497 25,043 32,925 29,707 38,835 35,874 46,052
Long-term debt, including current
portion................................ -- 2,300 2,300 3,500 3,500 3,500 3,500
Total shareholders' equity............... 18,440 19,036 23,945 22,174 29,111 16,764 17,166
- ---------------
(1) The Miracle-Gro Companies, other than Nurseries, have elected to be taxed as
Subchapter S corporations. Accordingly, the summary historical combined
financial data does not reflect provisions for income taxes that would have
been incurred if the Miracle-Gro Companies had been taxed as C corporations.
8
21
THE COMPANY'S SUMMARY UNAUDITED PRELIMINARY PRO FORMA
CONSOLIDATED FINANCIAL DATA
The following summary unaudited preliminary pro forma consolidated
financial data of the Company and the Miracle-Gro Companies should be read in
conjunction with the unaudited preliminary pro forma consolidated financial data
included elsewhere herein. The following summary unaudited preliminary pro forma
consolidated financial data give effect to the significant prior acquisition of
Sierra, which occurred on December 16, 1993 as if it had occurred on October 1,
1992 and to the Merger Transactions as if they had occurred on October 1, 1993.
THE PRELIMINARY PRO FORMA INFORMATION AND ACCOMPANYING NOTES SHOULD BE READ
IN CONJUNCTION WITH THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO WHICH ARE INCLUDED ELSEWHERE HEREIN AND WITH THE MIRACLE-GRO COMPANIES'
COMBINED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE HEREIN. THE
PRELIMINARY PRO FORMA CONSOLIDATED FINANCIAL DATA DOES NOT PURPORT TO REPRESENT
WHAT THE COMPANY'S RESULTS OF OPERATIONS ACTUALLY WOULD HAVE BEEN HAD THE
ACQUISITION OF SIERRA OCCURRED ON OCTOBER 1, 1992 OR THE MERGER TRANSACTIONS
OCCURRED ON OCTOBER 1, 1993 OR TO PROJECT THE COMPANY'S RESULTS OF OPERATIONS
FOR ANY FUTURE PERIOD. THE PRELIMINARY PRO FORMA CONSOLIDATED FINANCIAL DATA IS
BASED ON ESTIMATES OF FINANCIAL EFFECTS THAT MAY NOT PROVE TO BE ACCURATE OVER
TIME.
FISCAL YEAR THREE MONTHS
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
1994 1994
------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT
RATIOS AND PER SHARE DATA)
PRELIMINARY PRO FORMA STATEMENT OF INCOME DATA:
Net sales.......................................................... $ 726,231 $109,906
Gross profit....................................................... 350,909 50,777
Total operating expenses........................................... 266,388 48,868
Income from operations............................................. 84,521 1,909
Interest expense................................................... 19,035 5,697
Income (loss) before income taxes and extraordinary item........... 65,486 (3,788)
Income taxes....................................................... 28,722 (1,129)
Net income before extraordinary item............................... 36,764 (2,659)
OTHER PRELIMINARY PRO FORMA DATA:
Depreciation and amortization...................................... 22,314 5,909
Capital investment................................................. 34,316 5,125
Earnings per common share -- primary and fully diluted............. $ 1.27 $ (0.27)
Book value per share(1)............................................ N/A 12.58
- ---------------
(1) Preliminary pro forma book value per share as of December 31, 1994 is
calculated using the Common Shares outstanding of the Company of 18,667,064
and the Common Shares issued assuming conversion of the Class A Convertible
Preferred Stock of 10,263,158 Common Shares.
9
22
THE ANNUAL MEETING
GENERAL
This Proxy Statement/Prospectus is furnished to the Company's shareholders
in connection with the solicitation on behalf of the Board of Directors of the
Company of proxies for use at the Annual Meeting to be held at the Stouffer
Dublin Hotel, 600 Metro Place North, Dublin, Ohio 43017, on Thursday, April 6,
1995, at 10:00 a.m., local time, and at any adjournment or adjournments thereof.
This Proxy Statement/Prospectus and the accompanying form of proxy were first
mailed to shareholders on or about March 16, 1995.
MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING
At the Annual Meeting, shareholders will be asked (i) to consider and vote
upon the acquisition of one-third or more but less than a majority of the voting
power of the Company by the Miracle-Gro Shareholders; (ii) to consider and act
upon a proposal to amend Article FOURTH of the Amended Articles of Incorporation
of the Company to increase the authorized number of Common Shares to 50,000,000
and to authorize a class of 195,000 voting preferred shares designated Class A
Convertible Preferred Stock; (iii) to consider and act upon a proposal to amend
the Amended Articles of Incorporation by adding new Article NINTH; (iv) to
consider and act upon proposals to amend Sections 2.02 and 6.01 of the Code of
Regulations; (v) to elect directors and (vi) to transact such other business as
may properly come before the Annual Meeting.
The Board of Directors has unanimously approved the Merger Transactions,
the Reincorporation, the Acquisition and each of the other matters to be voted
upon at the Annual Meeting. The Board recommends a vote FOR the Acquisition and
each of the other matters described herein and FOR the election of the directors
named herein.
VOTING AT THE MEETING; RECORD DATE
Only holders of record of the Company's Common Shares at the close of
business on the Record Date will be entitled to vote at the Annual Meeting. As
of the Record Date, there were 18,667,064 Common Shares outstanding. Each
Common Share entitles the holder to one vote. A quorum for the Annual Meeting is
a majority of the Common Shares outstanding. In addition, a quorum for purposes
of Proposal No. 1 only includes a majority of the portion of the voting
power excluding "Interested Shares." See "PROPOSAL TO APPROVE ACQUISITION OF
ONE-THIRD OR MORE BUT LESS THAN A MAJORITY OF THE VOTING POWER OF THE
COMPANY -- Recommendation and Vote." There is no cumulative voting. There are no
other voting securities of the Company outstanding.
Common Shares represented by signed proxies that are returned to the
Company will be counted toward the quorum in all matters even though they are
marked as "Abstain," "Against" or "Withhold Authority" on one or more or all
matters or they are not marked at all. Broker/dealers, who hold their customers'
shares in street name, may, under the applicable rules of the exchange and other
self-regulatory organizations of which the broker/dealers are members, sign and
submit proxies for such shares and may vote such shares on routine matters,
which, under such rules, typically include the election of directors, but
broker/dealers may not vote such shares on other matters, which typically
include amendments to the articles of incorporation of the Company and the
approval of stock compensation plans, without specific instructions from the
customer who owns such shares. Proxies signed and submitted by broker/dealers
which have not been voted on certain matters as described in the previous
sentence are referred to as broker non-votes. Such proxies count toward the
establishment of a quorum. THE EFFECT OF AN ABSTENTION OR BROKER NON-VOTE ON
EACH OF THE MATTERS TO BE VOTED UPON AT THE MEETING IS THE SAME AS A "NO" VOTE.
10
23
If the accompanying proxy card is properly signed and returned to the
Company prior to the Annual Meeting and not revoked, it will be voted in
accordance with the instructions contained therein. If no instructions are
given, the persons designated as proxies in the accompanying proxy card will
vote FOR the election as directors of those persons named below and FOR all
other proposals set forth herein.
The Board of Directors is not currently aware of any matters other than
those referred to herein which will come before the Annual Meeting. If any
other matter should be presented at the Annual Meeting for action, the persons
named in the accompanying proxy card will vote the proxy in their own
discretion.
You may revoke your proxy at any time before it is actually voted at
the Annual Meeting by delivering written notice of revocation to the Secretary
of the Company, by submitting a subsequently dated proxy, or by attending the
Annual Meeting and voting in person. Attendance at the Annual Meeting will
not, in itself, constitute revocation of the proxy.
The expense of preparing, printing and mailing proxy materials to the
Company's shareholders will be borne by the Company. The Company has engaged
Georgeson & Company to assist in the solicitation of proxies from stockholders
at a fee of approximately $10,000 plus reimbursement of reasonable
out-of-pocket expenses. In addition, proxies may be solicited personally or by
telephone, mail or telegraph. Officers or employees of the Company may assist
with personal or telephone solicitation and will receive no additional
compensation therefor. The Company will also reimburse brokerage houses and
other nominees for their reasonable expenses in forwarding proxy materials to
beneficial owners of the Common Shares.
If a shareholder is a participant in The Scotts Company Profit Sharing
and Savings Plan (the "PSP") and Common Shares have been allocated to such
person's account in the PSP, the trustee will vote the allocated Common Shares.
THE MERGER TRANSACTIONS
BACKGROUND OF THE MERGER TRANSACTIONS
Representatives of the Company have inquired of Miracle-Gro's
management periodically whether they would consider a business combination. In
the fall of 1994, the principals of Miracle-Gro and members of the Company's
senior management began meeting to determine whether there was a basis for
agreement. In September, the Miracle-Gro Companies retained CS First Boston to
provide advice with respect to the possible business combination, while, in
October, the Company determined to pursue this opportunity and retained Smith
Barney to assist in the negotiations. On October 3, 1994, the Company and
Miracle-Gro executed a confidentiality agreement. Thereafter, the parties
periodically discussed the terms of a possible business combination. Such
discussions culminated in the execution of the Agreement on January 26, 1995.
The consideration to be paid by the Company in the Merger Transactions
was determined by arms-length negotiation among the Miracle-Gro Companies, the
Miracle-Gro Shareholders and the Company, after consultation by the Company
with Smith Barney and consultation by the Miracle-Gro Shareholders with CS First
Boston.
EFFECT OF THE PROPOSED MERGER TRANSACTIONS
In connection with the Merger Transactions, the Miracle-Gro
Shareholders, as a group, will receive 195,000 shares of Class A Convertible
Preferred Stock of the Company, having approximately 35% of the voting power of
the Company, and Warrants to purchase an additional 3,000,000 Common Shares of
the Company, which, if exercised, would enable them to exercise, together with
the Class A Convertible Preferred Stock, approximately 42% of the voting power
of the Company. As a result, the Miracle-Gro Shareholders, voting together,
would be able to block any matter requiring the affirmative vote of two-thirds
of the voting power of the Company. A two-thirds vote is required to effect a
merger or consolidation, combination or majority share acquisition, sale or
other disposition of all or substantially all of the assets or dissolution of
the Company, and may be required to amend the Articles of Incorporation of the
Company. See "PROPOSED AMENDMENT TO ADOPT NEW ARTICLE NINTH OF THE AMENDED
ARTICLES OF INCORPORATION." If Proposal No. 6 is adopted, a two-thirds vote
would also be required to amend certain provisions of the Company's Code of
Regulations. See "PROPOSED AMENDMENT TO SECTON 6.01 OF THE CODE OF REGULATIONS."
The Agreement provides that the Miracle-Gro Shareholders shall be
entitled to designate three directors (one in each of the newly created
classes) to sit on the newly expanded twelve person Board of Directors. In
addition, the Agreement provides for certain voting rights of and certain
voting restrictions on the Miracle-Gro Shareholders and limits the ability of
the Miracle-Gro Shareholders to acquire additional Voting Stock of the Company
or to transfer the Class A Convertible Preferred Stock, the Warrants or the
underlying Common Shares. These provisions may have a significant effect on
the management and day-to-day operations of the Company and are more fully
described herein under "THE AGREEMENT - Standstill Provisions."
REASONS FOR THE MERGER TRANSACTIONS
The Board of Directors believes that the terms of the Merger
Transactions are fair to, and in the best interests of, the Company and its
shareholders. Accordingly, the Board of Directors has unanimously approved the
Agreement and the transactions contemplated thereby.
11
24
The Board of Directors believes that the Merger Transactions offer the
Company several unique and significant business opportunities that are
consistent with the Company's principal long-term growth strategies to enhance
the Company's position as the leading provider of brand name products for the
consumer lawn and garden and professional turf care markets in the United
States, while substantially expanding the Company's presence and growth
potential in markets overseas. Specifically, the Company's management and the
Board of Directors expect the Company to derive from the Merger Transactions
the following principal benefits:
First, the Merger Transactions WILL BRING TOGETHER TWO OF THE STRONGEST
BRANDS -- SCOTTS(R) AND MIRACLE-GRO(R) -- IN THE LAWN AND GARDEN INDUSTRY and
should establish the Company as a strong branded packaged-goods marketer.
Second, the combination SHOULD CREATE A MORE PROFITABLE, FASTER GROWING
COMPANY. Sales of the Miracle-Gro Companies have, over the last five years,
grown at greater than a 13% annual rate and net income has increased at more
than a 16% annual rate -- both higher than the Company's annual growth rates
for the comparable period. Therefore, assuming that Miracle-Gro's growth rates
can be sustained, the combination of the companies should accelerate the growth
of the Company's sales and profits. While the Company's management, after
reviewing the plans of the Miracle-Gro Companies and discussing them with their
management, believes these rates of growth to be sustainable, there can be no
assurance that these expectations will be realized.
Third, the combination of these companies SHOULD OPEN NEW INTERNATIONAL
MARKET OPPORTUNITIES. Since its introduction in the United Kingdom five years
ago, Miracle-Gro(R) has become the leading brand of garden plant food in that
market. Miracle-Gro UK, which will become part of New Miracle-Gro in the
Merger Transactions, owns a 32.5% equity interest in Miracle Holdings, a
newly-created entity which sells Miracle-Gro(R) products in the United Kingdom,
as well as a number of other leading brands of garden care products formerly
manufactured by ICI Zeneca. See "INFORMATION ABOUT THE MIRACLE-GRO COMPANIES -
Business of the Miracle-Gro Companies." Miracle Holdings is a holding company
which holds Miracle Garden Care, Ltd., the successor to the businesses of two
companies which had 1994 sales aggregating over $50 million. In addition,
Miracle-Gro UK, and upon consummation of the Merger Transactions New
Miracle-Gro, has the option to increase its percentage ownership from 32.5% to
approximately 98% of the equity of Miracle Holding, initially for (pound)35
million. Whether or not that option is exercised, the Company's management
believes that the combination of Miracle-Gro's proven consumer acceptance in
the United Kingdom, and the acceptance of the Company's products, including
Osmocote(R), in the commercial market in Europe should give the combined
companies the financial and management resources to accelerate their growth
outside of North America.
Fourth, the Miracle-Gro Companies' profitability, and the fact that
they require very little capital (other than seasonal borrowings), should
result in SUBSTANTIALLY INCREASED FREE CASH FLOW for the Company. While the
Company has not yet decided what uses it will make of this cash, the Company
plans to consider some or all of the following: investment in the business,
including research and development, capital expenditures, paying down debt, a
Common Share buyback and a Common Share dividend.
Finally, the combination of the Company and the Miracle-Gro Companies
should result in the ENHANCEMENT OF THE COMPANY'S BALANCE SHEET. Since the
Miracle-Gro Companies have relatively little debt, key financial ratios -- and
therefore the Company's credit-worthiness -- will be improved on a pro forma
basis as a result of the Merger Transactions.
Of course, as in any business transaction, there can be no assurance
that the Company's expectations will be realized.
In reaching its decision to approve the Agreement and the transactions
contemplated thereby, the material factors considered by the Board of
Directors were: (i) information concerning the financial performance,
financial condition, business operations and prospects of each of the Company
and the Miracle-Gro Companies; (ii) historical market prices and trading
information with respect to the Company's Common Shares; (iii) the expected
effect of the Merger Transactions on the Company's earnings per share based on
historical audited financial statements of the
12
25
Company and the Miracle-Gro Companies, financial forecasts prepared by their
respective managements and upon the amount and terms of the Class A Convertible
Preferred Stock and the Warrants to be issued in connection with the Merger
Transactions; (iv) the expected enhancement of the Company's capitalization and
cash flows as a result of the addition of Miracle-Gro's operating cash flows;
(v) the potential efficiencies and economies of scale resulting from the
combination to be effected by the Merger Transactions; (vi) the proposed terms
and structure of the Merger Transactions; (vii) the terms of the Agreement and
(viii) the opinion of Smith Barney referred to below (see "THE MERGER
TRANSACTIONS - Opinion of Financial Advisor").
OPINION OF FINANCIAL ADVISOR
The Board of Directors of the Company retained Smith Barney as
exclusive financial advisor to the Company to render certain financial advisory
services to the Company in connection with the Merger Transactions. In
connection with such engagement, the Company requested that Smith Barney
evaluate the fairness to the Company, from a financial point of view, of the
consideration to be paid by the Company in the Merger Transactions. On January
23, 1995, in connection with the evaluation of the proposed Agreement by the
Board of Directors of the Company, Smith Barney delivered its oral opinion
(which was subsequently confirmed in writing by a letter dated January 26,
1995) to the Board of Directors of the Company that, as of such
date and based upon and subject to certain matters stated in such opinion, the
value of the consideration to be paid in the Merger Transactions was fair, from
a financial point of view, to the Company.
In arriving at the opinion set forth in its January 26, 1995 letter,
Smith Barney reviewed a copy of the Agreement entered into by the parties
thereto on January 26, 1995. In delivering its oral opinion on January 23,
1995, Smith Barney reviewed a current draft of the Agreement (draft of January
21, 1995), the terms of which did not vary materially from the definitive
Agreement. Smith Barney held discussions with certain senior officers,
directors and other representatives and advisors of the Company and certain
senior officers and other representatives and advisors of the Miracle-Gro
Companies concerning the businesses, operations and prospects of the Company
and the Miracle-Gro Companies. Smith Barney examined certain publicly
available business and financial information relating to the Company and
certain business and financial information relating to the Miracle-Gro
Companies as well as certain financial forecasts and other data for the Company
and the Miracle-Gro Companies which were provided to Smith Barney by the
respective managements of the Company and the Miracle-Gro Companies. Smith
Barney reviewed the financial terms of the Company as set forth in the
Agreement in relation to, among other things: current and historical market
prices and trading volumes of the Company's Common Shares; the historical and
projected earnings of the Company and the Miracle-Gro Companies; and the
capitalization and financial condition of the Company and the Miracle-Gro
Companies. Smith Barney considered, to the extent publicly available, the
financial terms of certain other similar transactions recently effected which
Smith Barney considered comparable to the Merger Transactions and analyzed
certain financial, stock market and other publicly available information
relating to the businesses of other companies whose businesses Smith Barney
considered comparable to those of the Company and the Miracle-Gro Companies.
Smith Barney also evaluated the potential pro forma financial impact of the
Merger Transactions on the Company. In addition to the foregoing, Smith Barney
conducted such other analyses and examinations and considered such other
financial, economic and market criteria as Smith Barney deemed necessary to
arrive at its opinion. Smith Barney noted that its opinion was necessarily
based upon information available, and financial, stock market and other
conditions and circumstances existing and disclosed, to Smith Barney as of the
date of its opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information publicly available or furnished to or otherwise reviewed
by or discussed with Smith Barney. With respect to financial forecasts and
other information provided to or otherwise discussed with Smith Barney, Smith
Barney has been advised by the respective managements of the Company and the
Miracle-Gro Companies that such forecasts and other information were reasonably
prepared on bases reflecting their best currently available estimates and
judgments as to the expected future financial performance of the Company and
the Miracle-Gro Companies. Smith Barney assumed that the Merger Transactions
will be treated as tax-free reorganizations for federal income tax purposes.
Smith Barney's opinion relates to the relative values of the Company and the
Miracle-Gro Companies. Smith Barney did not express any
13
26
opinion as to what the value of the consideration to be paid with respect to
the Merger Transactions actually will be when issued pursuant to the Merger
Transactions or the price at which the Company's Common Shares will trade
subsequent to the Merger Transactions. In addition, Smith Barney did not make
or obtain an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of the Company or the Miracle-Gro Companies nor did
Smith Barney make any physical inspection of the properties or assets of the
Company or the Miracle-Gro Companies. Smith Barney was not asked to consider,
and its opinion does not address, the relative merits of the Merger
Transactions as compared to any alternative business strategies that might
exist for the Company or the effect of any other transaction in which the
Company might engage. In addition, although Smith Barney evaluated the
consideration to be paid in the Merger Transactions from a financial point of
view, Smith Barney was not asked to and did not recommend the specific amount
of consideration payable in the Merger Transactions. No other limitations were
imposed by the Company on Smith Barney with respect to the investigations made
or procedures followed by Smith Barney in rendering its opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF SMITH BARNEY DATED JANUARY 26,
1995, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS
ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS APPENDIX II AND IS INCORPORATED
HEREIN BY REFERENCE. THE COMPANY'S SHAREHOLDERS ARE URGED TO READ THIS OPINION
CAREFULLY IN ITS ENTIRETY. SMITH BARNEY'S OPINION IS DIRECTED ONLY TO THE
FAIRNESS OF THE VALUE OF THE CONSIDERATION TO BE PAID IN THE MERGER
TRANSACTIONS FROM A FINANCIAL POINT OF VIEW AND HAS BEEN PROVIDED FOR
THE USE OF THE BOARD OF DIRECTORS OF THE COMPANY IN ITS EVALUATION OF THE
MERGER TRANSACTIONS, DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER
TRANSACTIONS OR RELATED TRANSACTIONS AND DOES NOT CONSTITUTE A RECOMMENDATION
TO ANY COMPANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE ANNUAL
MEETING. THE SUMMARY OF THE OPINION OF SMITH BARNEY SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION.
In preparing its opinion, Smith Barney performed a variety of
financial and comparative analyses, of which the material ones are described
below. These analyses are necessarily based on certain assumptions and on the
information provided to Smith Barney and the scope of Smith Barney's
engagement, all of which are described and summarized in the full text of the
written opinion of Smith Barney attached hereto as Appendix II. The summary
of such analyses does not purport to be a complete description of the analyses
underlying Smith Barney's opinion. The preparation of a fairness opinion is a
complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, such an opinion
is not readily susceptible to summary description. In arriving at its
opinion, Smith Barney did not attribute any particular weight to any analysis
or factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Smith
Barney believes that its analyses must be considered as a whole, i.e., matters
discussed below under the captions "Comparable Company Analysis," "Selected
Merger and Acquisition Transaction Analysis," "Discounted Cash Flow Analysis,"
"Pro Forma Merger Analysis" and "Other Facts and Comparative Analyses," and
that selecting portions of its analyses and factors, without considering all
analyses and factors, could create a misleading or incomplete view of the
processes underlying such analyses and its opinion. In its analyses, Smith
Barney made numerous assumptions with respect to the Company, the Miracle-Gro
Companies, industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control
of the Company and the Miracle-Gro Companies. The estimates contained in such
analyses are not necessarily indicative of actual values or predictive of
future results or values, which may be significantly more or less favorable
than those suggested by such analyses. In addition, analyses relating to the
value of businesses or securities do not purport to be appraisals or to
reflect the prices at which businesses or securities actually may be sold.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty.
Comparable Company Analysis
Using publicly available information, Smith Barney analyzed a number of
factors, of which the material factors were the market values and trading
multiples of selected consumer products companies with a single product brand
name, the material ones of which are: WD 40 Co., Armor All, and Eskimo Pie
Co., and the following fertilizer and lawn care products companies: IMC Global
Inc., LESCO Inc., Terra Industries and Vigoro Corp. (the "Comparable
Companies"). Smith Barney compared market values as multiples of historical
and projected net income and adjusted market values (equity market value, plus
total debt and preferred stock, less cash and cash equivalents) as multiples
of, among other things, latest 12 months net revenue and earnings before
interest, taxes, depreciation and amortization ("EBITDA"). Smith Barney also
compared the debt to capitalization ratios, profits, profit margins, historical
14
27
revenue growth and projected calendar earnings per share ("EPS") growth of the
Comparable Companies with those of the Miracle-Gro Companies. EPS projections
for the Comparable Companies were analyzed based on the consensus estimates of
selected investment banking firms, and earnings projections for the Miracle-Gro
Companies were analyzed based on internal estimates of the management of the
Miracle-Gro Companies as adjusted by the Company's management. An analysis of
multiples of projected calendar 1995 net income yielded a range of 9.1x to
16.1x with a mean of 12.9x, as compared to approximately 9.7x for the
Miracle-Gro Companies. An analysis of multiples of latest 12 months EBITDA
yielded a range of 5.3x to 12.7x with a mean of 8.9x, as compared to
approximately 6.6x for the Miracle-Gro Companies. An analysis of five-year
historical annual sales growth resulted in a range of (2.6%) to 11.8% with a
mean of 4.7%, as compared to approximately 13.7% for the Miracle-Gro Companies.
An analysis of projected earnings growth yielded a range of 7.2% to 22.5% with
a mean of 12.6%, as compared to approximately 18.8% for the Miracle-Gro
Companies. All multiples, except those with respect to the Miracle-Gro
Companies, were based on closing stock prices as of January 19,
1995.
Selected Merger and Acquisition Transactions Analysis
Using publicly available information, Smith Barney analyzed the
purchase prices and implied transaction multiples in 16 selected mergers and
acquisition transactions announced between 1990 and 1995, the material ones of
which are Snapple Beverage Corp./Quaker Oats Co. and Neutrogena Corp./Johnson
& Johnson in the single-product brand name consumer products industry and
Grace-Sierra Horticultural Products Co./The Scotts Co. and Chevron Chemical
Company-Ortho/Monsanto Co. in the fertilizer and lawn and garden care products
industry (the "Selected Acquisitions"). Smith Barney compared transaction
values as multiples of latest 12 month revenue and EBITDA (a higher multiple
implies a higher price). An analysis of multiples of latest 12 month revenue
for the Selected Acquisitions yielded a range of 1.0x to 3.3x, with a mean of
2.1x, as compared to approximately 2.0x for the Miracle-Gro Companies (for
fiscal 1994). An analysis of the multiples to EBITDA for the Selected
Acquisitions yielded a range of 7.7x to 19.4x, with a mean of 9.0x, as compared
to approximately 6.6x for the Miracle-Gro Companies (for fiscal 1994).
No company, transaction or business used in the comparable company and
selected merger and acquisitions transactions analyses as a comparison is
identical to the Company, the Miracle-Gro Companies or the Merger Transactions.
Accordingly, an analysis of the results of the foregoing is not entirely
mathematical; rather, it involves complex considerations and judgments in order
to identify the Comparable Companies and Selected Acquisitions. In identifying
similar transactions, Smith Barney considered the consumer fertilizer industry
and companies with a single product brand name, the method of distributing the
product, transactions which occured after January 1993 and transactions in
excess of $25 million. Additional factors specifically considered are
differences in financial and operating characteristics and other factors that
could affect the acquisition or public trading value of the comparable
companies or the business segment or company to which they are being compared.
Discounted Cash Flow Analysis
Smith Barney performed discounted cash flow analyses of the projected
Miracle-Gro Companies' cash flows for the fiscal years ended September 30, 1995
through 1999, assuming, among other things, discount rates of 10% to 14%
(intended to reflect the Company's weighted average cost of capital) and
terminal multiples (i.e., the multiples used to estimate the valuation of the
Company at the end of the period) of 5x to 7x of EBITDA. Utilizing these
assumptions, Smith Barney arrived at an equity valuation reference range for
the Miracle-Gro Companies of approximately $266 million to $403 million. The
Company estimated the market value of the securities to be issued to acquire
the Miracle-Gro Companies at $167,200,000 for the 5% Convertible Preferred
Stock and $11,800,000 for the Warrants to purchase common stock. See Footnote 8
to the Company's Preliminary Pro Forma Consolidated Financial Information.
Pro Forma Merger Analysis
Smith Barney analyzed certain pro forma effects resulting from the
Merger Transactions assuming a March 31, 1995 closing, the material effects of
which were the enhanced credit statistics of the Company discussed below under
"Other Facts and Comparative Analyses" and the impact of the Merger
Transactions on the projected EPS of the Company for the fiscal years ended
1995 through 1999. The results of the pro forma merger analysis suggest that
the Merger Transactions would be break-even with respect to EPS for fiscal
1994, break-even with respect to consensus EPS estimates of selected investment
banking firms for fiscal 1995 and accretive for 1996 (an estimated range of
6.3% to 13.2%) through 1999 (an estimated range of 20.7% to 28.5%). The actual
results achieved by the combined company may vary from projected results, and
the variations may be material.
15
28
Other Facts and Comparative Analyses
In rendering its opinion, Smith Barney considered certain other factors
and conducted certain other comparative analyses, of which the material ones
are a review of (i) the historical and projected financial results of the
Company and the Miracle-Gro Companies, (ii) the history of trading prices for
the Company's Common Shares and (iii) the expected effect of the Merger
Transactions on selected credit statistics of the Company.
Pursuant to the terms of Smith Barney's engagement, the Company has
agreed to pay Smith Barney $450,000 upon delivery of its fairness opinion and a
transaction fee of $1.8 million (reduced by the amount paid in respect of the
delivery of the fairness opinion) upon consummation of the transaction. In the
event the transactions contemplated by the Agreement are not consummated and
the Company receives compensation in respect thereof, Smith Barney is entitled
to receive a termination fee equal to 10% of such compensation (reduced by the
amount paid in respect of the delivery of the fairness opinion). The Company
also has agreed to reimburse Smith Barney for travel and other out-of-pocket
expenses incurred by Smith Barney in performing its services, including the
fees and expenses of its legal counsel, and has agreed to indemnify Smith
Barney and related persons against certain liabilities, including liabilities
under the federal securities laws, arising out of Smith Barney's engagement.
Smith Barney has advised the Company that, in the ordinary course of
business, it may actively trade the equity and debt securities of the Company
for its own account or for the account of its customers and, accordingly, may
at any time hold a long or short position in such securities.
Smith Barney is a nationally recognized investment banking firm and was
selected by the Company based on Smith Barney's experience and expertise.
Smith Barney regularly engages in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of certain material federal income
tax consequences of the Merger Transactions. The discussion is based on the
Code, judicial decisions and administrative regulations, rulings and practices,
all of which are subject to change. The following does not address any state,
local or foreign income and other tax consequences of the Merger Transactions.
Neither the Company nor the holders of the Company's Common Shares will
recognize any gain or loss for federal income tax purposes as a result of the
Merger Transactions.
With respect to the Miracle-Gro Shareholders, the consummation of the
Merger Transactions is conditioned, among other things, upon the receipt of an
opinion of Skadden, Arps, Slate, Meagher & Flom, special counsel to the
Miracle-Gro Companies, to the effect that each of the Merger and the Subsequent
Mergers should constitute a tax-free reorganization pursuant to Section 368(a)
of the Code. Such opinion will be conditioned and based on certain statements
and representations which are expected to be made at the Effective Time by
executives of the Miracle-Gro Companies and the Company, and is subject to the
assumptions and limitations described therein. The opinion will not be binding
on the Internal Revenue Service, nor will it preclude the Internal Revenue
Service from taking a contrary position. Subject to these limitations, the
following is a summary of the material federal income tax consequences of the
Merger Transactions:
(i) each of the Merger Transactions should constitute a reorganization
within the meaning of Section 368(a) of the Code, and the Company,
Merger Subsidiary and each Miracle-Gro Company should each be a party
to the respective reorganizations of which they are a part within the
meaning of Section 368(b) of the Code;
16
29
(ii) no gain or loss should be recognized by the shareholders of a
Miracle-Gro Company upon their receipt of shares of Class A Convertible
Preferred Stock in a Merger Transaction in exchange for their shares of
stock of the relevant Miracle-Gro Company;
(iii) each shareholder of a Miracle-Gro Company should, with respect to each
Merger Transaction, recognize taxable income equal to the lesser of (x)
the fair market value of the Warrants received by such shareholder in
exchange for such shareholder's shares of stock of the relevant
Miracle-Gro Company and (y) the difference between the aggregate fair
market value of the shares of Class A Convertible Preferred Stock and
the Warrants received by such shareholder in such Merger Transaction
and such shareholder's tax basis in the stock of the relevant
Miracle-Gro Company exchanged therefor;
(iv) the tax basis of a shareholder of a Miracle-Gro Company in the shares
of Class A Convertible Preferred Stock received by such shareholder
should be the same as such shareholder's tax basis in the stock of such
Miracle-Gro Company exchanged therefor, decreased by the fair market
value of the Warrants received and increased by any taxable income
recognized by such shareholder in respect of such Merger Transactions;
(v) the tax basis of a shareholder of a Miracle-Gro Company in the Warrants
received by such shareholder will be equal to the fair market value of
the Warrants received; and
(vi) the holding period of the shares of Class A Convertible Preferred Stock
in the hands of a shareholder of a Miracle-Gro Company should include
the holding period of such shareholder's shares of stock of such
Miracle-Gro Company exchanged therefor.
The foregoing summary of federal income tax consequences is included
herein for general information only and does not address the federal income tax
consequences to all categories of Miracle-Gro Shareholders. EACH MIRACLE-GRO
SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE SPECIFIC
TAX CONSEQUENCES TO HIM OR HER OF THE MERGER TRANSACTIONS, INCLUDING THE
APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
ANTITRUST CONSIDERATIONS
Transactions such as the Merger Transactions are reviewed by the
Antitrust Division or the FTC to determine whether they comply with applicable
antitrust laws. Under the provisions of the HSR Act, the Merger Transactions
cannot be consummated until such time as the requirements of the HSR Act have
been satisfied. Certain information was filed with the Antitrust Division and
the FTC under the HSR Act by the Company and the Miracle-Gro Companies on
January 31, 1995. The Company and the Miracle-Gro Companies received a request
for additional information and documentary material from the FTC on March 2,
1995. The respective waiting periods under the HSR Act will expire twenty days
after substantial compliance by the Company and the Miracle-Gro Companies with
the request unless such waiting periods are earlier terminated by the FTC or
unless the parties agree to extend such waiting periods. The Company and the
Miracle-Gro Companies expect to file their respective information as promptly
as practicable. The Merger Transactions cannot be consummated until the
expiration or termination of the HSR Act waiting periods. Thereafter, the
waiting periods may be further extended only by court order.
At any time before or after the Effective Time of the Merger
Transactions, the Department of Justice or the FTC or a private person or
entity could seek under the antitrust laws to enjoin the Merger Transactions or
to cause the Company to divest itself, in whole or in part, of the Miracle-Gro
Companies or of other businesses conducted by the Company. There can be no
assurance that a challenge to the Merger Transactions will not be made or that,
if such a challenge is made, the Company and the Miracle-Gro Companies will
prevail.
ACCOUNTING TREATMENT
The Merger Transactions will be accounted for by the Company under the
"purchase" method of accounting in accordance with generally accepted
accounting principles.
THE AGREEMENT
This section of the Proxy Statement/Prospectus describes the material
terms of the Agreement. The following description, however, does not purport
to be complete and is qualified in its entirety by reference to the Agreement
itself which is attached hereto as Appendix I and is incorporated herein by
reference. Capitalized terms used herein and not otherwise defined shall have
the meanings ascribed thereto in the Agreement.
TERMS OF THE AGREEMENT
Pursuant to the Agreement, (1) Merger Subsidiary shall be merged with
and into Miracle-Gro, whereupon Miracle-Gro will be the surviving corporation
and a wholly-owned subsidiary of the Company; (2) immediately thereafter, (x)
Nurseries will transfer all of its assets, including but not limited to all of
its intellectual property rights, but none of its liabilities, to Miracle-Gro
and (y) Miracle-Gro Delaware and Miracle-Gro UK will each merge with and into
Miracle-Gro; and (3) immediately thereafter, Miracle-Gro shall be merged with
and into New Miracle-Gro, which shall be the ultimate surviving corporation
under the name "Scotts' Miracle-Gro Products, Inc." In connection with the
Merger Transactions, the Miracle-Gro Shareholders, as a group, will receive in
the
17
30
aggregate 195,000 shares of Class A Convertible Preferred Stock and three
separate series of warrants (collectively, the "Warrants"). See "DESCRIPTION
OF THE CAPITAL STOCK OF THE COMPANY - Class A Convertible Preferred Stock" and
"THE WARRANTS." As of the Effective Time of the Merger Transactions, the Class
A Convertible Preferred Stock will be convertible into approximately 35% of the
Company's Common Shares on a fully-diluted basis and the Warrants will be
exercisable for an additional 3,000,000 of the Company's Common Shares, which,
if exercised, would enable them to exercise, together with the Class A
Convertible Preferred Stock, approximately 42% of the Total Voting Power.
As a result of the Merger Transactions and as provided by the GCL and
other applicable law, all the property, rights, privileges, powers and
franchises of the Miracle-Gro Companies will vest in New Miracle- Gro, as the
ultimate surviving corporation, and all debts, liabilities and duties of
Miracle-Gro, Miracle-Gro Delaware and Miracle-Gro UK will become the debts,
liabilities and duties of New Miracle-Gro, as the ultimate surviving
corporation.
REPRESENTATIONS AND WARRANTIES
The Agreement includes various customary representations and warranties
of the parties for transactions of this type. Material representations and
warranties by Miracle-Gro and the Miracle-Gro Shareholders cover (i) the
Miracle-Gro Companies' organization and foreign qualification to do business;
(ii) execution, delivery and performance by the Miracle-Gro Companies of the
Agreement and its valid and binding nature; (iii) the unanimous approval of
the Merger Transactions by all of the outstanding capital shares of the
Miracle-Gro Companies; (iv) non-contravention of the organizational documents
of the Miracle-Gro Companies, provisions of applicable law or agreements and
required consents and approvals; (v) the capitalization of the Miracle-Gro
Companies; (vi) the accuracy of the financial statements of the Miracle-Gro
Companies and other information provided to the Company; (vii) the absence of
certain changes and the conduct of the business of the Miracle-Gro Companies
since September 30, 1994; (viii) the absence of undisclosed material
liabilities; (ix) pending or threatened litigation; (x) proper payment of
taxes and the status of the Miracle-Gro Companies as S corporations (other
than Nurseries) within the meaning of Section 1361(a)(1) of the Code; (xi)
ERISA plans and liability; (xii) trademarks, patents, copyrights and other
intellectual property rights; (xiii) material contracts; (xiv) compliance with
applicable law; (xv) finders' fees; and (xvi) environmental compliance.
With certain limited exceptions, the representations and warranties by
the Company and Merger Subsidiary mirror the representations and warranties by
Miracle-Gro and the Miracle-Gro Shareholders. In addition, the Company and
Merger Subsidiary make representations and warranties as to (i) the Company's
public financial statements and documents filed with the Commission and (ii)
receipt of a fairness opinion from Smith Barney.
The representations and warranties of each of the parties contain,
variously, customary carve-outs for materiality, knowledge and previously
disclosed information.
COVENANTS
Pursuant to the Agreement, the Miracle-Gro Companies and the
Miracle-Gro Shareholders, on the one hand, and the Company and Merger
Subsidiary, on the other, have made various covenants customary for
transactions of this type. Material covenants relate to (i) conduct of their
respective businesses from the date of the Agreement through the Effective
Time; (ii) access to information and confidentiality; (iii) solicitation or
negotiation of competing offers; and (iv) notice of certain events. In
addition, the parties have made certain joint covenants with respect to (a)
using their best efforts to consummate the transactions contemplated by the
Agreement; (b) cooperating in connection with the preparation of this Proxy
Statement/Prospectus and obtaining all requisite consents, approvals or
waivers; (c) public announcements; (d) further assurances; (e) responsibility
for preparing and filing various pre- and post-Effective Time tax returns; and
(f) the qualification of the Merger Transactions as tax-free reorganizations
within the meaning of Section 368(a) of the Code. In addition, the parties
have agreed that prior to the Effective Time the Miracle-Gro Companies shall
distribute $22 million to the Miracle-Gro
18
31
Shareholders, which amount represents the estimated earnings of the Miracle-Gro
Companies from October 1, 1994 through the Effective Time, although there can
be no assurance as to the amount of actual earnings. The Miracle-Gro
Companies may borrow funds to finance the payment of such distribution, and
such distribution shall be made whether or not the earnings actually equal or
exceed $22 million for such period. To the extent that such earnings exceed
$22 million, the Company shall indemnify, or gross-up, the Miracle-Gro
Shareholders for taxes on up to $1 million of excess earnings by the
Miracle-Gro Companies from October 1, 1994 through the Effective Time.
The covenants of each of the parties contain, variously, customary
carve-outs for materiality, knowledge and previously disclosed information.
STANDSTILL PROVISIONS
The Agreement provides for certain voting rights of and certain voting
restrictions on the Miracle- Gro Shareholders. The Agreement also limits the
ability of the Miracle-Gro Shareholders to acquire additional Voting Stock of
the Company or to transfer the Class A Convertible Preferred Stock, the
Warrants or the underlying Common Shares. These provisions will have a
significant effect on the management and day- to-day operations of the Company.
Investors in the Company, therefore, should consider carefully, in addition to
the other information contained in this Proxy Statement/Prospectus, the
following summary of the material provisions:
Board of Directors
The Agreement provides that, assuming that the shareholders of the
Company approve Proposal Nos. 4 and 5 herein, the Miracle-Gro Shareholders,
through the Shareholder Representative, shall be entitled to designate three
directors (one in each of the newly created classes) (the "Miracle-Gro
Directors") to sit on a newly expanded twelve person Board of Directors.
Thereafter, until the earlier of the fifth anniversary of the Effective Time
(the "Standstill Period") and such time as Miracle-Gro Shareholders no longer
beneficially own at least 19% of the Voting Stock, the Shareholder
Representative will continue to be entitled to designate three of twelve
members of the Board of Directors. To the extent that the Company maintains an
Executive Committee and/or a Nominating Committee, such committee(s) shall
consist of four members, one of which shall be a Miracle-Gro Director. In
addition, to the extent that any of the Miracle-Gro Directors is qualified,
under the applicable requirements of the Code, the by-laws of the National
Association of Securities Dealers, Inc. or otherwise, to sit on the Audit or
Compensation Committees of the Board of Directors or any newly created
committee, one of such Miracle-Gro Directors shall be entitled to sit on such
committee(s) to the same extent, and on the same basis, as the other members of
the Board of Directors. Following the Standstill Period or such time as the
Miracle-Gro Shareholders cease to own at least 19% of the Voting Stock, the
Miracle-Gro Shareholders will have no contractual right to, and the Company
will not be able to restrict, the election of directors.
Voting Restrictions
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 the Voting Stock, the
Miracle-Gro Shareholders will be required to vote their shares of Class A
Convertible Preferred Stock and Common Shares (i) for the Company's 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 GCL relating to (a) the acquisition of Voting Stock of
the Company, (b) a merger or consolidation, (c) a sale of all or substantially
all of the assets of the Company, (d) a recapitalization of the Company or (e)
an amendment to the Company's Amended Articles of Incorporation or Code of
Regulations which would materially adversely affect the rights of the
Miracle-Gro Shareholders. The Company has agreed that, without the prior
consent of the Shareholder Representative, it shall not (x) issue Voting Stock
(or Voting Stock equivalents) constituting in the aggregate more than 12.5% of
Total Voting Power (other than pursuant to employee benefit plans in the
ordinary course of business) or (y) in a single transaction or a 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 Exchange Act;
provided, however, that if five-sixths
19
32
of the Board of Directors determine that it is in the best interests of the
Company 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 the Company's
consent or to solicit proxies or become a participant 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 the Company. 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
Agreement will expire. The Miracle-Gro Shareholders consist of: Horace
Hagedorn who will receive 17,196 shares of the Company's Class A Convertible
Preferred Stock and Warrants to purchase 2,933,358 Common Shares in connection
with the Merger Transactions, James Hagedorn, Katherine Hagedorn Littlefield,
Paul Hagedorn, Peter Hagedorn, Robert Hagedorn and Susan Hagedorn, each of whom
will receive 28,912 shares of Class A Convertible Preferred Stock in connection
with the Merger Transactions; and John Kenlon who will receive 4,332 shares of
Class A Convertible Preferred Stock and Warrants to purchase 66,642 Common
Shares in connection with the Merger Transactions. The Miracle-Gro
Shareholders intend to vote their shares as a block and otherwise act in
concert with respect to such shares. In furtherance thereof, the Miracle-Gro
Shareholders (other than John Kenlon) may enter into a shareholders' agreement
and may contribute their shares to a limited partnership, voting trust or other
entity. John Kenlon has agreed to vote his shares as directed by the other
Miracle-Gro Shareholders and to grant such Shareholders a right of first
refusal on his shares.
Standstill Restrictions
The Agreement provides that during the Standstill Period, the
Miracle-Gro Shareholders shall not acquire, directly or indirectly, beneficial
ownership of Voting Stock representing more than 43% of Total Voting Power.
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 (and the terms of any such employee stock options
likely will 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. See "THE WARRANTS."
To the extent that a recapitalization of the Company or a Common Share
repurchase program by the Company increases the aggregate beneficial ownership
of the Miracle-Gro Shareholders to an amount in excess of 44% of 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. The Company 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 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 Total Voting Power except pursuant
to a tender offer for 100% of Total Voting Power, which tender offer is
conditioned upon the receipt of at least a majority of the Voting Stock
beneficially owned by shareholders of the Company other than the Miracle-Gro
Shareholders and their Affiliates and Associates.
Restrictions on Transfers
During the Standstill Period, the Agreement provides that no
Miracle-Gro Shareholder may transfer any Common Shares upon conversion of the
Class A Convertible Preferred Stock or exercise of the Warrants, except (i) to
the Company or any Person approved by the Company; (ii) to a Permitted
Transferee who agrees in writing to abide by the provisions of the Agreement;
(iii) pursuant to a merger or consolidation of the Company or a plan of
liquidation which has been approved by the Company's Board of Directors; (iv)
in a bona fide public offering registered under the Securities Act and designed
to prevent any Person or group from acquiring beneficial ownership of 3% or
more of Total Voting Power; (v) subject to the Company's 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 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 the
Company or with the approval of the Company's Board of Directors; or (vii)
subject to the Company's 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
Total Voting Power.
20
33
Neither the Class A Convertible Preferred Stock nor, during the
Standstill Period, the Warrants may be transferred except (i) to the Company or
any Person or group approved by the Company; (ii) to a Permitted Transferee who
agrees in writing to abide by the provisions of the Agreement; (iii) pursuant
to a merger or consolidation of the Company or a plan of liquidation; or (iv)
with respect to Class A Convertible Preferred Stock representing no more than
15% of the Voting Stock on a fully diluted basis or any number of Warrants: (A)
subject to the Company's 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
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 the Company's 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 Total Voting
Power. For purposes of clauses (A) and (B) only, the Company's right of first
offer with respect to shares of Class A Convertible Preferred Stock would be at
a price equal to (x) the aggregate Market Price of the Common Shares into which
such shares of Class A 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 Class A Convertible Preferred Stock are freely
transferable, subject to the requirements of the Securities Act and applicable
law.
CONDITIONS
The respective obligations of the Company, Merger Subsidiary,
Miracle-Gro and the Miracle-Gro Shareholders to consummate the Merger
Transactions are conditioned upon, among other things, (i) the Company's
receipt of a consent under the Third Amended and Restated Credit Agreement,
dated as of April 7, 1992, as amended (the "Existing Credit Agreement"), among
the Company, the Banks listed therein and Chemical Bank, as Agent, and the
provisions therein relating to restricted payments, operating and financial
condition ratios and events of default having been amended in contemplation of
the transactions contemplated by the Agreement in a manner reasonably
satisfactory to the Miracle-Gro Companies; (ii) the Company's receipt of a
consent by certain holders of the Company's outstanding 9-7/8% Senior
Subordinated Notes due August 1, 2004, pursuant to the terms of the Indenture
dated as of June 1, 1994, as supplemented, between the Company and Chemical
Bank, as trustee; (iii) the approval by the Company's shareholders of Proposal
Nos. 1, 2, 4 and 5 as set forth in this Proxy Statement/Prospectus; (iv)
expiration or termination of the applicable waiting period under the HSR Act;
(v) the absence of any applicable law or regulation or judgment, injunction,
order or decree which prohibits the consummation of the Merger Transactions;
(vi) the receipt of all material required authorizations, consents, waivers,
orders or approvals and the making of all material required filings, notices and
declarations; and (vii) the registration statement on Form S-4 relating to the
sale of the Class A Convertible Preferred Stock and the Warrants having been
declared effective.
The obligations of the Company and Merger Subsidiary to consummate the
Merger Transactions are further conditioned upon, among other things, (i) the
material accuracy of the representations and warranties of the Miracle-Gro
Companies and the Miracle-Gro Shareholders and the material performance by them
of their respective agreements and covenants required by the Agreement, along
with receipt by the Company of a certificate signed by the Chief Executive
Officer and Chief Financial Officer of Miracle-Gro to such effect; (ii) the
absence of any material adverse change in the business, results of operations
or condition (financial or otherwise) of the Miracle-Gro Companies and a
certificate of the Chief Executive Officer of Miracle-Gro to such effect; and
(iii) the receipt by the Company of Employment Agreements executed by Horace
Hagedorn, John Kenlon and James Hagedorn (see "ELECTION OF DIRECTORS -
Executive Compensation - Miracle-Gro Employment Agreements").
The obligations of Miracle-Gro and the Miracle-Gro Shareholders to
consummate the Merger Transactions are further conditioned upon, among other
things, (i) the material accuracy of the representations and warranties of the
Company and Merger Subsidiary and the material performance by them of their
respective
21
34
agreements and covenants required by the Agreement, along with receipt by
Miracle-Gro of a certificate signed by the Chief Executive Officer and Chief
Financial Officer of the Company to such effect; (ii) the absence of any
material adverse change in the business, results of operations or condition
(financial or otherwise) of the Company and its subsidiaries, taken as a whole,
and a certificate of the Chief Executive Officer of the Company to such effect;
and (iii) the receipt of an opinion of Skadden, Arps, Slate, Meagher & Flom,
substantially in the form attached to the Agreement, to the effect that each of
the Merger and the Subsequent Mergers should constitute a tax-free
reorganization under Section 368(a) of the Code.
WAIVERS AND AMENDMENTS
The conditions to consummation of the Merger Transactions may be waived
at any time by the party or parties for whose benefit they were created.
Except in certain limited circumstances, the Agreement may be amended at any
time by written agreement of the parties.
TERMINATION
The Agreement may be terminated and the Merger Transactions may be
abandoned at any time prior to the Effective Time (notwithstanding any approval
of the Proposals contained in this Proxy Statement/Prospectus) (i) by mutual
written consent of the parties; (ii) by any party if the Merger has not been
consummated by September 30, 1995; (iii) by any party if, prior to the
Effective Time, the Market Price of the Company's Common Shares shall be less
than the Target Amount for ten consecutive trading days, the "Target Amount"
being the lesser of $12 per share and the amount determined by multiplying $12
by a percentage equal to 100% minus the percentage decline, if any, in the
Standard & Poors 500 Index from the date of the Agreement through the beginning
of the ten consecutive trading day period; (iv) by any party in the event of
any law or regulation prohibiting the Merger or of any final and unappealable
judgment, injunction, order or decree enjoining the Company or any Miracle-Gro
Company from consummating any of the Merger Transactions; and (v) by any party
upon a breach of any representation, warranty, covenant or agreement on the
part of the other party, or if any representation or warranty of the other
party becomes untrue, in each case such that the conditions set forth above
under "THE AGREEMENT - Conditions" would be incapable of being satisfied by
September 30, 1995. In the event of termination, the Agreement shall become
void except that certain provisions relating to confidentiality and expenses
shall survive such termination.
INDEMNIFICATION
The Agreement provides that, subject to certain time limitations (in
the case of the tax representations, until expiration of the applicable
statutory period of limitations, and in the case of all other representations
until the Effective Time), Miracle-Gro and each Miracle-Gro Shareholder, on the
one hand, and the Company and Merger Subsidiary, on the other, have agreed to
indemnify, defend and hold the other party harmless from any and all damage,
loss, liability and expense (including, without limitation, reasonable expenses
of investigation and reasonable attorneys' fees and expenses) incurred or
suffered by such other party as a result of any misrepresentation or breach of
warranty, covenant or agreement contained in the Agreement. There are no
monetary limitations on such indemnification.
EXPENSES
Whether or not the Merger Transactions are consummated, all costs and
expenses incurred in connection with the Agreement will be borne by the party
incurring them. All applicable sales, use or transfer taxes, if any, and all
capital gains or income taxes of the Miracle-Gro Shareholders or any
Miracle-Gro Company that may be due and payable as a result of any of the
Merger Transactions or the transactions contemplated by the Agreement, whether
levied on the Company, Merger Subsidiary, any Miracle-Gro Company or any
Miracle-Gro Shareholder, shall be borne by the Miracle-Gro Shareholders.
22
35
PROPOSAL NO. 1
PROPOSAL TO APPROVE ACQUISITION OF ONE-THIRD OR MORE BUT LESS
THAN A MAJORITY OF THE VOTING POWER OF THE COMPANY
The Miracle-Gro Shareholders, according to the acquiring person
statement provided by them to the Company pursuant to Section 1701.831 of the
GCL, do not currently own any Common Shares of the Company. As described above
(see "THE AGREEMENT"), at the Effective Time of the Merger Transactions they
will receive 195,000 shares of Class A Convertible Preferred Stock of the
Company. Each share of Class A Convertible Preferred Stock is entitled to that
number of votes per share equal to the number of Common Shares into which such
Class A Convertible Preferred Stock could be converted at the date of
determination. As of the date hereof, each share of Class A Convertible
Preferred Stock would be entitled to approximately 52.6 votes per share. See
"DESCRIPTION OF THE CAPITAL STOCK OF THE COMPANY - Class A Convertible
Preferred Stock." As a result, immediately following the Merger Transactions,
the Miracle-Gro Shareholders, as a group, would be able to exercise
approximately 35% of the voting power of the Company.
Section 1701.831 of the GCL defines a "control share acquisition" to
include an acquisition of the Company's shares which would give the acquiring
person voting power falling within one of the following three categories: (a)
one-fifth or more but less than one-third of the voting power, (b) one-third or
more but less than a majority of the voting power, and (c) a majority or more
of the voting power. See "PROTECTION AGAINST NON-NEGOTIATED TAKEOVERS." The
Acquisition constitutes such a "control share acquisition." Pursuant to the
GCL, approval of any "control share acquisition" of a public company must be
submitted to the company's shareholders. The Miracle-Gro Shareholders have
delivered to the Company the acquiring person statement required by the GCL, a
copy of which is attached hereto as Appendix III and made a part hereof. At
the Annual Meeting, shareholders of the Company will be asked to consider a
proposal to allow the Miracle-Gro Shareholders, as a group, to complete a
"control share acquisition" with respect to the Company's shares.
EFFECT OF APPROVAL OF ACQUISITION
If the Acquisition is approved and the Merger Transactions are
consummated, the Miracle-Gro Shareholders also will receive Warrants to
purchase an additional 3,000,000 Common Shares of the Company. Approval of the
Acquisition will enable the Miracle-Gro Shareholders to acquire additional
voting securities of the Company, on exercise of the Warrants or otherwise, so
long as they do not acquire securities evidencing more than a majority of the
voting power of the Company. Until the fifth anniversary of the Effective Time
of the Merger, however, the Miracle-Gro Shareholders have agreed that they will
not acquire securities having more than 43% (or, in certain limited
circumstances, 44%) of the voting power of the Company. See "THE AGREEMENT -
23
36
Standstill Provisions - Standstill Restrictions" for additional restrictions on
the power of the Miracle-Gro Shareholders to acquire additional Common Shares
of the Company.
RECOMMENDATION AND VOTE
For the Acquisition to be approved, the affirmative vote of the holders
of a majority of the voting power of the Company represented at the Annual
Meeting and the affirmative vote of the holders of a majority of the portion of
such voting power excluding "Interested Shares" is required. At least a
majority of the voting power of the Company, and a majority of the portion of
such voting power excluding the voting power of "Interested Shares," must be
represented at the Annual Meeting in person or by proxy. "Interested Shares"
are defined by the GCL to include (i) shares held by the Acquiring Person
(i.e., the Miracle-Gro Shareholders, as a group), (ii) shares held by an
officer of the Company elected or appointed by the Board of Directors, (iii)
shares held by employees of the Company who are also directors and (iv) shares
purchased after a control share acquisition is announced if the aggregate
consideration paid by the person acquiring such shares exceeds $250,000 or the
number of shares acquired exceeds one-half of one percent of the voting power
of the Company. As indicated elsewhere in this Proxy Statement/Prospectus,
officers and directors as a group own approximately 9% of the Company's
outstanding Common Shares, and the Miracle-Gro Shareholders do not currently
own any outstanding Common Shares. The officers and directors of the Company
have indicated their intent to vote in favor of the Acquisition; however,
substantially all of such shares will be excluded from the second vote as
"Interested Shares."
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE ADOPTION
OF THE PROPOSED CONTROL SHARE ACQUISITION OF ONE-THIRD OR MORE BUT LESS THAN A
MAJORITY OF THE VOTING POWER OF THE COMPANY.
PROPOSAL NO. 2
PROPOSED AMENDMENT TO ARTICLE FOURTH OF
THE AMENDED ARTICLES OF INCORPORATION
PROPOSED AMENDMENT
The Amended Articles of Incorporation of the Company currently
authorize 35,000,000 shares, all of which are Common Shares, each without par
value. Each Common Share entitles the holder thereof to one vote on each
matter properly submitted to the shareholders for their vote.
The Board of Directors proposes that the shareholders adopt an
amendment to the Amended Articles of Incorporation increasing the authorized
number of Common Shares from 35,000,000 shares to 50,000,000 shares and
authorizing 195,000 voting preferred shares designated Class A Convertible
Preferred Stock. Proposed amended Article FOURTH is set forth in Appendix IV
attached hereto and made a part hereof. The following summary of the proposed
amendment is qualified in its entirety by reference to Appendix IV.
The terms of the Class A Convertible Preferred Stock were negotiated
with the Miracle-Gro Shareholders and are part of the Agreement. Dividends
will be payable on the Class A Convertible Preferred Stock at the rate of
$50.00 per share per year. Dividends will be cumulative and will be payable
quarterly. In the event that the Company fails to pay all or any portion of
the accrued but unpaid dividends for two consecutive quarters, the Miracle-Gro
Shareholders shall be entitled to elect three additional directors on an
expanded Board until such time as the accrued but unpaid dividends are paid to
the holders of the Class A Convertible Stock, at which time such new directors
shall be removed and the Board of Directors shall be reduced to the number in
effect immediately prior to the increase. In the event of liquidation,
dissolution or winding up of the Company, the holders of the Class A
Convertible Preferred Stock will be entitled to receive $1,000 per share, plus
accumulated unpaid dividends, before any amount will be paid to the holders of
the Common Shares. Each share of Class A Convertible Preferred Stock will be
entitled to the number of votes equal to the number of Common Shares into which
it is convertible and will vote together with the Common Shares as a single
class. Each share of the Class A Convertible Preferred Stock will be
convertible at any time into the number of Common Shares determined by
24
37
dividing $1,000 by the Conversion Price, initially $19 per Common Share subject
to adjustment in the event of stock dividends, stock splits, share
combinations, asset distributions, recapitalizations and similarly dilutive
events. See "DESCRIPTION OF THE CAPITAL STOCK - Class A Convertible Preferred
Stock." The Class A Convertible Preferred Stock will be subject to redemption
at any time after five years from the date of issuance, for $1,000 per share
plus accrued, unpaid dividends.
EFFECT OF ADOPTION OF AMENDMENT
Pursuant to the Agreement, the 195,000 shares of Class A Convertible
Preferred Stock are to be issued to the Miracle-Gro Shareholders. The current
Amended Articles of Incorporation do not authorize a class of preferred shares.
Therefore, the Merger Transactions cannot be consummated unless this amendment
to the Amended Articles of Incorporation is adopted.
The existing shareholders will have no preemptive rights to acquire any
of the shares to be issued in connection with the Merger Transactions.
If the proposed amendment is adopted, the additional Common Shares will
be available, free from any preemptive rights, for issuance from time to time
to such persons and for such considerations as the Board of Directors may
determine, without necessarily requiring further action by the shareholders.
The Common Shares may be used for various corporate purposes, including stock
splits and dividends, acquisitions, public offerings and stock options and
other employee benefit plans. Depending on the terms thereof, the issuance of
the additional Common Shares and preferred shares may have a dilutive effect on
the equity interest of the Company's then-existing shareholders. Except for
the transactions described herein, there are no present plans to issue any of
the additional Common Shares which will be authorized by the adoption of the
amendment to Article FOURTH, nor are there any pending negotiations,
discussions, agreements or understandings which would involve the issuance of
any of such shares.
RECOMMENDATION AND VOTE
The affirmative vote of the holders of two-thirds of the outstanding
Common Shares is required to approve the amendment.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT.
25
38
PROPOSAL NO. 3
PROPOSED AMENDMENT TO ADOPT NEW ARTICLE NINTH
OF THE AMENDED ARTICLES OF INCORPORATION
PROPOSED AMENDMENT
If adopted, Article NINTH would require the affirmative vote of at
least two-thirds of the voting power of the Company to authorize any of the
following transactions: (1) a further amendment to Article NINTH of the
Amended Articles of Incorporation, (2) a merger or consolidation of the Company
with another corporation and requiring shareholder approval, (3) a combination
or majority share acquisition involving the issuance of shares of the Company
and requiring shareholder approval, (4) a sale or other disposition of all or
substantially all of the assets of the Company and (5) a dissolution of the
Company. On all other matters, the affirmative vote of a majority of the
voting power of the Company would be required. Proposed Article NINTH is set
forth in Appendix V attached hereto and made a part hereof.
EFFECT OF ADOPTION OF AMENDMENT
Under Ohio law and the Amended Articles of Incorporation, each of the
transactions listed above currently requires the affirmative vote of at least
two-thirds of the voting power of the Company. The proposed amendment fixes
this voting requirement in the Amended Articles of Incorporation so that it
cannot be affected by changes in Ohio law. In addition, the proposed amendment
will make the adoption of future amendments to the Amended Articles of
Incorporation -- other than an amendment to change the vote required to
authorize the listed transactions -- easier by reducing the vote required from
two-thirds to a majority.
RECOMMENDATION AND VOTE
The affirmative vote of the holders of two-thirds of the outstanding
Common Shares is required to approve the amendment.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT.
PROPOSAL NOS. 4 AND 5
PROPOSED AMENDMENTS TO SECTION 2.02
OF THE CODE OF REGULATIONS
PROPOSED AMENDMENTS TO SUBPARAGRAPHS (A) AND (B) (PROPOSAL NO. 4)
Ohio law permits the regulations of an Ohio corporation to provide for
the classification of directors into separate classes of not fewer than three
directors per class. The Board of Directors proposes to amend Subparagraphs
(A) and (B) of Section 2.02 of the Code of Regulations by deleting them in
their entirety and substituting therefor new Subparagraphs (A) and (B). The
proposed amendments are set forth in Appendix VI attached hereto and made a
part hereof. The following summary of the proposed amendments is qualified in
its entirety by reference to Appendix VI.
Under existing Section 2.02(A) and (B) of the Company's Code of
Regulations, the number of directors is nine; the number of directors can be
changed by the affirmative vote of the holders of a majority of the voting
shares of the Company; directors serve for terms of one year and each director
is elected annually for a term of one year.
26
39
The proposed amendments to Section 2.02(A) and (B) provide that, until
changed as provided in Section 2(C) of proposed Article FOURTH of the Amended
Articles of Incorporation, by action of the directors or by amendment of the
Code of Regulations, the number of directors shall be nine, divided into three
uniform classes. If the amendment is adopted, three directors will be elected
to serve initially for one year, three directors will be elected to serve
initially for two years and three directors will be elected to serve for three
years. The election of each class will be a separate election. At each annual
meeting after the 1995 Annual Meeting, directors will be elected to serve for
terms of three years so that the term of one class of directors shall expire in
each year.
PROPOSED AMENDMENT TO SUBPARAGRAPH (C) (PROPOSAL NO. 5)
Existing Section 2.02(C) of the Code of Regulations gives the directors
the power to change the number of directors and to fill any vacancy which is
created by an increase in the number of directors; provided, however, that the
number of directors may not be less than three. The proposed amendment to
Section 2.02(C) eliminates the authority of the directors to increase the
number of directors to more than twelve. The proposed amendment to Section
2.02(C) is set forth in Appendix VI attached hereto and made a part hereof.
EFFECT OF ADOPTION OF AMENDMENTS
Pursuant to the Agreement, the Company has agreed, at the Effective
Time of the Merger Transactions, to take such action as may be necessary to
increase the number of directors to twelve, divided into three classes of four
directors each, and to fill the vacancy in each class with a director
designated by the Miracle-Gro Shareholder Representative. See "THE AGREEMENT -
Standstill Provisions - Board of Directors." It is currently anticipated that
Horace Hagedorn, John Kenlon and James Hagedorn will be elected directors of
the Company following the Merger Transactions. See "ELECTION OF DIRECTORS -
Miracle-Gro Directors."
Approval of the proposed amendments to Subparagraphs (A), (B) and (C)
of Section 2.02 is a condition precedent to the Merger Transactions. If either
of the proposed amendments to Section 2.02 is not adopted, the Merger
Transactions cannot be consummated unless the parties to the Agreement agree to
waive the condition precedent.
Although there has been no significant problem of continuity in the
past, the establishment of three- year terms provides for the greatest possible
degree of continuity of director service, and may assist in attracting
qualified candidates for election as directors.
A classified board may deter certain mergers, tender offers or other
future takeover attempts which some or a majority of shareholders may deem to
be in their best interests. In addition, a classified board would generally
prevent shareholders who do not approve of the policies of the Board of
Directors from replacing a majority of the Board for two years, unless,
assuming adoption of Proposal No. 6, they can obtain the vote of the holders of
two-thirds of the voting power to amend the Code of Regulations to eliminate
the classified board. The amendments, if adopted, would be applicable to every
election of directors, not just to elections occurring after a change in
control of the Company. See "PROTECTION AGAINST NON-NEGOTIATED TAKEOVERS."
If the proposed amendment to Subparagraphs (A) and (B) of Section 2.02
is adopted, the shareholders could change the number of directors only by
amending the Code of Regulations. See "PROPOSED AMENDMENT TO SECTION 6.01 OF
THE CODE OF REGULATIONS."
RECOMMENDATION AND VOTE
The affirmative vote of the holders of a majority of the outstanding
Common Shares is required to adopt the amendments.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF PROPOSAL NO.
4 AND PROPOSAL NO. 5.
27
40
PROPOSAL NO. 6
PROPOSED AMENDMENT TO SECTION 6.01
OF THE CODE OF REGULATIONS
PROPOSED AMENDMENT
Currently, Section 6.01 of the Code of Regulations provides that the
Regulations can be amended, or new Regulations adopted, by the affirmative vote
of the holders of a majority of the voting power of the Company. If the
proposed amendment to Subparagraphs (A) and (B) of Section 2.02 of the Code of
Regulations is adopted, it is proposed to amend Section 6.01 to increase the
vote required to amend Sections 1.02 (Calling of Meetings), 2.02 (Number of
Directors and Term of Office) and 6.01 (Amendments) to two-thirds of the voting
power of the Company. If the proposed amendment to Subparagraphs (A) and (B)
of Section 2.02 of the Code of Regulations is not adopted, it is proposed to
amend Section 6.01 to increase the vote required to amend only Sections 1.02
and 6.01 to two-thirds. The proposed amendments to Section 6.01 of the Code of
Regulations are set forth in Appendix VII attached hereto and made a part
hereof.
EFFECT OF ADOPTION OF AMENDMENT
Section 1.02 of the Regulations provides that the holders of a majority
of the voting power of the Company can call a meeting of shareholders. Under
Ohio law, a lesser percentage of the voting power could call a shareholders'
meeting if the Regulations so specified. The proposed amendment will make it
more difficult to amend Section 1.02 to reduce the percentage of the voting
power required to call a meeting.
The proposed amendment will also protect the classified board in new
Section 2.02(A) and (B) if it is adopted. As noted above, the classified board
may deter certain mergers, tender offers or other future takeover attempts
which some or a majority of shareholders may deem to be in their best
interests. In addition, a classified board would generally prevent
shareholders who do not approve of the policies of the Board of Directors from
replacing a majority of the Board for two years, unless, assuming adoption of
this Proposal No. 6, they can obtain the vote of the holders of two-thirds of
the voting power to amend the Code of Regulations to eliminate the classified
board. See "PROTECTION AGAINST NON-NEGOTIATED TAKEOVERS." If Subparagraphs
(A) and (B) of Section 2.02 are not amended to create a classified board, the
proposed amendment to Section 6.01 will not include Section 2.02.
Finally, the proposed amendment will make it more difficult to change
the vote required to amend the Code of Regulations in the future by increasing
to two-thirds the vote required to amend Section 6.01.
RECOMMENDATION AND VOTE
The affirmative vote of the holders of a majority of the outstanding
Common Shares is required to adopt the amendment.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT.
28
41
PROTECTION AGAINST NON-NEGOTIATED TAKEOVERS
The proposal to amend the Code of Regulations to classify the Board of
Directors, together with the proposed amendment to Section 6.01 of the
Regulations to protect the classified board and the procedure for calling
shareholder meetings, may have an anti-takeover impact and may make tender
offers, proxy contests and certain mergers more difficult. See "PROPOSED
"AMENDMENTS TO SECTION 2.02 OF THE CODE OF REGULATIONS" and "PROPOSED AMENDMENT
TO SECTION 6.01 OF THE CODE OF REGULATIONS."
Except for the Acquisition, the Board of Directors is not aware of any
efforts to obtain control of the Company or to effect substantial accumulations
of the Common Shares.
The Amended Articles of Incorporation and Code of Regulations of the
Company do not presently contain any provisions intended by the Company to have
or, to the knowledge of the Board of Directors having, an anti-takeover effect.
Ohio law, however, contains several provisions, applicable to the Company,
which are designed to encourage potential acquirors to make financially
attractive, non-coercive offers and to negotiate directly with the Board of
Directors. The following paragraphs outline these Ohio statutory provisions
and their effects.
Section 1701.831 of the GCL (the "Ohio Control Share Acquisition
Statute") requires shareholder approval of any proposed "control share
acquisition" of an Ohio corporation. A "control share acquisition" is the
acquisition, directly or indirectly, by any person (including any individual,
partnership, corporation, limited liability company, society, association or
two or more persons who have a joint or common interest) of shares of a
corporation that, when added to all other shares of the corporation that may be
voted, directly or indirectly, by the acquiring person, would entitle such
person to exercise or direct the exercise of 20% or more (but less than 33
1/3%) of the voting power of the corporation in the election of directors or 33
1/3% or more (but less than a majority) of such voting power or a majority or
more of such voting power. Under the GCL, the control share acquisition must
be approved in advance by the holders of a majority of the outstanding voting
shares represented at a meeting at which a quorum is present and by the holders
of a majority of the portion of the outstanding voting shares represented at
such a meeting excluding the voting shares owned by the acquiring shareholder
and certain "interested shares," including shares owned by officers elected or
appointed by the directors of the corporation and by directors of the
corporation who are also employees of the corporation.
The purpose of the Ohio Control Share Acquisition Statute is to give
shareholders of Ohio corporations a reasonable opportunity to express their
views on a proposed shift in control, thereby reducing the coercion inherent in
an unfriendly takeover. The provisions of the Ohio Control Share Acquisition
Statute grant to the shareholders of the Company the assurance that they will
have adequate time to evaluate the proposal of the acquiring person, that they
will be permitted to vote on the issue of authorizing the acquiring person's
purchase program to go forward in the same manner and with the same proxy
information that would be available to them if a proposed merger of the Company
were before them and, most importantly, that the interests of all shareholders
will be taken into account in connection with such vote and the probability
will be increased that they will be treated equally regarding the price to be
offered for their Common Shares if the implementation of the proposal is
approved.
The Ohio Control Share Acquisition Statute applies not only to
traditional tender offers but also to open market purchases, privately
negotiated transactions and original issuances by an Ohio corporation, whether
friendly or unfriendly. The procedural requirements of the Ohio Control Share
Acquisition Statute could render approval of any control share acquisition
difficult in that a majority of the voting power of the Company, excluding
"interested shares," must be represented at the meeting and must be voted in
favor of the acquisition. It is recognized that any corporate defense against
persons seeking to acquire control may have the effect of discouraging or
preventing offers which some shareholders might find financially attractive.
On the other hand, the need on the part of the acquiring person to convince the
shareholders of the Company of the value and validity of his offer may cause
such offer to be more financially attractive in order to gain shareholder
approval.
29
42
Chapter 1704 of the GCL (the "Merger Moratorium Statute") generally
prohibits a wide range of business combinations and other transactions
(including mergers, consolidations, asset sales, loans, disproportionate
distributions of property and disproportionate issuances or transfers of shares
or rights to acquire shares) between an Ohio corporation and a person that
owns, alone or with other related parties, shares representing at least 10% of
the voting power of the corporation (an "Interested Shareholder") for a period
of three years after such person becomes an Interested Shareholder, unless,
prior to the date that the Interested Shareholder became such, the directors
approve either the transaction or the acquisition of the corporation's shares
that resulted in the person becoming an Interested Shareholder. Following the
three-year moratorium period, the corporation may engage in covered
transactions with an Interested Shareholder only if, among other things, (i)
the transaction receives the approval of the holders of 2/3 of all the voting
shares and the approval of the holders of a majority of the voting shares held
by persons other than an Interested Shareholder or (ii) the remaining
shareholders receive an amount for their shares equal to the higher of the
highest amount paid in the past by the Interested Shareholder for the
corporation's shares or the amount that would be due the shareholders if the
corporation were to dissolve. The Merger Moratorium Statute is designed to
prevent many of the self-dealing activities that often accompany
highly-leveraged acquisitions by prohibiting an Interested Shareholder from
using the corporation or its assets or shares for his special benefit. The
Merger Moratorium Statute will encourage potential tender offerors to negotiate
with the Board of Directors of the Company to ensure that the shareholders of
the Company receive fair and equitable consideration for their shares.
However, the Merger Moratorium Statute presents potential pitfalls for unwary
shareholders. Close attention to the impact of common corporate actions, such
as the grant of employee stock options and loans to Interested Shareholders in
the ordinary course of business, is necessary to determine whether such actions
are encompassed by the Merger Moratorium Statute.
Because the Board of Directors has approved the Acquisition, the Merger
Moratorium Statute will not be triggered by the Acquisition.
Section 1707.041 of the GCL provides in part that no offeror may make a
control bid pursuant to a tender offer or a request or invitation for tenders
unless, on the day the offeror commences a control bid, it files with the Ohio
Division of Securities (the "Securities Division") and the target company
certain information in respect of the offeror, his ownership of the company's
shares and his plans for the company (including, among other things, plans to
terminate employee benefit plans, close any plant or facility or reduce the
work force). If the Securities Division determines that the offeror's
disclosures are inadequate, it must act within three calendar days from the
date of the offeror's filing to issue a suspension order. If a bid is
suspended, a hearing must be held within ten calendar days from the date of the
Securities Division's suspension order. The hearing procedure must be
completed no later than sixteen calendar days after the date on which the
suspension was imposed. A control bid is the purchase of or offer to purchase
any equity security of an issuer with certain connections to Ohio from a
resident of Ohio if (i) after the purchase of such security, the offeror would
directly or indirectly be the beneficial owner of more than 10% of any class of
the issued and outstanding equity securities of the issuer or (ii) the offeror
is the issuer, there is a pending control bid by a person other than the issuer
and the number of the issued and outstanding shares of the company would be
reduced by more than 10%. Section 1707.041 does not apply when the offeror or
the target company is a bank, a bank holding company or a savings and loan
holding company and the control bid is subject to approval by the appropriate
federal regulatory agency.
Section 1707.043 of the Ohio Revised Code (the "Profit Recovery
Statute") permits an Ohio corporation to recover any profit realized from the
disposition of equity securities of the corporation by a person or group who
made a proposal to acquire control of the corporation within eighteen months
before the disposition of the equity securities. Certain profits are not
recoverable pursuant to the Profit Recovery Statute, including profits that do
not exceed $250,000 in the aggregate, profits with respect to securities that
were acquired prior to April 11, 1990 or more than eighteen months prior to the
date on which the acquisition proposal was made and profits realized by a
person or group that establishes in court that its motives were not
manipulative.
Neither Section 1707.041 nor Section 1707.043 is applicable to the
Acquisition.
30
43
PROPOSAL NO. 7
ELECTION OF DIRECTORS
NOMINEES FOR ELECTION
If the proposed amendment to Subparagraphs (A) and (B) of Section 2.02
of the Code of Regulations of the Company is adopted, three directors will be
elected initially for terms of one year, three directors will be elected
initially for terms of two years and three directors will be elected for terms
of three years, as indicated below. The election of each class of directors
shall be a separate election. If the proposed amendment to Subparagraphs (A)
and (B) of Section 2.02 of the Code of Regulations of the Company is not
adopted, nine directors will be elected for a term of one year. See "PROPOSED
AMENDMENTS TO SECTION 2.02 OF THE CODE OF REGULATIONS."
The Board of Directors of the Company has no reason to believe that any
of the nominees will not serve if elected, but if any of them should become
unavailable or unable to serve as a director, and if prior to the Annual
Meeting, the Board designates a substitute nominee, the persons named in the
accompanying proxy card will vote for the substitute nominee designated by the
Board.
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 the Company by each director. Except
where indicated, each director has had the same principal occupation for the
last five years. 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.
Information Concerning Nominees as of January 15, 1995:
Proposed Class I Directors (one year terms):
--------------------------------------------
THEODORE J. HOST, age 49 President, Chief Operating Officer
and Director of the Company since
1991
Prior to joining the Company, Mr. Host was Senior Vice President,
Marketing with Coca-Cola USA from 1990 to 1991 and was with American Home
Products, Inc. for twenty-three years, serving as President of the Boyle-Midway
Household Products division for five years before joining Coca-Cola USA.
Committee Membership: None at this time
KAREN GORDON MILLS, age 41 Director of the Company 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.
Committee Membership: Nominating
31
44
TADD C. SEITZ, age 53 Chairman of the Board, Chief
Executive Officer and Director of
the Company since 1987
Mr. Seitz has been the Chief Executive Officer of the Company since
1987. He was also President of the Company#s main operating subsidiary from
1983 until 1991. Previously, Mr. Seitz served as the Company's Director of
Marketing and as General Manager of The W. Atlee Burpee Company. Mr. Seitz has
been employed by the Company for twenty-one years. Mr. Seitz also serves as a
director of Holophane Corporation.
Committee Membership: Executive (Chairman) and Nominating
Proposed Class II Directors (two year terms):
---------------------------------------------
JAMES B BEARD, age 59 Director of the Company since 1989
Dr. Beard is Professor Emeritus of Turfgrass Physiology and Ecology at
Texas A&M University where he served from 1975 to 1992. Presently, he is
President and Chief Scientist at the International Sports Turf Institute. 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.
Committee Membership: Audit
JOHN M. SULLIVAN, age 59 Director of the Company 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 the Company, is registered under or subject to the
requirements of the Exchange Act or the Investment Company Act of 1940.
Committee Membership: Compensation and Nominating
L. JACK VAN FOSSEN, age 57 Director of the Company since 1993
Mr. Van Fossen has been President and Chief Executive Officer of Red
Roof Inns, Inc., an owner and operator of motels, since 1991. From 1988 to
1991, Mr. Van Fossen was self-employed as an independent business consultant.
Mr. Van Fossen also serves as a director of Cardinal Health, Inc.
Committee Membership: Audit
Proposed Class III Directors (three year terms):
------------------------------------------------
JOHN S. CHAMBERLIN, age 66 Director of the Company 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. He was also a director of The Travelers
Insurance Company until December, 1993 and was a director of Curaflex Health
Services, Inc. from 1992 to July 1994.
Committee Memberships: Executive and Compensation
32
45
JOSEPH P. FLANNERY, age 62 Director of the Company
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.
Committee Membership: Compensation (Chairman)
DONALD A. SHERMAN, age 43 Director of the Company since 1988
Mr. Sherman has been President of Waterfield Mortgage Company in Fort
Wayne, Indiana, since 1989.
Committee Membership: Audit (Chairman)
RECOMMENDATION AND VOTE
Under Ohio law and the Company's Code of Regulations, the three
nominees for election in each class (or the nine nominees if the proposed
amendment to Subparagraphs (A) and (B) of Section 2.02 is not adopted)
receiving the greatest number of votes will be elected.
Common Shares represented by the accompanying proxy card will be voted
FOR the election of the above nominees unless authority to vote for one or more
nominees is withheld. Shareholders may withhold authority to vote for the
entire slate as nominated or, by writing the name of one or more nominees in
the space provided in the proxy card, withhold the authority to vote for such
nominee or nominees. Common Shares as to which the authority to vote is
withheld and broker non-votes will be counted for quorum purposes but will not
be counted toward the election of directors, or toward the election of the
individual nominees specified on the form of proxy.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE ABOVE
NOMINEES.
MIRACLE-GRO DIRECTORS
As noted above (see "THE AGREEMENT - Standstill Provisions - Board of
Directors"), the Company has agreed, at the Effective Time of the Merger
Transactions, to take such action as may be necessary to increase the number of
directors to twelve and to elect the persons named below for the terms
indicated below (or for one-year terms if only the proposal to amend
Subparagraph (C) of Section 2.02 of the Code of Regulations is adopted and the
parties waive the amendment of Subparagraphs (A) and (B) of Section 2.02 of the
Code of Regulations as a condition precedent to the Merger Transactions):
HORACE HAGEDORN, age 79
Horace Hagedorn founded Miracle-Gro in 1950, and has been an owner of
the company since that time. He has served as Chief Executive Office of
Miracle-Gro since 1985. Previously, he was Senior Vice President at the SSC&B
advertising agency. Prior to that he worked in sales at the National
Broadcasting Company. 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.
33
46
JOHN KENLON, age 63
John Kenlon has been the President of Miracle-Gro since December 1985;
President of Miracle-Gro UK since its incorporation in May 1992; and Vice
Chairman of the Board and Executive Vice President of Miracle-Gro Delaware
since its incorporation in November 1993. Mr. Kenlon began his association
with Miracle-Gro in 1960 when the corporate sales totaled $125,000.
JAMES HAGEDORN, age 39
James Hagedorn has been Executive Vice President of Miracle-Gro since
1989 and a Director of Miracle-Gro since 1985. He is also President of
Miracle-Gro Delaware and Executive Vice President of Miracle-Gro UK. Mr.
Hagedorn became a director and principal of Miracle-Gro in 1985. He was
previously an officer and an F-16 pilot in the United States Air Force. Mr.
Hagedorn also serves on the boards of Miracle Holdings and Miracle Garden Care,
both U.K. companies. 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. Mr. Hagedorn is
Chairman of the Sands Point, NY Zoning Board of Appeals. James Hagedorn is the
son of Horace Hagedorn.
BENEFICIAL OWNERSHIP OF COMMON SHARES
The following table furnishes certain information as of February 17,
1995 (except as otherwise noted), as to the Common Shares beneficially owned by
each of the nominees for election as a director of the Company, by each of the
executive officers of the Company named in the Summary Compensation Table and
by all directors and executive officers of the Company as a group, and, to the
Company's knowledge, by the only person beneficially owning more than 5% of the
outstanding Common Shares.
34
47
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(1)
COMMON
SHARES
WHICH
CAN BE
ACQUIRED
UPON
EXERCISE
OF
COMMON OPTIONS
SHARES EXERCISABLE PERCENT OF CLASS(2)
NAME OF BENEFICIAL OWNER OR PRESENTLY WITHIN ----------------------
NUMBER OF PERSONS IN GROUP HELD 60 DAYS TOTAL 2/17/95 POST-MERGER
- --------------------------- --------- ------- --------- ------- -----------
Government of Singapore
Investment............... 1,135,500(3) 0 1,135,500(3) 6.08%(3) 3.92%(3)
Corporation Pte Ltd
250 North Bridge Road
#33-00
Raffles City Tower
Singapore 0607
Leon G. Cooperman.......... 972,700(4) 0 972,700(4) 5.2%(4) 3.36%(4)
c/o Omega Advisors, Inc
88 Pine Street
Wall Street Plaza-31st
Floor
New York, New York 10005
Goldman, Sachs & Co........ 1,224,809(5) 0 1,224,809(5) 6.6%(5) 4.23%(5)
The Goldman Sachs
Group, L.P.
85 Broad Street
New York, New York 10004
James B Beard ............. 16,727 8,000 24,727 (6) (6)
John S. Chamberlin......... 22,727 8,000 30,727 (6) (6)
Joseph P. Flannery......... 25,454 8,000 33,454 (6) (6)
Theodore J. Host(7)........ 45,454(8) 216,222 261,676 1.38% (6)
Karen Gordon Mills......... 0 0 0 (6) (6)
Tadd C. Seitz(7)........... 462,454 127,389 589,843 3.14% 2.03%
Donald A. Sherman.......... 22,727 8,000 30,727 (6) (6)
John M. Sullivan........... 1,000 4,000 5,000 (6) (6)
L. Jack Van Fossen......... 1,200 4,000 5,200 (6) (6)
J. Blaine McKinney(7)...... 1,100 40,666 41,766 (6) (6)
Richard B. Stahl(7)........ 77,545(9) 21,890 99,435 (6) (6)
Paul D. Yeager(7).......... 140,885(10) 27,538 168,423 (6) (6)
All directors and executive
officers as a group (19
persons)................. 1,244,123(11) 473,705 1,717,828 8.97% 5.84%
- ---------------
(1) Unless otherwise indicated, the beneficial owner has sole voting and
investment power as to all of the Common Shares reflected in the table.
(2) The percent of class at February 17, 1995 is based upon the sum of
18,667,064 Common Shares outstanding on February 17, 1995, and the number
of Common Shares as to which the named person has the right to acquire
beneficial ownership upon the exercise of options exercisable within 60
days of February 17, 1995. The post-merger adjustment reflects the dilution
in voting power resulting from the issuance of 195,000 Class A Preferred
Shares having 10,263,158 votes.
35
48
(3) Based on information contained in Amendment No. 1 to a Schedule 13D dated
October 18, 1994 filed with the Commission, Government of Singapore
Investment Corporation Pte Ltd, an agency of the Singapore government and
an investment manager, shares voting and investment power with respect to
803,000 Common Shares with the Government of Singapore, shares voting and
investment power with respect to 303,500 Common Shares with the Monetary
Authority of Singapore and shares voting and investment power with respect
to 29,000 Common Shares with the Board of Commissioners of Currency,
Singapore.
(4) Based on information contained in a Schedule 13D dated February 6, 1995,
Mr. Cooperman is the managing general partner of Omega Capital Partners,
L.P., which has sole voting and investment power with respect to 329,800
Common Shares of the Company, and of Omega Institutional Partners, L.P.,
which has sole voting and investment power with respect to 331,400 Common
Shares. He is also President and majority shareholder of Omega Advisors,
Inc. ("OAI"). OAI serves as investment manager to Omega Overseas Partners,
Ltd., which has sole voting and investment power with respect to 161,300
Common Shares, and to Omega Overseas Partners II, Ltd., which has sole
voting and investment power with respect to 26,600 Common Shares. OAI also
shares voting and investment power with respect to 123,600 Common Shares
owned by unrelated third parties which it serves as investment manager.
(5) Based on information contained in a Schedule 13G dated February 10, 1995,
Goldman, Sachs & Co. and The Goldman Sachs Group, L.P. have shared voting
and investment power as to 1,224,809 Common Shares of the Company.
(6) Represents ownership of less than 1% of the outstanding Common Shares of
the Company.
(7) Executive officer of the Company named in the Summary Compensation Table.
(8) 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.
(9) Includes 1,000 Common Shares held by the son of Mr. Stahl who shares his
home.
(10) Includes 100 Common Shares held by each of Mr. Yeager's wife and his two
daughters who share his home.
(11) See Notes (8), (9) and (10) above. Also includes Common Shares held by the
respective spouses of executive officers of the Company and by their
children who reside with them.
To the Company's knowledge, based solely on a review of the copies of the
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended September 30, 1994 (the
"1994 Fiscal Year"), all filing requirements applicable to officers, directors
and greater than 10% beneficial owners of the Company under Section 16(a) of the
Exchange Act were complied with.
36
49
EXECUTIVE OFFICERS
The executive officers of the Company, their positions as of January 31,
1995, their ages and years with the Company (and its predecessors) are set forth
below.
YEARS WITH
THE COMPANY (AND
ITS
NAME AGE POSITION(S) HELD PREDECESSORS)
- ----------------------- --- ------------------------------------------- ----------------
Tadd C. Seitz.......... 53 Director, Chairman of the Board and Chief 22
Executive Officer
Theodore J. Host....... 49 Director, President and Chief Operating 3
Officer
Paul D. Yeager......... 56 Executive Vice President and Chief 20
Financial Officer
Michael P. Kelty....... 44 Senior Vice President, Technology and 15
Operations
Richard B. Stahl....... 59 Senior Vice President, Commercial Business 27
Group
J. Blaine McKinney..... 51 Senior Vice President, Consumer Business 2
Group
Bernard R. Ford........ 51 Vice President, Strategy and Business 16
Development
Lawrence M. McCartney.. 54 Vice President, Information Systems 20
Lisle J. Smith......... 38 Vice President, Administration and Planning 1
Robert A. Stern........ 52 Vice President, Human Resources 12
Craig D. Walley........ 51 Vice President, Corporate Communications 10
General Counsel and Secretary
Robert M. Webb......... 52 Vice President, Manufacturing & Logistics 14
Executive officers serve at the discretion of the Board of Directors (and,
in the case of Mr. Host, pursuant to an Employment Agreement). See "Executive
Compensation -- Company Employment Agreements."
The business experience of each of the persons listed above during the past
five years is as follows:
On January 23, 1995, Mr. Seitz submitted his resignation as Chief Executive
Officer of the Company to be effective as of the date of the 1995 Annual
Meeting. Mr. Seitz has been the Chief Executive Officer of the Company since
1987. He was also President of the Company's main operating subsidiary from 1983
until 1991. Previously, Mr. Seitz served as the Company's Director of Marketing
and as General Manager of The W. Atlee Burpee Company.
On January 23, 1995, the Board of Directors of the Company appointed Mr.
Host as successor to Mr. Seitz as Chief Executive Officer of the Company
effective as of the date of the 1995 Annual Meeting. Mr. Host has been President
and Chief Operating Officer of the Company since 1991. From 1990 to 1991, he was
Senior Vice President, Marketing for Coca-Cola USA. He was President of the
Boyle-Midway Household Products Division of American Home Products, Inc. for
five years before joining Coca-Cola USA.
37
50
Mr. Yeager has been an Executive Vice President of the Company since 1991
and a Vice President and the Chief Financial Officer of the Company and its
predecessors since 1980. He was first Assistant Comptroller and then Comptroller
of the Company's predecessor from 1974 to 1980.
Dr. Kelty has been Senior Vice President, Technology and Operations, of the
Company since 1994. From 1988 to 1994, he served first as Director, then as Vice
President of Research and Development of the Company. Prior to that, Dr. Kelty
was the Director of Advanced Technology Research of the Company, and from 1983
to 1987 he was Director, Chemical Technology Development of the Company and its
predecessors.
Mr. Stahl has been Senior Vice President, Commercial Business Group, of the
Company since 1994. From 1987 to 1994, he was Vice President and General Manager
of the Company's Professional Business Group. Mr. Stahl joined the Company in
1967 as a technical representative in the golf course division.
Mr. McKinney has been Senior Vice President, Consumer Business Group, of
the Company 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. Ford has been Vice President, Strategy and Business Development of the
Company since 1987. Other positions that Mr. Ford has held with the Company and
its predecessors include Director of Market Development, Director of Export
Marketing Services and Director of Marketing.
Mr. McCartney has been Vice President, Information Systems, of the Company
since 1989. He joined the predecessor of the Company in 1974 as Systems and
Programming Manager, and was Director, Information Systems, of the Company and
its predecessors from 1976 until 1989.
Mr. Smith has been Vice President, Administration and Planning, of the
Company since 1994. Prior to joining the Company in 1993, he served as Chief
Financial Officer of Grace-Sierra Horticultural Products Company from 1991 to
1993, and as Treasurer and Controller of that corporation from 1987 to 1991.
Mr. Stern has been Vice President, Human Resources, of the Company and its
predecessors since 1984.
Mr. Walley has been Vice President, Corporate Communications, General
Counsel and Secretary of the Company and its predecessors since 1985.
Mr. Webb has been a Vice President of the Company since 1988. He was Vice
President -- Operations of Hyponex Corporation from 1980 until 1988.
It is currently anticipated that James Hagedorn will become Senior Vice
President of the Company and Manager of the Company's Consumer Garden Group as
soon as practicable after the Merger Transactions become effective. It is not
currently anticipated that any other employee of Miracle-Gro will become an
executive officer of the Company; however, it is anticipated that Horace
Hagedorn will be named Vice Chairman of the Board of Directors upon the
consummation of the Merger Transactions.
38
51
PERFORMANCE GRAPH
The following line graph compares the yearly percentage change in the
Company's cumulative total stockholder return (as measured by dividing (i) the
sum of (A) the cumulative amount of dividends for the measurement period,
assuming dividend reinvestment, and (B) the difference between the price of the
Company's Common Shares at the end and the beginning of the measurement period;
by (ii) the price of the Company's Common Shares at the beginning of the
measurement period) against the cumulative return of the Standard & Poor's 500
Composite Stock Index ("S&P 500 Comp") and of an index comprised of the common
stock of Duracell International, Inc., First Brands Corp., Lesco Inc., Newell
Co., Rubbermaid Inc. and Stanley Works (the "Peer Group") for the period from
January 31, 1992 to September 30, 1994. Members of the Peer group were chosen
based upon their strong customer orientation, leading brand name and desirable
price/earnings multiple. The Company's Common Shares became registered
under Section 12 of the Exchange Act on January 31, 1992. The comparison
assumes $100 was invested on January 31, 1992 in the Company's Common Shares
and in each of the foregoing indices and assumes reinvestment of dividends.
RETURN TO SHAREHOLDERS
REINVESTMENT OF DIVIDENDS
MEASUREMENT PERIOD THE SCOTTS S&P 500 IN-
(FISCAL YEAR COVERED) COMPANY DEX PEER GROUP
IPO-1/31/92 100.00 100.00 100.00
9/30/92 82.90 104.4 90.31
9/30/93 96.71 117.91 97.77
9/30/94 81.59 122.96 104.93
39
52
REPORT OF THE COMPENSATION COMMITTEE
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN THE COMPANY'S
PREVIOUS FILINGS UNDER THE SECURITIES ACT OR THE EXCHANGE ACT THAT MIGHT
INCORPORATE FUTURE FILINGS, INCLUDING THIS PROXY STATEMENT/PROSPECTUS, IN WHOLE
OR IN PART, THIS REPORT AND THE GRAPH SET FORTH ABOVE UNDER "ELECTION OF
DIRECTORS - PERFORMANCE GRAPH" SHALL NOT BE INCORPORATED BY REFERENCE INTO ANY
SUCH FILINGS.
The Compensation Committee of the Board of Directors of the Company
(the "Committee") is comprised of three outside directors, none of whom was
formerly an officer of the Company. During the 1994 fiscal year, none of the
Company's executive officers served on the board of any organization of which a
Committee member was an executive officer or on the compensation committee of
any organization of which any director of the Company was an executive officer.
The Committee has retained outside legal counsel and compensation consultants.
Role of the Compensation Committee
The Committee has the oversight responsibility for the Company's
executive compensation program. The Committee reviews the general compensation
philosophy of the Company and, in consideration thereof, determines the forms
and terms of compensation to be paid to executive officers of the Company.
Prior to the beginning of each fiscal year, the Committee reviews the
performance of the Chief Executive Officer and the Chief Operating Officer and
determines the amount of salary adjustment, if any, each should receive. At
the same time, the Committee establishes the goals to be met by the executive
officers of the Company during the fiscal year and targets the levels at which
bonuses will be paid under the Company's Executive Annual Incentive Plan (the
"Bonus Plan") . At the end of each fiscal year, the Committee determines the
extent to which goals have been met or exceeded by the executive officers of
the Company and awards bonuses accordingly. In addition, the Committee is
charged with administering the Company's 1992 Long Term Incentive Plan (the
"1992 LTIP") and makes awards of stock options and performance shares pursuant
thereto.
Compensation Philosophy
In designing the compensation program for the executive officers of
the Company, the Committee follows the belief that the amounts of compensation
received by the executive officers should reflect not only the value created
for shareholders during the fiscal year but also the extent to which the
Company's short-term and long-term strategic goals and objectives have been
advanced. The compensation program has been designed to achieve the following
objectives:
- - Compensation should be meaningfully related to the value created for
shareholders. The Committee has linked executive performance to corporate
performance by measuring the Company's year-to- year gains in net income,
setting a target at the median net income gain of all S&P 500 companies.
Executives are then rewarded with awards under the Bonus Plan based upon
the Company's performance.
- - The various elements of the compensation program should support the short
and long term strategic goals and objectives of the Company by rewarding
the Company's executive officers based upon the achievement of these goals.
- - The various elements of the compensation program should enable the Company
to recruit, maintain and motivate the executive talent required to meet the
Company's strategic goals.
- - The various elements of the compensation program should reflect and promote
the Company's values and reward individuals for outstanding contributions
to the Company's success.
40
53
- - Performance should be a key determinant of pay.
- - Minimum stock ownership must be attained by all corporate officers and
directors.
Committee Activity
During the 1994 fiscal year, the Committee determined that the Company
would be better advised by a new compensation consulting firm. The Company
identified and recommended a new consultant which the Committee approved.
Thereafter, the Committee directed that management of the Company and the
consultant review the existing executive compensation program and propose
modifications prior to the beginning of the 1995 fiscal year. The consultant
confirmed that for the 1995 fiscal year and beyond the existing compensation
program should:
- - Target base salaries at the competitive 50th percentile of base salaries
for executive officers in similar positions at corporations of similar
sales volume and net income growth performance.
- - Target payoffs under the Bonus Plan at the competitive 50th percentile of
short-term incentives for executive officers in similar positions in
companies comparable to the Company.
The comparative group of companies used to calculate base salaries and bonuses
consisted of approximately 425 companies in a proprietary data base maintained
by the Company's compensation consultant. The Company is not privy to the
identity of these companies but has been advised that they represent a broad
cross section of general industry and they are comparable to the Company as to
sales volumes and net income growth performance. The Company believes some
but not all of the companies in the Peer Group are included in the comparative
group used by the compensation consultant.
The consultant recommended and the Committee approved the following
changes to the Company's executive compensation program:
- - Targets for awards under the Bonus Plan have been established to measure
year-to-year gains in net income before accounting changes. The Committee
recognizes that accounting changes often adversely affect the reporting of
year-to-year changes in net income. The Committee therefore believes it is
more fair and accurate to evaluate performance of the Company and its
executives for bonus purposes prior to recognizing the impact of accounting
changes. Targets have been set at the comparative performance levels of
companies in the S&P 500, as previously discussed under "Compensation
Philosophy" above.
- - Grants of stock options under the 1992 LTIP are to be set at the 75th
percentile of stock option grants made to executive officers in similar
positions in a group of comparative manufacturing and consumer products
companies identified by the consultant with compensation data adjusted to
reflect the Company's sales volume. The comparative companies are a part of
the large proprietary data base which the consultant maintains. All such
grants are to be in the form of non-qualified stock options with exercise
prices equal to the closing "asked" price of the Company's Common Shares on
the date of grant.
- - Beginning in fiscal 1995, discontinuation of the performance share
component of the Company's 1992 LTIP to focus value creation on stock
options and simplify long term incentives.
Salary Adjustments, Bonus Awards and Stock Grants During the 1994 Fiscal Year
SALARY ADJUSTMENTS. Continuing the Company's philosophy of
strengthening the performance-related pay components, base salary merit
increases for 1994 for executive officers as a group were an aggregate 3%.
Based on the recommendation of the Company's compensation consultant and the
continuing low rate of inflation, the Committee determined that a 3% merit
increase target was sufficient to maintain competitive positioning of base
salaries of the Company's executive officers at the 50th percentile of the
comparative group of companies previously discussed.
During the 1994 fiscal year, the Committee increased the base salary
component of the compensation of Mr. Seitz, Chairman and Chief Executive
Officer of the Company, by 4%. At the December 1993 Compensation Committee
Meeting, the Committee considered the attainment of 1993 fiscal year goals and
the completion of the acquisition of the Republic Tool and Manufacturing
Company when determining the performance of Mr. Seitz for
41
54
that period. The Committee also considered that Mr. Seitz's base salary was at
the low end of the competitive range.
BONUS AWARDS. (a) BONUSES GRANTED PURSUANT TO THE BONUS PLAN. The
payments made under the Bonus Plan were based on Earnings before Interest ,
Taxes and Amortization ("EBITA") (60%) and Average Working Capital plus Average
Capital Expense ("AWC+ACE") (40%). EBITA was 92.2% of the target level, and
AWC + ACE was 78.6% of target level, leading to a composite corporate
performance for the purposes of the Bonus Plan of 86.7%. This measure was used
in the calculation of executive bonuses, including the bonus paid to Mr. Seitz.
(b) ADJUSTMENT BONUSES. The Committee recognized the contribution of
certain executive officers to the acquisition and successful, non-dilutive
integration of the operations of Grace-Sierra Horticultural Products Company
("Grace-Sierra") into those of the Company and the impact of the
discontinuance of the performance share component of the 1992 LTIP by making a
one time, additional bonus (the "Adjustment Bonus") to those executives
impacted by both. The Adjustment Bonus in total represented approximately 13%
of aggregate salaries of the executive officers who received an Adjustment
Bonus, and was allocated based on the loss of opportunity resulting from the
termination of the performance share component of the 1992 LTIP and such
executive officer's participation in the successful integration of
Grace-Sierra. The amount of the adjustment bonus paid to Mr. Seitz was
$56,345.
STOCK OPTIONS AND PERFORMANCE SHARE AWARDS. Based on the
recommendation of the Company's previous compensation consultant, the Committee
determined the aggregate value of the awards to be made to each executive
officer under the 1992 LTIP for the 1994 fiscal year. The value of such awards
was then divided equally between options and performance shares, and was based
upon the closing "asked" price of the Company's Common Shares on the date of
grant. The number of options granted to each executive officer was then
determined based upon the Black-Scholes valuation of the value of an option
with a ten-year term. Stock option grants and performance share awards made to
Mr. Seitz are reflected in the table on page 43 of this Proxy
Statement/Prospectus.
As previously indicated, after the grant of performance share awards
for fiscal 1994, the Committee determined to discontinue the performance share
component of the 1992 LTIP. As a result of such discontinuance, the Committee
approved the vesting of previous grants of performance shares at the initial
grant level as they mature (i.e., without applying performance standards to the
number of shares granted). Awards which matured at the end of the 1994 fiscal
year were vested or paid to plan participants.
SUBMITTED BY THE COMPENSATION COMMITTEE OF THE COMPANY.
Joseph P. Flannery, Chairman, John S. Chamberlin and John M. Sullivan
42
55
EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table shows, for the fiscal years ended September 30, 1994,
1993 and 1992, compensation awarded or paid to, or earned by, the Company's
Chief Executive Officer and the four other most highly compensated executive
officers of the Company.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
---------------------- -----------------------
NAME AND FISCAL SALARY BONUS SECURITIES UNDERLYING ALL OTHER
PRINCIPAL OFFICE YEAR ($) ($) OPTIONS/SARS(#)(1) COMPENSATION($)(2)
- ---------------------------- ------ --------- -------- ----------------------- ------------------
Tadd C. Seitz:
Chairman of the 1994 $ 362,500 $228,965 129,447 $3,270
Board and Chief 1993 $ 341,725 $189,780 85,019 $3,270
Executive Officer 1992 $ 323,925 $191,066 0 --
Theodore J. Host:
President and 1994 $ 307,833 $196,650 82,567 $3,270
Chief Operating 1993 $ 283,750 $162,963 53,108 $3,270
Officer 1992 $ 292,745 $250,000 136,364(3) --
Paul D. Yeager:
Executive Vice 1994 $ 202,250 $125,000 25,342 $3,270
President and Chief 1993 $ 192,750 $115,103 18,739 $3,270
Financial Officer 1992 $ 173,950 $ 91,827 0 --
J. Blaine McKinney:
Senior Vice President 1994 $ 191,667 $105,000 31,658 $1,907
Consumer Business 1993 $ 177,333 $ 87,365 35,409 --
Group 1992 $ 58,333 $ 30,000 0 --
Richard B. Stahl:
Senior Vice President 1994 $ 180,333 $ 89,000 14,932 $3,270
and General Manager, 1993 $ 163,600 $ 89,679 14,546 $3,270
Commercial Business 1992 $ 155,000 $ 82,800 0 --
Group
- ---------------
(1) Except as noted, these numbers represent options for Common Shares granted
pursuant to the Company's 1992 Long Term Incentive Plan. See the table under
"OPTION GRANTS IN LAST FISCAL YEAR" for more detailed information on such
options.
(2) In accordance with the transition provisions of the revised rules governing
the disclosure of executive compensation adopted by the Commission, amounts
of "All Other Compensation" are excluded for the Company's 1992 fiscal year.
Includes contributions to the PSP.
43
56
(3) These options expire on January 8, 2002; provided, however, that if Mr.
Host's active employment with the Company and its subsidiaries is terminated
for cause, these options will be forfeited.
Grants of Options
The following table sets forth information concerning individual grants of
options made during the 1994 Fiscal Year to each of the executive officers named
in the Summary Compensation Table. The Company has
never granted stock appreciation rights.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
% OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
- ---------------------- ------------ ------------ --------- ---------- -------- ----------
Tadd C. Seitz......... 87,840(2)(3) 22.5% $ 17.25 9/30/03 $953,064 $2,414,722
41,607(3)(4) 10.6% $ 16.25 11/03/02 $372,840 $ 918,142
Theodore J. Host...... 56,580(2)(3) 14.5% $ 17.25 9/30/03 $613,893 $1,555,384
25,987(3)(4) 6.6% $ 16.25 11/03/02 $232,869 $ 573,455
Paul D. Yeager........ 16,180(2)(3) 4.1% $ 17.25 9/30/03 $175,553 $ 444,788
9,162(3)(4) 2.3% $ 16.25 11/03/02 $ 82,101 $ 202,178
J. Blaine McKinney.... 21,680(2)(3) 5.5% $ 17.25 9/30/03 $235,228 $ 595,983
9,978(3)(4) 2.5% $ 16.25 11/03/02 $ 89,413 $ 220,184
Richard B. Stahl...... 7,820(2)(3) 2.0% $ 17.25 9/30/03 $ 84,847 $ 214,972
7,112(3)(4) 1.8% $ 16.25 11/03/02 $ 63,731 $ 156,940
- ---------------
(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 the Company
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 the Company's 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 Committee of the Company's 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
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.
44
57
(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 1994 Fiscal Year. However, on December 13, 1994, the Company's Board of
Directors approved its Compensation 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 1994 Fiscal Year by each of the executive
officers named in the Summary Compensation Table. No options were exercised
during the 1994 Fiscal Year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
NUMBER OF UNDERLYING VALUE OF UNEXERCISED
SECURITIES UNEXERCISED OPTIONS AT IN-THE-MONEY
UNDERLYING FY-END (#) OPTIONS AT FY-END($)(1)
OPTIONS VALUE ----------------------------- -----------------------------
NAME EXERCISED REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ---------- ----------- ----------- ------------- ----------- -------------
Tadd C. Seitz.......... 0 -- 98,873 157,200 $ 0 $ 0
Theodore J. Host....... 0 -- 198,126 99,900 $ 763,638 $ 0
Paul D. Yeager......... 0 -- 12,623 40,621 $ 0 $ 0
J. Blaine McKinney..... 0 -- 28,721 48,325 $ 0 $ 0
Richard B. Stahl....... 0 -- 16,912 19,679 $ 0 $ 0
- ---------------
(1) "Value of Unexercised In-the-Money Options at FY-End" is based upon the fair
market value of the Company's Common Shares on September 30, 1994 ($15.50)
less the exercise price of in-the-money options at the end of the 1994
Fiscal Year.
Pension Plans
The Company maintains a tax-qualified non-contributory defined benefit
pension plan (the "Pension Plan"). All employees of the Company and its
subsidiaries (except for Hyponex Corporation, a wholly-owned subsidiary of the
Company ("Hyponex"), and O. M. Scott & Sons, Ltd., a wholly owned subsidiary of
the Company in the United Kingdom) 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.
45
58
PENSION PLANS TABLE (1)
ANNUALIZED YEARS OF SERVICE
AVERAGE ------------------------------------------------------------
FINAL PAY 10 15 20 25 30
---------- -------- -------- -------- -------- --------
$ 100,000 $ 13,280 $ 19,919 $ 26,559 $ 33,199 $ 39,839
250,000 35,780 53,669 71,559 89,449 107,339
500,000 73,280 109,919 146,559 183,199 219,839
750,000 110,580 166,169 221,559 276,949 332,339
1,000,000 148,280 222,419 296,559 370,699 444,839
1,250,000 185,780 278,669 371,559 464,449 557,339
- ---------------
(1) 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 Scotts Company Excess
Benefit Plan (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 above figures is $13,764. Thus, the offset is $5,161
for a person with 30 years of service. The maximum possible offset is $6,882
for a person with 40 years of service.
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, 1994, the credited years of service (including certain
prior service with ITT Corporation, from whom the Company was acquired in 1986)
and the 1994 annual covered compensation for purposes of the Pension Plan and
the Excess Benefit Plan of the five executive officers of the Company named in
the Summary Compensation Table were as follows:
COVERED
YEARS OF SERVICE COMPENSATION
--------------------- ------------
Mr. Seitz......................................... 18 years 9 months $587,965
Mr. Host.......................................... 2 years 10 months $501,650
Mr. Stahl......................................... 18 years 9 months $264,733
Mr. Yeager........................................ 25 years 1 month $324,000
Mr. McKinney...................................... 2 years 4 months $291,667
Effective October 1, 1993, the Company also established the Excess Benefit
Plan which 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.
46
59
Company Employment Agreements
The Company entered into an Employment Agreement with Mr. Host
effective October 1991 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. If Mr. Host's employment is terminated for
specified reasons, the Employment Agreement provides that he will receive,
subject to certain limitations, his full base salary which would have been paid
until the first anniversary of his date of termination.
In connection with the entering into of his Employment Agreement, Mr.
Host received a signing bonus of $250,000, and in January 1992, pursuant to
such Agreement, purchased 45,454 Common Shares at a purchase price of $9.90 per
share, and pursuant to a Stock Option Plan and Agreement dated as of January 9,
1992, 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 the Company and its subsidiaries is terminated
for cause, these options will be forfeited.
Miracle-Gro Employment Agreements
In connection with and as a condition to the Merger Transactions, the
Company or New Miracle-Gro intends to enter into employment agreements (the
"Employment Agreements") with the following employees of Miracle-Gro: Horace
Hagedorn, John Kenlon and James Hagedorn. Under such Employment Agreements,
Horace Hagedorn will serve as Chief Executive Officer of New Miracle-Gro,
John Kenlon will serve as President of New Miracle-Gro and James Hagedorn will
serve as Senior Vice President of the Company.
Each of the Employment Agreements will have a term of at least three
years, and is automatically renewed for an additional year each subsequent year
unless either party notifies the other party of their desire not to renew. The
Employment Agreements will provide for a minimum annual salary of $200,000,
$195,000 and $200,000 for Horace Hagedorn, John Kenlon and James Hagedorn,
respectively. In addition, within five days after entering into the Employment
Agreements the Company will be required to grant to each of Horace Hagedorn,
John Kenlon and James Hagedorn options to acquire 24,000 Common Shares pursuant
to the terms and conditions of the Company's 1992 Long Term Incentive Plan.
Upon certain types of termination of employment with the Company (e.g.,
a termination by the Company for any reason other than "cause" (as defined in
the Employment Agreements) or a termination by the employee entering into such
Employment Agreement (the "Employee") constituting "good reason" (as defined
in the Employment Agreements)), the Employee will become entitled to receive
certain severance benefits including a payment equal to three times the sum of
such Employee's salary plus such Employee's highest annual bonus in any of the
three preceding years.
The Employment Agreements contain confidentiality and noncompetition
provisions which prevent the applicable Employee from disclosing confidential
information about the Company and from competing with the Company during his
employment therewith and for an additional three years thereafter.
CERTAIN MATTERS PERTAINING TO THE BOARD OF DIRECTORS
Committees and Meetings of the Board
The Company's Board of Directors held nine regularly scheduled or
special meetings (including telephonic meetings) during the 1994 Fiscal Year.
The Company's Board of Directors has four standing committees: an Executive
Committee, an Audit Committee, a Nominating Committee and a Compensation
Committee.
Each current member of the Board of Directors of the Company nominated
for election attended at least 75% of the aggregate of the total number of
meetings of the Board of Directors of the Company and the total number of
meetings held by the committees of such Board on which he or she served during
the period he or she served.
EXECUTIVE COMMITTEE. The Executive Committee has the authority, with
certain exceptions, to take all actions that may be taken by its full Board of
Directors. It may meet between regularly scheduled meetings to take such
action as is necessary for the operation of the Company. The Executive
Committee did not meet during the 1994 Fiscal Year.
AUDIT COMMITTEE. The Audit Committee reviews and approves the scope
and results of any outside audit of the Company, and the fees therefor, and
makes recommendations to the Board of Directors or management concerning
auditing and accounting matters and the selection of outside auditors. The
Audit Committee met three times during the 1994 Fiscal Year.
NOMINATING COMMITTEE. The Nominating Committee, which was established
in December, 1994, recommends policies on the composition of the Board and
nominees for membership on the Board. It did not meet during the 1994 Fiscal
Year.
47
60
COMPENSATION COMMITTEE. The Compensation Committee reviews, considers
and acts upon matters of salary and other compensation and benefits of all
officers and other employees of the Company and acts upon all matters
concerning, and exercises such authority as is delegated to it under the
provisions of, any benefit, retirement or pension plan. The Compensation
Committee met five times during the 1994 Fiscal Year.
Compensation of Directors
Each director of the Company, other than any director employed by the
Company, 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 (commencing with the 1994 Annual
Meeting) of options to purchase 4,000 Common Shares at an exercise price equal
to the fair market value of the underlying Common Shares on the date of the
grant. In addition, on November 11, 1992, each of the Nonemployee Directors of
the Company on that date (Messrs. Beard, Chamberlin, Flannery and Sherman and
Henry O. Timnick (who is no longer a director of the Company)) was granted
options to purchase 4,000 Common Shares at an exercise price of $16.25.
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 the Company's Board of
Directors.
DESCRIPTION OF THE CAPITAL STOCK OF THE COMPANY
The authorized capital stock of the Company consists of 35,000,000
Common Shares, each without par value. At January 15, 1995, 1,364,589 Common
Shares, were reserved for issuance upon the exercise of outstanding employee
stock options. If the Merger Transactions are consummated, an additional
3,000,000 Common Shares will be reserved for issuance upon exercise of the
Warrants and 10,263,158 Common Shares will be reserved for issuance upon
conversion of the Class A Convertible Preferred Stock. See "THE AGREEMENT -
Terms of the Merger Transactions."
If the proposed amendment to Article FOURTH of the Amended Articles is
adopted, the authorized capital stock of the Company will consist of 50,000,000
Common Shares, each without par value, and 195,000 voting preferred shares
designated Class A Convertible Preferred Stock. The following description of
capital stock of the Company assumes this amendment is adopted. See "PROPOSED
AMENDMENT TO ARTICLE FOURTH OF THE AMENDED ARTICLES OF INCORPORATION."
Holders of Common Shares are entitled to one vote for each share held
of record on each matter submitted to a vote of shareholders. Holders of Class
A Preferred Stock are entitled to the number of votes equal to the number of
Common Shares into which the Class A Preferred Stock is convertible
(approximately 52.6 votes per share initially), as described below. The Common
Shares and the Class A Convertible Preferred Stock will vote together as a
single class. Shareholders have no cumulative voting rights, which means that
the holders of shares entitled to exercise more than fifty percent of the
voting power are able to elect all of the directors (or all of the directors in
each class of directors if the proposed amendment to Subparagraphs (A) and (B)
of Section 2.02 of the Code of Regulations is adopted). The Company has agreed
that, until the fifth anniversary of the Effective Time of the Merger
Transactions, it will take such action as may be required to cause three
directors designated by the Miracle-Gro Shareholder Representative to be
elected to the Board of Directors of the Company (one director to each class of
directors if the proposed amendment to Subparagraphs (A) and (B) of Section
2.02 of the Code of Regulations is adopted). See "THE AGREEMENT - Standstill
Provisions - Board of Directors" and "PROPOSED AMENDMENTS TO SECTION 2.02 OF
THE CODE OF REGULATIONS - Effect of Adoption of Amendments."
Under Ohio law and the Company's Amended Articles of Incorporation, the
affirmative vote of the holders of shares entitled to exercise at least
two-thirds of the voting power is necessary for certain corporate
48
61
actions, including merger or consolidation with another corporation,
combination or majority share acquisition, sale or other disposition of all or
substantially all of the Company's property and assets, voluntary dissolution
of the Company or amendment of the Amended Articles of Incorporation. If the
proposal to adopt new Article NINTH to the Amended Articles of Incorporation is
adopted, the vote required to amend the Amended Articles of Incorporation --
other than amendments to change the vote required to authorize the listed
transactions -- will be reduced to a majority. If the proposal to adopt new
Article NINTH is not adopted, the affirmative vote of the holders of shares
entitled to exercise at least two-thirds of the voting power will be necessary
to adopt any amendment to the Amended Articles of Incorporation. See "PROPOSED
AMENDMENT TO ADOPT NEW ARTICLE NINTH OF THE AMENDED ARTICLES OF INCORPORATION."
See "PROPOSED AMENDMENT TO ARTICLE FOURTH OF THE AMENDED ARTICLES OF
INCORPORATION," "PROPOSED AMENDMENTS TO SECTION 2.02 OF THE CODE OF
REGULATIONS," "PROPOSED AMENDMENT TO SECTION 6.01 OF THE CODE OF REGULATIONS"
and "PROTECTION AGAINST NON-NEGOTIATED TAKEOVERS" for a description of
provisions in the Company's Amended Articles of Incorporation and Code of
Regulations and in Ohio law which might have the effect of delaying or
preventing a change of control of the Company.
COMMON SHARES
Holders of Common Shares are entitled to receive dividends when and if
declared by the Board of Directors out of funds legally available therefor,
subject to the rights of holders of the Class A Cumulative Preferred Stock, as
described below, and to any contractual restrictions on the payment of
dividends. Upon consummation of the Merger Transactions, in the event the
Company receives additional free cash flow, as expected, the Company plans to
consider some or all of the following: investment in the Company's business,
including research and development, paying down debt, a Common Share buyback
and a Common Share dividend.
Upon dissolution, liquidation or sale of all or substantially all the
assets of the Company, after payment in full of all amounts required to be paid
to creditors and to the holders of the Class A Convertible Preferred Stock, as
described below, the holders of Common Shares will be entitled to receive pro
rata the remaining assets of the Company available for distribution.
The holders of Common Shares do not have preemptive, subscription,
redemption or conversion rights.
CLASS A CONVERTIBLE PREFERRED STOCK
The 195,000 shares of Class A Convertible Preferred Stock are to be
issued to the Miracle-Gro Shareholders in connection with the Merger
Transactions. See "THE AGREEMENT - Terms of the Agreement."
Dividends shall be payable on the Class A Convertible Preferred Stock
at the rate of $50.00 per share per year. Dividends shall be cumulative and
shall be payable quarterly. No dividends or other distributions (other than
stock dividends) and no redemption, repurchase or other acquisition for value
(other than from employees pursuant to obligations existing, or upon
foreclosure of loans existing, prior to the Effective Time) shall be made with
respect to the Common Shares until cumulative dividends on the Class A
Convertible Preferred Stock, and all amounts payable on redemption of the Class
A Convertible Preferred Stock, have been paid in full or set apart for payment.
In the event that the Company fails to pay all or any portion of the accrued
but unpaid dividends for two consecutive quarters, Miracle-Gro Shareholders
shall be entitled to elect three additional directors until such time as the
accrued but unpaid dividends are paid to the holders of the Class A Convertible
Preferred Stock, at which time such new directors shall be removed and the
Board of Directors shall be reduced to the number in effect immediately prior
to the increase.
In the event of liquidation, dissolution or winding up of the Company,
the holders of the Class A Convertible Preferred Stock shall be entitled to
receive $1,000 per share, plus accumulated unpaid dividends, before any amount
will be paid to the holders of the Common Shares.
49
62
Each share of the Class A Convertible Preferred Stock shall be
convertible at any time into the number of Common Shares determined by dividing
$1,000 by the Conversion Price, initially $19 per Common Share subject to
adjustment in the event of stock dividends, stock splits, share combinations,
asset distributions, recapitalizations and similarly dilutive events.
The Class A Convertible Preferred Stock will be subject to redemption
at any time after five years from date of issuance for $1,000 per share plus
accrued unpaid dividends.
The holders of Class A Convertible Preferred Stock do not have
preemptive or subscription rights, except as set forth in the Agreement. See
"THE AGREEMENT - Standstill Provisions."
THE WARRANTS
In connection with the Merger Transactions, and pursuant to the
Agreement, the Company will issue three separate series of Warrants, designated
Series A, B and C, which will be indistinguishable from each other except with
respect to the exercise price. Each series of Warrants will be exercisable for
1,000,000 Common Shares, which collectively represent approximately 8% of the
Company's Common Shares on a fully diluted basis. The number of Common Shares
for which the Warrants will be exercisable will be adjusted in the event of
stock dividends, stock splits, share combinations, asset distributions,
recapitalizations and similarly dilutive events.
Each Warrant will be exercisable for eight and one-half years from the
Effective Time. Each Warrant will provide that to the extent that exercise of
such Warrant would increase the Total Voting Power of the Miracle-Gro
Shareholders to more than 43% during the Standstill Period (excluding the
unexercised Warrants) or to more than 49% after the Standstill Period
(including the unexercised Warrants), such Warrant will not be exercisable for
Common Shares but rather will be exercisable only for the spread between the
exercise price thereof and the fair market value of the Company's Common Shares
at the time of exercise. The Warrants will provide that the exercise price
thereof may be paid in Common Shares or by reducing the number of Common Shares
for which such Warrants would otherwise be exercisable. The Miracle-Gro
Shareholders may not exercise any voting rights with respect to the Common
Shares underlying the Warrants until, and to the extent, they are exercised for
Common Shares.
The exercise prices for the Series A, Series B and Series C Warrants
are $21 per Common Share, $25 per Common Share and $29 per Common Share,
respectively.
DESCRIPTION OF CAPITAL STOCK OF THE MIRACLE-GRO COMPANIES
The authorized capital stock of Miracle-Gro consists of 20,000 shares
of voting common stock, without par value, and 20,000 shares of non-voting
common stock, without par value. As of the date hereof there are outstanding
13,405 shares of Miracle-Gro's voting common stock and 13,405.284 shares of
Miracle-Gro's non-voting common stock. Such voting and non-voting stock is
held by eight people.
The authorized capital stock of Miracle-Gro Delaware consists of 1,500
shares of voting common stock, without par value, and 1,500 shares of
non-voting common stock, without par value. As of the date hereof there are
outstanding 1,000 shares of Miracle-Gro Delaware's voting common stock and
999.8 shares of Miracle-Gro Delaware's non-voting common stock. Such voting
and non-voting stock is held by eight people.
The authorized capital stock of Miracle-Gro UK consists of 20,000
shares of voting common stock, without par value, and 20,000 shares of
non-voting common stock, without par value. As of the date hereof there are
outstanding 4,997.274 shares of Miracle-Gro UK's voting common stock and
4,997.106 shares of Miracle-Gro UK's non-voting common stock. Such voting and
non-voting stock is held by eight people.
50
63
The authorized capital stock of Nurseries consists of 500 shares,
without par value. As of the date hereof there is outstanding one share of
Nurseries stock held by one person.
For all of the Miracle-Gro Companies, each outstanding share of voting
common stock entitles the holder to one vote on all matters submitted to a vote
of shareholders. Holders of shares of common stock (whether voting or
non-voting) of each of the Miracle-Gro Companies have equal dividend and
liquidation rights, and no holder has any preemptive rights to subscribe for
any securities of his or her respective company.
COMPARISON OF SHAREHOLDER RIGHTS
The Miracle-Gro Companies are closely held corporations, each with
eight or fewer individual shareholders, all but one of whom are members of the
Hagedorn family. Such persons' rights as shareholders have been governed
primarily by discussions and agreements among these eight individuals.
Following the Merger Transactions, the Miracle-Gro Shareholders will hold
shares in the Company, an Ohio corporation which is a public company, and their
rights will be governed by Ohio law and the Company's Amended Articles of
Incorporation and Code of Regulations. Accordingly, the material difference
between the present rights of Miracle-Gro Shareholders and their rights as
holders of Scott's securities is that following the Merger Transactions they
will be shareholders in a public company governed by Ohio law and the Company's
Amended Articles of Incorporation and Code of Regulations rather than such
discussions and agreements. Set forth below is a summary of the material
provisions of Ohio law and the Amended Articles of Incorporation and
Regulations of the Company which will govern their rights as shareholders after
the Merger Transactions. The Company is proposing amendments to its Amended
Articles of Incorporation and Code of Regulations. See "PROPOSED AMENDMENT TO
ARTICLE FOURTH OF THE AMENDED ARTICLES OF INCORPORATION," "PROPOSED AMENDMENT
TO ADOPT NEW ARTICLE NINTH OF THE AMENDED ARTICLES OF INCORPORATION," "PROPOSED
AMENDMENTS TO SECTION 2.02 OF THE CODE OF REGULATIONS," and "PROPOSED AMENDMENT
TO SECTION 6.01 OF THE CODE OF REGULATIONS." The following discussion assumes
these amendments are adopted.
MERGERS AND CONSOLIDATIONS
Under the GCL and the Company's Amended Articles of Incorporation, an
agreement of merger or consolidation must be approved by the directors of each
constituent corporation and adopted by shareholders of each constituent Ohio
corporation (other than the surviving corporation in the case of a merger)
holding at least two-thirds of the corporation's voting power. In the case of
a merger, the agreement must also be adopted by the shareholders of the
surviving corporation by similar vote, if one or more of the following
conditions exist: (a) the articles or regulations of the surviving corporation
then in effect require that the agreement be adopted by the shareholders or by
the holders of a particular class of shares of that corporation; (b) the
agreement conflicts with the articles or regulations of the surviving
corporation then in effect, or changes the articles or regulations, or
authorizes any action that, if it were being made or authorized apart from the
merger, would otherwise require adoption by the shareholders or by the holders
of a particular class of shares of that corporation; (c) the merger involves
the issuance or transfer by the surviving corporation to the shareholders of
the other constituent corporation or corporations of such number of shares of
the surviving corporation as will entitle the holders of the shares immediately
after the consummation of the merger to exercise one-fifth or more of the
voting power of that corporation in the election of directors; or (d) the
agreement of merger makes such change in the directors of the surviving
corporation as would otherwise require action by the shareholders or by the
holders of a particular class of shares of that corporation.
OTHER CORPORATE TRANSACTIONS
Subject to certain exceptions, under the GCL and the Company's Amended
Articles of Incorporation, the approval of two-thirds of the voting power of
the Company is required for (i) the consummation of combinations and majority
share acquisitions involving the transfer or issuance of such number of shares
as would entitle the holders thereof to exercise at least one-fifth of the
voting power of such corporation in the election of directors immediately after
the consummation of such transaction, (ii) the disposition of all or
substantially all of the corporation's assets other than in the regular course
of business and (iii) voluntary dissolutions.
51
64
PROTECTION AGAINST NON-NEGOTIATED TAKEOVERS
See "PROTECTION AGAINST NON-NEGOTIATED TAKEOVERS."
SPECIAL MEETINGS
Under the GCL, persons who may call a special meeting of shareholders
include the chairman of the board, the president, or, in case of the
president's absence, death, or disability, the vice-president authorized to
exercise the authority of the president in the absence of the latter; the
directors by action at a meeting or a majority of the directors acting without
a meeting; persons holding 25% or more of the voting power of all shares
entitled to vote, unless the articles or regulations specify a smaller or
larger portion, but not more than 50%; or such other officers or persons as the
articles or regulations may authorize. The Regulations authorize the Chairman
of the Board, the President (or, in the event of his absence, death or
disability, the Vice President authorized to exercise the authority of the
President in the absence of the latter), the Secretary or the Board of
Directors to call a special meeting of shareholders. In addition, the
Regulations authorize a special meeting of shareholders to be called by persons
holding at least a majority of all shares outstanding and entitled to vote
thereat.
CLASS VOTING
Under the GCL, holders of a particular class of shares are entitled to
vote as a separate class if the rights of such class are affected by mergers,
consolidations or amendments to the articles.
REMOVAL OF DIRECTORS AND FILLING OF VACANCIES
Under the Regulations, a director or directors may be removed from
office, with or without cause, by the affirmative vote of the holders of at
least a majority of the voting power of the Company which entitles them to
elect directors in place of those to be removed. Vacancies in the Board of
Directors of the Company and any newly-created directorships resulting from any
increase in the number of the directors may be filled by the directors, acting
by the vote of a majority of the directors then in office, even if less than a
quorum. A director elected to the Board to fill a vacancy would hold office
for the unexpired portion of the term of the director whose place has been
filled. A director elected by the Board to fill a newly created directorship
resulting from an increase in the number of directors would hold office until
the next election of the class for which the director was elected.
AMENDMENT TO THE ARTICLES
Under the GCL, an amendment to the articles must be adopted by the
affirmative vote of the holders of shares entitling them to exercise two-thirds
of the voting power of the corporation on the proposal, or a different
proportion but not less than a majority of the voting power, as provided in the
articles. New Article NINTH of the Amended Articles of Incorporation reduces
the vote required to amend any provision of the Amended Articles of
Incorporation except Article NINTH to a majority. See "PROPOSED AMENDMENT TO
ADOPT NEW ARTICLE NINTH OF THE AMENDED ARTICLES OF INCORPORATION."
APPRAISAL RIGHTS
Under the GCL, dissenting shareholders are entitled to appraisal rights
in connection with the lease, sale, exchange, transfer or other disposition of
all or substantially all of the assets of a corporation and in connection with
amendments to its articles which change the rights of shareholders in a
substantially prejudicial manner. In addition, shareholders of an Ohio
corporation being merged into a new corporation are also entitled to appraisal
rights. Shareholders of an acquiring corporation are entitled to appraisal
rights in a merger, combination or majority share acquisition in which such
shareholders are entitled to voting rights.
52
65
DIVIDENDS
An Ohio corporation may pay dividends out of surplus, however created,
in cash, property or shares. An Ohio corporation must notify its shareholders
if a dividend is paid out of capital surplus.
REPURCHASES
Under the GCL, a corporation may repurchase its own shares if
authorized to do so by its articles or under certain other circumstances but
may not do so if immediately thereafter its assets would be less than its
liabilities plus its stated capital, if any, or if the corporation is insolvent
or would be rendered insolvent by such a purchase or redemption. Article FIFTH
of the Amended Articles of Incorporation permits the Company to repurchase
shares to the extent permitted by law.
DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION
Under Section 1701.13(E) of the Ohio Revised Code, directors, officers,
employees and agents of Ohio corporations have an absolute right to
indemnification for expenses (including attorneys' fees) actually and
reasonably incurred by them to the extent they are successful in defense of any
action, suit or proceeding, including derivative actions, brought against them,
or in defense of any claim, issue or matter asserted in any such proceeding.
A director or officer is entitled to such indemnification if his success is "on
the merits or otherwise," thus mandating indemnification if the indemnitee is
successful on the merits or if he is successful, for example, in asserting a
procedural defense, such as a claim that the action is barred by the applicable
statute of limitations or if he is released pursuant to a negotiated settlement
without making payment or providing other consideration. Directors (but not
officers, employees or agents) are entitled to mandatory payment of expenses by
the corporation as they are incurred, in advance of the final disposition of
the action, suit or proceeding, provided the director agrees to cooperate with
the corporation concerning the matter and to repay the amount advanced if it is
proved by clear and convincing evidence that his act or failure to act was done
with deliberate intent to cause injury to the corporation or with reckless
disregard for the corporation's best interests.
The GCL permits a corporation to indemnify directors, officers,
employees or agents of the corporation in circumstances where indemnification
is not mandated by the statute if certain statutory standards are satisfied. A
corporation may grant indemnification in actions other than actions brought by,
or derivatively in the right of, the corporation if the indemnitee has acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the corporation, and with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Such indemnification is permitted against expenses (including attorneys' fees)
as well as judgments, fines and amounts paid in settlement actually and
reasonably incurred by the indemnitee.
An Ohio corporation may also provide indemnification in actions brought
by, or derivatively in the right of, the corporation for attorneys' fees and
expenses actually and reasonably incurred in connection with the defense or
settlement of an action if the officer, director, employee or agent acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the corporation. Ohio law does not expressly authorize
indemnification against judgments, fines and amounts paid in settlement in such
actions. The corporation may not indemnify a director, officer, employee or
agent in such actions for attorneys' fees and expenses if the director,
officer, employee or agent is adjudged to be liable to the corporation for
negligence or misconduct in the performance of his duties to the corporation,
unless and only to the extent that a court determines that, despite the
adjudication of liability, such person is fairly and reasonably entitled to
indemnity.
The GCL grants express power to an Ohio corporation to purchase and
maintain insurance or furnish similar protection, including but not limited to
trust funds, letters of credit and self-insurance, for director, officer,
employee or agent liability. Such insurance may be purchased for, or other
protection provided to, any director, officer, employee or agent, regardless of
whether that individual is otherwise eligible for indemnification by the
corporation.
53
66
The Regulations provide for indemnification consistent with Section
1701.13(E) of the Ohio Revised Code. The Regulations provide that the Company
must indemnify officers and directors against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement incurred in connection
with any pending, threatened or completed action (whether criminal, civil,
administrative or investigative) by reason of the fact that such individual is
or was a director, officer, employee or agent of the Company or is or was
serving at the request of the Company as a director, trustee, officer,
employee, member, manager or agent of another corporation or other entity so
long as such individual acted in good faith and in a manner he reasonably
believed was in, or not opposed to, the best interests of the Company and, with
respect to any criminal matter, he had no reasonable cause to believe his
conduct was unlawful. The Regulations forbid the Company from indemnifying
an officer or director if such person is adjudged to be liable for acting with
reckless disregard for the best interests of the Company or misconduct (other
than negligence) in the performance of his duty to the Company unless and only
to the extent a court, in view of all the circumstances, concludes that such
person is fairly and reasonably entitled to such indemnity as the court deems
proper. The Regulations create a presumption that a director or officer has
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Company, and with respect to any criminal
matter to have had no reasonable cause to believe his conduct was unlawful.
Because of this presumption, the Company believes that a director or officer
will not have the initial burden of showing that he acted in good faith or in a
manner he reasonably believed to be in, or not opposed to, the best interests
of the Company In addition, the Regulations require the Company to advance
expenses on behalf of officers and directors if they agree in writing to repay
such amounts if they are not successful in the litigation.
The Regulations state that the indemnification provided thereby is not
exclusive of any other rights to which any person seeking indemnification may
be entitled. Additionally, the Regulations provide that the Company may
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Company, or who is or was serving
another entity at the request of the Company, against any liability asserted
against him and incurred by him in such capacity, or arising out of his status
as such, whether or not the Company would have the obligation or power to
indemnify him under the Regulations. The Regulations also authorize the
Company to purchase and maintain trust funds, letters of credit or
self-insurance on behalf of any person who is or was a director, officer,
employee or agent of the Company or who is serving or has served another entity
at the request of the Company.
Ohio has codified the directors' common law duty of care and, in part,
their common law duty of loyalty. Section 1701.59(B) of the Ohio Revised Code
provides in pertinent part: "A director shall perform his duties as a director,
including his duties as a member of any committee of the directors upon which
he may serve, in good faith, in a manner he reasonably believes to be in or not
opposed to the best interests of the corporation, and with the care that an
ordinarily prudent person in a like position would use under similar
circumstances."
Under Ohio law, a director is not liable for monetary damages unless it
is proved by clear and convincing evidence that his action or failure to act
was undertaken with deliberate intent to cause injury to the corporation or
with reckless disregard for the best interests of the corporation. This higher
standard of proof must be met in any action brought against a director for
breach of his duties, including any action involving or affecting (i) a change
or potential change in control of the corporation, (ii) a termination or
potential termination of a director's service to the corporation as a director
or (iii) a director's service in any other position or relationship with the
corporation. The higher standard of proof, however, does not affect the
liability of directors for unlawful loans, dividends or distributions under
Section 1701.95 of the Ohio Revised Code. There is no comparable provision
limiting the liability of officers, employees or agents of Ohio corporations.
Ohio law provides specific statutory authority for directors, when
determining what they reasonably believe to be in the best interests of the
corporation, to consider, in addition to the interests of the corporation's
shareholders, other factors such as the interests of the corporation's
employees, suppliers, creditors and customers; the economy of the state and
nation; community and societal considerations; the long-term and the short-term
interests of the corporation and its shareholders; and the possibility that
these interests may be best served by the continued independence of the
corporation.
54
67
INFORMATION ABOUT THE COMPANY
BUSINESS
The Company, through its wholly-owned subsidiaries, Hyponex Corporation
("Hyponex"), Sierra, Republic and their subsidiaries 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 market segments, the Company's Scotts(R) and Turf Builder(R) (for
consumer lawn 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 and stable
operating margins. On September 20, 1994, The Scotts Company, a Delaware
corporation ("Scotts Delaware") was merged with and into The Scotts Company, an
Ohio corporation ("Scotts Ohio") (hereafter, the "Company Merger"). On
September 30, 1994, Scotts Ohio's major operating subsidiary, The O. M. Scott &
Sons Company, a Delaware Corporation ("O. M. Scott") was merged into Scotts
Ohio (the "O. M. Scott Merger"). Management believes these mergers should
decrease the Company's overall tax liability.
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 Commercial
(formerly known as Professional), to serve these domestic markets, as well as
an International Group to serve its markets outside of North America.
CONSUMER BUSINESS GROUP
PRODUCTS
The Company's consumer products include lawn fertilizers,
fertilizer/control combination products, potting soils and other organic
products, grass seed, lawn spreaders, and indoor and outdoor plant care
products.
Lawn Fertilizers and Combination Products. 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 fertilizer and combination products
are sold in dry, granular form, although the Company also sells a small amount
of liquid lawn care products. With the acquisition of Sierra in December,
1993, the Company obtained new products and technologies. Consumer products
that utilize Sierra's technology in this category include Once(R)
controlled-release lawn fertilizer, which can provide up to three months of
feeding from one application.
Management estimates that in fiscal 1994, the Company's share of the U.S.
do-it-yourself consumer lawn chemicals products market was approximately 46%,
more than double that of the second leading brand.
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 1994 U.S. market share was approximately
50% in potting soils, and approximately 39% 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
55
68
geographies. Management estimates that the Company's share of the U.S.
consumer grass seed market was approximately 28% in fiscal 1994.
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 spreaders and Republic's EZ 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 42% in fiscal 1994.
Garden Products, Tools and Indoor Products. The Company produces and
sells a line of boxed Scotts Plant Foods, garden and landscape fertilizers and
indoor plant care products and Peters(R) Professional(R) water soluble
fertilizers and Once(R) controlled-released garden fertilizers. In September
1994, the Company entered into 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. The Company also 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. In management's
estimation, the Company did not have a material share of the markets for these
products in fiscal 1994.
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 and the service it provides its
customers. The Company plans to maintain and expand its market position by
emphasizing these qualities and taking advantage of the Scotts name and
reputation. Through its Hyponex label, the Company has also focused on
increasing sales of its higher margin organic items such as potting soils. In
1994, the Company introduced a line of Scotts potting soils.
The acquisition of Sierra in 1993 provides the Company with numerous
strategic opportunities. This includes the expansion of sales of water-soluble
fertilizers manufactured by Sierra into the consumer market and the future
introduction into the consumer market of certain bioinsecticides for which
Sierra has licenses.
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 Scotts' 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; and 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.
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
56
69
compost yard waste. A pilot program was started in 1991 on Company-owned land
in Marysville when the Company entered into a five-year contract with Franklin
County, Ohio, to compost a minimum of 50,000 tons of yard waste per year for a
fee of $20 per ton. The Company now has seventeen 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 1994 and 1993 from composting services were $5.0 million and $2.1
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 59% of the Consumer Business Group sales in
fiscal 1993 and 66% in 1994.
At the same time, the Company continues to support its independent
retailers. Most importantly, the Company developed a special line of products,
marketed under the Lawn Pro(R) name, which are sold exclusively 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 program as providing consumers with all their annual lawn care needs
for less than half of what a lawn care service would cost. The Company
believes that 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
promotional efforts on this period. Through advertising, consumer rebates,
retailer allowances and other promotional efforts, the Company seeks to
encourage customers 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.
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 372,000 telephone and written
inquiries in fiscal 1994 and have handled over 2,500,000 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 Scotts products.
Refunds under this guarantee have consistently amounted to less than 0.3% of
net sales on an annual basis.
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. 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 Miracle-Gro.
57
70
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.
BACKLOG
The major portion 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 January and are
filled during the months of January through March. As of January 31, 1995,
orders on hand for retail customers (including orders for Sierra products)
totaled approximately $85.7 million compared to approximately $50.5 million on
the same date in 1994 (excluding orders for Sierra products). All such orders
are expected to be filled in fiscal 1995.
COMMERCIAL 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 1994, the Professional Business Group served over
12,000 North American customers, among them such high profile golf courses as
Augusta National (Georgia), Cypress Point, Spyglass and Pebble Beach
(California), Desert Mountain (Arizona), Muirfield (Ohio), The Country Club
(Massachusetts), Colonial Country Club (Texas) and Butler National (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 accounted for approximately 43% of the Company's
professional sales in fiscal 1994. During 1994, the Company sold products to
approximately 55% of the over 14,500 golf courses in North America, including
78 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 will be approximately 20% in 1994.
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 contribute to an annual sales growth rate
in the golf course segment of 9%.
Horticulture sales accounted for approximately 38% of the Company's
professional sales in fiscal 1994. 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 1994.
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/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
58
71
professional products. By the end of fiscal 1994, over 60 distributors had
been added, with plans to add additional distributors in 1995 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 segment.
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 1994, over 15 professional products featured exclusive control technologies,
including such products as the TGR(R) growth regulator line, Turplex(R)
bioinsecticide and DMC weed control. Liquid-applied fertilizers and control
products numbered 37 in 1994. Application devices include both rotary and drop
action spreaders. Over 20 proprietary grass seed varieties are part of the
professional line. The Sierra acquisition added an established line of
soilless 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 1994, the Company introduced 24 new professional products,
including Poly-S(R) and TGR(R) line extensions, a line of Peters(R)
water-soluble fertilizers for golf course greens, an Osmocote
controlled-release potassium product and Merit(R) insecticide.
BUSINESS STRATEGY
The Company's Commercial 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 Commercial Business Group's strategy is to
provide a continuing flow of innovative new products to its professional
customers. Products introduced since 1989 accounted for over 60% of the
Commercial Business Group's net sales in fiscal 1994.
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 Scott(R) nursery products in the commercial
horticultural segment in which Sierra has a strong position.
The Commercial 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, sportsfields, golf course
architects and construction companies, and international segments of the
professional market. In 1992, the Company introduced a fairway application
service for golf courses. This service has been expanded and is now available
in eight markets, with six new markets planned for 1995. In 1994, the
ProGrow(R) business was launched to better serve lawn/landscape services that
purchase on an as-needed basis.
59
72
MARKETING AND PROMOTION
The Commercial Business Group's sales force consists of 125 territory
managers who cover over 17,000 accounts. 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, Scotts' 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
segment 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 40,000 telephone inquiries in fiscal 1994.
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
The major 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 January 31, 1995, orders on hand from
professional customers (including orders for Sierra products) totaled
approximately $13.1 million compared with $4.9 million on the same date in
1994 (excluding orders for Sierra products). All such orders are expected to
be filled in fiscal 1995.
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 label
mainly in Canada, the Far East and Europe. The Company's United Kingdom
subsidiary has continued to make inroads into the lawn and garden market in
Great Britain. The Company's long-term relationship with Hyponex Japan
Corporation, Ltd. has allowed it to maintain its presence in Japan's consumer
market under its Hyponex(R) label. International sales of consumer products in
fiscal 1994 totaled approximately $7.3 million.
60
73
Professional markets include both the turf and horticulture industries.
The Company currently distributes its professional products in Canada, Latin
America, Europe and Asia Pacific. Turf products are mainly distributed under
the Scotts name, while horticultural products are distributed primarily under
the Sierra label. Professional horticultural products are also distributed
under the Hyponex label in Japan. International sales of Scotts' professional
products in fiscal 1994 totaled approximately $10 million. International sales
of Sierra professional products from December 17, 1993 through September 30,
1994 totaled approximately $30.3 million.
BUSINESS STRATEGY
An increasing portion of the Company's sales is derived from customers
in foreign countries, and, with the acquisition of Sierra, 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
Europe, the United Kingdom, Australia, Hungary, Singapore and Malaysia. The
Company plans to expand into new areas and market segments and to increase
international awareness of the Scotts name and oval logo. By positioning the
Scotts(R) name worldwide, the Company believes it can build awareness of its
products' quality, reliability and value.
The Company intends to continue to market its products internationally
through both direct sales and distributor arrangements. In fiscal 1994, the
Company entered into various new distributor agreements. Sierra terminated
several distributor arrangements with W.R. Grace so that the Company could
directly distribute those products. The Company also amicably terminated its
European distributor agreement with Wolf-Gerate AG during fiscal 1994. At the
time this agreement was signed, the Company had no European distribution
capabilities and Wolf-Gerate served that purpose. With the 1993 acquisition of
Sierra, the Company acquired a distribution network which eliminated the need
for Wolf-Gerate's services. The Company believes its direct distribution of its
products in Europe will represent a cost savings, as products will now be
distributed at their full retail price, rather than sold at a discount to
Wolf-Gerate for distribution, as required under the agreement.
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 United Kingdom.
Competitors in the United Kingdom include Fisons, ICI, PBI and various local
companies. Competitors in Canada include Nu-Gro, So-Green and Vigoro. The
Company intends to respond to this competition by increasing brand awareness
and loyalty through increased marketing and improved customer service.
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 and
Coron. The Company will respond to this competition by educating customers as
to the quality and value of its products.
Management believes the Company is well-positioned to obtain an increased
share of the international market. 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" 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 registered and are considered material to
the Company's business. In 1989, the Company assigned all its rights to
certain "Hyponex" trademarks in the Far East to a Japanese company.
As of September 30, 1994, the Company held over 100 patents on processes,
compositions, grasses, and mechanical spreaders and has several additional
patent applications pending. Over the past two years, the Company has been
granted a number of patents covering key new process and product technologies.
This new patent protection will 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.
61
74
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. Virtually all 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's research and development department is headquartered in the
Dwight G. Scott Research Center in Marysville, Ohio. The Company also operates
three research field stations in Florida, Texas and Oregon. In addition, the
Company funds research at universities across the United States and conducts
cooperative projects with key professional customers. Research to develop new
and improved application devices is conducted at Republic's manufacturing
facility in Carlsbad, California. Investment in research is directed toward
developing new technology and products to increase manufacturing efficiency,
reduce product cost, improve performance, solve specific problems, improve
packaging and simplify lawn, turf and horticultural plant care.
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 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 department 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 is the introduction, in 1994, of a line of
value-added, premium quality potting soils and planting mixes under the Scotts
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. The Company's 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.
Research has resulted in improved Peters'(R) water-soluble fertilizers.
Reformulated potting soils and planting mixes have been introduced into both
the consumer and professional markets.
Combined Company and Sierra research and development expenses were
approximately $10.4 million (1.7% of net sales) for 1994, including
environmental and regulatory expenses. This compares to $6.2 million (1.5% of
net sales) and $7.7 million (1.7% of net sales) in fiscal 1992 and 1993,
respectively.
PRODUCTION FACILITIES
The manufacturing plants for consumer and professional fertilizer-based
products marketed under the Scotts label are located in Marysville, Ohio. The
Company's Taylor Seed Packaging Plant is located on a separate site in
Marysville. Hyponex(R) organic products are harvested and packaged in over 20
locations throughout the United States. The Company's lawn spreaders are
produced at the Republic facility in Carlsbad, California. Some granular and
mechanical products and all liquid products, constituting an aggregate of
approximately 16% of the
62
75
Company's cost of sales in fiscal 1994, are produced for the Company by other
manufacturers. Sierra has manufacturing sites in the United States and one
located in The Netherlands. Sierra's controlled-release
fertilizers are produced in Charleston, South Carolina, Milpitas, California,
and at Heerlen, The Netherlands. Water-soluble fertilizers are produced in
Allentown, Pennsylvania, and the potting soils are produced in Travelers Rest,
South Carolina and in Hope, Arkansas. Resin used for producing Osmocote(R)
controlled-release fertilizer is manufactured at Sierra Sunpol Resins, a joint
venture company which is 97% owned by Scotts. The Company operates seventeen
composting facilities where yard waste (grass clippings, leaves, and twigs) is
converted to raw materials for the Company's organic products. Fourteen of the
facilities are "stand-alone" facilities with the remainder being located at
existing organics products bagging facilities. Recently opened facilities
include Pittsburgh, Pennsylvania; Cincinnati, Ohio; and Riverside, California.
Management believes that each of its facilities is well-maintained and
suitable for its purpose. Substantially all of the Company's owned properties
are mortgaged to secure the Company's indebtedness under various bank
agreements.
The Company's fertilizer processing and packaging facilities currently
operate, on average, five days per week for three shifts. Because of the
seasonal nature of the demand for the Company's products, certain of these
facilities operate on a seven day basis or three out of four weekends during
periods of peak demand. During 1994, initial steps were taken to integrate
some product manufacturing between the Company 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
fertilizer plant, an investment made necessary by very strong forecasted
demand. Additionally, approximately $4.0 million was spent on Sierra business
needs including $1.5 million for construction of a new processing line at the
Charleston, South Carolina facility to produce a technologically advanced
controlled-release fertilizer.
CAPITAL EXPENDITURES
Capital expenditures totaled $15.2 million and $33.4 million for the
fiscal years ended September 30, 1993 and 1994, respectively. The Company
expects that capital expenditures during fiscal 1995 will total approximately
$23 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
63
76
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. The Company considers its
sources of supply for these materials to be adequate.
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.
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. 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 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 and Home Depot represented approximately 23.9% and 14.9%, respectively,
of the Consumer business group's sales in fiscal 1994, 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, 1994, 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 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
64
77
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 and federal 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 will 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 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.
State, federal and local agencies regulate the disposal, handling and storage
of waste and air and water discharges from Company facilities. During fiscal
1994, the Company had approximately $100,000 in environmental capital
expenditures and $300,000 in other environmental expenses, compared with
approximately $180,000 in environmental capital expenditures and $260,000 in
other environmental expenses in fiscal 1993. The Company has budgeted $485,000
in environmental capital expenditures and $350,000 in other environmental
expenses for fiscal 1995.
The Company has been 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, is
investigating the extent of contamination in the Hershberger site and
developing a remediation program. Phase I of the investigation has been
completed and the Company is seeking resolution to this matter by being
designated as a de minimis contributor with minimal financial liability.
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 has agreed to settle this matter by
means of a one-time total payment of $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
65
78
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.
PROPERTIES
The Company has fee or leasehold interests in approximately
sixty-seven facilities. All of the owned properties are mortgaged to secure
the Company's indebtedness under the Existing Credit Agreement (see
"INFORMATION ABOUT THE COMPANY - Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "RECENT DEVELOPMENTS - New
Credit Facility").
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 four
fertilizer warehouses in Illinois, California, Ohio and Pennsylvania. Republic
leases its twenty acre spreader facility in Carlsbad, California.
The Company's twenty-four organics facilities are located nationwide
in eighteen states. Twenty-two are owned, while two are leased. Facilities at
most include production lines, warehouses and offices. Six sites also include
composting facilities.
The Company has fourteen stand-alone composting facilities. Nine of
these sites are leased and are located in Oregon, California, Florida, Indiana,
Ohio, Pennsylvania and Illinois. Five sites are utilized through agreements
with the municipalities of Greensboro, NC; Shreveport, LA; Spokane, WA;
Independent Hill, VA and Balls Ford, VA.
The Company owns two Sierra manufacturing facilities in Fairfield, CA
and Heerlen, The Netherlands. It leases three Sierra manufacturing facilities
in Allentown, PA, Milpitas, CA and North Charleston, SC.
It is the opinion of the Company's management that its facilities are
adequate to serve their intended purposes and that its property leasing
arrangements are stable.
LEGAL PROCEEDINGS
As noted in the discussion under "--Environmental and Regulatory
Considerations" above, 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.
MARKET FOR THE COMPANY'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS
Scotts Delaware made an initial public offering of its Class A Common
Stock on January 31, 1992. As a result of the merger of Scotts Delaware into
Scotts Ohio on September 20, 1994, each share of outstanding Class A Common
Stock of Scotts Delaware was converted into one Common Share of Scotts Ohio
(the Company). The shares of Class A Common Stock of Scotts Delaware were, and
the Common Shares of the Company are traded on the NASDAQ Stock Market under
the symbol "SCTT".
66
79
The following table sets forth, for the periods indicated, the high and low
sales prices of the Company's Common Shares, as reported on the NASDAQ Stock
Market.
SALES
PRICES
-----------
HIGH LOW
--- ---
FISCAL 1993
1st quarter............................................................ 18 1/2 14 1/2
2nd quarter............................................................ 20 1/2 17 1/8
3rd quarter............................................................ 18 3/4 15 1/4
4th quarter............................................................ 18 3/8 15 1/4
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 (through 3/1/95)........................................... 19 3/8 15 7/8
The Company has not paid dividends in the past and does not presently plan
to pay dividends. 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 will be determined by the Board of Directors of the Company 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. Under a covenant in the Company's
Existing Credit Agreement, the Company is restricted in its payment of cash
dividends, to an amount not to exceed 33 1/3% of the consolidated net income of
the Company and its consolidated subsidiaries during the immediately preceding
fiscal year. See "RECENT DEVELOPMENTS -- New Credit Facility."
As of March 1, 1994, the Company estimates there were approximately
6,400 shareholders including holders of record and the Company's estimate of
beneficial holders.
SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data of the Company and has been derived from the Company's Consolidated
Financial Statements and Notes thereto as of September 30, 1993 and 1994 and for
the three years ended September 30, 1994 included elsewhere herein. The selected
historical consolidated financial data as of January 1, 1994 and December 31,
1994 and for the three months then ended, respectively, are derived from
unaudited consolidated financial statements included elsewhere herein. Such
unaudited consolidated financial statements have been prepared on the same basis
as the Company's Consolidated Financial Statements, and the Company's management
believes that such unaudited consolidated financial statements contain all
adjustments necessary for a fair presentation of the financial information
presented (consisting only of normal recurring adjustments). Interim results are
not necessarily indicative of results for the full year. The selected historical
consolidated financial data should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto and "INFORMATION ABOUT THE
COMPANY -- Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere herein.
67
80
THE SCOTTS COMPANY
SELECTED CONSOLIDATED FINANCIAL DATA
FISCAL YEAR ENDED SEPTEMBER 30, THREE MONTHS ENDED
---------------------------------------------------- -------------------------
1990 1991 1992 1993(1) 1994(2) 1/1/94(2) 12/31/94
-------- -------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
STATEMENT OF INCOME DATA(3):
Net sales................................. $350,441 $388,120 $413,558 $466,043 $606,339 $68,326 $98,019
Cost of sales............................. 186,803 207,956 213,133 244,218 319,730 37,364 53,520
-------- -------- -------- -------- -------- ----------- -----------
Gross profit.............................. 163,638 180,164 200,425 221,825 286,609 30,962 44,499
-------- -------- -------- -------- -------- ----------- -----------
Operating expenses:
Marketing............................... 48,681 57,489 66,245 74,579 100,106 12,921 19,902
Distribution............................ 55,628 57,056 61,051 67,377 84,407 10,976 14,540
General and administrative.............. 23,965 22,985 24,759 27,688 30,189 5,010 5,967
Research and development................ 4,714 5,247 6,205 7,700 10,352 2,004 2,765
Other expenses.......................... 2,880 2,000 20 660 2,283 28 995
-------- -------- -------- -------- -------- ----------- -----------
Total operating expenses.............. 135,868 144,777 158,280 178,004 227,337 30,939 44,169
-------- -------- -------- -------- -------- ----------- -----------
Income from operations.................... 27,770 35,387 42,145 43,821 59,272 23 330
Interest expense.......................... 34,531 30,932 15,942 8,454 17,450 2,640 5,694
-------- -------- -------- -------- -------- ----------- -----------
Income (loss) before income taxes,
extraordinary items and cumulative
effect of accounting changes............ (6,761) 4,455 26,203 35,367 41,822 (2,617) (5,364)
Income taxes.............................. 143 2,720 11,124 14,320 17,947 (1,060) (2,226)
-------- -------- -------- -------- -------- ----------- -----------
Income (loss) before extraordinary items
and cumulative effect of accounting
changes................................. (6,904) 1,735 15,079 21,047 23,875 (1,557) (3,138)
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 (loss)......................... $ (6,904) $ 4,316 $ 15,592 $ 7,890 $ 22,883 $(1,557) $(3,138)
======== ======== ======== ======== ======== =========== ===========
Net income (loss) per common share:(4)
Income (loss) before extraordinary items
and cumulative effect of accounting
changes................................. $ (0.58) $ 0.15 $ 0.84 $ 1.07 $ 1.27 $ (0.08) $ (0.17)
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 (loss)......................... $ (0.58) $ 0.36 $ 0.87 $ 0.40 $ 1.22 $ (0.08) $ (0.17)
======== ======== ======== ======== ======== =========== ===========
Weighted average common shares outstanding
during the period....................... 11,977 11,833 18,014 19,687 18,785 18,659 18,667
68
81
THE SCOTTS COMPANY
SELECTED CONSOLIDATED FINANCIAL DATA (CONT.)
FISCAL YEAR ENDED SEPTEMBER 30, THREE MONTHS ENDED
-------------------------------------------------------- -------------------------
1990 1991 1992 1993(1) 1994(2) 1/1/94(2) 12/31/94
-------- -------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
OTHER HISTORICAL DATA:
Depreciation and amortization........ $ 20,474 $ 17,785 $ 15,848 $ 18,144 $ 21,937 $ 4,603 $ 5,801
Capital investment................... 8,494 8,818 19,896 15,158 33,402 4,985 5,012
Ratio of earnings to fixed charges
and preferred stock dividends(5)... (6) 1.14x 2.40x 4.08x 2.89x (7) (8)
Book value per share(9).............. $ (0.49) $ (0.39) $ 8.35 $ 7.66 $ 9.01 $ 7.58 $ 8.84
BALANCE SHEET DATA(3):
Working capital...................... $ 18,230 $ 21,260 $ 54,795 $ 88,526 $140,566 $ 112,717 $ 135,427
Property, plant and equipment,
net................................ 83,384 79,903 89,070 98,791 140,105 122,320 141,556
Total assets......................... 270,429 260,729 268,021 321,590 528,584 508,742 576,618
Term debt, including current
portion............................ 192,915 182,954 31,897 92,524 223,885 226,084 223,158
Total shareholders' equity
(deficit).......................... (12,677) (9,961) 175,929 143,013 168,160 141,371 165,061
- ---------------
(1) Includes Republic from November 19, 1992.
(2) Includes Sierra from December 16, 1993.
(3) Certain amounts have been reclassified to conform to 1994 presentation;
these changes did not impact net income.
(4) Net income (loss) per share for fiscal 1990 and 1991 have 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
1990 and 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.
(5) See Note 3 to the Company's Summary Historical Financial Data.
(6) Reflects a deficiency of earnings to fixed charges of $6.8 million.
(7) Reflects a deficiency of earnings to fixed charges of $2.6 million.
(8) Reflects a deficiency of earnings to fixed charges of $5.4 million.
(9) Book value per share is computed by dividing the number of Common Shares
outstanding at the end of the period into total shareholders' equity
(deficit) at the end of the period.
69
82
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of the consolidated results of operations,
liquidity and capital resources of the Company for the three months ended
December 31, 1994 and January 1, 1994, respectively, and the fiscal years ended
September 30, 1994, 1993 and 1992 should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Proxy Statement/Prospectus and the information under
"INFORMATION ABOUT THE COMPANY -- Selected Financial Data."
Results of Operations
THREE MONTHS ENDED DECEMBER 31, 1994 COMPARED WITH THREE MONTHS ENDED JANUARY
1, 1994
Net sales of $98.0 million increased by $29.7 million or approximately
43.5%. Net sales included net sales for Sierra, which was acquired by the
Company on December 16, 1993. On a pro forma basis, assuming the acquisition
had taken place on October 1, 1992, net sales for the three months ended
December 31, 1994 would have increased by $8.9 million or approximately 9.9%.
Consumer Business Group sales of $55.7 million increased by approximately 26%.
On a pro forma basis, Consumer Business Group sales were up approximately
19.5%, resulting primarily from increased sales volume. Commercial Business
Group (previously referred to as the Professional Business Group) sales of
$27.9 million increased by 46.1% but decreased, on a pro forma basis, by
approximately 10.2%. The Company's management believes that this decrease
reflects a continuing trend by golf course customers to order products closer
to Spring usage and, therefore, management believes that sales expectations for
the Commercial Business Group will be met by the end of the fiscal year.
International sales of $14.4 million increased by approximately 189.4%. On a
pro forma basis, International sales increased by approximately 25.7%. The
increase primarily reflected increased sales volume, partly due to the
introduction of Scotts(R) branded products into the Sierra distribution
network.
Cost of sales for the three months ended December 31, 1994 represented
54.6% of net sales, nearly flat with cost of sales for 54.7% for the three
months ended January 1, 1994.
Operating expenses of $44.2 million increased by $13.3 million or
approximately 42.8%, which was proportional to the sales increase. On a pro
forma basis, including Sierra operating expenses from October 1, 1992,
operating expenses increased by approximately 8.4%, reflecting slightly higher
marketing expense which increased by $1.7 million and increased distribution
expense of $2.6 million related to higher sales.
Interest expense of $5.7 million increased by $3.1 million or
approximately 115.7%. The increase was caused, in significant part, by
increased borrowings for the Sierra acquisition, which were outstanding for the
full three months ended December 31, 1994, and partly caused by higher interest
rates for floating-rate bank debt this year and the higher rate payable with
respect to the 9 7/8% Senior Subordinated Notes issued by the Company in July
1994 compared with the floating rate bank debt the notes replaced.
The net loss of $3.1 million increased by $1.6 million or
approximately 101.5%, primarily due to increased interest expense which is
discussed above.
FISCAL 1994 COMPARED WITH FISCAL 1993
Net sales of $606.3 million increased by $140.3 million or 30.1%,
primarily due to increased sales volume, a portion of which relates to new
pre-season promotion programs with major retailers. 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 sales
volume to major retailers, with sales to the Company's top ten accounts up
70
83
16% over the prior year, and from sales of 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 pro forma basis that includes Sierra sales on a historical basis
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 last year. The increase reflected higher spreader sales,
which increased by approximately $8.0 million and 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 this year of approximately $32.5 million. The
increase was also caused, to a lesser degree, by distribution costs, which
increased by approximately $11.6 million due to higher sales volume, and by
higher marketing costs, which increased by approximately $8.1 million
reflecting increased spending for national advertising and promotion programs.
The increase was partly offset by reduced general and administrative expenses,
which decreased by approximately $3.2 million exclusive of Sierra expenses,
for the year.
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 $100 million of the Company's 9 7/8% Senior
Subordinated 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 last year. The increase was primarily attributable to a non-recurring
charge of $13.2 million, net of tax, last year for the cumulative effect of
accounting changes. The increase also reflected increased operating income
this year which was partly offset by increased interest expense and also
offset, in part, by a $1.0 million non-recurring charge, net of tax, for
financing costs related to the term debt prepaid this year with net proceeds
from the Notes.
FISCAL 1993 COMPARED WITH FISCAL 1992
Net sales of $466.0 million increased by $52.5 million or 12.7%. The
majority of the increase resulted from increased sales volume of consumer
products. Consumer Business Group sales of $370.2 million increased by $47.6
million or 14.8%. The growth was principally derived from increased sales
volume to major retailers and from sales for Republic, acquired in November
1992, which accounted for approximately 37.5% of the increase in Consumer
Business Group sales. Professional Business Group sales of $93.7 million
increased by $3.6 million or 4.0%. The majority of the latter increase was due
to increased sales volume.
Cost of sales represented 52.4% of net sales compared with 51.5% in
1992. The increase was primarily caused by lower gross profit margins on
Republic's products in the current year. Cost savings from the implementation
of new controlled-release fertilizer technology, which exceeded start-up costs
incurred early in the year, partly offset the increase.
Operating expenses of $178.0 million increased by $19.7 million or
12.5%. The increase was caused by increased investment in advertising and
consumer rebates in 1993 of approximately $8.1 million, higher distribution
costs which increased by approximately $5.5 million related to increased
sales, and the inclusion of operating expenses for Republic which amounted to
approximately $3.0 million from November through the end of fiscal 1993.
Income from operations of $43.8 million increased by $1.7 million or
4.0%, which resulted from increased sales, partially offset by increased
operating expenses. The increase was also offset, in part, by additional
pretax charges of $2.4 million, in 1993, resulting from the implementation of
the Financial Accounting Standards Board ("Board") Statement of Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions" ("SFAS 106").
71
84
Interest expense of $8.5 million decreased by $7.5 million or 47.0%.
The decrease resulted from reduced borrowings and lower interest rates
including the effect of early redemption of subordinated notes and debentures.
Reduced borrowings resulted from the application of the net proceeds of the
Company's January 1992 initial public offering and cash flow from operations,
partly offset by the use of capital resources for the Republic acquisition, the
purchase of a block of the Company's Class A Common Stock and capital
investment.
Income before extraordinary items and cumulative effect of accounting
changes increased by approximately $6.0 million or 39.6% primarily due to
increased operating income and lower interest expense. The increase was
partially offset by a $1.4 million charge, net of tax, related to adoption of
SFAS 106 in fiscal 1993.
Net income of $7.9 million decreased by $7.7 million or 49.4%. The
decrease was attributable to expense from the implementation of SFAS 106 and a
non-recurring charge for the cumulative effect of the change in accounting in
the amount of $14.9 million, net of tax. The decrease was partially offset by
a non-recurring benefit of $1.8 million, related to implementation of the
Board's Statement of Accounting Standards No. 109, "Accounting for Income
Taxes."
Liquidity and Capital Resources
Capital expenditures totaled approximately $33.4 million and $15.2
million for the fiscal years ended September 30, 1994 and 1993, respectively,
and are expected to be approximately $23 million in fiscal 1995. The key
capital project in fiscal 1994 was an approximately $13 million investment in a
new production facility to increase capacity to meet demand for Scotts'
Poly-S(R) controlled-release fertilizers. The production facility was
completed as planned and is currently in operation. The Company's Existing
Credit Agreement restricts the amount the Company may spend on future capital
expenditures to $35 million per year for fiscal 1995 and each year thereafter.
It is anticipated that the New Credit Agreement (as defined below) will permit
capital expenditures of up to $50 million per year. See "RECENT DEVELOPMENTS -
New Credit Facility." These expenditures will be financed with cash provided by
operations and utilization of available credit facilities.
Current assets of $298.7 million at December 31, 1994 increased by
$48.4 million compared with current assets at September 30, 1994 and by $52.9
million compared with current assets at January 1, 1994. The increase compared
with September 30, 1994 is primarily attributable to the seasonal nature of the
Company's business, with inventory and accounts receivable levels generally
being higher in December relative to September. The increase compared with
January 1, 1994 was partly due to increased accounts receivable related to
higher sales and also, in part, to higher inventory levels for Scotts(R) and
Hyponex(R) products this year in anticipation of the upcoming peak selling
season as well as higher inventories for golf course products which reflect
lower than expected sales for the quarter ended December 31, 1994.
Current liabilities of $163.3 million at December 31, 1994 increased
by $53.6 million compared with current liabilities at September 30, 1994 and by
$30.2 million compared with current liabilities at January 1, 1994. The
increase compared with September 30, 1994 is primarily caused by the
seasonality of the Company's business. The increase compared with January 1,
1994 is caused, in part, by increased short-term borrowings, higher trade
payables and higher accrued liabilities this year reflecting somewhat higher
working capital needs this year including higher accruals for interest and
taxes.
Shareholders' equity of $165.1 million at December 31, 1994 decreased
by $3.1 million compared with shareholders' equity at September 30, 1994 and
increased by $23.7 million compared with shareholders' equity at January 1,
1994. The decrease compared with September 30, 1994 reflects the net loss for
the three months ended December 31, 1994. The increase compared with January
1, 1994 resulted primarily from net earnings for the twelve months ended
December 31, 1994 which included a cumulative foreign currency adjustment
related to translating the assets and liabilities of Sierra's foreign
subsidiaries to U. S. dollars.
The Company has foreign exchange rate risk to international earnings
and cash flows. These exposures arise from outstanding intercompany receivables
and payables and cash flows from sales and purchases in foreign currencies
throughout the Company's international operations. To minimize the impact on
earnings and cash flows of adverse foreign exchange rate movements, the Company
has developed a written policy and strategy detailing the management and
mitigation of foreign exchange rate risk. The policy and strategy has been
explained to and approved by the Company's Board of Directors and is monitored
regularly by the treasury function.
The risk management program is 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. To
implement the program, in January 1995 the Company entered into forward foreign
exchange contracts and purchased 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 February 28, 1995, the Company's European operations had foreign
exchange rate risk in various 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, Dutch
Guilder and the British Pound which are tied to the U.S. Dollar. As of
February 28, 1995, outstanding foreign exchange forward contracts had a
contract value of approximately $18.8 million and outstanding purchased
currency options had a contract value of approximately $3.7 million. These
contracts have maturity dates ranging from March 22, 1995 to July 13, 1995.
The primary sources of liquidity for the Company are funds generated
by operations and borrowings under the Company's Existing Credit Agreement. As
amended to date, the Existing Credit Agreement provides a
72
85
revolving credit commitment of $150 million through March 31, 1996 and provided
$195 million of term debt with scheduled maturities extending through September
30, 2000 until the prepayment discussed below. As of February 3, 1994, the
Existing Credit Agreement provided $93.1 million of term debt. The Existing
Credit Agreement contains financial covenants which, among other things, limit
capital expenditures, require maintenance of Adjusted Operating Profit,
Consolidated Net Worth and Interest Coverage (each as defined therein) and
require the Company to reduce revolving credit borrowings to no more than
$30,000,000 for 30 consecutive days each year. See "RECENT DEVELOPMENTS - New
Credit Facility" for the terms anticipated to be included in the New Credit
Agreement.
On July 19, 1994, the Company issued $100,000,000 of 9 7/8% Senior
Subordinated Notes at 99.212% of face value. The net proceeds of the offering
were $96,354,000 after underwriting discount and expenses and this amount was
used to prepay term debt outstanding under the Existing Credit Agreement.
Scheduled term debt maturities were adjusted to reflect the prepayment in
accordance with the terms of the Existing Credit Agreement. All of the Notes
are subordinated to other outstanding debt, principally to banks. The Notes
are subject to redemption, at the Company's option, in whole or in part, at any
time after August 1, 1999 at redemption prices specified in the indenture
governing such notes. In order to redeem the Notes, the Company must obtain
approval of the banks party to the Existing Credit Agreement as specified
therein. The Notes include a limited number of financial covenants which are
generally less restrictive than the financial covenants contained in the
Existing Credit Agreement and the financial covenants anticipated to be
contained in the New Credit Agreement. See "RECENT DEVELOPMENTS - New Credit
Facility."
Any additional working capital needs resulting from the Merger
Transactions are expected to be financed through an increase in the amount of
revolving credit available under the Company's Existing Credit Agreement and
the New Credit Agreement. See "RECENT DEVELOPMENTS -- New Credit Facility."
The seasonal nature of the Company's business is reflected in working
capital requirements. Working capital requirements are greatest from November
through May, the peak production period, and are at their highest in March.
Working capital needs are relatively low in the summer months.
In the opinion of the Company's management, cash flows from operations
and capital resources will be sufficient to meet future debt service and
working capital needs.
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.
73
86
RECENT DEVELOPMENTS
NEW CREDIT FACILITY
The Company has received a commitment from Chemical Bank, as agent, to
arrange a syndicate to amend and restate the Existing Credit Agreement (as
amended and restated, the "New Credit Agreement"). Under the New Credit
Agreement, Chemical Bank and the other lenders will agree to provide, on an
unsecured basis, up to $375 million to the Company, comprised of an uncommitted
commercial paper/competitive advance facility and a committed revolving credit
facility. It is anticipated that the New Credit Agreement will be executed and
initially funded prior to or simultaneously with the consummation of the Merger
Transactions; however, such execution and funding are not conditioned on the
consummation of the Merger Transactions. Upon the execution and funding of the
New Credit Agreement, the total indebtedness outstanding under the Existing
Credit Agreement will be replaced by the revolving credit facility of the New
Credit Agreement.
The Company expects to have approximately $130 million of additional
financing available under the New Credit Agreement. While the Existing Credit
Agreement is secured by substantially all of the assets of the Company, the New
Credit Agreement will be unsecured. The New Credit Agreement will be
guaranteed by each of the Company's domestic subsidiaries which currently
guarantee the Existing Credit Agreement and, assuming consummation of the Merger
Transactions, by New Miracle-Gro. The New Credit Agreement will terminate on
March 31, 2000, and, because it does not contain a term loan facility, does not
contain an amortization schedule. The New Credit Agreement will require a
"clean down" of indebtedness for borrowed money for 30 consecutive days during
each fiscal year to $225 million (compared to $30 million in the Existing
Credit Agreement), and will be subject to optional and mandatory prepayment
provisions substantially similar to those in the Existing Credit Agreement.
Interest pursuant to the commercial paper/competitive advance facility
will be determined by auction. Interest pursuant to the revolving credit
facility will be at a floating rate initially equal, at the Company's option,
to the Alternate Base Rate (as defined in the Existing Credit Agreement)
without additional margin or the LIBO Rate (as defined in the Existing Credit
Agreement) plus a margin of .3125% per annum, which margin may be decreased to
as little as .25% or increased to as much as .625% based on the higher of
Standard & Poors and Moody's senior unsecured debt ratings of the Company. The
Existing Credit Agreement provides for a margin of 1% with respect to LIBO Rate
loans.
Upon the closing of the New Credit Agreement, the Company will be
required to pay arrangement and other fees totalling approximately $250,000 in
addition to legal and accounting fees. In addition, the New Credit Agreement
will provide for the payment of a facility fee on the entire $375 million
amount of the revolving credit facility of .1875% per annum initially, which
fee may reduced to as little as .15% or increased to as much as .375% based on
the higher of Standard & Poors and Moody's senior unsecured debt ratings of the
Company. The Existing Credit Agreement provides for a commitment fee of .375%
on the unused portion of the $150 million revolving credit facility. Both the
New Credit Agreement and the Existing Credit Agreement provide as well for an
administration fee.
The New Credit Agreement will include certain negative covenants, as
does the Existing Credit Agreement. While such covenants under the New Credit
Agreement will differ somewhat from those under the Existing Credit Agreement,
the Company believes that the new covenants will provide it with additional
financial and operating flexibility. Specifically, the New Credit Agreement,
in contrast to the Existing Credit Agreement, is anticipated to permit $50
million of capital expenditures per year (subject to limited carry-over)
compared to $35 million, will provide less restrictive liquidity tests and will
lessen the restrictions on the Company's ability to pay dividends on its Common
Shares, to repurchase its Common Shares and to make certain acquisitions.
Because the terms, conditions and covenants of the New Credit
Agreement are subject to negotiation, execution and delivery of definitive
documentation, certain of the actual terms, conditions and covenants may differ
from those described above.
74
87
INFORMATION ABOUT THE MIRACLE-GRO COMPANIES
BUSINESS OF THE MIRACLE-GRO COMPANIES
Products
The Miracle-Gro Companies market and distribute 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.
The Miracle-Gro(R) branded line of products was established in 1951 by
nurseryman Otto Stern and advertising executive Horace Hagedorn through a
combination of the production activities of Stern's Nurseries, Inc. with the
marketing and sales activities of Hagedorn Sales Company, Inc. The products
were initially marketed through mail order catalogues and later through retail
outlets. In 1985 Mr. Hagedorn acquired Stern's Nurseries, Inc. from Mr. Stern
and formed Stern's Miracle-Gro Products, Inc.
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 for Roses,
Miracle-Gro for Tomatoes and Miracle-Gro Lawn Food. 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, African Violet Food,
Plant Food Spikes and Leaf Shine. In addition, in 1994, the Miracle-Gro
Companies began a test market of a granular lawn product, and plan to expand
the test market in 1995.
All of the products sold by the Miracle-Gro Companies (other than
those produced by Miracle-Gro UK) are produced under contract by independent
fertilizer blending and packaging companies.
International
Miracle-Gro UK was formed in 1990 as the marketing arm for expansion
into the United Kingdom ("U.K."). The Company 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, 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 has 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 will extend to the
Company after the Merger Transactions.
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 for a period of time
ranging from five to twenty years. The actual length of the license period
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. Following completion of the Merger
Transactions, the territory in which Miracle Garden
75
88
Care has the right to sell Miracle-Gro branded products will be 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.
Only five years after introduction, Miracle-Gro UK's water soluble
plant foods are the leading such products in the U.K. In addition, Miracle
Garden Care sells a line of lawn care products and other products which had
been part of the Zeneca product line.
Although the Miracle-Gro Companies recognize that international
operations are subject to the risk of foreign currency fluctuations not present
in domestic operations, management has not engaged in hedging or other measures
for reducing the effect of fluctuating exchange rates because currency losses
to date have not been material to the Miracle-Gro Companies' operations as a
whole.
Marketing and Promotion
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.
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, K-Mart,
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 line. The
houseplant items are also carried in stores with traditionally small garden
sections, such as supermarkets and drugstores.
The Miracle-Gro Companies have adopted a "pull-through" marketing
strategy, generating demand for the products at the consumer level to create
sales from the retail shelves. This is accomplished by an intensive national
advertising program in the spring and early summer months, with the focus on
television commercials, mostly during prime-time. This advertising campaign is
supported by drive-time radio advertising on a national and local basis, as
well as print advertising in dozens of regional and national magazines.
Competition
The Miracle-Gro Companies sell their products, which are generally
non-proprietary, in a very competitive marketplace. They compete primarily
against regional brands, and private label products on both a regional and
national basis. The competitors are generally larger and have greater
financial and product development resources than the Miracle-Gro Companies and
often sell their products at lower prices than the Miracle-Gro Companies. The
Miracle-Gro Companies maintain 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.
Significant Customers
Wal-Mart and Home Depot represented approximately 17% and 10%,
respectively, of Miracle-Gro's sales in fiscal 1994. The loss of either of
these customers, or a substantial decrease in the amount of their purchases,
could have a material adverse effect on Miracle-Gro's business.
Legal Proceedings
During 1993 and 1994, Miracle-Gro 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 reimburse it for monies allegedly spent by Pursell in
connection with the proposed project. Because Miracle-Gro 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 owed no monies to Pursell relating to the
proposed project and that no joint venture was formed. Pursell has moved to
dismiss the New York Action.
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
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. The Alabama Action seeks compensatory and punitive
damages in excess of $10 million. Miracle-Gro does not believe that the Alabama
Action has any merit and intends to vigorously defend that action.
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK OF THE MIRACLE-GRO COMPANIES
Each of the Miracle-Gro Companies is a privately held company for
which there is no established public trading market.
For information regarding distributions to the shareholders of the
Miracle-Gro Companies, see "INFORMATION ABOUT THE MIRACLE-GRO COMPANIES -
Selected Financial Data," below, and the Miracle-Gro Companies' Combined
Financial Statements and Notes thereto appearing elsewhere in this Proxy
Statement/Prospectus.
76
89
SELECTED FINANCIAL DATA
THE MIRACLE-GRO COMPANIES
SELECTED HISTORICAL COMBINED FINANCIAL DATA
The following table sets forth selected historical combined financial data
of the Miracle-Gro Companies and has been derived from the Miracle-Gro
Companies' Combined Financial Statements and Notes thereto as of September 30,
1993 and 1994 and for the three years ended September 30, 1994 included
elsewhere herein. The selected historical combined financial data as of
December 31, 1993 and 1994 and for the three months then ended, respectively,
are derived from unaudited combined financial statements included herein. Such
unaudited combined financial statements have been prepared on the same basis as
the Miracle-Gro Companies' Combined Financial Statements, and Miracle-Gro's
management believes that such unaudited combined financial statements contain
all adjustments necessary for a fair presentation of the financial information
presented (consisting only of normal recurring adjustments). Interim results
are not necessarily indicative of results for the full year. The selected
historical combined financial data should be read in conjunction with the
Miracle-Gro Companies' Combined Financial Statements and Notes thereto and
"INFORMATION ABOUT THE MIRACLE-GRO COMPANIES -- Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
herein.
FISCAL YEAR ENDED SEPTEMBER 30, THREE MONTHS ENDED
------------------------------------------------ DECEMBER 31,
1990 1991 1992 1993 1994 -------------------------
------- ------- ------- ------- -------- 1993 1994
----------- -----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
STATEMENT OF INCOME DATA(1):
Net sales..................................... $62,655 $72,494 $93,147 $92,779 $107,421 $14,078 $15,255
Cost of sales................................. 32,843 37,014 46,648 46,833 52,255 7,024 7,702
------- ------- ------- ------- -------- ----------- -----------
Gross profit.................................. 29,812 35,480 46,499 45,946 55,166 7,054 7,553
------- ------- ------- ------- -------- ----------- -----------
Advertising expense........................... 13,041 12,585 15,706 14,947 17,412 1,310 1,522
Selling expense............................... 763 696 868 951 1,139 205 227
General and administrative expense............ 3,387 4,413 4,941 5,678 6,541 1,591 2,241
Other (income) expense, net................... (343) 74 92 859 550 270 818
------- ------- ------- ------- -------- ----------- -----------
Total operating expenses...................... 16,848 17,768 21,607 22,435 25,642 3,376 4,808
------- ------- ------- ------- -------- ----------- -----------
Income from operations........................ 12,964 17,712 24,892 23,511 29,524 3,678 2,745
Interest (income) expense, net................ (304) (155) 77 312 125 (1) 3
------- ------- ------- ------- -------- ----------- -----------
Income before income taxes.................... 13,268 17,867 24,815 23,199 29,399 3,679 2,742
Income taxes.................................. 165 284 732 527 490 120 149
------- ------- ------- ------- -------- ----------- -----------
Net income.................................... $13,103 $17,583 $24,083 $22,672 $ 28,909 $ 3,559 $ 2,593
======= ======= ======= ======= ======== =========== ===========
BALANCE SHEET DATA (END OF PERIOD):
Working capital............................... $17,159 $19,984 $26,200 $24,272 $ 30,694 $18,629 $18,745
Capital investment............................ 343 362 194 413 914 237 113
Property, plant and equipment, net............ 986 1,116 1,068 1,238 1,778 1,422 1,783
Total assets.................................. 21,497 25,043 32,925 29,707 38,835 35,874 46,052
Total shareholders' equity.................... 18,440 19,036 23,945 22,174 29,111 16,764 17,166
- ---------------
(1) The Miracle-Gro Companies, other than Nurseries, have elected to be taxed as
Subchapter S corporations. Accordingly, the summary historical combined
financial data does not reflect provisions for income taxes that would have
been incurred if the Miracle-Gro Companies had been taxed as C corporations.
77
90
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
The following discussion of the results of operation, liquidity and
capital resources of the Miracle-Gro Companies for the three months ended
December 31, 1994 and 1993, and the years ended September 30, 1994, 1993 and
1992 should be read in conjunction with the Miracle-Gro Companies' Combined
Financial Statements and the Notes thereto appearing elsewhere in this Proxy
Statement/Prospectus and the information under "INFORMATION ABOUT THE
MIRACLE-GRO COMPANIES -- Selected Financial Data."
The Miracle-Gro Companies' combined financial statements are presented
to reflect the combined financial position and results of operations of the
Miracle-Gro Companies, which are being acquired by the Company in the Merger
Transactions. Each Miracle-Gro Company is controlled (directly or indirectly)
by the same group of shareholders. Accordingly, the assets, liabilities and
equity of the individual Miracle-Gro Companies have been combined. All
material intercompany transactions and balances have been eliminated in such
combination.
Each of the Miracle-Gro Companies (except Nurseries, which is
immaterial to the combined group) has elected to be treated as a Subchapter S
Corporation under the Code. Therefore, federal and most state income taxes are
paid by their Miracle-Gro Shareholders. As a result, the Miracle-Gro combined
financial statements include only those state and local income taxes payable
directly by the Miracle-Gro Companies. Because those companies are not taxable
under the Code, no deferred taxes have been provided in the combined financial
statements. See Note 2 in the Notes to the Stern's Miracle-Gro Products, Inc.
and Affiliate Companies Combined Financial Statements appearing elsewhere in
this Proxy Statement/Prospectus.
Results of Operations
THREE MONTHS ENDED DECEMBER 31, 1994 COMPARED WITH
THREE MONTHS ENDED DECEMBER 31, 1993
Net sales for the quarter ended December 31, 1994 were $15.3 million
compared to $14.1 million for the quarter ended December 31, 1993. The
increase of $1.2 million, or 8.4%, is attributable to sales volume increases in
the U.K. Net sales in the U.S. and Canada were $11.9 million compared to $12.6
million for the three months ended December 31, 1994 and 1993, respectively, a
decrease of $0.7 million, or 5.9%. This decrease was due to a lower volume of
early season orders. Net sales in the U.K. were $3.4 million compared to $1.4
million for the three months ended December 31, 1994 and 1993, respectively, an
increase of $2.0 million, or 132.9%. This increase was due to a higher volume
of early season orders.
Cost of sales of $7.7 million (50.5% of net sales) for the quarter
ended December 31, 1994 compared to $7.0 million (49.9% of net sales) for the
corresponding quarter in the prior year. This increase was primarily due to
the new lawn food which had a higher cost of sales than most of the other
Miracle-Gro(R) products.
Operating expenses of $4.8 million for the quarter ended December 31,
1994 increased $1.4 million, or 30.7%, in the quarter ended December 31, 1993.
The two major components of this increase were a $0.8 million increase in
bonuses paid to Zeneca and a $0.3 million increase in legal expenses. The
legal expenses were related to the Agreement with the Company in the U.S. and
to a licensing agreement with Miracle Garden Care in the U.K. This licensing
agreement gave Miracle Garden Care a license to produce and market Miracle-Gro
products in exchange for approximately 32.5% of the stock in Miracle Holdings,
the parent of Miracle Garden Care.
Net income of $2.6 million for the three months ended December 31,
1994 was a decrease of $1.0 million from $3.6 million for the comparable period
of the prior year. This is mainly attributable to legal expenses and the
increased performance bonuses in the U.K. referred to above.
78
91
FISCAL 1994 COMPARED WITH FISCAL 1993
Net sales for the fiscal year ended September 30, 1994 were $107.4
million compared to $92.8 million for the fiscal year ended September 30, 1993.
The increase of $14.6 million, or 15.8%, is attributable to increased sales
volume across Miracle-Gro's product lines. Net sales in the U.S. and Canada
were $99.2 million compared to $87.1 million for the years ended September 30,
1994 and 1993, respectively, an increase of $12.1 million, or 13.9%. Net sales
in the U.K. were $8.2 million in fiscal 1994 compared to $5.7 million in fiscal
1993, an increase of $2.5 million, or 44%.
Cost of sales was $52.3 million (48.6% of net sales) for fiscal 1994
compared to $46.8 million (50.5% of net sales) for fiscal 1993. The increase
in cost of sales in fiscal 1994 was due to the higher sales volume. The
improved gross margin in fiscal 1994 was due primarily to an increased
proportion of direct sales to major retailers which carry a higher margin.
Operating expenses of $25.6 million in fiscal 1994 increased over the
prior year by $3.2 million, or 14.3%. The major components of this increase
were a $1.9 million increase in spending on merchandising programs designed
to obtain increased shelf presence, a $0.7 million increase in personnel
expense and a $0.5 million increase in profit payments due to the U.K.
distributor.
Net interest expense of $0.1 million in fiscal 1994 decreased by $0.2
million from the prior year due to increased cash levels in 1994 which
generated higher interest income.
Net income of $28.9 million in fiscal 1994 increased by $6.2 million
from $22.7 million in fiscal 1993. This increase is primarily attributable to
increased sales volume and gross margin, partially offset by increased
operating expenses.
FISCAL 1993 COMPARED WITH FISCAL 1992
Net sales for the fiscal year ended September 30, 1993 were $92.8
million compared to $93.1 million for the fiscal year ended September 30, 1992.
The decrease of $0.3 million, or 0.4%, was primarily attributable to an
unusually cold and wet springtime weather pattern throughout the U.S. Net
sales in the U.S. and Canada were $87.1 million compared to $88.6 million for
the years ended September 30, 1993 and 1992, respectively, a decrease of $1.5
million, or 1.7%. Net sales in the U.K. were $5.7 million for fiscal 1993
compared to $4.5 million for fiscal 1992, an increase of $1.2 million, or
26.0%.
Cost of sales of $46.8 million (50.5% of net sales) for fiscal 1993
compares to $46.6 million (50.1% of net sales) for fiscal 1992. The increase as
a percentage of net sales is attributable primarily to a shift in sales toward
lower margin products.
Operating expenses of $22.4 million in fiscal 1993 represents an
increase from the prior year of $0.8 million, or 3.8%. The major components of
this increase were a $0.4 million rise in G&A expenses due to increased
personnel expense and a $0.3 million increase in losses due to uncollectable
receivables.
Net interest expense of $0.3 million in fiscal 1993 was an increase of
$0.2 million from the prior year due to higher inventory levels in 1993 which
required increased borrowing, generating more interest expense.
Net income of $22.7 million in fiscal 1993 represents a decrease of
$1.4 million from the previous year's $24.1 million due primarily to the
factors discussed above.
79
92
Liquidity and Capital Resources
Capital expenditures totaled $0.1 million and $0.2 million for the
three months ended December 31, 1994 and 1993, respectively, and $0.9 million
and $0.4 million for the fiscal years ended September 30, 1994 and 1993,
respectively. In 1994 Miracle-Gro's main expenditures were for new computers
and a new telephone system. Miracle-Gro UK's expenditures for both years were
for production machinery in the U.K. The Miracle-Gro Companies do not
anticipate any major capital expenditures in fiscal 1995.
Current assets of $44.1 million of December 31, 1994 increased by $9.9
million compared to current assets of $34.2 million on December 31, 1993. This
increase was due to higher levels of inventory in the U.K. and inventory of the
new lawn food products. Both of these inventories are needed for the expected
increased demand. Current assets of $44.1 million on December 31, 1994
increased by $7.2 million compared with the current assets on September 30,
1994. This increase had three primary components consisting of cash,
receivables and inventory. Cash decreased by $16.4 million due to Subchapter S
distributions and inventory increases. Accounts receivable increased by $12.0
million because of the much higher sales volume in the quarter ended December
31, 1994 compared to the quarter ended September 30, 1994. Inventory increased
by $11.6 million due to higher levels of inventory needed for the expected
sales increases. Current assets of $36.9 million on September 30, 1994
increased by $8.6 million compared with the current assets on September 30,
1993. This increase was due to a $4.7 million increase in cash due to higher
profits and a $2.0 million increase in inventory.
Total assets of $46.1 million on December 31, 1994 increased by $10.2
million compared to total assets of $35.9 million on December 31, 1993. This
increase was primarily due to the increased inventory levels. Total assets of
$46.1 million on December 31, 1994 increased by $7.3 million compared with
total assets on September 30, 1994. This increase was primarily due to the
increase in current assets. Total assets of $38.8 million on September 30,
1994 increased by $9.1 million compared with total assets on September 30, 1993.
This increase was primarily due to the increase in current assets.
Total liabilities of $28.9 million on December 31, 1994 increased by
$9.8 million compared to the total liabilities of $19.1 million on December 31,
1993. This increase was due to the increased accounts payable in the U.K. and
a line of credit incurred by Miracle-Gro Delaware. The increased accounts
payable in the U.K. was due to the increased inventory production and legal
costs regarding the licensing agreement discussed above. The Miracle-Gro
Delaware line of credit was used to build inventory. Total liabilities of
$28.9 million on December 31, 1994 increased by $19.2 million compared with
the total liabilities on September 30, 1994. The increase was mainly due to
$16.9 million of revolving credit line. This line of credit was used to
finance the increases in inventory and Subchapter S distributions. Total
liabilities of $9.7 million on September 30, 1994 increased by $2.2 million
compared with the total liabilities on September 30, 1993. This increase was
mainly due to the timing of payments.
Shareholders equity of $17.2 million on December 31, 1994 increased by
$0.4 million compared with shareholders equity of $16.8 million on December 31,
1993. This increase was primarily due to capital stock purchases of
Miracle-Gro Delaware and timing of Subchapter S corporation distributions.
Shareholders equity of $29.1 million on September 30, 1994 reflected an
increase of $6.9 million compared with shareholders equity on September 30,
1993. This increase was primarily due to undistributed Subchapter-S earnings.
Shareholders equity of $17.2 million on December 31, 1994 decreased by
$11.9 million compared with shareholders equity on September 30, 1994. This
decrease was primarily due to Subchapter S distributions.
Shareholders equity of $29.1 million on September 30, 1994 increased
by $6.9 million compared with shareholders equity on September 30, 1993. This
increase was due to the increased profits for the fiscal year.
The primary sources of liquidity for the Miracle-Gro Companies are
funds generated by operations, borrowings under a $25 million line of credit
with Chase Manhattan Bank ("Chase") that is secured by both accounts receivable
and inventory, and borrowings under a $10 million line of credit with the
Hagedorn Family Fund, a private partnership, the partners of which are six of
the Miracle-Gro Shareholders. The Chase line of credit is renewed annually and
is currently scheduled to expire on March 31, 1995, but is expected to be
extended in February 1995 for an additional year. Both lines of credit bear
interest at an interest rate of 1/4% under the Chase prime lending rate.
Interest on the Chase line of credit is payable on a monthly basis. Borrowings
under the Chase line of credit traditionally start in December and are fully
paid by the following May. All outstanding balances on this line have always
been completely paid by the end of the fiscal year in which they were incurred.
On December 31, 1994 borrowings under the Chase and Hagedorn Family Fund lines
of credit were $13.3 million and $7.2 million, respectively. These borrowings
are used to fund working capital requirements during the period when the
Miracle-Gro Companies offer customers spring dating terms for payment. The
Hagedorn Family Fund line of credit is payable on demand and had monthly
interest payments made through December 31, 1994. In connection with the
Merger Transactions, this line of credit will not earn interest after December
31, 1994 and the maximum amount to be borrowed is $8.5 million. After the
closing of the Merger Transactions, this line of credit will be paid in full or
forgiven.
In the opinion of Miracle-Gro's management, cash flows from operations
and capital resources will be sufficient to meet future working capital needs.
Inflation
The Miracle-Gro Companies are subject to the effects of changing
prices. In recent history these increases have not had any material impact.
Historically, the Miracle-Gro Companies have been able to pass along
inflationary increases in their costs.
Commitments and Contingencies
All of the Miracle-Gro Companies' products are manufactured by
independent manufacturers. In addition, except for trace amounts of metals
which are constituents of the fertilizers, the Miracle-Gro Companies' products
do not contain any hazardous substances as defined under federal and state law.
The Miracle-Gro Companies have never had a claim asserted against them under
environmental laws and, based on the foregoing, do not expect any material
claims in the future, although there can be no assurances in this regard.
Also, see "INFORMATION ABOUT THE MIRACLE-GRO COMPANIES -- Business of the
Miracle-Gro Companies -- Legal Proceedings.
80
93
DISSENTERS' RIGHTS
Shareholders of the Company have no dissenters' rights with respect to
the Merger Transactions, the Acquisition or any other matter to be considered
at the Annual Meeting.
The Miracle-Gro Shareholders have unanimously approved the Merger
Transactions. Therefore, none of the Miracle-Gro Shareholders has any
dissenters' rights with respect to the Merger Transactions.
VALIDITY OF SHARES OF CLASS A
CONVERTIBLE PREFERRED STOCK
The validity of the shares of Class A Convertible Preferred Stock
offered hereby will be passed upon for the Company by Vorys, Sater, Seymour and
Pease, Columbus, Ohio.
EXPERTS
The consolidated balance sheets of the Company as of September 30,
1993 and 1994, and the consolidated statements of income, changes in
shareholder's equity and cash flows for each of the three years in the period
ended September 30, 1994, have been included in this Proxy Statement/Prospectus
in reliance on the report of Coopers & Lybrand L.L.P., independent accountants
("Coopers & Lybrand"), given upon their authority as experts in accounting and
auditing.
The combined balance sheets of the Miracle-Gro Companies as of
September 30, 1993 and 1994, and the combined statements of income and retained
earnings and cash flows for each of the three years in the period ended
September 30, 1994, have been included in this Proxy Statement/Prospectus in
reliance on the report of Joel E. Sammett & Co., independent accountants, given
upon their authority as experts in accounting and auditing.
INDEPENDENT AUDITORS
The Board of Directors of the Company has appointed Coopers & Lybrand
as the Company's independent auditors for the 1995 fiscal year. Coopers &
Lybrand, a certified public accounting firm, has served as the Company's
independent auditors since 1986.
A representative of Coopers & Lybrand is expected to be present at the
Annual Meeting to respond to appropriate questions and to make such statements
as he may desire.
SHAREHOLDER PROPOSALS FOR 1996 ANNUAL MEETING
Proposals by shareholders intended to be presented at the 1996 Annual
Meeting of Shareholders must be received by the Secretary of the Company no
later than November 8, 1995, to be included in the Company's proxy, notice of
meeting and proxy statement relating to such meeting and should be mailed to
The Scotts Company, 14111 Scottslawn Road, Marysville, Ohio 43041, Attention:
Secretary.
OTHER BUSINESS
The Board of Directors is aware of no other matter that will be
presented for action at the 1995 Annual Meeting. If any other matter requiring
a vote of the shareholders properly comes before the Annual Meeting, the
persons authorized under management proxies will vote and act according to
their best judgments in light of the conditions then prevailing.
81
94
ANNUAL REPORT
The Company's 1994 Annual Report to Shareholders containing audited
financial statements for the 1994 fiscal year is being mailed to all
shareholders of record with this Proxy Statement/Prospectus.
The form of proxy and the Proxy Statement/Prospectus have been
approved by the Board of Directors of the Company and are being mailed and
delivered to shareholders by its authority.
/s/ Craig D. Walley
Craig D. Walley
Vice President and Secretary
82
95
INDEX TO FINANCIAL STATEMENTS
I. THE SCOTTS COMPANY AND SUBSIDIARIES PRELIMINARY PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION
Introduction.......................................................................... F-3
Preliminary Pro Forma Consolidated Statement of Income for the Fiscal Year Ended
September 30, 1994 (Unaudited)...................................................... F-4
Notes to Preliminary Pro Forma Consolidated Statement of Income for the Fiscal Year
Ended September 30, 1994 (Unaudited)................................................ F-5
Preliminary Pro Forma Consolidated Statement of Income for the Three Months Ended
December 31, 1994 (Unaudited)....................................................... F-7
Notes to Preliminary Pro Forma Consolidated Statement of Income for the Three Months
Ended December 31, 1994 (Unaudited)................................................. F-8
Preliminary Pro Forma Consolidated Balance Sheet as of December 31, 1994
(Unaudited)......................................................................... F-10
Notes to Preliminary Pro Forma Consolidated Balance Sheet as of December 31, 1994
(Unaudited)......................................................................... F-11
II. THE SCOTTS COMPANY AND SUBSIDIARIES CONSOLIDATED FINANCIAL INFORMATION
A. FISCAL YEAR ENDED SEPTEMBER 30, 1994
Report of Independent Accountants..................................................... F-13
Consolidated Statements of Income for the Fiscal Years Ended
September 30, 1992, 1993 and 1994................................................... F-14
Consolidated Statements of Cash Flows for the Fiscal Years Ended
September 30, 1992, 1993 and 1994................................................... F-15
Consolidated Balance Sheets as of September 30, 1993 and 1994......................... F-17
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the Fiscal
Years Ended September 30, 1992, 1993 and 1994....................................... F-18
Notes to Consolidated Financial Statements............................................ F-19
B. FISCAL QUARTER ENDED DECEMBER 31, 1994
Consolidated Statements of Income for the Three Months Ended January 1, 1994 and
December 31, 1994 (Unaudited)....................................................... F-36
Consolidated Statements of Cash Flows for the Three Months Ended January 1, 1994 and
December 31, 1994 (Unaudited)....................................................... F-37
Consolidated Balance Sheets as of January 1, 1994 (Unaudited), December 31, 1994
(Unaudited) and September 30, 1994.................................................. F-38
Notes to Consolidated Financial Statements (Unaudited)................................ F-39
F-1
96
III. STERN'S MIRACLE-GRO PRODUCTS, INC. AND AFFILIATED COMPANIES COMBINED
FINANCIAL INFORMATION
A. FISCAL YEAR ENDED SEPTEMBER 30, 1994
Independent Auditor's Report.......................................................... F-42
Combined Balance Sheets as of September 30, 1993 and 1994............................. F-43
Combined Statement of Income and Retained Earnings for the Fiscal Years Ended
September 30, 1992, 1993 and 1994................................................... F-44
Combined Statement of Cash Flows for the Fiscal Years Ended September 30, 1992, 1993
and 1994............................................................................ F-45
Notes to Combined Financial Statements................................................ F-46
B. FISCAL QUARTER ENDED DECEMBER 31, 1994
Combined Balance Sheets as of December 31, 1993 and 1994 (Unaudited) and September 30,
1994................................................................................ F-53
Combined Statement of Income and Retained Earnings for the Three Months Ended
December 31, 1993 and 1994 (Unaudited).............................................. F-54
Combined Statement of Cash Flows for the Three Months Ended December 31, 1993 and
1994 (Unaudited).................................................................... F-55
Notes to Combined Financial Statements (Unaudited).................................... F-56
F-2
97
THE SCOTTS COMPANY AND SUBSIDIARIES
PRELIMINARY PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
INTRODUCTION
On January 26, 1995, The Scotts Company ("Scotts" or the "Company"), the
Miracle-Gro Companies ("Miracle-Gro") and the Miracle-Gro Shareholders entered
into a merger agreement (the "Agreement"). Pursuant to the Agreement,
Miracle-Gro will become wholly-owned by the Company, and the Company will issue
$195 million face amount of Class A Convertible Preferred Stock and warrants to
purchase three million common shares. The transaction will be accounted for
using the purchase method of accounting. The Class A Convertible Preferred
Shares will be convertible into common shares at $19.00 per share, will pay
dividends at a rate 5.0% of per annum, will be non-callable for five years and
will be subject to certain restrictions on transfer. The warrants will be
exercisable for eight and one-half years in three series for one million common
shares each at $21.00, $25.00 and $29.00 per share, respectively.
The purchase price for the Miracle-Gro Companies in these unaudited
preliminary pro forma financial statements is based on the fair value of the
Class A Convertible Preferred Shares and warrants as of closing and is estimated
to be approximately $200 million. The transaction is subject to, among other
things, approval of the Company's shareholders.
This unaudited pro forma consolidated financial information is preliminary
and will likely be affected by changes in the market value of Scotts common
shares, timing of closing the transaction and other factors beyond the control
of the Company or Miracle-Gro.
The following unaudited Preliminary Pro Forma Consolidated Statement of
Income gives effect to the merger of Scotts and Miracle-Gro as if the
transaction, which is expected to be completed by early April 1995, had taken
place on October 1, 1993. The following unaudited Preliminary Pro Forma
Consolidated Balance Sheet gives effect to the acquisition as if the transaction
had occurred on December 31, 1994.
The unaudited pro forma adjustments are described in the accompanying notes
to the unaudited preliminary pro forma consolidated financial statements. The
unaudited preliminary pro forma consolidated financial statements should be read
in conjunction with the notes thereto and the consolidated financial statements
of Scotts included in the Company's Annual Report on Form 10-K for the year
ended September 30, 1994 and the combined financial statements of Miracle-Gro
presented elsewhere in this Form S-4.
The unaudited preliminary pro forma consolidated financial statements do
not purport to be indicative of the Company's financial position at December 31,
1994 or the results of operations which actually would have occurred had the
acquisition taken place on October 1, 1993, nor do they purport to indicate the
future results of future operations of the merged companies.
F-3
98
THE SCOTTS COMPANY AND SUBSIDIARIES
PRELIMINARY PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1994
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SUBTOTAL
PRO FORMA
THE SCOTTS SIERRA AS
COMPANY PRO FORMA PREVIOUSLY MIRACLE-GRO PRO FORMA PRO
HISTORICAL SEE NOTE (A) PRESENTED HISTORICAL ADJUSTMENTS FORMA
---------- ------------ ---------- ----------- ----------- --------
Net sales............................... $606,339 $ 20,826 $627,165 $ 107,421 $ (8,355)(1) $726,231
Cost of sales........................... 319,730 10,642 330,372 52,255 (7,305)(1)(2) 375,322
---------- ------------ ---------- ----------- ----------- --------
Gross profit............................ 286,609 10,184 296,793 55,166 (1,050) 350,909
---------- ------------ ---------- ----------- ----------- --------
Marketing............................... 100,106 5,233 105,339 18,551 (129)(1)(3) 123,761
Distribution............................ 84,407 989 85,396 -- 2,957(4) 88,353
General and administrative.............. 30,189 2,086 32,275 6,541 (2,081)(1)(5) 36,735
Research and development................ 10,352 906 11,258 -- -- 11,258
Other expense, net...................... 2,283 582 2,865 550 2,866(1)(6) 6,281
---------- ------------ ---------- ----------- ----------- --------
Income from operations.................. 59,272 388 59,660 29,524 (4,663) 84,521
Interest expense........................ 17,450 1,460 18,910 125 -- 19,035
---------- ------------ ---------- ----------- ----------- --------
Income before income taxes
and extraordinary item................ 41,822 (1,072) 40,750 29,399 (4,663) 65,486
Income taxes............................ 17,947 (965) 16,982 490 11,250(7) 28,722
---------- ------------ ---------- ----------- ----------- --------
Net income before extraordinary item.... $ 23,875 $ (107) $ 23,768 $ 28,909 $ (15,913) $ 36,764
========= ============ ========= =========== =========== ========
Earnings per common share -- primary
and fully diluted..................... $ 1.27 $ 1.27 $ 1.27
========= ========= ========
See Notes to Preliminary Pro Forma Consolidated Statement of Income.
F-4
99
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO PRELIMINARY PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1994
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
I. PRO FORMA ADJUSTMENTS
(A) On December 17, 1993, Scotts purchased Grace-Sierra Horticultural Products
Company ("Sierra"). The pro forma consolidated statement of income for the
year ended September 30, 1994 reflects this acquisition as if it had
occurred on October 1, 1992, as previously reported, giving effect to pro
forma adjustments for depreciation and amortization of tangible and
intangible assets, interest and expenses on acquisition indebtedness, and
income taxes. The Company's consolidated balance sheet as of December 31,
1994 and consolidated statement of income for the three months ended
December 31, 1994 include Sierra for the entire period.
Miracle-Gro Limited Transaction
(1) The historical combined financial statements of Miracle-Gro include the
revenues and expenses of Miracle-Gro Products Limited ("Limited"). On
December 31, 1994, Limited 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. In future periods, this investment will be accounted for on the
equity method. Accordingly, the Preliminary Pro Forma Consolidated Statement
of Income has been adjusted to reflect the net income of Limited for the
year ended September 30, 1994 as if it had been accounted for as an equity
investment.
To reclassify Limited income statement accounts:
Net sales................................................................... $8,355
Cost of sales............................................................... 4,456
Marketing expense........................................................... 1,868
General and administrative expense.......................................... 304
Other expense............................................................... 807
------
Net income as reclassified to pro forma other expense, net.................. $ 920
======
This reclassification reflects the historical Limited results and not the
results that would have been reported had the 32.5% interest in the U.K. based
garden products company been held for the year. The historical income of Limited
reflected on the equity method of accounting is not necessarily indicative of
Limited's share of future earnings attributable to its equity investment.
F-5
100
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO PRELIMINARY PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1994
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Miracle-Gro Acquisition
The following pro forma adjustments are made to reflect the application of
purchase accounting and certain adjustments to conform the Miracle-Gro financial
statement classifications to the Scotts presentation.
(2) To record additional depreciation ($50); to reclassify distribution expense
($2,957) recorded as cost of sales to distribution; and to reclassify
depreciation ($58) to cost of sales from general and administrative.
(3) To reclassify sales and marketing related salaries and fringe benefits
($1,739) from general and administrative to marketing.
(4) To reclassify distribution expense ($2,957) from cost of sales.
(5) To record additional depreciation on buildings and amortization of a
favorable land lease ($20); to reclassify sales and marketing salaries
($1,739) to marketing; and to reclassify depreciation ($58) to cost of
sales.
(6) To record amortization of acquired trademarks and goodwill ($4,593) over 40
years.
(7) To record additional income tax expense assuming Miracle-Gro had been taxed
as C corporations ($11,278) and to record the tax benefit of pro forma
adjustments ($28); historically Miracle-Gro had elected Subchapter S status
under the Internal Revenue Code.
II. EARNINGS PER COMMON SHARE
For purposes of computing earnings per share, the convertible preferred
stock is considered a common stock equivalent. Pro forma primary and
fully-diluted earnings per share for the year ended September 30, 1994 are
calculated using the weighted average common shares outstanding for Scotts of
18,784,729 and the common shares that would have been issued assuming conversion
of preferred stock at the beginning of the year of 10,263,158 common shares. The
computation of pro forma primary earnings per share assuming reduction of
earnings for preferred dividends and no conversion of preferred stock was
anti-dilutive.
F-6
101
THE SCOTTS COMPANY AND SUBSIDIARIES
PRELIMINARY PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 1994
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THE SCOTTS
COMPANY MIRACLE-GRO PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ---------
Net sales............................... $ 98,019 $15,255 $(3,368)(1) $ 109,906
Cost of sales........................... 53,520 7,702 (2,093)(1)(2) 59,129
---------- ----------- ----------- ---------
Gross profit............................ 44,499 7,553 (1,275) 50,777
---------- ----------- ----------- ---------
Marketing............................... 19,902 1,749 357(1)(3) 22,008
Distribution............................ 14,540 -- 546(4) 15,086
General and administrative.............. 2,765 2,241 (746)(1)(5) 4,260
Research and development................ 5,967 -- -- 5,967
Other expense, net...................... 995 818 (266)(1)(6) 1,547
---------- ----------- ----------- ---------
Income from operations.................. 330 2,745 (1,166) 1,909
Interest expense........................ 5,694 3 -- 5,697
---------- ----------- ----------- ---------
Income (loss) before income taxes....... (5,364) 2,742 (1,166) (3,788)
Income taxes............................ (2,226) 149 948(7) (1,129)
---------- ----------- ----------- ---------
Net income (loss)....................... $ (3,138) $ 2,593 $(2,114) $ (2,659)
======== ========= ========= ========
Earnings per common share -- primary
and fully diluted..................... $ (0.17) $ (0.27)
======== ========
See Notes to Preliminary Pro Forma Consolidated Statement of Income.
F-7
102
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO PRELIMINARY PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 1994
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
I. PRO FORMA ADJUSTMENTS
Miracle-Gro Limited Transaction
(1) The historical combined financial statements of Miracle-Gro include the
revenues and expenses of Miracle-Gro Products Limited ("Limited"). On
December 31, 1994, Limited 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. In future periods, this investment will be accounted for on the
equity method. Accordingly, the Preliminary Pro Forma Consolidated Statement
of Income has been adjusted to reflect the net income of Limited for the
three months ended December 31, 1994 as if it had been accounted for as an
equity investment.
To reclassify Limited income statement accounts:
Net sales................................................................... $3,368
Cost of sales............................................................... 1,575
Marketing expense........................................................... 78
General and administrative expense.......................................... 301
Other expense............................................................... 839
------
Net income as reclassified to pro forma other expense, net.................. $ 575
======
This reclassification reflects the historical Limited results and not the
results that would have been reported had the 32.5% interest in the U.K. based
garden products company been held for the period. The historical income of
Limited reflected on the equity method of accounting is not necessarily
indicative of Limited's share of future earnings attributable to its equity
investment.
Miracle-Gro Acquisition
The following pro forma adjustments are made to reflect the application of
purchase accounting and certain adjustments to conform the Miracle-Gro financial
statement classifications to the Scotts presentation.
(2) To record additional depreciation ($13); to reclassify distribution expense
($546) recorded as cost of sales to distribution; and to reclassify
depreciation ($15) to cost of sales from general and administrative.
(3) To reclassify sales and marketing related salaries and fringe benefits
($435) from general and administrative to marketing.
(4) To reclassify distribution expense ($546) from cost of sales.
F-8
103
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO PRELIMINARY PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 1994
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(5) To record additional depreciation on buildings and amortization of a
favorable land lease ($5); to reclassify sales and marketing salaries ($435)
to marketing; and to reclassify depreciation ($15) to cost of sales.
(6) To record amortization of acquired trademarks and goodwill ($1,148) over 40
years.
(7) To record additional income tax expense assuming Miracle-Gro had been taxed
as C corporations ($955) and to record the tax benefit of pro forma
adjustments ($7); historically Miracle-Gro had elected Subchapter S status
under the Internal Revenue Code.
II. EARNINGS PER COMMON SHARE
For purposes of computing earnings per share, the convertible preferred
stock is considered a common stock equivalent. Pro forma primary and
fully-diluted earnings per share for the three months ended December 31, 1994
are calculated using the weighted average common shares outstanding for Scotts
of 18,667,064. The pro forma net loss of $2,659 has been increased by the
preferred stock dividend of $2,438 to determine the loss applicable to common
shares. The computation of pro forma primary earnings per share assuming
conversion of the preferred stock at the beginning of the three month period was
anti-dilutive.
F-9
104
THE SCOTTS COMPANY AND SUBSIDIARIES
PRELIMINARY PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1994
(UNAUDITED)
(IN THOUSANDS)
THE
SCOTTS
COMPANY MIRACLE-GRO PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
-------- ----------- ----------- ---------
ASSETS
Current Assets:
Cash............................................. $ 5,410 $ -- $ -- $ 5,410
Accounts receivable, net......................... 128,454 15,277 (2,633)(1) 141,098
Inventories...................................... 145,095 28,429 (4,021)(1) 169,503
Prepaid and other current assets................. 19,735 425 300(1)(2) 20,460
-------- ----------- ----------- ---------
Total current assets........................... 298,694 44,131 (6,354) 336,471
Property, plant and equipment, net.................. 141,556 1,783 396(1)(3) 143,735
Trademarks, patents and other intangibles........... 27,485 -- 75,000(4) 102,485
Goodwill............................................ 103,926 -- 108,703(4) 212,629
Other assets........................................ 4,957 138 10,186(1) 15,281
-------- ----------- ----------- ---------
Total Assets................................... $576,618 $46,052 $ 187,931 $810,601
======== ========= =========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving credit line............................ $ 68,062 $16,931 $ -- $ 84,993
Current portion of term debt..................... 5,540 -- -- 5,540
Accounts payable................................. 53,565 6,438 5,614(1)(5) 65,617
Other current liabilities........................ 36,100 2,017 2,792(1)(7) 40,909
-------- ----------- ----------- ---------
Total current liabilities...................... 163,267 25,386 8,406 197,059
Long-term debt...................................... 217,618 3,500 (3,500)(1) 217,618
Postretirement benefits other than pensions......... 27,180 -- -- 27,180
Other noncurrent liabilities........................ 3,492 -- 1,191(2)(6) 4,683
-------- ----------- ----------- ---------
Total Liabilities.............................. 411,557 28,886 6,097 446,540
-------- ----------- ----------- ---------
Shareholders' Equity:
Preferred stock.................................. -- -- 187,200(8) 187,200
Common stock..................................... 211 9,456 (9,456)(8) 211
Capital in excess of par value................... 193,418 240 11,560(8) 205,218
Retained earnings................................ 10,737 7,470 (7,470)(8) 10,737
Cumulative translation gain...................... 2,136 -- -- 2,136
Treasury stock................................... (41,441) -- -- (41,441 )
-------- ----------- ----------- ---------
Total Shareholders' Equity..................... 165,061 17,166 181,834 364,061
-------- ----------- ----------- ---------
Total Liabilities and Shareholders' Equity..... $576,618 $46,052 $ 187,931 $810,601
======== ========= =========== =========
See Notes to Preliminary Pro Forma Consolidated Balance Sheet.
F-10
105
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO PRELIMINARY PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1994
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) On December 31, 1994, Limited 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. Current assets, comprised primarily of accounts receivable and
inventories will be used to liquidate current liabilities and long-term
debt, with any residual cash remaining with Limited.
To record the contribution of equipment at net book value and investment in
the new company at fair value:
Equipment.......................................................... $ (604)
Other assets -- investment......................................... 10,186
To reflect disposition of assets in satisfaction of liabilities:
Accounts receivable................................................ $(2,663)
Inventories........................................................ (4,021)
Prepaid and other current assets................................... (140)
Accounts payable................................................... (2,486)
Accrued liabilities................................................ (808)
Long-term debt..................................................... (3,500)
(2) To record a current deferred tax asset ($440) and noncurrent deferred tax
liability ($400) for differences in the financial reporting and tax bases of
certain acquired liabilities and fixed assets.
(3) To record buildings and equipment ($1,000) at estimated fair value.
(4) To record the estimated fair value of Miracle-Gro trademarks ($75,000) and
to record the excess of purchase price over the underlying value of net
assets acquired (goodwill).
(5) To record the estimated liability ($8,100) for distributions to be made to
Miracle-Gro shareholders pursuant to the purchase agreement. The total
liability is estimated to be $22,000 based on the expected increase in
Miracle-Gro's net assets from normal operations through the transaction
closing date.
(6) To record the excess of the projected benefit obligation over the plan
assets ($791) of the Miracle-Gro defined benefit pension plan.
(7) To record for estimated transaction costs ($3,600).
(8) To record the issuance of 5% convertible preferred stock with an estimated
market value of $187,200 and a face amount of $195,000 and warrants to
purchase common stock with an estimated market value of $11,800 as
consideration to acquire Miracle-Gro, and to eliminate the historical
shareholders' equity of Miracle-Gro.
F-11
106
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL INFORMATION
FOR
FISCAL YEAR ENDED SEPTEMBER 30, 1994
AND
FISCAL QUARTER ENDED DECEMBER 31, 1994
F-12
107
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, 1993 and 1994, and the related
consolidated statements of income, cash flows and changes in shareholders'
equity (deficit) for each of the three years in the period ended September 30,
1994. 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, 1993 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1994, in conformity with generally accepted
accounting principles.
As discussed in Notes 3 and 6 to the consolidated financial statements,
effective the beginning of fiscal 1993 the Company changed its method of
accounting for postretirement benefits other than pensions and income taxes.
COOPERS & LYBRAND L. L. P.
Columbus, Ohio
November 14, 1994
F-13
108
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1992 1993 1994
-------- -------- --------
Net sales.................................................. $413,558 $466,043 $606,339
Cost of sales.............................................. 213,133 244,218 319,730
-------- -------- --------
Gross profit............................................... 200,425 221,825 286,609
-------- -------- --------
Marketing.................................................. 66,245 74,579 100,106
Distribution............................................... 61,051 67,377 84,407
General and administrative................................. 24,759 27,688 30,189
Research and development................................... 6,205 7,700 10,352
Other expenses, net........................................ 20 660 2,283
-------- -------- --------
Income from operations..................................... 42,145 43,821 59,272
Interest expense........................................... 15,942 8,454 17,450
-------- -------- --------
Income before taxes, extraordinary items and cumulative
effect of accounting changes............................. 26,203 35,367 41,822
Income taxes............................................... 11,124 14,320 17,947
-------- -------- --------
Income before extraordinary items and cumulative effect of
accounting changes....................................... 15,079 21,047 23,875
Extraordinary items:
Loss on early extinguishment of debt, net of tax......... (4,186) -- (992)
Utilization of net operating loss carryforwards.......... 4,699 --
Cumulative effect of changes in accounting for
postretirement benefits, net of tax and income taxes..... -- (13,157) --
-------- -------- --------
Net income................................................. $ 15,592 $ 7,890 $ 22,883
======== ======== ========
Net income per common share:
Income before extraordinary items and cumulative effect
of accounting changes................................. $ .84 $ 1.07 $ 1.27
Extraordinary items:
Loss on early extinguishment of debt, net of tax...... (.23) -- (.05)
Utilization of net operating loss carryforwards....... .26 -- --
Cumulative effect of changes in accounting for
postretirement benefits, net of tax and income
taxes................................................. -- (.67) --
-------- -------- --------
Net income............................................ $ .87 $ .40 $ 1.22
======== ======== ========
Weighted average common shares outstanding during the
period................................................... 18,014 19,687 18,785
======== ======== ========
See Notes to Consolidated Financial Statements.
F-14
109
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1992, 1993 AND 1994
(IN THOUSANDS)
1992 1993 1994
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 15,592 $ 7,890 $ 22,883
Adjustments to reconcile net income to net cash provided
by
operating activities:
Depreciation.......................................... 10,206 12,278 13,375
Amortization.......................................... 5,642 5,866 8,562
Extraordinary loss on early extinguishment of debt.... 4,186 -- 992
Cumulative effect of change in accounting for
postretirement benefits............................. -- 24,280 --
Postretirement benefits............................... -- 2,366 368
Deferred income taxes................................. 1,588 (12,740) 5,378
Loss on sale of equipment............................. 392 94 29
Provision for losses on accounts receivable........... 990 1,409 422
Other................................................. 204 748 234
Changes in assets and liabilities:
Accounts receivable................................. (5,476) (10,002) (32,294)
Inventories......................................... (3,291) (11,147) (10,406)
Prepaid and other current assets.................... (268) (393) (2,065)
Accounts payable.................................... (654) (2,390) 6,400
Accrued liabilities................................. (5,351) 1,630 6,220
Other assets and liabilities........................ 3,682 4,784 (10,231)
-------- -------- --------
Net cash provided by operating activities........ 27,442 24,673 9,867
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in plant and equipment........................ (19,896) (15,158) (33,402)
Acquisitions, net of cash acquired....................... -- (16,366) (117,107)
Proceeds from sale of equipment.......................... 131 194 384
-------- -------- --------
Net cash used in investing activities................. (19,765) (31,330) (150,125)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under term debt............................... -- 70,000 289,215
Payments on term and other debt.......................... (58,307) (640) (166,844)
Net (payments) borrowings under revolving credit......... (36,500) (18,238) 30,500
Net borrowings (payments) under bank line of credit...... 349 (953) 1,211
Redemption of senior subordinated notes.................. (53,223) -- --
Redemption of subordinated debentures.................... (21,132) -- --
Deferred financing cost incurred......................... (1,117) (628) (5,139)
Net proceeds from issuance of Class A Common Stock....... 160,237 -- --
Issuance (purchase) of Class A Common Stock.............. -- (41,441) 160
-------- -------- --------
Net cash (used in) provided by financing activities... (9,693) 8,100 149,103
-------- -------- --------
Effect of exchange rate changes on cash.................... -- -- (473)
-------- -------- --------
Net (decrease) increase in cash............................ (2,016) 1,443 8,372
Cash, beginning of period.................................. 2,896 880 2,323
-------- -------- --------
Cash, end of period........................................ $ 880 $ 2,323 $ 10,695
======== ======== ========
See Notes to Consolidated Financial Statements.
F-15
110
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
FOR THE YEARS ENDED SEPTEMBER 30, 1992, 1993 AND 1994
(IN THOUSANDS)
SUPPLEMENTAL CASH FLOW INFORMATION
Interest (net of amount capitalized)....................... $16,240 $ 6,169 $ 10,965
Income taxes paid.......................................... 1,189 11,500 20,144
Businesses acquired:
Fair value of assets acquired........................... -- 23,799 143,520
Liabilities assumed..................................... -- (7,433) (26,413)
Net cash paid for acquisition........................... -- 16,366 117,107
See Notes to Consolidated Financial Statements.
F-16
111
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1993 AND 1994
(IN THOUSANDS)
1993 1994
-------- --------
ASSETS
Current Assets:
Cash................................................................. $ 2,323 $ 10,695
Accounts receivable, less allowance of $2,511 in 1993 and $2,933 in
1994.............................................................. 60,848 115,772
Inventories.......................................................... 76,654 106,636
Prepaid and other assets............................................. 13,552 17,151
-------- --------
Total current assets.............................................. 153,377 250,254
Property, plant and equipment, net..................................... 98,791 140,105
Patents and other intangibles, net..................................... 23,502 28,880
Goodwill............................................................... 41,340 104,578
Other assets........................................................... 4,580 4,767
-------- --------
Total Assets...................................................... $321,590 $528,584
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving credit line................................................ $ 705 $ 23,416
Current portion of term debt......................................... 5,444 3,755
Accounts payable..................................................... 28,279 42,914
Accrued liabilities.................................................. 21,170 35,220
Accrued taxes........................................................ 9,253 4,383
-------- --------
Total current liabilities......................................... 64,851 109,688
Long-term debt, less current portions.................................. 87,080 220,130
Postretirement benefits other than pensions............................ 26,646 27,014
Other liabilities...................................................... -- 3,592
-------- --------
Total Liabilities................................................. 178,577 360,424
-------- --------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.01 par value in 1993.............................. -- --
Common stock, $.01 par value, issued 21,073 shares in 1993 no par
value, issued 21,082 shares in 1994............................... 211 211
Capital in excess of par value....................................... 193,263 193,450
Retained earnings (deficit).......................................... (9,008) 13,875
Cumulative translation gain (loss)................................... (12) 2,065
Treasury stock, 2,415 shares in 1993 and 1994, at cost............... (41,441) (41,441)
-------- --------
Total Shareholders' Equity........................................ 143,013 168,160
-------- --------
Total Liabilities and Shareholders' Equity........................ $321,590 $528,584
======== ========
See Notes to Consolidated Financial Statements.
F-17
112
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 1992, 1993 AND 1994
(IN THOUSANDS)
TOTAL
COMMON SHARES CAPITAL IN RETAINED TREASURY STOCK CUMULATIVE SHAREHOLDERS'
--------------- EXCESS OF EARNINGS/ ----------------- TRANSLATION EQUITY/
SHARES AMOUNT PAR VALUE (DEFICIT) SHARES AMOUNT GAIN (LOSS) (DEFICIT)
------ ------ ----------- --------- ------ -------- ----------- -------------
Balance, September 30, 1991......... 9,617 $ 96 $ 18,083 $(27,720 ) 117 $ (420) -- $ (9,961)
Adjustment for redeemable
common stock...................... 2,162 22 9,826 -- -- -- -- 9,848
Issuance of common stock held
in treasury....................... -- -- 310 -- (112) 407 -- 717
Exchange of warrants for common
stock............................. 325 3 4,754 (4,770 ) (5) 13 --
Issuance of common stock............ 8,969 90 159,430 -- -- -- -- 159,520
Net income.......................... -- -- -- 15,592 -- -- -- 15,592
Amortization of unearned
compensation...................... -- -- 24 -- -- -- -- 24
Options outstanding................. -- -- 177 -- -- -- -- 177
Foreign currency translation
adjustment........................ -- -- -- -- -- -- $ 12 12
------ ------ ----------- --------- ------ -------- ----------- -------------
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 stock............ -- -- -- -- (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
====== ======= ========= ========= ====== ========= ========== ============
See Notes to Consolidated Financial Statements.
F-18
113
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEAR ENDED SEPTEMBER 30, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
On September 20, 1994, the shareholders voted to reincorporate The Scotts
Company from Delaware to Ohio. As a result of the reincorporation, The Scotts
Company, a Delaware corporation merged into The Scotts Company, an Ohio
corporation ("Scotts Ohio"). Immediately following the consummation of the
merger, the O. M. Scott & Sons Company was merged into Scotts Ohio. Scotts Ohio
and its wholly-owned subsidiaries, Hyponex Corporation ("Hyponex"), Republic
Tool and Manufacturing Corp. ("Republic") and Scott-Sierra Horticultural
Products Company ("Sierra"), (collectively, the "Company"), is engaged in the
manufacture and sale of lawn care and garden products. All material intercompany
transactions have been eliminated.
Shareholders' equity, shares outstanding and per share amounts for all
periods 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.
Inventories
Inventories are principally stated at the lower of cost or market,
determined by the FIFO method; certain inventories of Hyponex and Sierra
(primarily organic products) are accounted for by the LIFO method. At September
30, 1993 and 1994, approximately 24% and 31% 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 as of September 30,
1993 and 1994, net of such provisions, consisted of:
1993 1994
------- --------
(IN THOUSANDS)
Finished goods................................................ $44,735 $ 55,102
Raw materials................................................. 31,905 52,639
------- --------
FIFO cost..................................................... 76,640 107,741
LIFO reserve.................................................. 14 (1,105)
------- --------
$76,654 $106,636
======= ========
Advertising and Consumer Guarantee
The Company has a cooperative advertising program with customer dealers
whereby the Company reimburses dealers for the qualifying portion of dealer
advertising costs. Such advertising allowances are based on the timing of dealer
orders and deliveries. The Company provides for the cost of this program in the
period the sales to dealers are recorded. 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 dealers.
F-19
114
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED SEPTEMBER 30, 1994
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 cost at September 30, 1993 and 1994
consisted of the following:
1993 1994
-------- --------
(IN THOUSANDS)
Land and improvements................................ $ 19,817 $ 21,856
Buildings............................................ 36,300 41,313
Machinery and equipment.............................. 87,250 111,639
Furniture and fixtures............................... 5,952 8,861
Construction in progress............................. 4,687 24,340
-------- --------
154,006 208,009
Less accumulated depreciation........................ 55,215 67,904
-------- --------
$ 98,791 $140,105
======== ========
Property subject to capital leases in the amount of $1,484,000 and
$1,270,000 (net of accumulated amortization of $1,560,000 in 1993 and $2,303,000
in 1994) has been included in machinery and equipment at September 30, 1993 and
1994, respectively.
The Company capitalized interest costs of $380,000 in fiscal 1992 and
$321,000 in fiscal 1994 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
the straight-line basis. Other intangible assets consist primarily of patents
and are being amortized on a straight-line basis over periods varying from 7 to
24 years. Accumulated amortization at September 30, 1993 and 1994 was
$33,876,000 and $42,438,000, respectively.
F-20
115
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED SEPTEMBER 30, 1994
Company Management periodically assesses the recoverability of goodwill,
patents 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.
Included in other intangible assets are debt issuance costs which are being
amortized over the terms of the various agreements and organization costs which
are being amortized over five years. 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 Senior Subordinated Notes and recognized an extraordinary
charge of $1.7 million before taxes in unamortized debt issuance costs in
connection with certain debt prepayments.
Foreign Currency
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 (loss) were ($12,000) and
$2,065,000 as of September 30, 1993 and 1994, respectively. Foreign currency
transaction gains and losses are included in determining net income. In fiscal
1992, 1993 and 1994, the Company recorded foreign currency transaction losses in
other expenses of $324,000, $196,000 and $491,000, respectively.
Income Taxes
Effective October 1, 1992, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the financial
statements or tax returns. 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.
Prior to fiscal 1993, the Company's deferred income tax provision was based
differences between financial reporting and taxable income.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to fiscal 1994 classifications.
F-21
116
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED SEPTEMBER 30, 1994
2. 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 Statement 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 Scott-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 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 results of operations have been
included in the Consolidated Statements of Income from the acquisition date.
F-22
117
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED SEPTEMBER 30, 1994
The following represents pro forma results of operations assuming the
Sierra acquisition had occurred effective October 1, 1992 after giving effect to
certain related adjustments, including depreciation and amortization on tangible
and intangible assets, and interest and expenses on acquisition debt.
YEAR ENDED SEPTEMBER
30,
-----------------------
1993 1994
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
(UNAUDITED)
Net sales.................................................... $585,318 $627,165
======== ========
Income before extraordinary items and cumulative effect of
accounting changes......................................... $ 20,274 $ 23,768
======== ========
Net income................................................... $ 7,117 $ 22,776
======== ========
Income per common share before extraordinary items and
cumulative effect of accounting changes.................... $ 1.03 $ 1.27
======== ========
Net income per common share.................................. $ .36 $ 1.22
======== ========
The pro forma information provided does not purport to be indicative of
actual results of operations if the Sierra acquisition had occurred as of
October 1, 1992, and is not intended to be indicative of future results or
trends.
3. ASSOCIATE BENEFITS
Both Scotts Ohio and Sierra have defined benefit pension plans covering
substantially all full-time associates who have completed one year of eligible
service and reached the age of 21. The benefits under these plans are based on
years of service and the associates' average final compensation for the Scotts
Ohio plan and for Sierra salaried employees and stated amounts for Sierra hourly
employees. The Company's funding policy, consistent with statutory requirements
and tax considerations, is based on actuarial computations using the Projected
Unit Credit method.
F-23
118
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED SEPTEMBER 30, 1994
The following table sets forth the plans' funded status and the related
amounts recognized in the consolidated balance sheets.
SEPTEMBER 30,
-------------------------
1993 1994
-------- --------
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
Vested benefits....................................... $(28,904) $(29,768)
Nonvested benefits.................................... (1,875) (5,093)
Additional obligation for projected compensation
increases............................................. (5,530) (5,919)
-------- --------
Projected benefit obligation for service rendered to
date..................................................... (36,309) (40,780)
Plan assets at fair value, primarily corporate bonds, U.S.
bonds and cash equivalents............................... 33,214 38,901
-------- --------
Plan assets less than projected benefit obligations........ (3,095) (1,879)
Unrecognized net asset being amortized over 11 1/2 years... (626) (234)
Unrecognized net loss...................................... 4,609 4,137
-------- --------
Prepaid pension costs.................................... $ 888 $ 2,024
======== ========
Pension cost includes the following components:
YEAR ENDED SEPTEMBER 30,
-------------------------------
1992 1993 1994
------- ------- -------
(IN THOUSANDS)
Service cost.......................................... $ 1,571 $ 1,571 $ 1,685
Interest cost......................................... 2,438 2,628 2,968
Actual return on plan assets.......................... (2,602) (2,774) (3,092)
Net amortization and deferral......................... (133) (18) (53)
------- ------- -------
Net pension cost.................................... $ 1,274 $ 1,407 $ 1,508
======= ======= =======
The weighted average settlement rate used in determining the actuarial
present value of the projected benefit obligation was 9%, 8% and 8% as of
September 30, 1992, 1993 and 1994, respectively. Future compensation is assumed
to increase 5% annually for fiscal 1992, and 4% annually for fiscal 1993 and
1994. The expected long-term rate of return on plan assets was 10% in fiscal
1992, and 9% in fiscal 1993 and 1994.
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.
F-24
119
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED SEPTEMBER 30, 1994
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 1993 and 1994 included
the following components:
1993 1994
------ ------
(IN THOUSANDS)
Service cost -- benefits attributed to associate service during the
year............................................................. $ 930 $ 419
Interest cost on accumulated postretirement benefit obligation..... 2,038 1,276
Amortization of prior service costs and gains from changes in
assumptions...................................................... -- (921)
------ ------
Net periodic postretirement benefit cost......................... $2,968 $ 774
====== ======
The following table sets forth the retiree medical plan status reconciled
to the amount included in the consolidated balance sheet as of September 30,
1993 and 1994.
1993 1994
------- -------
(IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees....................................................... $ 6,738 $ 7,136
Fully eligible active plan participants........................ 314 437
Other active plan participants................................. 8,305 8,789
------- -------
Total accumulated postretirement benefit obligation.............. 15,357 16,362
Unrecognized prior service cost.................................. 9,494 8,590
Unrecognized gains from changes in assumptions................... 1,795 2,062
------- -------
Accrued postretirement benefit cost.............................. $26,646 $27,014
======= =======
The discount rate used in determining the accumulated postretirement
benefit obligation was 8.5%. For measurement purposes, a 14% annual rate of
increase in per capita cost of covered retiree medical benefits was assumed for
fiscal 1994; the rate was assumed to decrease gradually to 5.5% through the year
2051 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, 1993 and 1994 by $875,000 and $957,000,
respectively.
F-25
120
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED SEPTEMBER 30, 1994
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 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 $1,750,000,
$1,993,000 and $2,097,000 for fiscal 1992, 1993 and 1994, 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 was $99,000.
The Company is self-insured for certain health benefits up to $125,000 per
occurrence per individual. The cost of such benefits is recognized as expense in
the period the claim occurred. This cost was $6,439,000, $6,662,000 and
$6,177,000 in 1992, 1993 and 1994, respectively. The Company is self-insured for
State of Ohio workers compensation up to $500,000 per claim. The cost for
workers compensation was $127,000, $268,000 and $297,000 in 1992, 1993 and 1994,
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 $3,612,000 and
$4,903,000 at September 30, 1993 and 1994, 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. The Company is required to adopt SFAS No. 112 no later than the
first quarter of fiscal 1995. Management has evaluated the provisions of SFAS
No. 112. Since most of these benefits are already accounted for by the Company
on an accrual method, the impact of this new standard is not expected to be
significant.
4. LONG-TERM DEBT
1994 1993
------- --------
(IN THOUSANDS)
Revolving credit line........................................... $21,705 $ 53,416
Senior Subordinated Notes $100 million face amount.............. -- 99,221
Term loan....................................................... 70,000 93,598
Capital lease obligations and other............................. 1,524 1,066
------- --------
93,229 247,301
Less current portions........................................... 6,149 27,171
------- --------
$87,080 $220,130
======= ========
F-26
121
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED SEPTEMBER 30, 1994
Maturities of term debt for the next five years are as follows:
(IN THOUSANDS)
1995................................................... $ 27,171
1996................................................... 41,034
1997................................................... 15,779
1998................................................... 15,608
1999 and thereafter.................................... 148,497
On December 16, 1993, the Company entered into an amendment to the Third
Amended and Restated Credit Agreement ("Agreement") with Chemical Bank and
various participating banks to finance the Sierra acquisition. The amendment
increased the term debt commitments available under the Credit Agreement to
$195,000,000. The Credit Agreement continues to provide a revolving credit
commitment of $150,000,000 through the scheduled maturity date of March 31,
1996. The facility contains a requirement limiting the maximum amount borrowed
under the revolving credit commitment to $30,000,000 for a minimum of 30
consecutive days each fiscal year.
For both term and revolving credit borrowings under the Agreement, the
Company can elect to borrow domestic funds at the reference rate ("prime") of
Chemical or Eurodollars at 1% in excess of the London Interbank Offered Rate
("LIBOR"). Interest on Chemical rate loans is payable quarterly and interest on
Eurodollar loans is payable at three month intervals from the date of each
Eurodollar contract. Applicable rates for Chemical and Eurodollar loans were
7.75% and 5.88% to 6.00%, respectively, at September 30, 1994. A commitment fee
of 3/8 of 1% is charged on the average daily unused portion of the available
commitment. An additional 1/4 of 1% is charged on the average daily aggregate
principal amount of commercial paper obligations outstanding. Loans under the
Agreement are collateralized by substantially all of the Company's tangible and
intangible assets.
The Agreement contains certain financial and operating covenants, the most
restrictive of which requires the Company to maintain earnings before interest,
taxes, profit sharing, certain depreciation charges and the effect of certain
accounting changes, as defined, to meet specified requirements. The Company was
in compliance with all required covenants at September 30, 1994.
At September 30, 1994, the Company had available an unsecured $2,000,000
line of credit with a bank, which is renewable annually, of which $705,000 and
$1,916,000 was outstanding at September 30, 1993 and 1994, 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 Senior
Subordinated Notes, estimated based on the quoted market prices for same or
similar issues is approximately $101,000,000 at September 30, 1994.
The Company recorded extraordinary charges of $4,186,000, net of income
taxes of $2,157,000, related to the early extinguishment of 13% Senior
Subordinated Notes and 13.5% Subordinated Debentures in 1992 and $992,000, net
of income taxes of $662,000, related to the early extinguishment of term loans
in 1994.
F-27
122
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED SEPTEMBER 30, 1994
5. SHAREHOLDERS' EQUITY
Stock
1993 1994
-------------- --------------
(IN THOUSANDS)
Preferred stock $.01 par value:
Authorized................................................... 10,000 shares None
Issued....................................................... None None
Common stock $.01 par value:
Class A -- voting:
Authorized................................................ 35,000 shares None
Issued.................................................... 21,074 shares None
Class B -- non-voting:
Authorized:............................................... 35,000 shares None
Issued:................................................... None None
Common shares, no par value
Authorized................................................... 35,000 shares
Issued....................................................... 21,082 shares
The Class A and Class B Common Stock were identical in all respects except
for voting rights and the right of the holder of non-voting Class B stock to
convert into an equal number of shares of voting Class A stock and the right of
the holder of voting Class A stock to convert into an equal number of shares of
non-voting Class B stock. In January 1992, every 2.2 shares of old Scotts Class
A Common Stock were exchanged for one share of new Scotts Class A Common Stock
("Shares"). On February 7, 1992, the Company closed the initial public offering
of its Shares pursuant to which Scotts sold 8,968,750 newly issued Shares and
certain non-management shareholders of Scotts sold an aggregate of 5,406,250
Shares. On September 20, 1994, as a result of the reincorporation, outstanding
shares of Class A Common Stock were converted into an equal number of common
shares, without par value, of Scotts Ohio. Additionally, the Class B Common
Stock and preferred stock is no longer authorized. The Scotts Ohio Common Shares
are listed on the NASDAQ National Market System under the symbol "SCTT".
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, 18,658,535 shares of Class A Common Stock and 18,667,064 Common
Shares were outstanding as of September 30, 1993 and 1994, respectively.
On November 4, 1992, the Company adopted The Scotts Company 1992 Long Term
Incentive Plan (the "Plan"). The Plan was accepted 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
shares 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.
F-28
123
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED)
FISCAL YEAR ENDED SEPTEMBER 30, 1994
In addition, pursuant to various employment agreements, the Company granted
136,364 and 300,000 stock options in fiscal 1992 and 1993, respectively.
Aggregate stock option activity consists of the following:
YEAR ENDED SEPTEMBER 30,
------------------------------------------
1992 1993 1994
-------- -------------- --------------
Options outstanding at October 1..................... -- 136,364 586,289
Options granted...................................... 136,364 449,925 942,354
Options exercised.................................... -- -- (8,529)
Options canceled..................................... -- -- (155,525)
-------- -------------- --------------
Options outstanding at September 30.................. 136,364 586,289 1,364,589
======= ============ =============
Options exercisable at September 30.................. 45,455 90,910 204,422
======= ============ =============
Option prices per share:
Granted............................................ $9.90 $16.25-$18.75 $17.25-$19.375
======= ============ =============
Exercised.......................................... $18.75
=============
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 Committee of the Company's 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 stock, with adjustments made quarterly for market price fluctuations. The
Company recognized compensation expense for stock options and performance share
awards of $177,000, $635,000 and $0 in fiscal 1992, 1993 and 1994, respectively.
In October 1991, an officer of Scotts purchased 22,727 Shares and three
other Scotts associates purchased an aggregate of 44,318 Shares at a purchase
price of $3.98 per share. Pursuant to an employment agreement, an officer of
Scotts purchased 45,454 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
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 stock of
approximately $1,729,000, $230,000 and $140,000 at September 30, 1992, 1993 and
1994, respectively.
In connection with the 1988 acquisition of the lawn and garden business of
Hyponex, the Company entered into a warrant purchase agreement with the prior
majority shareholder of Hyponex. In January 1992, the warrants were exchanged
for 330,000 Shares. The repurchase and retirement of the warrants was valued at
the estimated value of the Shares at the date of the exchange less the original
consideration received.
F-29
124
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED SEPTEMBER 30, 1994
6. 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.
Prior to fiscal 1993 the Company accounted for income taxes under Accounting
Principles Board Opinion No. 11.
The provision for income taxes consists of the following:
YEAR ENDED SEPTEMBER 30,
-------------------------------
1992 1993 1994
------ -------- -------
(IN THOUSANDS)
Currently payable:
Federal............................................. $1,802 $ 14,537 $ 7,400
State............................................... 878 1,400 2,131
Foreign............................................. -- -- 2,376
Deferred:
Federal............................................. 1,588 (11,694) 4,290
State............................................... -- (1,046) 1,088
------ -------- -------
Income tax expense.................................... $4,268 $ 3,197 $17,285
====== ======== =======
Income tax expense is included in the financial statements as follows:
Operations........................................... $11,124 $ 14,320 $17,947
Cumulative effect of change in accounting
principle.......................................... -- (11,123) --
Extraordinary items.................................. (6,856) -- (662)
------- -------- -------
Income tax expense................................... $ 4,268 $ 3,197 $17,285
======= ======== =======
Deferred income taxes for fiscal 1993 and 1994 reflect the impact of
"temporary differences" between the amounts of assets and liabilities for
financial reporting purposes and such amounts as determined by tax regulations.
These temporary differences are determined in accordance with SFAS No. 109 and
are more inclusive in nature than "timing differences" as determined under
previously applicable accounting principles.
F-30
125
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED SEPTEMBER 30, 1994
The components of the net deferred tax asset (liability) are as follows:
SEPTEMBER 30,
---------------------
1993 1994
-------- --------
(IN THOUSANDS)
Assets
Accounts receivable.......................................... $ 687 $ 987
Inventory.................................................... 2,359 1,816
Accrued expenses............................................. 6,589 7,649
Postretirement benefits...................................... 10,458 10,576
Other........................................................ 652 4,166
-------- --------
Gross deferred tax assets.................................... $ 20,745 $ 25,194
-------- --------
Liabilities
Property and equipment....................................... (9,913) (16,511)
Safe harbor lease............................................ (1,181) --
Taxes on repatriated foreign earnings........................ -- (500)
-------- --------
Gross deferred tax liabilities............................... (11,094) (17,011)
-------- --------
Net asset.................................................... $ 9,651 $ 8,183
======== ========
The net current and noncurrent components of deferred income taxes
recognized in the balance sheet at September 30, are:
1993 1994
------ -------
(IN THOUSANDS)
Net current asset.............................................. $9,635 $10,452
Net noncurrent asset (liability)............................... 16 (2,269)
------ -------
Net asset...................................................... $9,651 $ 8,183
====== =======
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,
----------------------
1992 1993 1994
---- ---- ----
Statutory income tax rate...................................... 34.0% 35.0% 35.0%
Pension amortization........................................... 0.3 0.7 0.1
Goodwill amortization and other permanent differences resulting
from purchase accounting..................................... 4.0 4.7 2.1
State taxes, net of Federal benefit............................ 2.2 3.4 5.6
Other.......................................................... 2.0 (3.3) 0.1
---- ---- ----
Effective income tax rate.................................... 42.5% 40.5% 42.9%
==== ==== ====
F-31
126
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED SEPTEMBER 30, 1994
The Company acquired certain tax credit carryforwards in connection with
its acquisition of Sierra. Foreign tax credit carryforwards total $704,000 and
expire through 1997. Net operating loss carryforwards in the U.S. total
$5,500,000 and expire through 2007, net operating loss carryforwards in foreign
jurisdictions total $1,100,000 and expire through 1999. The use of these
acquired carryforwards are subject to limitations imposed by the Internal
Revenue Code.
In fiscal 1992, for financial reporting purposes the Company utilized
$13,800,000 of net operating loss carryforwards and reflected the related tax
benefits of $4,699,000 as an extraordinary item. At September 30, 1992, the
Company fully utilized its financial reporting net operating loss carryforwards.
For tax purposes, the Company utilized its remaining net operating loss
carryforwards of approximately $5,000,000 on the fiscal 1993 Federal income tax
return. The variance between the operating loss carryforwards on a tax basis and
a financial reporting basis is principally due to excess tax depreciation,
uniform capitalization rules, nondeductible reserves, capitalization and
amortization of package and design costs, and various accrued liabilities that
are not deductible for tax purposes until paid. During 1992, the Company
recognized $1,588,000 of deferred taxes previously offset by net operating loss
carryforwards.
During fiscal 1992, the Company was subject to the alternative minimum tax
("AMT") for financial reporting purposes resulting in AMT expense of $1,200,000.
During fiscal 1992, the Company fully utilized its AMT net operating loss
carryforwards. AMT paid results in a tax credit carryforward which can be used
in subsequent years to offset regular income tax to the extent it exceeds AMT
tax in those years. At September 30, 1992, the Company had $1,480,000 of AMT
credit carryforwards which were utilized on the fiscal 1993 Federal income tax
return.
7. 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, 1994, future minimum lease payments
were as follows:
YEAR ENDING CAPITAL OPERATING
SEPTEMBER 30, LEASES LEASES TOTAL
------------------------------------------------------- ------- --------- -------
(IN THOUSANDS)
1995................................................... $ 622 $ 9,490 $10,112
1996................................................... 481 8,766 9,247
1997................................................... 168 6,722 6,890
1998................................................... 72 5,571 5,643
1999................................................... -- 2,713 2,713
2000 and thereafter.................................... -- 7 7
------- --------- -------
Total minimum lease payments........................... $ 1,343 $33,269 $34,612
======= =======
Less: Amount representing interest..................... 277
-------
Present value of net minimum lease payments............ $ 1,066
======
F-32
127
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED SEPTEMBER 30, 1994
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 expense for operating
leases was $7,281,000, $9,125,000 and $12,914,000 for fiscal 1992, 1993 and
1994, respectively.
8. COMMITMENTS AND CONTINGENCIES
Seed production agreements obligate the Company to make future purchases
based on estimated yields. Seed purchases under production agreements for fiscal
1992, 1993 and 1994 were approximately $9,281,000, $4,692,000 and $6,508,000,
respectively. At September 30, 1994, estimated annual seed purchase commitments
were as follows:
YEAR ENDING
SEPTEMBER 30, (IN THOUSANDS)
-------------------------------------------------------
1995................................................... $ 12,049
1996................................................... 6,800
1997................................................... 2,189
1998................................................... 1,184
The Company has a contractual commitment to purchase neem-based
bioinsecticide. The commitment is a multi-year, take or pay arrangement. There
is a penalty for falling short of the purchase commitment. Minimum commitments
are $438,000 in 1995 and $875,000 in 1996. The Company has accrued $1,137,500 in
the financial statements for estimated purchase shortfalls.
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.
The Company has been involved in studying a landfill to which it is
believed some of the Company's solid waste had been hauled in the 1970's. In
September 1991, the Company was named by the Ohio Environmental Protection
Agency ("Ohio EPA") as a Potentially Responsible Party ("PRP") with respect to
this landfill. Pursuant to a consent order with the Ohio EPA, the Company,
together with four other PRP's identified to date, is investigating the extent
of contamination at the landfill and developing a remediation program.
F-33
128
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED SEPTEMBER 30, 1994
In July 1990, the Company was directed by the Army Corps of Engineers (the
"Corps") to cease peat harvesting operations at its New Jersey facility. The
Corps' has alleged that the peat harvesting operations were in violation of the
Clean Water Act ("CWA"). The United States Department of Justice has commenced a
legal action to seek a permanent injunction against peat harvesting at this
facility and to recover civil penalties under the CWA. This action had been
suspended while the parties engaged in discussion to resolve the dispute. Those
discussions have not resulted in a settlement and accordingly the action has
been reinstated. The Company intends to defend the action vigorously but if the
Corps' position is upheld the Company could be prohibited from further
harvesting of peat at this location and penalties could be assessed against the
Company. In the opinion of management, the outcome of this action will not have
a material adverse effect on the Company's financial position or results of
operations. Furthermore, management believes the Company has sufficient raw
material supplies available such that service to customers will not be adversely
affected by continued closure of this peat harvesting operation.
Sierra has been named as a Potentially Responsible Party ("PRP") in an
environmental contamination action in connection with a landfill 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. Based on estimates of the
clean-up costs and that the Company denies any liability in connection with this
matter, management believes that the ultimate outcome will not have a material
impact on the financial position or results of operations of the Company.
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 management's
anticipated levels of compliance, they estimate Sierra's liability to be
$200,000, which has been accrued in the financial statements.
9. 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, sports fields, nurseries, lawn
care service companies and growers of specialty agriculture crops. In 1992, 1993
and 1994, two customers accounted for 15.3% and 7.5%, 18.0% and 9.3% and 15.1%
and 9.5% of consolidated net sales, respectively. No other customer accounted
for more than 5% of consolidated net sales. As of September 30, 1994, two
accounts comprised 15.2% and 5.4% 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.
10. RELATED PARTIES
Clayton, Dubilier & Rice, Inc., a private investment firm in which a
director of the Company is an owner, was paid $300,000 in fiscal 1992, and
$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 5.
F-34
129
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED SEPTEMBER 30, 1994
11. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for fiscal 1993 and 1994 (in thousands except share data):
FISCAL 1993 JANUARY 2 APRIL 3 JULY 3 SEPTEMBER 30 FULL YEAR
- -------------------------------- ----------- ----------- ----------- ------------ -----------
Net sales....................... $ 67,757 $ 161,102 $ 156,327 $ 80,857 $ 466,043
Gross profit.................... 30,703 78,621 74,814 37,687 221,825
Income (loss) before cumulative
effect of accounting
changes(1).................... (471) 10,847 7,986 2,685 21,047
Net income (loss)(2)............ (13,628) 10,847 7,986 2,685 7,890
Net income (loss) per common
share:
Income (loss) before
cumulative effect of
accounting
changes(1)................. (.02) .54 .43 .14 1.07
Net income (loss)(2).......... (.65) .54 .43 .14 .40
Weighted average common shares
outstanding during the
period........................ 21,128,564 20,138,585 18,743,752 18,737,150 19,687,013
FISCAL 1994 JANUARY 1 APRIL 2 JULY 2 SEPTEMBER 30 FULL YEAR
- -------------------------------- ----------- ----------- ----------- ------------ -----------
Net sales....................... $ 68,326 $ 207,424 $ 200,915 $ 129,674 $ 606,339
Gross profit.................... 30,962 98,324 96,376 60,947 286,609
Income (loss) before
extraordinary item............ (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)............... (.08) .69 .50 .11 1.22
Weighted average common shares
outstanding during the
period........................ 18,658,535 18,890,221 18,810,783 18,727,711 18,784,729
- ---------------
(1) Income (loss) before cumulative effect of accounting changes for each of the
first three quarters of fiscal 1993 has been restated to reflect the ongoing
charge resulting from the adoption of SFAS 106 effective October 1, 1992.
The net of tax charge was $462 or $.02 per share for the quarter ended
January 2, 1993 and $325 or $.02 per share for each of the subsequent two
quarters.
(2) The net loss for the quarter ended January 2, 1993 has been restated to
reflect the cumulative effect of accounting for postretirement benefits (a
net of tax charge of $14,932 or $.71 per share) and income taxes (a benefit
of $1,775 or $.08 per share).
F-35
130
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
------------------------
JANUARY DECEMBER 31,
1, 1994 1994
------- ------------
Net sales............................................................. $68,326 $ 98,019
Cost of sales......................................................... 37,364 53,520
------- ------------
Gross profit.......................................................... 30,962 44,499
------- ------------
Marketing............................................................. 12,921 19,902
Distribution.......................................................... 10,976 14,540
General and administrative............................................ 5,010 5,967
Research and development.............................................. 2,004 2,765
Other expenses, net................................................... 28 995
------- ------------
Income from operations................................................ 23 330
Interest expense...................................................... 2,640 5,694
------- ------------
Loss before income tax benefit........................................ (2,617) (5,364)
Income tax benefit.................................................... (1,060) (2,226)
------- ------------
Net loss.............................................................. $(1,557) $ (3,138)
======= ==========
Net loss per common share............................................. $ (.08) $ (.17)
======= ==========
Weighted average common shares outstanding during the period.......... 18,659 18,667
======= ==========
See Notes to Consolidated Financial Statements.
F-36
131
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
----------------------------
JANUARY DECEMBER 31,
1, 1994 1994
--------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................................ $ (1,557) $ (3,138)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................ 4,603 5,801
Postretirement benefits...................................... 32 166
Net increase in certain components of working capital........ (53,377) (47,003)
Net increase (decrease) in other assets and liabilities and
other adjustments........................................... (147) 354
--------- ------------
Net cash used in operating activities...................... (50,446) (43,820)
--------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in plant and equipment, net.......................... (4,985) (5,012)
Investment in Affiliate......................................... -- (250)
Acquisition of Sierra, net of cash acquired..................... (118,986) --
--------- ------------
Net cash used in investing activities...................... (123,971) (5,262)
--------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under term debt...................................... 125,000 --
Payments on term and other debt................................. (141) (727)
Revolving lines of credit and bank line of credit, net.......... 53,598 44,646
--------- ------------
Net cash provided by financing activities.................. 178,457 43,919
--------- ------------
Effect of exchange rate changes on cash........................... (116) (122)
--------- ------------
Net increase (decrease) in cash................................... 3,924 (5,285)
Cash, beginning of period......................................... 2,323 10,695
--------- ------------
Cash, end of period............................................... $ 6,247 $ 5,410
========= ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid (net of amount capitalized)....................... $ 1,958 $ 2,082
Income taxes paid............................................... 2,261 890
Businesses acquired:
Fair value of assets acquired................................ 138,933 --
Liabilities assumed.......................................... (19,947) --
Net cash paid for acquisition................................ 118,986 --
See Notes to Consolidated Financial Statements.
F-37
132
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
JANUARY 1, DECEMBER 31, SEPTEMBER 30,
1994 1994 1994
---------- ------------ -------------
ASSETS
Current Assets:
Cash..................................................... $ 6,247 $ 5,410 $ 10,695
Accounts receivable, less allowances of $3,056, $3,213
and $2,933, respectively.............................. 93,964 128,454 115,772
Inventories.............................................. 129,421 145,095 106,636
Prepaid and other assets................................. 16,152 19,735 17,151
---------- ------------ -------------
Total current assets............................. 245,784 298,694 250,254
Property, plant and equipment, net......................... 122,320 141,556 140,105
Patents and other intangibles, net......................... 31,592 27,485 28,880
Goodwill................................................... 103,488 103,926 104,578
Other assets............................................... 5,558 4,957 4,767
---------- ------------ -------------
Total Assets..................................... $ 508,742 $576,618 $ 528,584
======== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving credit line.................................... $ 45,303 $ 68,062 $ 23,416
Current portion of term debt............................. 20,444 5,540 3,755
Accounts payable......................................... 41,388 53,565 46,967
Other current liabilities................................ 25,932 36,100 35,550
---------- ------------ -------------
Total current liabilities........................ 133,067 163,267 109,688
Long-term debt, less current portions...................... 205,640 217,618 220,130
Postretirement benefits other than pensions................ 26,678 27,180 27,014
Other liabilities.......................................... 1,986 3,492 3,592
---------- ------------ -------------
Total Liabilities................................ 367,371 411,557 360,424
---------- ------------ -------------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.01 par value in 1993.................. -- -- --
Common stock............................................. 211 211 211
Capital in excess of par value........................... 193,353 193,418 193,450
Retained earnings (deficit).............................. (10,565) 10,737 13,875
Cumulative translation gain (loss)....................... (187) 2,136 2,065
Treasury stock, 2,415 shares at cost..................... (41,441) (41,441) (41,441)
---------- ------------ -------------
Total Shareholders' Equity....................... 141,371 165,061 168,160
---------- ------------ -------------
Total Liabilities and Shareholders' Equity....... $ 508,742 $576,618 $ 528,584
======== ========== ==========
See Notes to Consolidated Financial Statements.
F-38
133
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 1994
1. ORGANIZATION AND BASIS OF PRESENTATION
The Scotts Company ("Scotts") and its wholly owned subsidiaries, Hyponex
Corporation ("Hyponex"), Republic Tool and Manufacturing Corp. ("Republic") and
Scotts-Sierra Horticultural Products Company ("Sierra"), (collectively, the
"Company"), are engaged in the manufacture and sale of lawn care and garden
products. The Company's business is highly seasonal with approximately 70% of
sales occurring in the second and third fiscal quarters.
The consolidated balance sheets as of January 1, 1994 and December 31,
1994, the related consolidated statements of income for the three month periods
ended January 1, 1994 and December 31, 1994 and the related consolidated
statements of cash flows for the three month periods ended January 1, 1994 and
December 31, 1994 are unaudited; however, in the opinion of management, such
financial statements contain all adjustments necessary for the fair presentation
of the Company's financial position and results of operations. Interim results
reflect all normal recurring adjustments and are not necessarily indicative of
results for a full year. The interim financial statements and notes are
presented as specified by Regulation S-X of the Securities Exchange Act of 1934,
and should be read in conjunction with the financial statements and accompanying
notes in the Company's fiscal 1994 Annual Report on Form 10-K.
2. INVENTORIES
Inventories consisted of the following:
JANUARY 1, DECEMBER 31, SEPTEMBER 30,
1994 1994 1994
---------- ------------ -------------
(IN THOUSANDS)
Finished goods................................. $ 80,174 $ 85,314 $ 54,980
Raw materials.................................. 49,247 59,781 51,656
---------- ------------ -------------
$ 129,421 $145,095 $ 106,636
======== ========== ==========
3. RECLASSIFICATIONS
Certain reclassifications have been made to the prior periods' financial
statements to conform to December 31, 1994 presentation.
4. ACQUISITIONS
Effective December 16, 1993, the Company completed the acquisition of
Grace-Sierra Horticultural Products Company now known as Scotts-Sierra
Horticultural Products Company (all further references will be made as
"Sierra"). 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.
F-39
134
THE SCOTTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED DECEMBER 31, 1994
The following represents pro forma results of operations assuming the
Sierra acquisition had occurred effective October 1, 1992 after giving effect to
certain related adjustments, including depreciation and amortization on tangible
and intangible assets, and interest on acquisition debt.
THREE MONTHS ENDED
JANUARY 1, 1994
------------------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
Net sales..................................................... $ 89,152
==================
Net loss...................................................... $ (2,641)
==================
Net loss per common share..................................... $ (.14)
==================
The pro forma information provided does not purport to be indicative of
actual results of operations if the Sierra acquisition had occurred as of
October 1, 1992, and is not intended to be indicative of future results or
trends.
5. ACCOUNTING ISSUES
In November 1992, the Financial Accounting Standard Board issued SFAS No.
112, "Employers' Accounting for Postemployment Benefits," which changed the
prevalent method of accounting for benefits provided after employment but before
retirement. The Company adopted SFAS No. 112 in the first quarter of fiscal
1995. Since most of these benefits were already accounted for by the Company on
the accrual method, the impact of adoption was not significant.
6. SUBSEQUENT EVENT
On January 26, 1995, the Company and the shareholders of Stern's
Miracle-Gro Products, Inc. and affiliated companies (Miracle-Gro) entered into
the Merger Agreement. The Company will issue $195 million face value convertible
preferred stock convertible at $19 per share plus warrants exercisable over
8 1/2 years, to purchase three million shares at prices ranging from $21 to $29
per share. The preferred stock will pay quarterly dividends at an annual rate of
5.0%, will be non-callable for five years and will be subject to certain
restrictions on transfer. The total purchase price is based on the fair value of
the convertible preferred stock and warrants as of closing and is estimated to
be approximately $200 million. The transaction requires approval of the Scotts
shareholders.
F-40
135
STERN'S MIRACLE-GRO PRODUCTS, INC.
AND
AFFILIATED COMPANIES
COMBINED FINANCIAL INFORMATION
FOR
FISCAL YEAR ENDED SEPTEMBER 30, 1994
AND
FISCAL QUARTER ENDED DECEMBER 31, 1994
F-41
136
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of
Stern's Miracle-Gro Products, Inc.
We have audited the accompanying combined balance sheets of Stern's
Miracle-Gro Products, Inc. and affiliated companies as of September 30, 1993 and
1994, and the related combined statements of income and retained earnings, and
cash flows for each of the three years in the period ended September 30, 1994.
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 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 combined financial position of Stern's Miracle-Gro
Products, Inc. and affiliated companies as of September 30, 1993 and 1994, and
the combined results of their operations and their combined cash flows for each
of the three years in the period ended September 30, 1994, in conformity with
generally accepted accounting principles.
Joel E. Sammet & Co.
Certified Public Accountants
New York, New York
January 26, 1995, except as to Note 12,
which is as of March 10, 1995
F-42
137
STERN'S MIRACLE-GRO PRODUCTS, INC. AND AFFILIATED COMPANIES
COMBINED BALANCE SHEETS
AS OF SEPTEMBER 30,
---------------------------
1993 1994
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents....................................... $11,746,627 $16,403,197
Accounts receivable -- trade.................................... 1,412,207 3,344,878
Inventories..................................................... 14,825,635 16,796,721
Other current assets............................................ 320,559 373,080
----------- -----------
Total current assets.................................... 28,305,028 36,917,876
----------- -----------
Property and equipment -- cost.................................... 2,655,982 3,489,965
Less: Accumulated depreciation.................................. 1,417,699 1,712,258
----------- -----------
1,238,283 1,777,707
Other assets...................................................... 163,739 139,085
----------- -----------
Total Assets............................................ $29,707,050 $38,834,668
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................ $ 484,311 $ 1,103,347
Other current liabilities....................................... 1,784,992 3,636,278
Due to United Kingdom distributor............................... 1,157,361 780,657
Accrued taxes................................................... 606,729 703,789
----------- -----------
Total current liabilities............................... 4,033,393 6,224,071
Long-term debt.................................................... 3,500,000 3,500,000
----------- -----------
Total Liabilities....................................... 7,533,393 9,724,071
----------- -----------
Stockholders' Equity:
Capital stock................................................... 8,456,106 9,456,006
Paid in capital................................................. 240,000 240,000
Retained earnings............................................... 13,477,845 19,414,885
----------- -----------
22,173,951 29,110,891
Less: Treasury stock............................................ 294 294
----------- -----------
Total Stockholders' Equity.............................. 22,173,657 29,110,597
----------- -----------
Total Liabilities and Stockholders' Equity.............. $29,707,050 $38,834,668
========== ==========
See Notes to Combined Financial Statements.
F-43
138
STERN'S MIRACLE-GRO PRODUCTS, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED SEPTEMBER 30,
--------------------------------------------
1992 1993 1994
----------- ----------- ------------
Net sales.......................................... $93,146,626 $92,779,345 $107,421,014
Cost of goods sold................................. 46,647,377 46,833,142 52,255,083
----------- ----------- ------------
Gross profit....................................... 46,499,249 45,946,203 55,165,931
----------- ----------- ------------
Advertising expenses............................... 15,706,008 14,946,888 17,412,363
Selling expenses................................... 867,495 951,119 1,138,862
General and administrative expenses................ 4,941,438 5,678,104 6,541,282
Other expense, net................................. 91,915 859,188 549,331
----------- ----------- ------------
Total operating expenses........................... 21,606,856 22,435,299 25,641,838
----------- ----------- ------------
Operating profit................................... 24,892,393 23,510,904 29,524,093
Interest expense, net.............................. 77,337 311,934 125,422
----------- ----------- ------------
Income before taxes................................ 24,815,056 23,198,970 29,398,671
Provision for state income taxes................... 732,204 527,384 489,705
----------- ----------- ------------
Net income......................................... 24,082,852 22,671,586 28,908,966
Retained earnings -- October 1,.................... 10,581,589 15,489,929 13,477,845
----------- ----------- ------------
Total.............................................. 34,664,441 38,161,515 42,386,811
Less: Distribution to shareholders................. 19,174,512 24,683,670 22,971,926
----------- ----------- ------------
Retained Earnings -- September 30,................. $15,489,929 $13,477,845 $ 19,414,885
========== ========== ===========
See Notes to Combined Financial Statements.
F-44
139
STERN'S MIRACLE-GRO PRODUCTS, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------------------
1992 1993 1994
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................... $ 24,082,852 $ 22,671,586 $ 28,908,966
------------ ------------ ------------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization.................. 236,092 243,625 377,239
Changes in assets and liabilities:
(Increase) Decrease in accounts
receivable................................ 1,147,187 677,638 (1,932,671)
(Increase) Decrease in inventories.......... (1,511,723) (2,095,818) (1,971,086)
(Increase) Decrease in other current
assets.................................... 11,052 (37,550) (52,521)
(Increase) Decrease in other assets......... -- -- (37,500)
(Decrease) Increase in accounts payable..... 1,463,141 (1,305,432) 619,036
(Decrease) Increase in other current
liabilities............................... 310,652 (141,509) 1,571,642
------------ ------------ ------------
Total adjustments........................... 1,656,401 (2,659,046) (1,425,861)
------------ ------------ ------------
Net cash provided by operating activities...... 25,739,253 20,012,540 27,483,105
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of fixed asset acquisitions............... (193,768) (412,653) (913,509)
Cost of intangible assets acquired............. -- (47,316) --
Sale of fixed assets........................... 6,372 -- --
------------ ------------ ------------
Net cash used in investing activities.......... (187,396) (459,969) (913,509)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Note payments received from shareholders....... 59,000 59,000 59,000
Paid in capital contributed.................... -- 240,000 --
Capital stock issued........................... -- -- 999,900
Purchase of treasury stock..................... -- (294) --
Distribution to shareholders................... (19,174,512) (24,683,669) (22,971,926)
Increase in loan payable....................... 1,200,000 -- --
------------ ------------ ------------
Net cash used in financing activities............ (17,915,512) (24,384,963) (21,913,026)
------------ ------------ ------------
Net increase (decrease) in cash and
equivalents.................................... 7,636,345 (4,832,392) 4,656,570
Cash and cash equivalents at beginning of year... 8,942,674 16,579,019 11,746,627
------------ ------------ ------------
Cash and cash equivalents at end of year......... $ 16,579,019 $ 11,746,627 $ 16,403,197
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid.................................... $ 640,078 $ 688,944 $ 645,626
Income taxes paid................................ 557,970 561,531 260,766
See Notes to Combined Financial Statements.
F-45
140
STERN'S MIRACLE-GRO PRODUCTS, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
FISCAL YEAR ENDED SEPTEMBER 30, 1994
NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION
The accompanying combined financial statements include the accounts of
Stern's Miracle-Gro Products, Inc. ("MG, Inc."), Miracle-Gro Products Limited
("MG Limited"), Miracle-Gro Lawn Products, Inc. ("Lawn Products") and Stern's
Nurseries, Inc. ("Stern's"), collectively the "Company" or "Miracle-Gro."
The Company is engaged in the marketing and distribution of plant foods and
lawn and garden products primarily in the United States, Canada and through MG
Limited in the United Kingdom.
The combined financial statements are presented to reflect the combined
financial position and results of operations of the companies to be acquired
pursuant to the transaction described in the second paragraph of Note 11. Each
of the above companies is controlled by the same group of shareholders (directly
or indirectly). Accordingly, the assets, liabilities and stockholders' equity of
the individual entities have been combined. All material intercompany
transactions and balances have been eliminated in combination. Another company
similarly controlled, Necessary Organics, Inc., has not been included in the
presentation as it is not part of the group of companies to be acquired.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Foreign Currency
The functional currency of the Company is the United States Dollar. MG
Limited operates in the United Kingdom, but is essentially financed and
supported by the United States affiliated companies. Exchange gains and losses
are included in determining net income. Exchange gains and (losses) were
($88,544), ($604,888) and $228,495 for fiscal years ended September 30, 1992,
1993 and 1994, respectively.
Revenue Recognition
Revenue is recognized upon the shipment of products to customers.
Inventories
Inventories are valued at the lower of cost or market under the Last-In
First-Out (LIFO) method. At September 30, 1993 and 1994 inventories were
comprised of the following:
1993 1994
----------- -----------
Raw materials..................................... $ 4,946,812 $ 5,858,804
Finished goods.................................... 9,689,738 10,579,723
----------- -----------
FIFO cost......................................... $14,636,550 $16,438,527
LIFO reserve...................................... 189,085 358,194
----------- -----------
$14,825,635 $16,796,721
========== ==========
Income Taxes
Each of the affiliated companies in the combined financial statements
(except for Stern's) has elected to be treated as a Subchapter S corporation
under the Internal Revenue Code. Therefore, federal and most state income taxes
are paid by their shareholders. As a result, the Combined Financial Statements
include only those state and local income taxes payable directly by the
affiliated companies.
F-46
141
STERN'S MIRACLE-GRO PRODUCTS, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED SEPTEMBER 30, 1994
Had such companies been C corporations, additional provisions for income
taxes of $8,450,000, $8,056,000 and $10,400,000 would have been required in the
fiscal years ended September 30, 1992, 1993 and 1994, respectively.
As the entities are not taxable under the Internal Revenue Code, no
deferred taxes have been provided in the combined statements.
Property and Equipment
Property and equipment are recorded at cost and depreciated over their
estimated useful lives and under methods as established under the Internal
Revenue Code.
Accounts Receivable
Accounts receivable are directly written-off to bad debt expense when it is
determined that they are uncollectible. Bad debt expense amounted to ($9,223),
$241,198 and $46,394 in fiscal years ended September 30, 1992, 1993 and 1994,
respectively.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid debt instruments with an
original maturity of three months or less.
The Company has cash and cash equivalent accounts maintained in Sterling
and Canadian Dollars. The United States Dollar equivalent balance of the
accounts at September 30, was:
1993 1994
---------- ----------
Sterling.................................................... $2,804,000 $1,586,000
========= =========
Canadian Dollars............................................ $1,411,000 $ 877,000
========= =========
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment, at cost, at September 30, 1993 and 1994 consisted
of the following:
1993 1994
----------------------- -----------------------
GROSS NET GROSS NET
---------- ---------- ---------- ----------
Building................................ $ 349,265 $ 107,150 $ 349,265 $ 83,865
Building improvements................... 436,785 309,936 487,186 335,042
Furniture and fixtures.................. 345,216 54,454 614,708 248,169
Molds................................... 624,977 135,980 721,077 173,889
Equipment............................... 394,777 313,126 777,680 575,893
Transportation equipment................ 504,962 317,637 540,049 360,849
---------- ---------- ---------- ----------
Total......................... $2,655,982 $1,238,283 $3,489,965 $1,777,707
========= ========= ========= =========
The Company recognized depreciation expense on property and equipment of
$236,092, $242,147 and $374,085 in fiscal years ended September 30, 1992, 1993,
and 1994, respectively.
F-47
142
STERN'S MIRACLE-GRO PRODUCTS, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED SEPTEMBER 30, 1994
The Company leases the land upon which its corporate headquarters is
located under an operating lease agreement expiring on September 30, 2062, at a
net rental of $12,000 per year. The agreement also provides the Company with the
right of first refusal on any sale of the land. Future minimum rentals as of
September 30, 1994 under this agreement are as follows:
1995...................................................... $ 12,000
1996...................................................... 12,000
1997...................................................... 12,000
1998...................................................... 12,000
1999...................................................... 12,000
thereafter................................................ 756,000
NOTE 4 RELATED PARTY TRANSACTIONS
The Company periodically borrows for working capital purposes from an
affiliated entity, The Hagedorn Family Fund ("HFF"). Borrowings under this
facility bear interest at 1/4% below the prime lending rate. The maximum
borrowings under this facility during the fiscal year ended September 30, 1994
were $5,000,000.
MG Limited has a note payable to the HFF of $3,500,000 as of September 30,
1994. This note bears interest at 1/4% below the prime lending rate and is due
on demand.
NOTE 5 EMPLOYEE BENEFIT PLANS
The Company maintains a Defined Benefit Pension Plan qualified under
Section 401 of the Internal Revenue Code covering substantially all full-time
employees who have completed six months of service and reached the age of 20.5
years. The benefits under this plan are 29.5% of the participants' average
monthly salary attained during their five highest consecutive years.
The following table sets forth the plan's funded status as of January 31,
1993 and 1994:
1993 1994
----------- -----------
Actuarial present value of benefit obligations:
Accumulated benefit obligations:
Vested benefits.................................... $(1,253,995) $(1,493,723)
Nonvested benefits................................. (11,647) (11,147)
Additional obligation for projected compensation
increases.......................................... (589,403) (662,166)
----------- -----------
Projected benefit obligation for services rendered to
date.................................................. (1,855,045) (2,167,036)
Plan assets at fair value............................... 1,143,447 1,315,712
----------- -----------
Plan assets less than projected benefit obligation...... (711,598) (851,324)
Unrecognized net obligation............................. 25,857 24,336
Unrecognized net loss................................... 535,597 608,707
----------- -----------
Accrued pension liability............................... $ (150,144) $ (218,281)
========== ==========
F-48
143
STERN'S MIRACLE-GRO PRODUCTS, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED SEPTEMBER 30, 1994
Periodic pension expense for fiscal years ended September 30, includes the
following components:
1992 1993 1994
-------- -------- --------
Service cost....................................... $127,237 $170,128 $193,506
Interest cost...................................... 79,186 131,998 153,338
Actual return on plan assets....................... (2,807) (27,765) (9,337)
Net amortization and deferral...................... (72,401) (37,564) (76,544)
-------- -------- --------
Net pension expense.............................. $131,215 $236,797 $260,963
======== ======== ========
The weighted average settlement rate used in determining the actuarial
present value of the projected benefit obligation was 8.5%. Future compensation
was assumed to increase at 7% annually and the long-term rate of return on plan
assets was 8.5% for the plan years ended January 31, 1992, 1993 and 1994.
The Company has adopted a salary reduction Plan under Internal Revenue Code
Section 401(K). The Company's contribution thereto was $25,000, $29,000 and
$33,000, respectively, for the fiscal years ended September 30, 1992, 1993 and
1994, and the related expenses were $11,303, $11,035 and $12,153 resulting in a
total expense of $36,303, $40,035 and $45,153, respectively.
NOTE 6 LINE OF CREDIT ARRANGEMENT
The Company maintains a secured line of Credit facility with the Chase
Manhattan Bank for up to $25,000,000. This line bears interest at a rate of
prime less 1/4% and expires on March 31, 1995. During the fiscal year ended
September 30, 1994, the Company's maximum borrowings on this facility were
$13,135,000.
NOTE 7 CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to credit risk are accounts
receivable. The Company sells its products through a distributor network and
directly to mass merchandisers. In fiscal year ended September 30, 1992, four
customers accounted for 17.7%, 11.9%, 11% and 6.8% of sales, respectively. In
fiscal year ended September 30, 1993, four customers accounted for 19.8%, 10%,
9.8% and 7.8% of sales, respectively. In fiscal year ended September 30, 1994,
four customers accounted for 18.8%, 10.3%, 7.5% and 5.8% of sales, respectively.
F-49
144
STERN'S MIRACLE-GRO PRODUCTS, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED SEPTEMBER 30, 1994
NOTE 8 STOCKHOLDER'S EQUITY
For purposes of these combined statements, the stockholders' equity of each
of the affiliated companies has been combined as if the companies had been
combined as of the beginning of the first period presented. The following table
summarizes stockholders' equity activity since September 30, 1991:
LAWN
COMMON STOCK MG, INC. MG LIMITED PRODUCTS STERN'S TOTAL
- ---------------------------- ------------ ----------- --------- ------- ------------
Balance as of
October 1, 1991........... $ 7,454,906 $ 1,000,000 $ 1,200 $ 8,456,106
=========== ========== ====== ===========
Balance as of
September 30, 1992........ 7,454,906 1,000,000 1,200 8,456,106
=========== ========== ====== ===========
Balance as of
September 30, 1993........ 7,454,906 1,000,000 1,200 8,456,106
=========== ========== ====== ===========
Issuance of common stock of
Lawn Products, Inc........ $ 999,900 999,900
--------- ------------
Balance as of
September 30, 1994........ $ 7,454,906 $ 1,000,000 $ 999,900 $ 1,200 $ 9,456,006
=========== ========== ========= ====== ===========
LAWN
RETAINED EARNINGS MG, INC. MG LIMITED PRODUCTS STERN'S TOTAL
- ---------------------------- ------------ ----------- --------- ------- ------------
Balance as of
October 1, 1991........... $ 11,173,081 $ (591,492) -0- $ 10,581,589
=========== ========== ====== ===========
Net income.................. 24,683,670 (600,818) -0- 24,082,852
Distributions to
shareholders.............. (19,174,512) (19,174,512)
------------ ----------- ------- ------------
Balance as of
September 30, 1992........ $ 16,682,239 $(1,192,310) -0- $ 15,489,929
=========== ========== ====== ===========
Net income.................. 22,971,766 (300,180) -0- 22,671,586
Distributions to
shareholders.............. (24,683,670) (24,683,670)
------------ ----------- ------- ------------
Balance as of
September 30, 1993........ $ 14,970,335 $(1,492,490) -0- $ 13,477,845
=========== ========== ====== ===========
Net income.................. 28,501,169 919,289 $(511,492) -0- 28,908,966
Distributions to
shareholders.............. (22,971,926) (22,971,926)
------------ ----------- --------- ------- ------------
Balance as of
September 30, 1994........ $ 20,499,578 $ (573,201) ($511,492) -0- $ 19,414,885
=========== ========== ========= ====== ===========
F-50
145
STERN'S MIRACLE-GRO PRODUCTS, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED SEPTEMBER 30, 1994
NOTE 9 SEGMENT INFORMATION
The Company operates primarily in the United States and the United Kingdom.
A summary of the Company's operations by geographic region is presented below:
1992 1993 1994
----------- ----------- ------------
Sales:
United States............................ $88,640,138 $87,100,160 $ 99,213,260
United Kingdom........................... 4,506,488 5,679,185 8,207,754
----------- ----------- ------------
Total Sales...................... $93,146,626 $92,779,345 $107,421,014
========== ========== ===========
Net Income:
United States............................ $24,683,670 $22,971,766 $ 27,989,677
United Kingdom........................... (600,818) (300,180) 919,289
----------- ----------- ------------
Total Net Income................. $24,082,852 $22,671,586 $ 28,908,966
========== ========== ===========
Identifiable Assets:
United States............................ $26,962,851 $24,656,191 $ 32,397,154
United Kingdom........................... 5,963,518 5,050,859 6,437,514
----------- ----------- ------------
Total Assets..................... $32,926,369 $29,707,050 $ 38,834,668
========== ========== ===========
NOTE 10 UNITED KINGDOM DISTRIBUTION AGREEMENT
The Company, through MG Limited, had a joint-venture agreement with a major
English corporation for manufacture and distribution of its products in the
United Kingdom. Joint-venture profit payments were made by the Company to this
English corporation in the amounts of $257,000 and $770,000 for the fiscal years
ended September 30, 1993 and 1994, respectively. This agreement was scheduled to
terminate on October 1, 1995. The Company had given notice that it would not
renew this agreement beyond October 1, 1995. Subsequently, on December 31, 1994
the Company, through MG Limited, entered into the transaction described in the
first paragraph of Note 11. This transaction terminates the earlier agreement,
effective December 31, 1994.
NOTE 11 SUBSEQUENT EVENTS
On December 31, 1994, MG Limited entered into an agreement to exchange its
equipment and a license for distribution of Miracle-Gro(R) products in certain
areas of Europe for a 32.5% equity interest in a garden products company. MG
Limited was granted an option to acquire substantially all of the remaining
67.5% interest in this company within a three year period. The initial period of
the license is five years and may be extended up to twenty years from January 1,
1995, depending on the circumstances defined in the license agreement. MG
Limited is entitled to annual royalties for the first five years of the license.
On January 26, 1995, the Company entered into a merger agreement with The
Scotts Company ("Scotts") whereby Scotts will purchase all the outstanding stock
of the Company in exchange for $195,000,000 face amount of convertible preferred
stock and warrants to purchase 3,000,000 common shares of Scotts. Such
securities are being registered on this Form S-4 in connection with this
transaction. The preferred stock will have a dividend yield of 5.0% and will be
convertible to 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.
Accordingly, the estimated purchase price will be approximately $200,000,000.
The transaction requires, among other things, the approval of the Scotts
shareholders.
F-51
146
NOTE 12 LITIGATION CONTINGENCY
An action has been commenced against the Company on March 2, 1995 in a U.S.
District Court in Alabama by an Alabama corporation. This action alleges, among
other things, that the Company breached an alleged joint venture contract with
the Plaintiff, committed fraud, and breached an alleged fiduciary duty owed to
the Plaintiff by not informing it of the negotiations concerning the merger with
the Scotts Company described in Note 5. The Plaintiff seeks compensatory and
punitive damages in excess of $10 million. The Company does not believe that
this action has any merit and intends to defend it vigorously. The financial
statements do not include any adjustments that might result from the outcome of
this litigation.
F-52
147
STERN'S MIRACLE-GRO PRODUCTS, INC. AND AFFILIATED COMPANIES
COMBINED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1993 1994 1994
------------ ------------ -------------
ASSETS
Current Assets:
Cash and cash equivalents...................... $ 1,352,675 $ -- $ 16,403,197
Accounts receivable, net....................... 13,383,557 15,276,721 3,344,878
Inventories.................................... 19,233,461 28,429,448 16,796,721
Other current assets........................... 269,574 424,678 373,080
------------ ------------ -------------
Total current assets...................... 34,239,267 44,130,847 36,917,876
Property and equipment, net....................... 1,422,155 1,782,869 1,777,707
Other assets...................................... 212,950 138,297 139,085
------------ ------------ -------------
Total Assets.............................. $ 35,874,372 $ 46,052,013 $ 38,834,668
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving credit............................... $ 11,055,000 $ 16,931,000 $ --
Accounts payable............................... 3,133,403 6,438,087 1,103,347
Other current liabilities...................... 632,412 644,431 3,636,278
Due to United Kingdom distributor.............. 285,932 783,851 780,657
Accrued taxes.................................. 503,752 588,426 703,789
------------ ------------ -------------
Total current liabilities................. 15,610,499 25,385,795 6,224,071
Long-term debt................................. 3,500,000 3,500,000 3,500,000
------------ ------------ -------------
Total Liabilities......................... 19,110,499 28,885,795 9,724,071
------------ ------------ -------------
Stockholders' equity:
Capital stock.................................. 8,456,106 9,456,006 9,456,006
Paid in capital................................ 240,000 240,000 240,000
Retained earnings.............................. 8,068,061 7,470,506 19,414,885
Treasury stock................................. (294) (294) (294)
------------ ------------ -------------
Total Stockholders' Equity................ 16,763,873 17,166,218 29,110,597
------------ ------------ -------------
Total Liabilities and Stockholders'
Equity.................................. $ 35,874,372 $ 46,052,013 $ 38,834,668
========== ========== ==========
See Notes to Combined Financial Statements.
F-53
148
STERN'S MIRACLE-GRO PRODUCTS, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
-----------------------------
1993 1994
----------- -----------
Net sales....................................................... $14,078,419 $15,254,564
Cost of goods sold.............................................. 7,024,720 7,702,435
----------- -----------
Gross profit.................................................... 7,053,699 7,552,129
----------- -----------
Advertising expenses............................................ 1,309,807 1,521,469
Selling expenses................................................ 204,994 227,489
General and administrative expenses............................. 1,591,251 2,240,898
Other expense................................................... 269,952 818,074
----------- -----------
Operating expenses.............................................. 3,376,004 4,807,930
----------- -----------
Operating profit................................................ 3,677,695 2,744,199
Interest expense (income), net.................................. (774) 2,656
----------- -----------
Income before taxes............................................. 3,678,469 2,741,543
Provision for state income taxes................................ 120,000 148,753
----------- -----------
Net income...................................................... 3,558,469 2,592,790
Retained earnings -- October 1,................................. 13,477,845 19,414,885
Distributions to stockholders................................... 8,968,253 14,537,169
----------- -----------
Retained earnings -- December 31,............................... $ 8,068,061 $ 7,470,506
========== ==========
See Notes to Combined Financial Statements.
F-54
149
STERN'S MIRACLE-GRO PRODUCTS, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED DECEMBER
31,
-----------------------------
1993 1994
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................... $ 3,558,469 $ 2,592,790
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization............................ 52,803 108,035
Net change in components of working capital.............. (15,806,085) (21,385,444)
Other.................................................... (49,211) 788
------------ ------------
Net cash used in operating activities ................ (12,244,024) (18,683,831)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in fixed assets................................. (236,675) (113,197)
------------ ------------
Net cash used in investing activities ................ (236,675) (113,197)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in notes payable.................................. 11,055,000 16,931,000
Distributions to shareholders.............................. (8,968,253) (14,537,169)
------------ ------------
Net cash provided by financing activities............. 2,086,747 2,393,831
------------ ------------
Net increase (decrease) in cash and cash equivalents............ (10,393,952) (16,403,197)
Cash and cash equivalents at beginning of period................ 11,746,627 16,403,197
------------ ------------
Cash and cash equivalents at end of period...................... $ 1,352,675 $ 0
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid................................................. $ 63,414 $ 81,145
Income taxes paid............................................. 33,448 1,539
See Notes to Combined Financial Statements.
F-55
150
STERN'S MIRACLE-GRO PRODUCTS, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 1994
NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION
The accompanying combined quarterly financial statements include the
accounts of Stern's Miracle-Gro Products, Inc. ("MG, Inc."), Miracle-Gro
Products Limited ("MG Ltd"), Miracle-Gro Lawn Products, Inc. ("Lawn Products")
and Stern's Nurseries, Inc. ("Stern's"), collectively the "Company" or
"Miracle-Gro." The Company is engaged in the marketing and distribution of plant
foods and lawn and garden products primarily in the United States, Canada and
through MG Ltd. in the United Kingdom. The Company's business is highly seasonal
with approximately 80% of sales occurring in its second and third fiscal
quarters.
The combined financial statements are presented to reflect the combined
financial position and results of operations of the companies to be acquired
pursuant to the transaction described in Note 5. Each of the above companies is
controlled by the same group of shareholders (directly or indirectly).
Accordingly, the assets, liabilities and stockholders' equity of the individual
entities have been combined. All material intercompany transactions and balances
have been eliminated in combination. Another company similarly controlled,
Necessary Organics, Inc., has not been included in the presentation as it is not
part of the group of companies to be acquired.
The consolidated balance sheets as of December 31, 1993 and 1994, the
related combined statements of income and retained earnings, and cash flows for
the three months then ended are unaudited; however, in the opinion of
Miracle-Gro's management, such financial statements contain all adjustments
necessary for the fair presentation of the Company's financial position and
results of operations. Interim results reflect all normal recurring adjustments
and are not necessarily indicative of results for a full year. The interim
financial statements and notes are presented as specified by Regulation S-X of
the Securities Exchange Act of 1934, and should be read in conjunction with the
financial statements and the accompanying notes in the Company's fiscal 1994
annual financial statements included elsewhere herein.
NOTE 2 INVENTORIES
Inventories consist of the following:
DECEMBER DECEMBER SEPTEMBER
31, 31, 30,
1993 1994 1994
----------- ----------- -----------
Raw materials............................... $ 5,867,487 $ 7,913,418 $ 6,216,998
Finished goods.............................. 13,365,974 20,516,030 10,579,723
----------- ----------- -----------
$19,233,461 $28,429,448 $16,796,721
========== ========== ==========
NOTE 3 INCOME TAXES
Each of the affiliated companies in the combined financial statements
(except for Stern's) has elected to be treated as a Subchapter S corporation
under the Internal Revenue Code. Therefore, federal and most state income taxes
are paid by their shareholders. As a result, the combined financial statements
include only those state and local income taxes payable directly by the
affiliated companies.
Had such affiliated companies been C Corporations, additional provisions
for income taxes of $1,263,104 and $882,067 would have been required in the
three months ended December 31, 1993 and 1994, respectively.
As the entities are not taxable under the Internal Revenue Code, no
deferred taxes have been provided in the combined financial statements.
F-56
151
STERN'S MIRACLE-GRO PRODUCTS, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED DECEMBER 31, 1994
NOTE 4 SIGNIFICANT TRANSACTIONS
On December 31, 1994, MG Ltd entered into an agreement to exchange its
equipment and a license for distribution of Miracle-Gro(R) 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, depending on the circumstances defined in
the license agreement. MG Ltd is entitled to annual royalties for the first five
years of the license.
The exchange is being accounted for at historical cost, with MG Ltd's
investment being equal to the book value of its assets contributed to the new
company. The investment will be accounted for on the equity method, with MG Ltd
recognizing its proportionate share of the new company's net income and/or
losses, as well as royalty income.
NOTE 5 SUBSEQUENT EVENTS
On January 26, 1995, the Company entered into a merger agreement with The
Scotts Company ("Scotts") whereby Scotts will acquire all the outstanding stock
of Miracle-Gro in exchange for $195,000,000 face amount convertible preferred
stock and warrants to purchase 3,000,000 common shares of Scotts. Such
securities are being registered on this Form S-4 in connection with this
transaction. The preferred stock will have a dividend yield of 5.0% per annum
and will be convertible into Scotts common stock at $19.00 per share. The
warrants are exercisable for eight one-half years in the aggregate 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 total purchase price is
based on the fair value of the convertible preferred stock and warrants as of
closing and is estimated to be approximately $200,000,000. The transaction
requires approval of the Scotts shareholders.
NOTE 6 LITIGATION CONTINGENCY
An action has been commenced against the Company on March 2, 1995 in a
U.S. District Court in Alabama by an Alabama corporation. This action alleges,
among other things, that the Company breached an alleged joint venture contract
with the Plaintiff, committed fraud, and breached an alleged fiduciary duty
owed to the Plaintiff by not informing it of the negotiations concerning the
merger with the Scotts Company described in Note 5. The Plaintiff seeks
compensatory and punitive damages in excess of $10 million. The Company does
not believe that this action has any merit and intends to defend it vigorously.
The financial statements do not include any adjustments that might result from
the outcome of this litigation.
F-57
152
APPENDIX I
AGREEMENT AND PLAN OF MERGER
dated as of
January 26, 1995
among
STERN'S MIRACLE-GRO PRODUCTS, INC.
STERN'S NURSERIES, INC.
MIRACLE-GRO LAWN PRODUCTS INC.
MIRACLE-GRO PRODUCTS LIMITED
(the "Miracle-Gro Constituent Companies")
HORACE HAGEDORN
JAMES HAGEDORN
KATHERINE HAGEDORN LITTLEFIELD
PAUL HAGEDORN
PETER HAGEDORN
ROBERT HAGEDORN
SUSAN HAGEDORN
JOHN KENLON
(the "Shareholders")
THE SCOTTS COMPANY
("Scotts")
and
ZYX CORPORATION
("Merger Subsidiary")
153
TABLE OF CONTENTS
PAGE
ARTICLE I
THE MERGER TRANSACTIONS
SECTION 1.01. The Merger Transactions; Effective Time................................ 2
SECTION 1.02. Closing................................................................ 2
SECTION 1.03. Effect of the Merger Transactions...................................... 2
SECTION 1.04. Conversion of Securities............................................... 2
SECTION 1.05. Surrender.............................................................. 4
SECTION 1.06. Nurseries Liquidation.................................................. 4
ARTICLE II
THE SURVIVING CORPORATION
SECTION 2.01. Reincorporation........................................................ 4
SECTION 2.02. Articles of Incorporation; Code of Regulations......................... 4
SECTION 2.03. Directors and Officers................................................. 5
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE MIRACLE-GRO CONSTITUENT COMPANIES AND THE SHAREHOLDERS
SECTION 3.01. Corporate Existence and Power.......................................... 5
SECTION 3.02. Organizational Documents............................................... 5
SECTION 3.03. Corporate Authorization................................................ 5
SECTION 3.04. Governmental Authorization............................................. 6
SECTION 3.05. Non-Contravention...................................................... 6
SECTION 3.06. Capitalization......................................................... 6
SECTION 3.07. Financial Statements................................................... 7
SECTION 3.08. Disclosure Documents................................................... 7
SECTION 3.09. Absence of Certain Changes............................................. 7
SECTION 3.10. No Undisclosed Material Liabilities.................................... 9
SECTION 3.11. Litigation............................................................. 9
SECTION 3.12. Taxes.................................................................. 9
SECTION 3.13. ERISA................................................................. 10
SECTION 3.14. Trademarks, Patents and Copyrights.................................... 11
SECTION 3.15. Material Contracts.................................................... 12
SECTION 3.16. Compliance with Laws.................................................. 13
SECTION 3.17. Finders' Fees......................................................... 13
SECTION 3.18. Other Information..................................................... 13
SECTION 3.19. Environmental Compliance.............................................. 13
i
154
PAGE
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF SCOTTS AND MERGER SUBSIDIARY
SECTION 4.01. Corporate Existence and Power........................................ 14
SECTION 4.02. Organizational Documents............................................. 15
SECTION 4.03. Corporate Authorization.............................................. 15
SECTION 4.04. Governmental Authorization........................................... 15
SECTION 4.05. Non-Contravention.................................................... 15
SECTION 4.06. Capitalization....................................................... 16
SECTION 4.07. SEC Filings; Financial Statements.................................... 16
SECTION 4.08. Absence of Certain Changes........................................... 17
SECTION 4.09. No Undisclosed Material Liabilities.................................. 18
SECTION 4.10. Litigation........................................................... 18
SECTION 4.11. Taxes................................................................ 18
SECTION 4.12. ERISA................................................................ 19
SECTION 4.13. Trademarks, Patents and Copyright.................................... 20
SECTION 4.14. Material Contracts................................................... 21
SECTION 4.15. Compliance with Laws................................................. 22
SECTION 4.16. Finders' Fees........................................................ 22
SECTION 4.17. Environmental Compliance............................................. 22
SECTION 4.18. Opinion of Financial Advisor......................................... 23
ARTICLE V
COVENANTS OF THE MIRACLE-GRO CONSTITUENT
COMPANIES AND THE SHAREHOLDERS
SECTION 5.01. Conduct of the Business of the Miracle-Gro Constituent Companies..... 23
SECTION 5.02. Access to Information; Confidentiality............................... 24
SECTION 5.03. Other Offers......................................................... 24
SECTION 5.04. Notices of Certain Events............................................ 24
SECTION 5.05. Certain Loans ....................................................... 25
ARTICLE VI
STANDSTILL AND VOTING PROVISIONS;
RESTRICTIONS ON TRANSFER
SECTION 6.01. Certain Definitions.................................................. 26
SECTION 6.02. Board of Directors................................................... 27
SECTION 6.03. Rule 145............................................................. 28
SECTION 6.04. Registration Rights.................................................. 28
SECTION 6.05. Reservation of Shares................................................ 28
SECTION 6.06. Standstill Restrictions.............................................. 28
SECTION 6.07. Additional Standstill Restrictions................................... 28
SECTION 6.08. Voting............................................................... 29
SECTION 6.09. Restrictions on Transfers of Voting Stock and Warrants............... 30
ii
155
PAGE
SECTION 6.10. Right of First Offer............................................... 31
ARTICLE VII
COVENANTS OF SCOTTS AND MERGER SUBSIDIARY
SECTION 7.01. Conduct of the Business of Scotts.................................. 32
SECTION 7.02. Access to Information; Confidentiality............................. 32
SECTION 7.03. Obligations of Merger Subsidiary................................... 33
SECTION 7.04. Other Offers....................................................... 33
SECTION 7.05. Notices of Certain Events.......................................... 33
SECTION 7.06. Proxy Statement and Shareholder Vote............................... 33
SECTION 7.07. Director and Officer Indemnification............................... 34
SECTION 7.08. Employee Benefits.................................................. 34
SECTION 7.09. Employee Stock Options............................................. 35
ARTICLE VIII
COVENANTS OF SCOTTS, THE MIRACLE-GRO
CONSTITUENT COMPANIES AND THE SHAREHOLDERS
SECTION 8.01. Best Efforts....................................................... 35
SECTION 8.02. Certain Filings.................................................... 35
SECTION 8.03. Public Announcements............................................... 35
SECTION 8.04. Further Assurances................................................. 35
SECTION 8.05. Tax Matters........................................................ 36
SECTION 8.06. Tax Treatment...................................................... 36
SECTION 8.07. Tax Gross-Up....................................................... 37
ARTICLE IX
CONDITIONS TO THE MERGER
SECTION 9.01. Conditions to the Obligations of Each Party........................ 37
SECTION 9.02. Conditions to the Obligations of Scotts and Merger Subsidiary...... 38
SECTION 9.03. Conditions to the Obligations of the Miracle-Gro
Constituent Companies and the Shareholders...................... 39
ARTICLE X
TERMINATION
SECTION 10.01. Termination....................................................... 40
SECTION 10.02. Effect of Termination............................................. 40
iii
156
PAGE
ARTICLE XI
SURVIVAL; INDEMNIFICATION
SECTION 11.01. Survival..................................................... 41
SECTION 11.02. Indemnification.............................................. 41
SECTION 11.03. Procedures................................................... 41
ARTICLE XII
MISCELLANEOUS
SECTION 12.01. Notices...................................................... 42
SECTION 12.02. Amendments; No Waivers....................................... 43
SECTION 12.03. Expenses; Taxes.............................................. 43
SECTION 12.04. Headings..................................................... 43
SECTION 12.05. Severability................................................. 43
SECTION 12.06. Entire Agreement............................................. 44
SECTION 12.07. Successors and Assigns....................................... 44
SECTION 12.08. Governing Law................................................ 44
SECTION 12.09. Counterparts; Effectiveness.................................. 44
Annex A - Terms of Class A Convertible Preferred Stock
Annex B - Terms of Series A Warrant
Annex C - Terms of Series B Warrant
Annex D - Terms of Series C Warrant
Annex E - Registration Rights
Annex F - Form of Employment Agreement of Horace Hagedorn, John Kenlon and James Hagedorn
[INTENTIONALLY OMITTED]
Annex G - Proposed Amendments to Scotts Articles of Incorporation and Code of Regulations
Annex H - Form of Skadden, Arps, Slate, Meagher & Flom Opinion [INTENTIONALLY OMITTED]
iv
157
INDEX OF DEFINED TERMS
PAGE
1
1994 Form 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
A
affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 18, 25
Applicable Corporate Statutes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Asset Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Associate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
B
Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Balance Sheet Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
beneficial ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Benefit Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
C
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Company Acquisition Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Company Disclosure Schedule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Company Material Adverse Effect. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Company Representatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Company Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Convertible Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Credit Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
CS First Boston. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
D
Delaware Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
E
Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Employee Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Environmental Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Excess Amount. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
G
group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
v
158
PAGE
H
HSR Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
I
Indemnified Party. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Indemnifying Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Intellectual Property Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
L
Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
M
Market Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Merger Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Merger Subsidiary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Merger Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Miracle-Gro Constituent Companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Miracle-Gro Delaware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Miracle-Gro Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Miracle-Gro UK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Multiemployer Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
N
New Jersey Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
New Miracle-Gro. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
New York Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Notes Indenture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Nurseries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
O
Ohio Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
P
PBGC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Pension Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Permitted Transferee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Plan Transfer Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Polluting Substance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
vi
159
PAGE
R
Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Reincorporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Release. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Retirement Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
S
Scotts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Scotts Acquisition Proposal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Scotts Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Scotts Benefit Arrangements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Scotts Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Scotts Disclosure Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Scotts Disclosure Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Scotts Employee Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Scotts Intellectual Property Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Scotts Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Scotts Multiemployer Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Scotts Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Scotts Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Scotts Representatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Scotts Retirement Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Scotts Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Scotts Shareholder Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Scotts Shareholder Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SEC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Securities Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Selling Shareholder. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Series A Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Series B Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Series C Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Shareholder Representative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Smith Barney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Standstill Percentage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Straddle Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Subsequent Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,16
Surviving Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
vii
160
PAGE
T
Target Amount. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Tax Returns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Total Voting Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Transfer Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Transfer Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
V
Voting Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Voting Stock Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
W
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
viii
161
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of January 24, 1995, among
STERN'S MIRACLE-GRO PRODUCTS INC., a New Jersey corporation (the "Company"),
STERN'S NURSERIES, INC., a New York corporation ("Nurseries"), MIRACLE-GRO LAWN
PRODUCTS INC., a Delaware corporation ("Miracle-Gro Delaware"), MIRACLE- GRO
PRODUCTS LIMITED, a New York corporation ("Miracle-Gro UK", and collectively
with the Company, Nurseries, Miracle-Gro Delaware and Miracle-Gro UK, the
"Miracle-Gro Constituent Companies"), the shareholders of the Miracle-Gro
Constituent Companies as listed on the signature pages hereof (the
"Shareholders"), The Scotts Company, an Ohio corporation ("Scotts"), and ZYX
CORPORATION, an Ohio corporation and a direct, wholly-owned subsidiary of
Scotts ("Merger Subsidiary").
WHEREAS, upon the terms and subject to the conditions of this
Agreement and in accordance with the General Corporation Law of the State of
Ohio (the "Ohio Law"), the Business Corporation Act of the State of New Jersey
(the "New Jersey Law"), the Business Corporation Law of the State of New York
(the "New York Law") and the General Corporation Law of the State of Delaware
(the "Delaware Law," and, collectively with the Ohio Law, the New Jersey Law
and the New York Law, the "Applicable Corporate Statutes"), the Miracle-Gro
Constituent Companies and Scotts have agreed to effectuate a business
combination transaction pursuant to which Merger Subsidiary will merge with and
into the Company (the "Merger"), and, immediately subsequent to the Merger,
Nurseries shall transfer substantially all of its assets, including but not
limited to all intellectual property rights to the Company (the "Asset
Transfer") and Miracle-Gro Delaware and Miracle-Gro UK will merge with and into
the Company (collectively, the "Subsequent Mergers" and, together with the
Merger and the Asset Transfer, the "Merger Transactions"); and
WHEREAS, the respective Boards of Directors of each of the Miracle-Gro
Constituent Companies, Scotts and Merger Subsidiary have determined that the
Merger Transactions are fair to and in the best interests of their respective
companies and shareholders and have approved and adopted this Agreement and
have approved the Merger Transactions and the other transactions contemplated
hereby and recommended approval and adoption of this Agreement and approval of
the Merger Transactions by their respective shareholders; and
WHEREAS, for federal income tax purposes, it is intended that each of
the Merger Transactions qualify as a reorganization under the provisions of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code")
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto agree as follows:
I-1
162
ARTICLE I
THE MERGER TRANSACTIONS
SECTION 1.01. THE MERGER TRANSACTIONS; EFFECTIVE TIME. (a) Upon the
terms and subject to the conditions set forth in this Agreement and in
accordance with the Applicable Corporate Statutes, as soon as practicable after
the satisfaction or, to the extent permitted hereunder, waiver of all
conditions to the Merger Transactions set forth in Article IX, (i) Merger
Subsidiary shall be merged with and into the Company, in accordance with Ohio
Law and New Jersey Law, whereupon the separate existence of Merger Subsidiary
shall cease and the Company shall be the surviving corporation, and (ii)
immediately subsequent thereto, (x) Nurseries shall transfer substantially all
of its assets, including but not limited to all intellectual property rights,
but excluding its liabilities, to the Company and (y) Miracle-Gro Delaware and
Miracle-Gro UK will separately merge with and into the Company, whereupon the
separate existence of Miracle-Gro Delaware and Miracle-Gro UK shall cease, and
the Company shall be the surviving corporation (the "Surviving Corporation").
(b) As soon as practicable after satisfaction or, to the extent
permitted hereunder, waiver of all conditions to the Merger Transactions set
forth in Article IX, the Miracle-Gro Constituent Companies and Merger
Subsidiary will file certificates of merger with the Secretaries of State of
the States of New Jersey, Ohio, New York and Delaware, in such forms as
required by and executed in accordance with the provisions of, and shall make
all other filings or recordings required by the applicable corporate statutes
in connection with the Merger Transactions. The Merger and each of the
Subsequent Mergers shall become effective at such time as the applicable
certificate of merger is duly filed with the Secretary of State of the
applicable states or at such later time as is specified in such certificates of
merger (the last such effective time being the "Effective Time").
(c) From and after the Effective Time, the Surviving Corporation
shall possess all the rights, privileges, powers and franchises and be subject
to all of the restrictions, disabilities and duties of the Company, Miracle-Gro
Delaware, Miracle-Gro UK and Merger Subsidiary, all as provided under the
Applicable Corporate Statutes.
SECTION 1.02. CLOSING. Unless this Agreement shall have been
terminated and abandoned pursuant to Section 10.01 and subject to the
satisfaction or, to the extent permitted hereunder, waiver of the conditions
set forth in Article IX, the consummation of the Merger Transactions will take
place as promptly as practicable (and in any event within two business days)
after satisfaction or waiver of the conditions set forth in Article IX, at the
offices of Vorys, Sater, Seymour and Pease, 52 East Gay Street, Columbus, Ohio,
unless another date or place is agreed to in writing by the Company and Scotts.
SECTION 1.03. EFFECT OF THE MERGER TRANSACTIONS. At the Effective
Time, the effect of the Merger Transactions shall be as provided in the
Applicable Corporate Statutes. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, except as otherwise
provided herein, all the property, rights, privileges, powers and franchises of
the Miracle-Gro Constituent Companies and Merger Subsidiary shall vest in the
Surviving Corporation, and all debts, liabilities and duties of the Company,
Miracle-Gro Delaware, Miracle-Gro UK and Merger Subsidiary shall become the
debts, liabilities and duties of the Surviving Corporation.
SECTION 1.04. CONVERSION OF SECURITIES.
(a) At the effective time of the Merger, by virtue of the Merger and
without any action on the part of the Company or any of the Shareholders, all
issued and outstanding shares of capital stock of the Company immediately prior
to the effective time of the Merger shall be converted into that number of
shares of Class A Convertible
I-2
163
Preferred Stock of Scotts set forth in Schedule 1.04(a) having the terms set
forth in Annex A attached hereto (the "Convertible Preferred Stock"), that
number of Series A warrants of Scotts set forth in Schedule 1.04(a) having the
terms set forth in Annex B hereto (the "Series A Warrants"), that number of
Series B warrants of Scotts set forth in Schedule 1.04(a) having the terms set
forth in Annex C hereto (the "Series B Warrants"), and that number of Series C
warrants of Scotts set forth in Schedule 1.04(a) having the terms set forth in
Annex D hereto (the "Series C Warrants" and, collectively with the Series A
Warrants and the Series B Warrants, the "Warrants"), and such Convertible
Preferred Stock, Series A Warrants, Series B Warrants and Series C Warrants
(collectively, the "Merger Consideration") shall be legally and beneficially
owned by the Shareholders as set forth in Schedule 1.04(a). The holders of
such certificates previously evidencing shares of capital stock of the Company
outstanding prior to the effective time of the Merger shall cease to have any
rights with respect to such shares of capital stock except as otherwise
provided herein or by applicable law.
(b) At the effective time of the merger of Miracle-Gro Delaware with
and into the Company, by virtue of the merger of Miracle-Gro Delaware with and
into the Company and without any action on the part of the Company, Miracle-Gro
Delaware or any of the Shareholders, all issued and outstanding shares of
capital stock of Miracle-Gro Delaware immediately prior to the effective time
of such Subsequent Merger shall be converted into that number of shares of
Convertible Preferred Stock and Warrants set forth in Schedule 1.04(a), and
such Merger Consideration shall be legally and beneficially owned by the
Shareholders as set forth in Schedule 1.04(b). The holders of such certificates
previously evidencing shares of capital stock of Miracle-Gro Delaware
outstanding prior to the effective time of the Merger shall cease to have any
rights with respect to such shares of capital stock except as otherwise
provided herein or by applicable law.
(c) At the effective time of the merger of Miracle-Gro UK with and
into the Company, by virtue of the merger of Miracle-Gro UK with and into the
Company and without any action on the part of the Company, Miracle-Gro UK or
any of the Shareholders, all issued and outstanding shares of capital stock of
Miracle-Gro UK immediately prior to the effective time of such Subsequent
Merger shall be converted into that number of shares of Convertible Preferred
Stock and Warrants set forth in Schedule 1.04(c), and such Merger Consideration
shall be legally and beneficially owned by the Shareholders as set forth in
Schedule 1.04(c). The holders of such certificates previously evidencing shares
of capital stock of Miracle-Gro Delaware outstanding prior to the effective
time of the Merger shall cease to have any rights with respect to such shares
of capital stock except as otherwise provided herein or by applicable law.
(d) At the effective time of the Asset Transfer and in consideration
therefor, Nurseries shall receive that number of shares of Convertible
Preferred Stock set forth in Schedule 1.04(d), and such Merger Consideration
shall be legally and beneficially owned by Nurseries as set forth Schedule
1.04(d).
(e) Each share of capital stock held by any Miracle-Gro Constituent
Company as treasury stock immediately prior to the Effective Time shall
automatically be cancelled and extinguished without any conversion thereof, and
no payment shall be made with respect thereto.
(f) Each share capital stock of Merger Subsidiary issued and
outstanding immediately prior to the Effective Time shall be converted into and
become one fully paid and non-assessable common share, without par value, of
the Surviving Corporation with the same rights, powers and privileges as the
shares so converted and shall constitute the only outstanding shares of capital
stock of the Surviving Corporation.
(g) Notwithstanding the foregoing, the aggregate amount of Merger
Consideration shall consist of (i) 195,000 shares representing $195 million
face amount of Convertible Preferred Stock; (ii) Series A Warrants to purchase
1,000,000 common shares, without par value, of Scotts (the "Scotts Common
Stock"); (iii) Series B
I-3
164
Warrants to purchase 1,000,000 shares of Scotts Common Stock and (iv) Series C
Warrants to purchase 1,000,000 shares of Scotts Common Stock.
SECTION 1.05. SURRENDER. (a) At the Effective Time, the holders of
shares of capital stock of the Company, Miracle-Gro Delaware and Miracle-Gro UK
outstanding immediately prior to the Effective Time shall be entitled to
receive the Merger Consideration set forth opposite their names in Schedule
1.04(a), Schedule 1.04(b) and Schedule 1.04(c) upon surrender to Scotts of all
certificates which formerly represented all outstanding shares of capital stock
of the Company, Miracle-Gro Delaware and Miracle-Gro UK. At the Effective Time
Nurseries shall be entitled to receive the Merger Consideration set forth in
Schedule 1.04(d).
(b) After the Effective Time, the stock transfer books of the
Miracle-Gro Constituent Companies shall be closed, and there shall be no
further registration of transfers of shares of capital stock of any of the
Miracle-Gro Constituent Companies on the records of any of the Miracle-Gro
Constituent Companies. If, after the Effective Time, certificates representing
shares of capital stock of any of the Miracle-Gro Constituent Companies are
presented to the Surviving Corporation, they shall be cancelled and exchanged
for the Merger Consideration provided for, and in accordance with the
procedures set forth, in this Article I.
(c) No dividends or other distributions declared or made after the
Effective Time which have a record date after the Effective Time shall be paid
to the holder of any unsurrendered certificates representing shares of capital
stock of any Miracle-Gro Constituent Company with respect to the shares of
Convertible Preferred Stock they are entitled to receive until such
certificates shall have been surrendered to the Surviving Corporation.
SECTION 1.06. NURSERIES LIQUIDATION. Promptly following the
Effective Time, Nurseries shall liquidate in accordance with New York Law.
ARTICLE II
THE SURVIVING CORPORATION
SECTION 2.01. REINCORPORATION. Immediately after the Effective Time,
the Surviving Corporation shall be merged with and into a newly-formed,
wholly-owned subsidiary of the Surviving Corporation which shall be an Ohio
corporation ("New Miracle-Gro")(the "Reincorporation"). The effect of the
Reincorporation shall be as provided under Ohio Law and New Jersey Law. Without
limiting the generality of the foregoing, and subject thereto, at the effective
time of the Reincorporation, all the property, rights, privileges, powers and
franchises of the Surviving Corporation shall vest in New Miracle-Gro, and all
debts, liabilities and duties of the Surviving Corporation shall become the
debts, liabilities and duties of New Miracle-Gro. It is intended that the
Reincorporation qualify as a reorganization under the provisions of Section
368(a)(1)(F) of the Code.
SECTION 2.02. ARTICLES OF INCORPORATION; CODE OF REGULATIONS. (a)
At the effective time of the Merger, the Certificate of Incorporation and the
By-laws of the Company, as in effect immediately prior to such effective time,
shall be the Certificate of Incorporation and the By-laws of the Surviving
Corporation.
(b) At the effective time of the Subsequent Mergers, the Certificate
of Incorporation and the By-laws of the Company, as in effect immediately prior
to such effective time, shall be the Certificate of Incorporation and the
By-laws of the Surviving Corporation.
I-4
165
(c) At the effective time of the Reincorporation, the Articles of
Incorporation and the Code of Regulations of New Miracle-Gro, as in effect
immediately prior to such effective time, shall be the Articles of
Incorporation and the Code of Regulations of New Miracle-Gro, except that the
name of New Miracle-Gro shall be changed to "Scotts' Miracle-Gro Products,
Inc."
SECTION 2.03. DIRECTORS AND OFFICERS. From and after the respective
effective times of the Merger, the Subsequent Mergers and the Reincorporation,
until successors are duly elected or appointed and qualified in accordance with
applicable law, (i) the directors of New Miracle-Gro at the Effective Time
shall be the directors of the Surviving Corporation and New Miracle-Gro,
respectively, and (ii) the officers of the Surviving Corporation and New
Miracle-Gro shall be the officers set forth on Schedule 2.03.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE MIRACLE-GRO CONSTITUENT COMPANIES AND THE SHAREHOLDERS
Each of the Miracle-Gro Constituent Companies and the Shareholders,
jointly and severally, represent and warrant to Scotts and Merger Subsidiary
that:
SECTION 3.01. CORPORATE EXISTENCE AND POWER. Each of the Miracle-Gro
Constituent Companies is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
organization, and has all corporate powers and all governmental licenses,
authorizations, consents and approvals required to own, lease and operate its
properties and to carry on its business as now conducted or as heretofore
conducted by the Miracle-Gro Constituent Companies, except to the extent the
failure to have such powers, licenses, authorizations, consents or approvals
would not, individually or in the aggregate, have a material adverse effect on
the business, assets, results of operations or condition (financial or
otherwise) of the Miracle-Gro Constituent Companies, taken as a whole (a
"Company Material Adverse Effect"). Each of the Miracle-Gro Constituent
Companies is duly qualified or licensed to do business as a foreign
corporation, and is in good standing, in each jurisdiction where the character
of the property owned or leased by it or the nature of its activities makes
such qualification or licensing necessary, except for those jurisdictions where
the failure to be so qualified or licensed and in good standing would not,
individually or in the aggregate, have a Company Material Adverse Effect.
SECTION 3.02. ORGANIZATIONAL DOCUMENTS. Each of the Miracle-Gro
Constituent Companies has heretofore delivered to Scotts true and complete
copies of the certificate of incorporation and by-laws, or equivalent
organizational documents, of such Miracle-Gro Constituent Company, in each case
as currently in effect. None of the Miracle-Gro Constituent Companies is in
violation of any provision of its certificate of incorporation, by-laws or
equivalent organizational documents, except for such violations that would not,
individually or in the aggregate, have a Company Material Adverse Effect.
SECTION 3.03. CORPORATE AUTHORIZATION. The execution, delivery and
performance by the Miracle-Gro Constituent Companies of this Agreement and the
consummation by the Miracle-Gro Constituent Companies of the transactions
contemplated hereby are within the corporate powers of each of the Miracle-Gro
Constituent Companies and have been duly authorized by all necessary corporate
action. This Agreement constitutes a valid and binding agreement of each of
the Miracle-Gro Constituent Companies. The Merger, the Subsequent Mergers and
the Asset Transfer, respectively, have been approved by the unanimous vote of
all of the outstanding capital shares of each of the respective Miracle-Gro
Constituent Companies.
I-5
166
SECTION 3.04. GOVERNMENTAL AUTHORIZATION. The execution, delivery
and performance by the Miracle-Gro Constituent Companies and the Shareholders
of this Agreement and the consummation of the transactions contemplated by the
Agreement by the Miracle-Gro Constituent Companies require no consent,
approval, authorization or permit of, or filing with or notification to any
governmental or regulatory authority, except (A) for (i) the filing of
certificates of merger and/or other appropriate merger documents in accordance
with New Jersey Law and Ohio Law; (ii) compliance with any applicable
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations thereunder (the "HSR Act"); (iii)
compliance with any applicable provisions of the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder (the "Securities
Act"), state securities or "blue sky" laws and state takeover laws; (iv)
compliance with any applicable requirements of the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder (the "Exchange
Act"); and (v) any applicable requirements of non-United States competition,
antitrust and investment laws and (B) where failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or notifications,
would not prevent or delay the consummation of the Merger or otherwise prevent
any Miracle-Gro Constituent Company from performing its obligations under this
Agreement, and would not, individually or in the aggregate, have a Company
Material Adverse Effect.
SECTION 3.05. NON-CONTRAVENTION. The execution, delivery and
performance by the Miracle-Gro Constituent Companies and the Shareholders of
this Agreement and the consummation by the Miracle-Gro Constituent Companies
and the Shareholders of the transactions contemplated hereby do not and will
not (i) contravene or conflict with the certificate of incorporation, by-laws
or equivalent organizational documents of any Miracle-Gro Constituent Company;
(ii) assuming compliance with the matters referred to in Section 3.04,
contravene or conflict with or constitute a violation of any provision of any
law, rule, regulation, judgment, injunction, order or decree binding upon or
applicable to any Miracle-Gro Constituent Company or any Shareholder; (iii)
constitute a default under or give rise to a right of termination, cancellation
or acceleration of any right or obligation of any Miracle-Gro Constituent
Company or to a loss of any benefit to which any Miracle-Gro Constituent
Company is entitled under any provision of any agreement, contract or other
instrument binding upon any Miracle-Gro Constituent Company or any license,
franchise, permit or other similar authorization held by any Miracle-Gro
Constituent Company; or (iv) result in the creation or imposition of any Lien
on any asset of any Miracle-Gro Constituent Company, except, in the case of
clauses (ii), (iii) and (iv), for any such conflicts, violations, defaults,
breaches or other occurrences which would not prevent or delay consummation of
the Merger, or otherwise prevent any Miracle-Gro Constituent Company from
performing its obligations under this Agreement, and would not, individually or
in the aggregate, have a Company Material Adverse Effect. For purposes of this
Agreement, "Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
SECTION 3.06. CAPITALIZATION. (a) The authorized capital stock of
the Company consists of 20,000 shares of Voting Common Stock, without par
value, and 20,000 shares of Non-Voting Common Stock, without par value. As of
the date hereof there are, and as of the Effective Time there will be,
outstanding 13,405 shares of Voting Common Stock and 13,405.284 shares of
Non-Voting Common Stock. All outstanding shares of capital stock of the Company
have been, and at the Effective Time will be, duly authorized and validly
issued and are, and at the Effective Time will be, fully paid and
nonassessable.
(b) The authorized capital stock of Miracle-Gro Delaware consists of
1,500 shares of Voting Common Stock, without par value, and 1,500 shares of
Non-Voting Common Stock, without par value. As of the date hereof there are,
and as of the Effective Time there will be, outstanding 1,000 shares of Voting
Common Stock and 999.8 shares of Non-Voting Common Stock. All outstanding
shares of capital stock of Miracle-Gro Delaware have been, and at the Effective
Time will be, duly authorized and validly issued and are, and at the Effective
Time will be, fully paid and nonassessable.
I-6
167
(c) The authorized capital stock of Miracle-Gro UK consists of 20,000
shares of Voting Common Stock, without par value, and 20,000 shares of
Non-Voting Common Stock, without par value. As of the date hereof there are,
and as of the Effective Time there will be, outstanding 4,997.274 shares of
Voting Common Stock and 4,997.106 shares of Non-Voting Common Stock. All
outstanding shares of capital stock of Miracle-Gro UK have been, and at the
Effective Time will be, duly authorized and validly issued and are, and at the
Effective Time will be, fully paid and nonassessable.
(d) Except as set forth in this Section, there are, and at the
Effective Time will be, outstanding (i) no shares of capital stock or other
voting securities of any of the Miracle-Gro Constituent Companies, (ii) no
securities of any of the Miracle-Gro Constituent Companies convertible into or
exchangeable for shares of capital stock or voting securities of any of the
Miracle-Gro Constituent Companies, and (iii) no options or other rights to
acquire from any of the Miracle-Gro Constituent Companies, and no obligation of
any of the Miracle-Gro Constituent Companies to issue, any capital stock,
voting securities or securities convertible into or exchangeable for capital
stock or voting securities of any of the Miracle-Gro Constituent Companies (the
items in clauses (i), (ii) and (iii) being referred to collectively as the
"Company Securities"). There are, and at the Effective Time will be, no
outstanding obligations of any of the Miracle-Gro Constituent Companies, to
repurchase, redeem or otherwise acquire any Company Securities or make any
material investment in any other Person. None of the Miracle-Gro Constituent
Companies has, or at the Effective Time will have, any Subsidiaries.
"Subsidiary" means with respect to any of the Miracle-Gro Constituent
Companies, any corporation or other entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions are directly
or indirectly owned by any of the Miracle-Gro Constituent Companies.
SECTION 3.07. FINANCIAL STATEMENTS. The audited combined financial
statements of the Miracle-Gro Constituent Companies as of September 30, 1993
and 1994 and for the three fiscal years ended September 30, 1994, which have
previously been provided to Scotts fairly present, in conformity with generally
accepted accounting principles applied on a consistent basis (except as may be
indicated in the notes thereto), the combined financial position of the
Miracle-Gro Constituent Companies as of the dates thereof and their combined
results of operations and changes in financial position for the periods then
ended (subject to normal and recurring year-end adjustments in the case of any
unaudited interim financial statements which were not, and are not expected,
individually or in the aggregate, to be, material in amount). For purposes of
this Agreement, "Balance Sheet" means the combined balance sheet of the
Miracle-Gro Constituent Companies as of September 30, 1994 and "Balance Sheet
Date" means September 30, 1994.
SECTION 3.08. DISCLOSURE DOCUMENTS. The information with respect to
the Miracle-Gro Constituent Companies that the Company furnishes to Scotts in
writing specifically for use in Scotts' proxy or information statement
(together with any amendments thereof, or supplements thereto, the "Scotts
Proxy Statement") to be filed with the Securities and Exchange Commission (the
"SEC") in connection with the Merger Transactions will not, at the time of the
filing of such Scotts Proxy Statement or at the time it is first mailed to the
shareholders of Scotts, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements made therein, in the light of the circumstances under
which they were made, not misleading.
SECTION 3.09. ABSENCE OF CERTAIN CHANGES. Since the Balance Sheet
Date and except as disclosed to Scotts in Section 3.09 of the disclosure
schedule previously delivered to Scotts by the Company (the "Company Disclosure
Schedule"), the Miracle-Gro Constituent Companies have conducted their business
only in the ordinary course consistent with past practice and there has not
been:
I-7
168
(a) any event, occurrence or development of a state of
circumstances or facts which has had or reasonably could be expected
to have a Company Material Adverse Effect;
(b) any declaration, setting aside or payment of any
dividend or other distribution with respect to any shares of capital
stock of any of the Miracle-Gro Constituent Companies, or any
repurchase, redemption or other acquisition by any Miracle-Gro
Constituent Company of any outstanding shares of capital stock or
other securities of, or other ownership interests in, any Miracle-Gro
Constituent Company;
(c) any amendment of any material term of any outstanding
security of any Miracle-Gro Constituent Company;
(d) any incurrence, assumption or guarantee by any
Miracle-Gro Constituent Company of any indebtedness for borrowed
money;
(e) any creation or assumption by any Miracle-Gro
Constituent Company of any Lien on any material asset other than in
the ordinary course of business consistent with past practices;
(f) any making of any loan, advance or capital contribution
to or investment in any individual, corporation, partnership, limited
liability company, association, trust or other entity or organization,
including a government or political subdivision or any agency or
instrumentality thereof (each, a "Person"), other than loans, advances
or capital contributions to or investments in any Miracle-Gro
Constituent Company made in the ordinary course of business consistent
with past practices;
(g) any transaction or commitment made, or any contract or
agreement entered into, by any Miracle-Gro Constituent Company
relating to its assets or business (including the acquisition or
disposition of any assets) or any relinquishment by any Miracle-Gro
Constituent Company of any contract or other right, in either case,
material to the Miracle-Gro Constituent Companies, taken as a whole,
other than transactions and commitments in the ordinary course of
business consistent with past practice and those contemplated by this
Agreement;
(h) any change in any method of accounting or accounting
practice by any Miracle-Gro Constituent Company, except for any such
change required by reason of a concurrent change in generally accepted
accounting principles;
(i) any (i) grant of any severance or termination pay to any
director, officer, employee or agent of any Miracle-Gro Constituent
Company, (ii) entering into of any employment, deferred compensation
or other similar agreement (or any amendment to any such existing
agreement) with any director, officer, employee or agent of any
Miracle-Gro Constituent Company, (iii) increase in benefits payable
under any existing severance or termination pay policies or employment
agreements or (iv) increase in compensation, bonus or other benefits
payable to directors, officers, employees or agents of any Miracle-Gro
Constituent Company, other than in the ordinary course of business
consistent with past practice or, in the case of employment
agreements, as contemplated by Section 9.02(v); or
(j) any labor dispute, other than routine individual
grievances, or any activity or proceeding by a labor union or
representative thereof to organize any employees of any Miracle-Gro
Constituent Company, which employees were not subject to a collective
bargaining agreement at the Balance Sheet Date, or any lockouts,
strikes, slowdowns, work stoppages or threats thereof by or with
respect to such employees.
I-8
169
SECTION 3.10. NO UNDISCLOSED MATERIAL LIABILITIES. Except as and to
the extent set forth in the Balance Sheet or as otherwise set forth in Section
3.10 of the Company Disclosure Schedule, none of the Miracle-Gro Constituent
Companies had any liability or obligation of any nature (whether accrued,
contingent, absolute, determined, determinable or otherwise) that (i) would be
required to be reflected on a combined balance sheet of the Miracle-Gro
Constituent Companies (including the notes thereto) or (ii) would have, or
could reasonably be likely to have, individually or in the aggregate, a Company
Material Adverse Effect.
SECTION 3.11. LITIGATION. Except as set forth in Section 3.11 of the
Company Disclosure Schedule, there is no claim, action, suit, investigation or
proceeding pending against or, to the knowledge of the Company or the
Shareholders, threatened against any of the Miracle-Gro Constituent Companies
or any of their respective properties before any court or arbitrator or any
governmental body, agency or official which, individually or in the aggregate,
would reasonably be likely to have a Company Material Adverse Effect or would
reasonably be likely to impair the ability of any Miracle-Gro Constituent
Company to consummate the Merger Transactions or the other transactions
contemplated by this Agreement.
SECTION 3.12. TAXES. Each of the Miracle-Gro Constituent Companies
has timely filed all federal, state, local and foreign income, gross income,
gross receipts, gains, premium, sales, use, ad valorem, transfer, franchise,
profits, withholding, payroll, employment, excise, severance, stamp,
occupation, license, lease, environmental, customs, duties, property, windfall
profits and all other tax returns, statements, reports and forms (the "Tax
Returns") required to be filed with the appropriate tax authority through the
date hereof, the failure of which to file would result in a Company Material
Adverse Effect, and shall timely file all such Tax Returns required to be filed
on or before the Effective Time. To the best knowledge of the Company and the
Shareholders, such Tax Returns are and will be true, correct and complete in
all material respects. Each of the Miracle-Gro Constituent Companies has paid
and discharged all federal, state, local and foreign Taxes due from them, other
than such Taxes that are adequately reserved as shown on the Balance Sheet.
Neither the Internal Revenue Service nor any other taxing agency or authority,
domestic or foreign, is now asserting or, to the best knowledge of the Company
and the Shareholders, threatening to assert against any of the Miracle-Gro
Constituent Companies any material deficiency or claim for additional Taxes.
There are no unexpired waivers by any of the Miracle-Gro Constituent Companies
of any statutes of limitations with respect to Taxes which, individually or in
the aggregate would have a Company Material Adverse Effect. The accruals and
reserves for Taxes reflected in the Balance Sheet are adequate for the periods
covered. Each of the Miracle-Gro Constituent Companies has withheld or
collected and paid over to the appropriate governmental authorities or is
properly holding for such payment all Taxes required by law to be withheld or
collected, except to the extent that the failure to so withhold or collect and
pay would not, individually or in the aggregate, have a Company Material
Adverse Effect. There are no Liens for Taxes upon the assets of any of the
Miracle-Gro Constituent Companies, which, individually or in the aggregate
would have a Company Material Adverse Effect or other than Liens for current
Taxes not yet due and payable. None of the Miracle-Gro Constituent Companies
has agreed to make, or is required to make, any adjustment under Section 481(a)
of the Code. None of the Miracle-Gro Constituent Companies is a party to any
agreement, contract, arrangement or plan that has resulted, or could result,
individually or in the aggregate, in the payment of "excess parachute payments"
within the meaning of Section 280G of the Code. Each of the Miracle-Gro
Constituent Companies, other than Nurseries, is, and at all times since January
1, 1985, has been, an S corporation within the meaning of Section 1361(a)(1) of
the Code (or the corresponding provisions of preceding law) and is not subject
to the tax imposed on certain built-in gains under Section 1374 of the Code or
the tax imposed under Section 1375 of the Code. For purposes of this
Agreement, "Taxes" shall mean all taxes, charges and other assessments,
including any interest, penalties or additions to tax with respect thereto.
For purposes of this Section 3.12 only, a Company Material Adverse Effect shall
mean a Loss (as hereafter defined) in excess of $500,000.
I-9
170
SECTION 3.13. ERISA. (a) Section 3.13(a) of the Company Disclosure
Schedule includes a list identifying each "employee benefit plan," as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974
("ERISA"), which (i) is subject to any provision of ERISA and (ii) is
maintained, administered or contributed to by any Miracle-Gro Constituent
Company or any affiliate (as defined below) and covers any employee or former
employee of any Miracle-Gro Constituent Company or any affiliate or under which
any Miracle-Gro Constituent Company or any affiliate has any liability. Copies
of such plans (and, if applicable, related trust agreements) and all amendments
thereto and written interpretations thereof have been furnished to Scotts
together with (x) the three most recent annual reports (Form 5500 including, if
applicable, Schedule B thereto) prepared in connection with any such plan and
(y) the most recent actuarial valuation report prepared in connection with any
such plan. Such plans are referred to collectively herein as the "Employee
Plans." For purposes of this Section, "affiliate" of any Person means any
other Person which, together with such Person, would be treated as a single
employer under Section 414 of the Code. The only Employee Plans which
individually or collectively would constitute an "employee pension benefit
plan" as defined in Section 3(2) of ERISA (the "Pension Plans") are identified
as such in the list referred to above. The Company has provided Scotts with
complete age, salary, service and related data as of December 31, 1994 for
employees and former employees of each of the Miracle-Gro Constituent Companies
and any affiliate covered under the Pension Plans.
(b) Except as otherwise identified in Section 3.13(b) of the Company
Disclosure Schedule, no Employee Plan constitutes a "multiemployer plan", as
defined in Section 3(37) of ERISA (a "Multiemployer Plan"), and no Employee
Plan is maintained in connection with any trust described in Section 501(c)(9)
of the Code. The only Employee Plans that are subject to Title IV of ERISA
(the "Retirement Plans") are identified in the list of such Employee Plans
heretofore provided to Scotts by the Company. As of the Balance Sheet Date,
the fair market value of the assets of each Retirement Plan (excluding for
these purposes any accrued but unpaid contributions) exceeded the present value
of all benefits accrued under such Retirement Plan determined on a termination
basis using the assumptions established by the Pension Benefit Guaranty
Corporation (the "PBGC") as in effect on such date. No "accumulated funding
deficiency," as defined in Section 412 of the Code, has been incurred with
respect to any Pension Plan, whether or not waived. The Company and the
Shareholders know of no "reportable event," within the meaning of Section 4043
of ERISA for which the 30-day notice requirement to the PBGC has not been
waived, and no event described in Section 4041, 4042, 4062 or 4063 of ERISA has
occurred in connection with any Employee Plan, other than a "reportable event"
that, individually or in the aggregate, will not have a Company Material
Adverse Effect. No condition exists and no event has occurred that would
constitute grounds for termination of any Retirement Plan or, with respect to
any Employee Plan which is a Multiemployer Plan, presents a material risk of a
complete or partial withdrawal under Title IV of ERISA and neither any
Miracle-Gro Constituent Company nor any of their respective affiliates has
incurred any material liability under Title IV of ERISA arising in connection
with the termination of, or complete or partial withdrawal from, any plan
covered or previously covered by Title IV of ERISA. If a "complete withdrawal"
by any Miracle-Gro Constituent Company and all of its respective affiliates
were to occur as of the Effective Time with respect to all Employee Plans which
are Multiemployer Plans, neither any Miracle-Gro Constituent Company nor any
such affiliate would incur any material withdrawal liability under Title IV of
ERISA. To the Company's and the Shareholders' knowledge, nothing done or
omitted to be done and no transaction or holding of any asset under or in
connection with any Employee Plan has or will make any Miracle-Gro Constituent
Company or any officer or director of any Miracle-Gro Constituent Company
subject to any liability under Title I of ERISA or liable for any tax pursuant
to Section 4975 of the Code that could, individually or in the aggregate, have
a Company Material Adverse Effect.
(c) Each Employee Plan which is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so qualified during the
period from its adoption to date, and each trust forming a part thereof is
exempt from tax pursuant to Section 501(a) of the Code. The Company has
furnished to Scotts copies of the most recent Internal Revenue Service
determination letters with respect to each such Plan. Each Employee Plan has
been
I-10
171
maintained in material compliance with its terms and with the requirements
prescribed by any and all statutes, orders, rules and regulations, including
but not limited to ERISA and the Code, which are applicable to such Plan.
(d) There is no contract, agreement, plan or arrangement covering any
employee or former employee of any Miracle-Gro Constituent Company or any
affiliate that, individually or collectively, could give rise to the payment of
any amount that would not be deductible pursuant to the terms of Sections
162(a)(1) or 280G of the Code.
(e) Section 3.13(e) of the Company Disclosure Schedule sets forth a
list of each employment, severance or other similar contract, arrangement or
policy and each plan or arrangement (written or oral) providing for insurance
coverage (including any self-insured arrangements), workers' compensation,
disability benefits, supplemental unemployment benefits, vacation benefits,
retirement benefits or for deferred compensation, profit-sharing, bonuses,
stock options, stock appreciation or other forms of incentive compensation or
post-retirement insurance, compensation or benefits which (i) is not an
Employee Plan, (ii) is entered into, maintained or contributed to, as the case
may be, by any of the Miracle-Gro Constituent Companies or any of their
respective affiliates and (iii) covers any employee or former employee of any
of the Miracle-Gro Constituent Companies or any of their respective affiliates.
Such contracts, plans and arrangements as are described above, copies or
descriptions of all of which have been furnished previously to Scotts are
referred to collectively herein as the "Benefit Arrangements." Each Benefit
Arrangement has been maintained in substantial compliance with its terms and
with the requirements prescribed by any and all statutes, orders, rules and
regulations that are applicable to such Benefit Arrangement.
(f) The excess of the present value of the projected liability in
respect of post-retirement health and medical benefits for retired employees of
any Miracle-Gro Constituent Companies and their respective affiliates,
determined using assumptions that are reasonable in the aggregate, over the
fair market value of any fund, reserve or other assets segregated for the
purpose of satisfying such liability (including for such purposes any fund
established pursuant to Section 401(h) of the Code) does not in the aggregate
exceed $1,000,000. No condition exists that would prevent any Miracle-Gro
Constituent Company from amending or terminating any Employee Plan or Benefit
Arrangement providing health or medical benefits in respect of any active
employee of any of the Miracle-Gro Constituent Companies other than limitations
imposed under the terms of a collective bargaining agreement.
(g) Except as set forth in Section 3.13(g) of the Company Disclosure
Schedule, no Miracle-Gro Constituent Company is a party to or subject to any
union contract or any employment contract or arrangement providing for annual
future compensation of $50,000 or more with any officer, consultant, director
or employee.
(h) The consummation of the transactions contemplated hereby will not
result in any material acceleration of benefits, or the modification of the
terms of any benefits, payable to or for the benefit of any officer, director
or employee of any Miracle-Gro Constituent Company, including any acceleration
of vesting of stock options or any changes in any amounts or timing of any
amounts payable under any incentive arrangement.
SECTION 3.14. TRADEMARKS, PATENTS AND COPYRIGHTS. (a) Section
3.14(a) of the Company Disclosure Schedule sets forth a true and complete list
of (i) all patents, patent rights, trademarks, trademark rights, trade names,
copyrights, service marks, trade secrets, applications for trademarks and for
service marks, know-how and other proprietary rights and information used or
held for use in connection with the business of the Miracle-Gro Constituent
Companies (collectively, "Intellectual Property Rights") and (ii) all licenses,
commitments and other agreements to which any Miracle-Gro Constituent Company
is a party providing for the license of any Intellectual Property Rights to or
from any other Person.
(b) Except as set forth in Section 3.14(b) of the Company Disclosure
Schedule, the Miracle-Gro Constituent Companies own or possess adequate
licenses or other rights to use all of the Intellectual Property Rights; there
are no
I-11
172
Intellectual Property Rights necessary for use in connection with the
business of the Miracle-Gro Constituent Companies which are not owned or
possessed by the Miracle-Gro Constituent Companies or which, upon completion of
the Merger Transactions, will not be owned or possessed by the Company; and
neither the Company nor the Shareholders is aware of any assertion or claim
challenging the validity of any of the Intellectual Property Rights; and the
conduct of the business of the Miracle-Gro Constituent Companies, to the best
knowledge of the Company and the Shareholders, does not conflict in any way
with any patent, patent right, license, trademark, trademark right, trade name,
trade name right, service mark or copyright of any third party. To the best
knowledge of the Company and the Shareholders, there are no infringements of
any proprietary rights owned by or licensed by or to any Miracle-Gro
Constituent Company that individually or in the aggregate would have a Company
Material Adverse Effect.
SECTION 3.15. MATERIAL CONTRACTS. (a) Except for agreements,
contracts, plans, leases, arrangements or commitments (in each case, oral or
written) set forth in Section 3.15(a) of the Company Disclosure Schedule, no
Miracle-Gro Constituent Company is a party to or subject to:
(i) any lease providing for annual rental payments
of $50,000 or more;
(ii) any contract for the purchase of materials,
supplies, goods, services, equipment or other assets
providing for annual payments by any Miracle-Gro Constituent
Company of $50,000 or more;
(iii) any sales, distribution or other similar
agreement providing for the sale by any Miracle-Gro
Constituent Company of materials, supplies, goods, services,
equipment or other assets that provides for annual payments
to any Miracle-Gro Constituent Company of $100,000 or more;
(iv) any partnership, joint venture or other
similar contract arrangement or agreement;
(v) any contract relating to indebtedness for
borrowed money or the deferred purchase price of property
(whether incurred, assumed, guaranteed or secured by any
asset), except contracts relating to indebtedness incurred in
the ordinary course of business in an amount not exceeding
$25,000;
(vi) any license agreement, franchise agreement or
agreement in respect of similar rights granted to or held by
any Miracle-Gro Constituent Company;
(vii) any agency, dealer, sales representative or
other similar agreement;
(viii) any contract or other document that
substantially limits the ability of any Miracle-Gro
Constituent Company to compete in any line of business or
with any Person or in any area or which would so restrict any
of the Miracle-Gro Constituent Companies after the Effective
Time; or
(ix) any other contract or commitment not made in
the ordinary course of business that is material to the
Company or any other Miracle-Gro Constituent Company.
(b) Each agreement, contract, lease, arrangement and commitment
disclosed in Section 3.15(a) of the Company Disclosure Schedule or required to
be disclosed pursuant to this Section is a valid and binding agreement of such
Miracle-Gro Constituent Company and is in full force and effect, and neither
any Miracle-Gro Constituent
I-12
173
Company nor, to the knowledge of the Company and the Shareholders, any other
party thereto is in default in any material respect under the terms of any such
agreement, contract, plan, lease arrangement or commitment.
SECTION 3.16. COMPLIANCE WITH LAWS. No Miracle-Gro Constituent
Company is in violation of, or has violated, any applicable provisions of any
laws, rules, statutes, ordinances or regulations, except for violations that
would not, individually or in the aggregate, have a Company Material Adverse
Effect.
SECTION 3.17. FINDERS' FEES. No investment banker, broker, finder or
other intermediary (other than CS First Boston Corporation ("CS First Boston"))
has been retained by, or authorized to act on behalf of, any Miracle-Gro
Constituent Company and entitled to any fee or commission in connection with
the Merger Transactions or the transactions contemplated by this Agreement.
The Company has previously furnished to Scotts a complete and correct copy of
all agreements between CS First Boston and any Miracle-Gro Constituent Company
(or any Shareholder) pursuant to which such firm would be entitled to any
payment relating to the Merger Transactions or the transactions contemplated by
this Agreement.
SECTION 3.18. OTHER INFORMATION. The statements contained in the
documents and certificates furnished or to be furnished by any of the
Miracle-Gro Constituent Companies or the Shareholders pursuant to this
Agreement and in connection with the transactions contemplated by this
Agreement, when considered in their entirety and taking into account all
subsequent corrections, modifications and amplifications of previously
delivered information, do not contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
contained therein not misleading. Notwithstanding anything herein to the
contrary, none of the Miracle-Gro Constituent Companies nor any Shareholder
makes any representation or warranty regarding any financial projection
relating to the Company and/or the other Miracle-Gro Constituent Companies or
any other indications of future financial performance or results of any
Miracle-Gro Constituent Company.
SECTION 3.19. ENVIRONMENTAL COMPLIANCE. Except as set forth in
Section 3.19 of the Company Disclosure Schedule:
(a) No written notice, notification, demand, request for information,
citation, summons, complaint or order has been issued or filed, no penalty has
been assessed and no investigation or review is pending, or to the knowledge of
the Company or the Shareholders, after due inquiry, threatened by any
governmental or other entity, and there are no existing orders, decrees or
agreements in effect or, to the knowledge of the Company or the Shareholders,
after due inquiry, threatened, (i) with respect to any alleged material
violation of any Environmental Law (as hereafter defined) in connection with
the conduct of the business of any of the Miracle-Gro Constituent Companies
(for purposes of this Section 3.19, the Miracle-Gro Constituent Companies shall
include any predecessor of any of the Miracle-Gro Constituent Companies) or
(ii) with respect to any alleged failure to have any permit, certificate,
license, approval, registration or authorization required by any Environmental
Law in connection with the conduct of the business of the Miracle-Gro
Constituent Companies or (iii) with respect to any generation, treatment,
storage, recycling, transportation, disposal or release (including a release as
defined in 42 USC section 9601) ("Release") of any polluting material, including
petroleum, its derivatives, by-products and other hydrocarbons ("Polluting
Substance").
(b)(i) No Miracle-Gro Constituent Company has, other than as a
generator, handled any Polluting Substance, on any property now or previously
owned or leased by any Miracle-Gro Constituent Company; (ii) no asbestos is
present at any property now or previously owned or leased by any Miracle-Gro
Constituent Company; (iii) there are no underground storage tanks currently in
use or, to the knowledge of the Company or the Shareholders, abandoned at any
property now or previously owned or leased by any Miracle-Gro Constituent
Company which have been used to store or have contained a substance which is
regulated by Environmental Laws or which, if Released into the environment,
would result in pollution, (iv) there has been no Release of a Polluting
Substance with respect
I-13
174
to which any of the Miracle-Gro Constituent Companies may reasonably be
required to perform investigation or remediation, other than routine spills and
leaks which are addressed in the ordinary course of business, at, on or under
any property now or previously owned or leased by any Miracle-Gro Constituent
Company and (v) no Hazardous Substance (as defined in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA")) is present in a reportable or threshold planning quantity, where
such a quantity has been established by statute, ordinance, rule, regulation or
order, at, on or under any property now or previously owned by any Miracle-Gro
Constituent Company.
(c) To the knowledge of the Company and the Shareholders, no
Miracle-Gro Constituent Company has transported or arranged for the
transportation (directly or indirectly) of any Hazardous Substance (as defined
in CERCLA) to any location which is listed or proposed for listing on the
nationwide priorities list established under CERCLA or on any similar state
list.
(d) To the knowledge of the Company and the Shareholders, no oral or
written notification of a Release of a Hazardous Substance (as defined in
CERCLA) has been filed by or on behalf of any Miracle-Gro Constituent Company,
and no property now or previously owned or leased by any Miracle-Gro
Constituent Company is listed, or to the knowledge of the Company or the
Shareholders, proposed for listing, on the National Priorities List promulgated
pursuant to CERCLA.
(e) There are no environmental Liens on any asset of any Miracle-Gro
Constituent Company and no government actions have been taken or are in process
which could subject any of such assets to such Liens.
(f) Except as set forth in Section 3.19(f) of the Company Disclosure
Schedule, there have been no material environmental investigations, studies,
audits, tests, reviews or other analyses conducted by or which are in the
possession of any of the Miracle-Gro Constituent Companies in relation to any
property or facility now or previously owned or leased by any Miracle-Gro
Constituent Company.
(g) For purposes of this Agreement, "Environmental Law" means all
applicable Federal, state and local laws, rules and regulations, including
common law, orders decrees, permits and other binding requirements relating to
pollution, the preservation of the environment and Releases of pollutants into
the environment or the workplace.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF SCOTTS AND MERGER SUBSIDIARY
Scotts and Merger Subsidiary, jointly and severally, represent and
warrant to the Miracle-Gro Constituent Companies and the Shareholders that:
SECTION 4.01. CORPORATE EXISTENCE AND POWER. Each of Scotts and
Merger Subsidiary is a corporation duly incorporated, validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
organization, and has all corporate powers and all governmental licenses,
authorizations, consents and approvals required to own, lease and operate its
properties and to carry on its business as now conducted except to the extent
the failure to have such powers, licenses, authorizations, consents or
approvals would not, individually or in the aggregate, have a material adverse
effect on the business, assets, results of operations or condition (financial
or otherwise) of Scotts and its consolidated Subsidiaries, taken as a whole (a
"Scotts Material Adverse Effect"). Each of Scotts and Merger Subsidiary is
duly qualified or licensed to do business as a foreign corporation, and is in
good
I-14
175
standing, in each jurisdiction where the character of the property owned or
leased by it or the nature of its activities makes such qualification or
licensing necessary, except for those jurisdictions where the failure to be so
qualified or licensed and in good standing would not, individually or in the
aggregate, have a Scotts Material Adverse Effect. Since the date of its
incorporation, Merger Subsidiary has not engaged in any activities other than
in connection with or as contemplated by this Agreement or in connection with
arranging any financing required to consummate the transactions contemplated
hereby.
SECTION 4.02. ORGANIZATIONAL DOCUMENTS. Scotts has heretofore
delivered to the Company true and complete copies of the Articles of
Incorporation and Code of Regulations of Scotts, Merger Subsidiary and New
Miracle-Gro, in each case as currently in effect. Neither Scotts nor Merger
Subsidiary is in violation of any provision of its Articles of Incorporation or
Code of Regulations, except for such violations that would not, individually or
in the aggregate, have a Scotts Material Adverse Effect.
SECTION 4.03. CORPORATE AUTHORIZATION. The execution, delivery and
performance by Scotts and Merger Subsidiary of this Agreement and the
consummation by Scotts and Merger Subsidiary of the transactions contemplated
hereby are within the corporate powers of each of Scotts and Merger Subsidiary
and have been duly authorized by all necessary corporate action (other than the
required approval by Scotts' shareholders of the matters set forth in Sections
9.01(iii) and (iv) (the "Scotts Shareholder Consent"). This Agreement
constitutes a valid and binding agreement of Scotts and Merger Subsidiary.
SECTION 4.04. GOVERNMENTAL AUTHORIZATION. The execution, delivery
and performance by Scotts and Merger Subsidiary of this Agreement and the
consummation by Scotts and Merger Subsidiary of the transactions contemplated
by the Agreement require no consent, approval, authorization or permit of, or
filing with or notification to any governmental or regulatory authority, except
(A) for (i) the filing of a certificate of merger and/or other appropriate
merger documents in accordance with New Jersey Law and Ohio Law, (ii)
compliance with any applicable requirements of the HSR Act; (iii) compliance
with any applicable requirements of the Securities Act, state securities or
"blue sky" laws and state takeover laws; (iv) compliance with any applicable
requirements of Exchange Act; and (v) any applicable requirements of non-United
States competition, antitrust and investment laws and (B) where failure to
obtain such consents, approvals, authorizations or permits, or to make such
filings or notifications, would not prevent or delay the consummation of the
Merger or otherwise prevent Scotts or Merger Subsidiary from performing its
obligations under this Agreement, and would not, individually or in the
aggregate, have a Scotts Material Adverse Effect.
SECTION 4.05. NON-CONTRAVENTION. The execution, delivery and
performance by Scotts and Merger Subsidiary of this Agreement and the
consummation by Scotts and Merger Subsidiary of the transactions contemplated
hereby, assuming receipt of the Scotts Shareholder Consent, do not and will not
(i) contravene or conflict with the Articles of Incorporation or Code of
Regulations of Scotts or Merger Subsidiary; (ii) assuming compliance with the
matters referred to in Section 4.04, contravene or conflict with or constitute
a violation of any provision of law, rule regulation, judgment, injunction,
order or decree binding upon Scotts or Merger Subsidiary; (iii) assuming
satisfaction or waiver of the conditions set forth in Section 9.01(i) and
Section 9.01(ii), constitute a default under or give rise to any right of
termination, cancellation or acceleration of any right or obligation of Scotts
or Merger Subsidiary or to a loss of any material benefit to which Scotts or
Merger Subsidiary is entitled under any material agreement, contract or other
instrument binding upon Scotts or Merger Subsidiary; or (iv) result in the
creation or imposition of any Lien on any asset of Scotts or Merger Subsidiary,
except, in the case of clauses (ii), (iii) and (iv), for any such conflicts,
violations, defaults, breaches or other occurrences which would not prevent or
delay consummation of the Merger, or otherwise prevent Scotts or Merger
Subsidiary from performing its obligations under this Agreement, and would not,
individually or in the aggregate, have a Scotts Material Adverse Effect.
I-15
176
SECTION 4.06. CAPITALIZATION. (a) As of the date hereof, the
authorized capital stock of Scotts consists of 35,000,000 shares of Scotts
Common Stock. As of January 15, 1995, there were outstanding 18,667,064 shares
of Scotts Common Stock and employee stock options to purchase an aggregate of
1,428,705 shares of Scotts Common Stock (of which options to purchase an
aggregate of 575,816 shares were exercisable). All of the outstanding common
shares of Scotts have been duly authorized and validly issued and are fully
paid and nonassessable. Except as set forth in this Section and except for
changes since January 15, 1995, resulting from the exercise of employee stock
options outstanding on such date, there are outstanding (i) no shares of
capital stock or other voting securities of Scotts, (ii) no securities of
Scotts convertible into or exchangeable for shares of capital stock or voting
securities of Scotts, and (iii) no options or other rights to acquire from
Scotts, and no obligation of Scotts to issue, any capital stock, voting
securities or securities convertible into or exchangeable for capital stock or
voting securities of Scotts (the items in clauses (i), (ii) and (iii) being
referred to collectively as the "Scotts Securities"). There are no outstanding
obligations of Scotts or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any Scotts Securities. "Subsidiary," with respect to Scotts,
means any corporation or other entity of which securities or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are directly or
indirectly owned by Scotts.
(b) The authorized capital stock of Merger Subsidiary consists of
1,000 common shares, without par value. As of the date hereof, there are
outstanding 1,000 common shares. All of the outstanding common shares of
Merger Subsidiary have been duly authorized and validly issued and are fully
paid and nonassessable. Except as set forth in this Section, there are
outstanding (i) no shares of capital stock or other voting securities of
Merger Subsidiary, (ii) no securities of Merger Subsidiary convertible into or
exchangeable for shares of capital stock or voting securities of Merger
Subsidiary, and (iii) no options or other rights to acquire from Merger
Subsidiary, and no obligation of Merger Subsidiary to issue, any capital stock,
voting securities or securities convertible into or exchangeable for capital
stock or voting securities of Merger Subsidiary.
(c) The Merger Consideration, when issued in accordance with this
Agreement, will be duly authorized, validly issued, in the case of the
Convertible Preferred Stock, fully paid and non-assessable, and, in the case
of the Warrants, valid and binding obligations of Scotts.
SECTION 4.07. SEC FILINGS; FINANCIAL STATEMENTS. (a) Scotts has
filed all forms, reports and documents required to be filed by it with the SEC
since September 30, 1992, and has heretofore made available to the Company and
the Shareholders, in the form filed with the SEC (excluding any exhibits
thereto, unless otherwise specifically requested by the Company or the
Shareholders), (i) its Annual Reports on Form 10-K for the fiscal years ended
September 30, 1992, 1993 and 1994, respectively; (ii) all proxy statements
relating to meetings of Scotts' shareholders (whether annual or special) held
since October 1, 1992; and (iii) all other reports and registration statements
(other than Quarterly Reports on Form 10-Q and Current Reports on Form 8-K
filed prior to September 30, 1994) filed with the SEC since October 1, 1992
(the forms, reports and other documents referred to in clauses (i) through
(iii) being referred to herein, collectively, as the "Scotts Disclosure
Documents"). The Scotts Disclosure Documents and any other forms, reports or
other documents filed by Scotts with the SEC after the date of this Agreement
but prior to the Effective Time (x) were prepared, or will be prepared, in
accordance with the Securities Act or the Exchange Act, as the case may be, and
(y) did not at the time they were filed, or will not at the time they are
filed, with the SEC contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements made therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in reliance upon
and in conformity with information furnished to Scotts by any Miracle-Gro
Constituent Company or any Shareholder. Notwithstanding anything herein to the
contrary, neither Scotts nor Merger Subsidiary makes any representation or
warranty regarding any financial projection relating to
I-16
177
Scotts or any of its Subsidiaries or any other indications of future financial
performance or results of Scotts or any of its Subsidiaries.
(b) Each of the consolidated financial statements (including any
notes thereto) contained in the Annual Report on Form 10-K for the fiscal year
ended September 30, 1994 (the "1994 Form 10-K"), was prepared in accordance
with generally accepted accounting principles and fairly presents the
consolidated financial position, results of operations and cash flows of Scotts
and its consolidated subsidiaries as at the respective dates thereof and for
the respective periods indicated therein.
(c) Except as and to the extent set forth in the consolidated balance
sheet included in the 1994 Form 10-K, or as otherwise set forth in Section 4.07
of the disclosure schedule previously delivered to the Company by Scotts (the
"Scotts Disclosure Schedule"), Scotts had no liability or obligation of any
nature (whether accrued, contingent, absolute, determined, determinable or
otherwise) that (i) would be required to be reflected in such consolidated
balance (including the notes thereto) or (ii) would have, or could reasonably
be likely to have, individually or in the aggregate, a Scotts Material Adverse
Effect.
SECTION 4.08. ABSENCE OF CERTAIN CHANGES. Since September 30, 1994,
and except as disclosed to the Company in Section 4.08 of the Scotts Disclosure
Statement or as otherwise contemplated by this Agreement, Scotts has conducted
its business only in the ordinary course consistent with past practice and
there has not been:
(a) any event, occurrence or development of a
state of circumstances or facts which has had or reasonably
could be expected to have a Scotts Material Adverse Effect;
(b) any declaration, setting aside or payment of
any dividend or other distribution with respect to any shares
of capital stock of Scotts, or any repurchase, redemption or
other acquisition by Scotts or any of its Subsidiaries of any
outstanding shares of capital stock or other securities of,
or other ownership interests in, Scotts;
(c) any amendment of any material term of any
outstanding security of Scotts;
(d) any incurrence, assumption or guarantee by
Scotts of indebtedness for borrowed money, which incurrence,
assumption or guarantee is material to Scotts and its
Subsidiaries, taken as a whole;
(e) any creation or assumption by Scotts of a Lien
on any material asset, which creation or assumption is
material to Scotts and its Subsidiaries, taken as a whole,
other than those in the ordinary course of business
consistent with past practices;
(f) any making of any loan, advance or capital
contribution to or investment in any Person, which is
material to Scotts and its Subsidiaries, taken as whole,
other than loans, advances or capital contributions to or
investments in any Subsidiary of Scotts made in the ordinary
course of business consistent with past practices;
(g) any transaction or commitment made, or any
contract or agreement entered into, by Scotts or its
Subsidiaries relating to their respective assets or business
(including the acquisition or disposition of any assets) or
any relinquishment by Scotts or its Subsidiaries of any
contract or other right, in either case, material to Scotts
and its Subsidiaries, taken as a whole, other than
I-17
178
transactions and commitments in the ordinary course of
business consistent with past practice and those contemplated
by this Agreement;
(h) any change in any method of accounting or
accounting practice by Scotts, except for any such change
required by reason of a concurrent change in generally
accepted accounting principles; or
(i) any labor dispute, other than routine
individual grievances, or any activity or proceeding by a
labor union or representative thereof to organize any
employees of Scotts, which employees were not subject to a
collective bargaining agreement at September 30, 1994, or any
lockouts, strikes, slowdowns, work stoppages or threats
thereof by or with respect to such employees.
SECTION 4.09. NO UNDISCLOSED MATERIAL LIABILITIES. Except as and to
the extent set forth in the 1994 Form 10-K, or as otherwise set forth in
Section 4.09 of the Scotts Disclosure Schedule, neither Scotts nor any of its
Subsidiaries had any liability or obligation of any nature (whether accrued,
contingent, absolute, determined, determinable or otherwise) that (i) would be
required to be reflected on a consolidated balance sheet of Scotts and its
Subsidiaries (including the notes thereto) or (ii) would have, or could
reasonably be likely to have, individually or in the aggregate, a Scotts
Material Adverse Effect.
SECTION 4.10. LITIGATION. Except as set forth in the 1994 Form 10-K
or in Section 4.10 of the Scotts Disclosure Schedule, there is no claim,
action, suit, investigation or proceeding pending against or, to the knowledge
of Scotts, threatened against Scotts or any of its Subsidiaries or any of their
respective properties before any court or arbitrator or any governmental body,
agency or official which, individually or in the aggregate, would reasonably be
likely to have a Scotts Material Adverse Effect or would reasonably be likely
to have impair the ability of Scotts or Merger Subsidiary to consummate the
Merger or the other transactions contemplated by this Agreement.
SECTION 4.11. TAXES. Scotts and each of its Subsidiaries has timely
filed all Tax Returns required to be filed with the appropriate tax authority
through the date hereof, the failure of which to file would result in a Scotts
Material Adverse Effect, and shall timely file all such Tax Returns required to
be filed on or before the Effective Time. To the best knowledge of Scotts,
such Tax Returns are and will be true, correct and complete in all material
respects. Scotts and each of its Subsidiaries has paid and discharged all
federal, state, local and foreign Taxes due from them, other than such Taxes
that are adequately reserved as shown on the balance sheet of Scotts included
in the 1994 Form 10-K (the "Scotts Balance Sheet"). Neither the Internal
Revenue Service nor any other taxing agency or authority, domestic or foreign,
is now asserting or, to the best knowledge of Scotts, threatening to assert
against Scotts or any of its Subsidiaries any material deficiency or claim for
additional Taxes. There are no unexpired waivers by Scotts or any of its
Subsidiaries of any statutes of limitations with respect to Taxes which,
individually or in the aggregate would have a Scotts Material Adverse Effect.
The accruals and reserves for Taxes reflected in the Scotts Balance Sheet are
adequate for the periods covered. Scotts and each of its Subsidiaries has
withheld or collected and paid over to the appropriate governmental authorities
or is properly holding for such payment all Taxes required by law to be
withheld or collected, except to the extent that the failure to so withhold or
collect and pay would not, individually or in the aggregate, have a Scotts
Material Adverse Effect. There are no Liens for Taxes upon the assets of
Scotts or any of its Subsidiaries, which, individually or in the aggregate
would have a Scotts Material Adverse Effect or other than Liens for current
Taxes not yet due and payable. Scotts has not agreed to make, and is not
required to make, any adjustment under Section 481(a) of the Code. Neither
Scotts nor any of its Subsidiaries is a party to any agreement, contract,
arrangement or plan that has resulted, or could result, individually or in the
aggregate, in the payment of "excess parachute payments" within the meaning of
Section 280G of the Code. For
I-18
179
purposes of this Section 4.11 only, a Scotts Material Adverse Effect shall mean
a Loss (as hereafter defined) in excess of $500,000.
SECTION 4.12. ERISA. (a) Section 4.12(a) of the Scotts Disclosure
Schedule includes a list identifying each material "employee benefit plan," as
defined in Section 3(3) of ERISA, which (i) is subject to any provision of
ERISA and (ii) is maintained, administered or contributed to by Scotts, any of
its Subsidiaries or any affiliate (as defined below) and covers any employee or
former employee of Scotts, any of its Subsidiaries or any affiliate or under
which Scotts, any of its Subsidiaries or any affiliate has any liability.
Copies of such plans (and, if applicable and available, related trust
agreements) and all amendments thereto have been furnished to the Company.
Such plans are referred to collectively herein as the "Scotts Employee Plans."
For purposes of this Section, "affiliate" of any Person means any other Person
which, together with such Person, would be treated as a single employer under
Section 414 of the Code. The only Employee Plans which individually or
collectively would constitute an "employee pension benefit plan" as defined in
Section 3(2) of ERISA (the "Scotts Pension Plans") are identified as such in
the list referred to above. Scotts has provided the Company with (x) complete
age, salary, service and related data as of December 31, 1994 for employees and
former employees of Scotts, any of its Subsidiaries and any affiliate covered
under the Scotts Pension Plans who had a salary in excess of $100,000 for the
fiscal year ended September 30, 1994 and (y) the two most recent annual reports
(Form 5500 including, if applicable, Schedule B thereto) prepared in connection
with any such plan.
(b) Except as otherwise identified in Section 4.12(b) of the Scotts
Disclosure Schedule, no Scotts Employee Plan constitutes a "multiemployer
plan", as defined in Section 3(37) of ERISA (a "Scotts Multiemployer Plan"),
and no Scotts Employee Plan is maintained in connection with any trust
described in Section 501(c)(9) of the Code. The only Scotts Employee Plans
that are subject to Title IV of ERISA (the "Scotts Retirement Plans") are
identified in the list of such Plans heretofore provided to the Company by
Scotts. As of the Scotts Balance Sheet Date, the fair market value of the
assets of each Scotts Retirement Plan (excluding for these purposes any accrued
but unpaid contributions) exceeded the present value of all benefits accrued
under such Scotts Retirement Plan determined on a termination basis using the
assumptions established by the PBGC as in effect on such date. No "accumulated
funding deficiency," as defined in Section 412 of the Code, has been incurred
with respect to any Scotts Pension Plan, whether or not waived. Scotts knows
of no "reportable event," within the meaning of Section 4043 of ERISA for which
the 30-day notice requirement to the PBGC has not been waived, and no event
described in Section 4041, 4042, 4062 or 4063 of ERISA has occurred in
connection with any Scotts Employee Plan, other than a "reportable event" that,
individually or in the aggregate, will not have a Scotts Material Adverse
Effect. No condition exists and no event has occurred that would constitute
grounds for termination of any Scotts Retirement Plan or, with respect to any
Scotts Employee Plan which is a Scotts Multiemployer Plan, presents a material
risk of a complete or partial withdrawal under Title IV of ERISA and neither
Scotts, any of its Subsidiaries nor any of their respective affiliates has
incurred any material liability under Title IV of ERISA arising in connection
with the termination of, or complete or partial withdrawal from, any plan
covered or previously covered by Title IV of ERISA. If a "complete withdrawal"
by Scotts, its Subsidiaries and all of their respective affiliates were to
occur as of the Effective Time with respect to all Scotts Employee Plans which
are Scotts Multiemployer Plans, neither Scotts, its Subsidiaries nor any such
affiliate would incur any material withdrawal liability under Title IV of
ERISA. To Scotts' knowledge, nothing done or omitted to be done and no
transaction or holding of any asset under or in connection with any Scotts
Employee Plan has or will make Scotts or any of its Subsidiaries or any officer
or director of Scotts or any of its Subsidiaries subject to any liability under
Title I of ERISA or liable for any tax pursuant to Section 4975 of the Code
that could, individually or in the aggregate, have a Scotts Material Adverse
Effect.
(c) Each Scotts Employee Plan which is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so qualified during the
period from its adoption to date, and each trust forming a part thereof is
exempt from tax pursuant to Section 501(a) of the Code. Scotts has furnished
to the Company copies of the most
I-19
180
recent Internal Revenue Service determination letters with respect to each
such Plan. Each Scotts Employee Plan has been maintained in material
compliance with its terms and with the requirements prescribed by any and all
statutes, orders, rules and regulations, including but not limited to ERISA and
the Code, which are applicable to such Plan.
(d) There is no contract, agreement, plan or arrangement covering any
employee or former employee of Scotts, any of its Subsidiaries or any affiliate
that, individually or collectively, could give rise to the payment of any
amount that would not be deductible pursuant to the terms of Sections 162(a)(1)
or 280G of the Code.
(e) Section 4.12(e) of the Scotts Disclosure Schedule sets forth a
list of each material employment, severance or other similar contract,
arrangement or policy and each plan or arrangement (written or oral) providing
for insurance coverage (including any self-insured arrangements), disability
benefits, supplemental unemployment benefits, retirement benefits or for
deferred compensation, stock options, stock appreciation or post-retirement
insurance, compensation or benefits which (i) is not a Scotts Employee Plan,
(ii) is entered into, maintained or contributed to, as the case may be, by
Scotts, its Subsidiaries or any of their respective affiliates and (iii) covers
any domestic employee or former employee of Scotts, any of its Subsidiaries or
any of their respective affiliates. Such contracts, plans and arrangements as
are described above are referred to collectively herein as the "Scotts Benefit
Arrangements." Scotts has furnished or made available to the Company copies or
descriptions of such Scotts Benefit Arrangements. Each Scotts Benefit
Arrangement has been maintained in substantial compliance with its terms and
with the requirements prescribed by any and all statutes, orders, rules and
regulations that are applicable to such Scotts Benefit Arrangement.
(f) The excess of the present value of the projected liability in
respect of post-retirement health and medical benefits for retired employees of
Scotts, its Subsidiaries and their respective affiliates, determined using
assumptions that are reasonable in the aggregate, over the fair market value of
any fund, reserve or other assets segregated for the purpose of satisfying such
liability (including for such purposes any fund established pursuant to Section
401(h) of the Code) does not in the aggregate exceed $20,000,000. No condition
exists that would prevent Scotts of any of its Subsidiaries from amending or
terminating any Scotts Employee Plan or Scotts Benefit Arrangement providing
health or medical benefits in respect of any active employee of Scotts or any
of its Subsidiaries other than limitations imposed under the terms of a
collective bargaining agreement.
(g) Except as set forth in Section 4.12(g) of the Scotts Disclosure
Schedule, neither Scotts nor any of its Subsidiaries is a party to or subject
to any union contract or any employment contract or arrangement providing for
annual future compensation of $100,000 or more with any domestic officer,
consultant, director or employee.
(h) The consummation of the transactions contemplated by this
Agreement will not result in any material acceleration of benefits, or the
modification of the terms of any benefits, payable to or for the benefit of any
officer, director or employee of Scotts or any of its Subsidiaries, including
any acceleration of vesting of stock options or any changes in the amounts or
timing of any amounts payable under any incentive arrangement.
SECTION 4.13. TRADEMARKS, PATENTS AND COPYRIGHT. (a) Section
4.13(a) of the Scotts Disclosure Schedule sets forth a true and complete list
of (i) all patents, patent rights, trademarks, trademark rights, trade names,
copyrights, service marks, trade secrets, applications for trademarks and for
service marks, know-how and other proprietary rights and information used or
held for use in connection with the business of Scotts as currently conducted
(collectively, "Scotts Intellectual Property Rights") and (ii) all licenses,
commitments and other agreements to which Scotts or any of its Subsidiaries is
a party providing for the license of any Intellectual Property Rights to or
from any other Person.
I-20
181
(b) Except as set forth in Section 4.13(b) of the Scotts Disclosure
Schedule, Scotts and its Subsidiaries own or possess adequate licenses or other
rights to use all of the Scotts Intellectual Property Rights; there are no
Scotts Intellectual Property Rights necessary for use in connection with the
business of Scotts as currently conducted which are not owned or possessed by
Scotts or its Subsidiaries; and Scotts is not aware of any assertion or claim
challenging the validity of any of the Scotts Intellectual Property Rights; and
the conduct of the business of Scotts as currently conducted, to the best
knowledge of Scotts, does not conflict in any way with any patent, patent
right, license, trademark, trademark right, trade name, trade name right,
service mark or copyright of any third party. To the best knowledge of Scotts,
there are no infringements of any proprietary rights owned by or licensed by or
to Scotts or any of its Subsidiaries that individually or in the aggregate
would have a Scotts Material Adverse Effect.
SECTION 4.14. MATERIAL CONTRACTS. (a) Except for agreements,
contracts, plans, leases, arrangements or commitments (in each case, oral or
written) set forth in Section 4.14(a) of the Scotts Disclosure Schedule or set
forth in the exhibit list to the 1994 Form 10-K, neither Scotts nor any of its
Subsidiaries is a party to or subject to:
(i) any lease which is material to Scotts and its
Subsidiaries, taken as a whole;
(ii) any contract for the purchase of materials,
supplies, goods, services, equipment or other assets which is
material to Scotts and its Subsidiaries, taken as a whole;
(iii) any sales, distribution or other similar
agreement which is material to Scotts and its Subsidiaries,
taken as a whole;
(iv) any partnership, joint venture or other
similar contract arrangement or agreement which is material
to Scotts and its Subsidiaries, taken as a whole;
(v) any contract relating to indebtedness for
borrowed money or the deferred purchase price of property
(whether incurred, assumed, guaranteed or secured by any
asset), which is material to Scotts and its Subsidiaries,
taken as a whole;
(vi) any license agreement, franchise agreement or
agreement in respect of similar rights, which is material to
Scotts and its Subsidiaries, taken as a whole
(vii) any agency, dealer, sales representative or
other similar agreement which is material to Scotts and its
Subsidiaries, taken as a whole;
(viii) any contract or other document that
substantially limits the ability of Scotts or any of its
Subsidiaries to compete in any material line of business or
in a material way with any Person or in any area or which
would so restrict Scotts or any of its Subsidiaries after the
Effective Time; or
(ix) any other contract or commitment of Scotts or
any of its Subsidiaries not made in the ordinary course of
business that is material to Scotts and its Subsidiaries,
taken as a whole.
(b) Each agreement, contract, lease, arrangement and commitment
disclosed in Section 4.14(a) of the Scotts Disclosure Schedule or required to
be disclosed pursuant to this Section is a valid and binding agreement of
Scotts or such Subsidiary and is in full force and effect, and neither Scotts,
such Subsidiary nor, to the knowledge of Scotts, any other party thereto is in
default in any material respect under the terms of any such agreement,
contract, plan, lease arrangement or commitment.
I-21
182
SECTION 4.15. COMPLIANCE WITH LAWS. Neither Scotts nor any of its
Subsidiaries is in violation of, or has violated, any applicable provisions of
any laws, rules, statutes, ordinances or regulations, except for violations
that would not, individually or in the aggregate, have a Scotts Material
Adverse Effect.
SECTION 4.16. FINDERS' FEES. No investment banker, broker, finder or
other intermediary (other than Smith Barney, Inc. ("Smith Barney")) has been
retained by, or authorized to act on behalf of, Scotts and entitled to any fee
or commission in connection with the Merger or the transactions contemplated by
this Agreement. Scotts has previously furnished to the Company a complete and
correct copy of all agreements between Smith Barney and Scotts pursuant to
which such firm would be entitled to any payment relating to the Merger or the
transactions contemplated by this Agreement.
SECTION 4.17. ENVIRONMENTAL COMPLIANCE. Except as set forth in
Section 4.17 of the Scotts Disclosure Schedule:
(a) No written notice, notification, demand, request for information,
citation, summons, complaint or order has been issued or filed, no penalty has
been assessed and no investigation or review is pending, or to the knowledge of
Scotts, after due inquiry, threatened by any governmental or other entity, and
there are no existing orders, decrees or agreements in effect or, to the
knowledge of Scotts, after due inquiry, threatened, (i) with respect to any
alleged material violation of any Environmental Law in connection with the
conduct of the business of Scotts (for purposes of this Section 4.17, Scotts
shall include any predecessor of Scotts) or (ii) with respect to any alleged
failure to have any permit, certificate, license, approval, registration or
authorization required by Environmental Law in connection with the conduct of
the business of Scotts or (iii) with respect to any Release of a Polluting
Substance with respect to which Scotts is or may be liable, except in each
case such alleged material violation, alleged failure or Release which could
not reasonably be expected, individually or in the aggregate, to result in a
Loss (as hereafter defined) by Scotts in excess of $100,000.
(b) Except as set forth in Section 4.17(b) of the Scotts Disclosure
Schedule, (i) Scotts has not, other than as a generator, handled any Polluting
Substance on any property now or previously owned or leased by Scotts or its
Subsidiaries; (ii) no asbestos is present at any property now or previously
owned or leased by Scotts or its Subsidiaries; (iii) there are no underground
storage tanks currently in use or, to the knowledge of Scotts, abandoned at any
property now or previously owned or leased by Scotts or any of its Subsidiaries
which have been used to store or have contained a substance which is regulated
by Environmental Laws or which, if released into the environment, would result
in pollution, (iv) there has been no Release of any Polluting Substance with
respect to which Scotts or any of its Subsidiaries may reasonably be required
to perform investigation or remediation, other than routine spills and leaks
which are addressed in the ordinary course of business, at, on or under any
property now or previously owned or leased by Scotts or any of its Subsidiaries
and (v) no Hazardous Substance (as defined in CERCLA) is present in a
reportable or threshold planning quantity, where such a quantity has been
established by statute, ordinance, rule, regulation or order, at, on or under
any property now or previously owned by Scotts or any of its Subsidiaries.
(c) To the knowledge of Scotts, neither Scotts nor any or its
Subsidiaries has transported or arranged for the transportation (directly or
indirectly) of any Hazardous Substance (as defined in CERCLA) to any location
which is listed or proposed for listing on the Nationwide Priorities List
established under CERCLA or on any similar state list.
(d) To the knowledge of Scotts, no oral or written notification of a
Release of a Hazardous Substance (as defined in CERCLA) has been filed by or on
behalf of Scotts or any of its Subsidiaries, and no property now or
I-22
183
previously owned or leased by Scotts or any of its Subsidiaries is listed, or
to the knowledge of Scotts, proposed for listing, on the National Priorities
List promulgated pursuant to CERCLA.
(e) There are no environmental Liens on any asset of Scotts or any of
its Subsidiaries and no government actions have been taken or are in process
which could subject any of such assets to such Liens.
(f) Except as set forth in Section 4.17(f) of the Scotts Disclosure
Schedule, there have been no material environmental investigations, studies,
audits, tests, reviews or other analyses conducted by or which are in the
possession of Scotts in relation to any property or facility now or previously
owned or leased by Scotts or any of its Subsidiaries.
SECTION 4.18. OPINION OF FINANCIAL ADVISOR. Scotts received the
opinion of Smith Barney orally on January 24, 1995 to the effect that, as of
such date, the Merger Transactions are fair to the shareholders of Scotts from
a financial point of view and a copy of the written confirmatory opinion to
such effect will be delivered to the Company promptly upon receipt.
ARTICLE V
COVENANTS OF THE MIRACLE-GRO CONSTITUENT
COMPANIES AND THE SHAREHOLDERS
Each of the Miracle-Gro Constituent Companies and the Shareholders,
jointly and severally, agree that:
SECTION 5.01. CONDUCT OF THE BUSINESS OF THE MIRACLE-GRO CONSTITUENT
COMPANIES. From the date hereof until the Effective Time unless Scotts shall
otherwise have consented in writing, the Miracle-Gro Constituent Companies
shall conduct their respective businesses in the ordinary course consistent
with past practice and shall use their best efforts to preserve intact their
business organizations and relationships with third parties and to keep
available the services of their present officers and employees. Without
limiting the generality of the foregoing, from the date hereof until the
Effective Time, except as contemplated or required by this Agreement or set
forth in Section 5.01 of the Company Disclosure Schedule, none of the
Miracle-Gro Constituent Companies shall, directly or indirectly, do, or propose
or agree to do, any of the following without the prior written consent of
Scotts:
(a) adopt or propose any change in their
respective certificates of incorporation or bylaws or
equivalent organizational documents;
(b) merge or consolidate with any other Person or
acquire a material amount of assets of any other Person;
(c) lease, license or otherwise dispose of any
material assets or property except (i) pursuant to existing
contracts or commitments or (ii) in the ordinary course
consistent with past practice;
(d) declare, set aside, make or pay any dividend
or other distribution, payable in cash, stock, property or
otherwise, with respect to any of their respective capital
stock;
(e) reclassify, combine, split, subdivide or
redeem, purchase or otherwise acquire, directly or
indirectly, any of their respective capital stock;
I-23
184
(f) increase the compensation payable or to become
payable to any of the Miracle-Gro Constituent Companies'
executive officers, directors or employees, except for
increases in the ordinary course of business consistent with
past practice, or grant any severance or termination pay to,
or enter into any employment or severance agreement with any
director or executive officer, or establish, adopt, enter
into or amend in any material respect or take action to
accelerate any rights or benefits under any collective
bargaining, bonus, profit sharing, thrift, compensation,
stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other
plan, agreement, trust, fund, policy or arrangement for the
benefit of any director, executive officer or employee;
(g) agree or commit to do any of the foregoing; or
(h) take or agree or commit to take any action
that would make any representation and warranty of the
Miracle-Gro Constituent Companies or the Shareholders
hereunder inaccurate in any respect at, or as of any time
prior to, the Effective Time.
SECTION 5.02. ACCESS TO INFORMATION; CONFIDENTIALITY. (a) From the
date hereof until the Effective Time, the Company shall afford Scotts, its
officers, directors, employees, counsel, financial advisors, auditors and other
authorized representatives (the "Scotts Representatives") reasonable access to
the offices, properties, books and records of each of the Miracle-Gro
Constituent Companies, will furnish to Scotts and the Scotts Representatives
such financial and operating data and other information as such Persons may
reasonably request and will instruct the Miracle-Gro Constituent Companies'
employees, counsel and financial advisors to cooperate with Scotts in its
investigation of the business of the Miracle-Gro Constituent Companies;
provided that no investigation pursuant to this Section shall affect any
representation or warranty given by the Miracle-Gro Constituent Companies and
the Shareholders to Scotts and Merger Subsidiary hereunder.
(b) All information obtained by Scotts pursuant to this Section shall
be kept confidential in accordance with the confidentiality agreements dated as
of October 3, 1994, between Scotts and the Company.
SECTION 5.03. OTHER OFFERS. From the date hereof until the later of
the termination of this Agreement and the Effective Time, none of the
Miracle-Gro Constituent Companies, the Shareholders or any officer, director,
employee or other agent of any of the Miracle-Gro Constituent Companies will,
directly or indirectly, (i) take any action to solicit, initiate or encourage
any inquiries or the making or implementation of any proposal or offer with
respect to a merger, acquisition, consolidation or similar transaction
involving, or any purchase of all or any significant portion of the assets or
any equity securities of, any Miracle-Gro Constituent Company (a "Company
Acquisition Proposal"), other than the transactions contemplated by this
Agreement, or (ii) engage in negotiations with, or disclose any nonpublic
information relating to any of the Miracle-Gro Constituent Companies or afford
access to the properties, books or records of any of the Miracle-Gro
Constituent Companies to, any Person that the Company believes may be
considering making, or has made, a Company Acquisition Proposal. The Company
will promptly notify Scotts upon receipt of any Company Acquisition Proposal or
any indication that any Person is considering making a Company Acquisition
Proposal or any request for nonpublic information relating to any of the
Miracle-Gro Constituent Companies or for access to the properties, books or
records of any of the Miracle-Gro Constituent Companies by any Person that may
be considering making, or has made, a Company Acquisition Proposal and will
keep Scotts fully informed of the status and details of any such Company
Acquisition Proposal, indication or request.
SECTION 5.04. NOTICES OF CERTAIN EVENTS. The Company shall promptly
notify Scotts of:
I-24
185
(i) any notice or other communication from any
Person alleging that the consent of such Person is or may be
required in connection with the transactions contemplated by
this Agreement;
(ii) any notice or other communication from any
governmental or regulatory agency or authority in connection
with the transactions contemplated by this Agreement;
(iii) the occurrence, or non-occurrence, of any
event the occurrence, or non-occurrence, of which would be
likely to cause (x) any representation or warranty contained
in this Agreement to be untrue or inaccurate or (y) any
covenant, condition or agreement contained in this Agreement
not to be complied with or satisfied; and
(iv) any failure of any Miracle-Gro Constituent
Company or any Shareholder to comply with or satisfy any
covenant, condition or agreement to be complied with or
satisfied by it hereunder;
provided, however, that the delivery of any notice pursuant to this Section
shall not limit or otherwise affect the remedies available hereunder to Scotts.
SECTION 5.05. CERTAIN LOANS. (a) The parties acknowledge that
Miracle-Gro Delaware owes $5.0 million to the Hagedorn Family Fund. The
parties agree that such amount shall be paid, without interest, as follows:
All available cash at such company (or the successor division of New
Miracle-Gro treated for this purpose as a separate business unit), including
all amounts received from the sale of inventory or the collection of accounts
receivable, shall be paid to the Hagedorn Family Fund until the amount set
forth in the first sentence of this paragraph has been repaid in full. If such
amount has not been paid in full by the close of business on September 30,
1995, Scotts will cause Miracle-Gro Delaware or New Miracle-Gro, as its
successor, to pay the remaining balance immediately following such date.
(b) The parties acknowledge that Miracle-Gro UK owes $3.5 million to
the Hagedorn Family Fund. The parties agree that payment shall be made as
follows, without interest: All available cash at such company (or the
successor division of New Miracle-Gro treated for this purpose as a separate
business unit), including all amounts received from the sale of inventory or
the collection of accounts receivable, shall be paid to the Hagedorn Family
Fund, such payments to continue until the close of business on September 30,
1995, or until there is no remaining cash or inventory, at which point such
payments shall cease. If the amount set forth in the first sentence of this
paragraph (b) has not been repaid in full on such date the outstanding balance
shall be forgiven.
(c) Following the Effective Time, Scotts shall operate the businesses
of Miracle-Gro Delaware and Miracle-Gro UK in the ordinary course of business
and will not take any action restricting the sale of inventory, the collection
of accounts receivable, or any other action which would interfere with the
payments contemplated by this Section 5.05.
I-25
186
ARTICLE VI
STANDSTILL AND VOTING PROVISIONS;
RESTRICTIONS ON TRANSFER
SECTION 6.01. CERTAIN DEFINITIONS. For purposes of this Article VI
only, the following terms have the following meanings:
(a) "Affiliate" and "Associate" shall have the meaning set forth in
Rule 405 of Regulation C under the Securities Act.
(b) "beneficial ownership" and "beneficially own" shall have the
meanings set forth in Rule 13d-3 under the Exchange Act.
(c) "group" shall have the meaning comprehended by Section 13(d)(3)
of the Exchange Act; provided that, for purposes of this Agreement, the
Shareholders shall not by themselves, or together with any Permitted
Transferee, constitute a "group."
(d) The "Market Price" of a share of Scotts Common Stock on any date
means (i) the last reported sales price of the Scotts Common Stock on the
principal national securities exchange on which the Scotts Common Stock is
listed or admitted to trading or, if no such reported sale takes place on any
such day, the average of the closing bid and asked prices thereon, as reported
in THE WALL STREET JOURNAL, or (ii) if the Scotts Common Stock shall not be
listed or admitted to trading on a national securities exchange, the last
reported sales price on the NASDAQ National Market System or, if no such
reported sale takes place on any such day, the average of the closing bid and
asked prices thereon, as reported in THE WALL STREET JOURNAL, or (iii) if the
Scotts Common Stock shall not be quoted on such National Market System nor
listed or admitted to trading on a national securities exchange, then the
average of the closing bid and asked prices, as reported by THE WALL STREET
JOURNAL for the over-the-counter market, or (iv) if there is no public market
for the Scotts Common Stock, the fair market value of a share of Scotts Common
Stock as determined in good faith by the Board of Directors of Scotts after
consultation with an independent investment bank of national repute (whose
report will be made available to the Shareholders prior to such determination
of fair market value).
(e) "Permitted Transferee" means the Shareholders, on the one hand,
and any other Shareholder, any lineal descendant of any Shareholder, any member
of the immediate family of any Shareholder or such descendant, any heir of the
foregoing, any trust for the benefit of any of the foregoing (including a
voting trust), any private charitable foundation or any partnership, limited
liability company or corporation owned or controlled by some or all of the
foregoing or any charity (public or private) which is transferred a
non-controlling interest (except as otherwise required by applicable law) in a
Permitted Transferee, on the other; provided, that such Permitted Transferee
has agreed in writing to be bound by the terms of this Agreement as if it were
a "Shareholder" hereunder.
(f) "Shareholder Representative" means a Shareholder who is a natural
person and has been chosen in writing, with notice thereof to Scotts, by a
majority of the Shareholders based on their then percentage of beneficial
ownership of Total Voting Power.
(g) "Standstill Percentage" means 43% of Total Voting Power.
I-26
187
(h) "Total Voting Power" means, at any time, the aggregate number of
votes which may be cast by holders of outstanding Voting Stock.
(i) "Voting Stock" means the Scotts Common Stock, the Convertible
Preferred Stock and any other securities (including voting preferred shares)
issued by Scotts which are entitled to vote generally for the election of
directors of Scotts, whether currently outstanding or hereafter issued (other
than securities having such powers only upon the occurrence of a contingency).
(j) "Voting Stock Equivalents" means the Warrants and any other
security that is not Voting Stock but is convertible into or exchangeable for
Voting Stock or is an option to purchase such securities or Voting Stock.
SECTION 6.02. BOARD OF DIRECTORS. (a) At the Effective Time,
Scotts will take such action as may be necessary to increase the size of the
Board of Directors to 12 and to fill a vacancy existing in each of the three
classes of directors (assuming the amendment of the Code of Regulations of
Scotts as contemplated by Section 9.01(v) hereof) with a director designated by
the Shareholder Representative (or in the event that the condition set forth in
Section 9.01(v) is waived by the parties, with three directors designated by
the Shareholder Representative) (each, a "Miracle-Gro Director" and,
collectively, the "Miracle-Gro Directors"). Scotts acknowledges and accepts
that the initial three Miracle-Gro Directors are the persons named in Section
9.02(iv), it being understood that any future successor designees will be
reasonably acceptable to the Scotts Board of Directors.
(b) Until the earlier of the fifth anniversary of the Effective Time
and such time as the Shareholders no longer beneficially own at least 19% of
the Voting Stock, Scotts covenants and agrees as follows:
(i) except as contemplated by this Agreement or as required
in the terms of the Convertible Preferred Stock, Scotts will not take
or recommend to its shareholders any action which would cause the
Board of Directors of Scotts to consist of any number of directors
other than twelve directors divided into three classes of four
directors each;
(ii) to the extent that, and for so long as, Scotts
maintains a Nominating Committee and/or an Executive Committee of the
Board of Directors, such committee(s) shall consist of four directors,
one of whom shall be a Miracle-Gro Director;
(iii) to the extent that, and for so long as, any of the
Miracle-Gro Directors is qualified under the then-current rules and
regulations of the Nasdaq National Market, or any exchange on which
the Scotts Common Stock is listed, the rules and regulations under the
Code relating to the qualification of employee stock benefit plans and
Scotts' Code of Regulations, the Audit Committee, Compensation
Committee and any newly created committees of the Board of Directors
shall consist of four directors, and one of the Miracle-Gro Directors
shall be entitled to sit on such committee(s) to the same extent, and
on the same basis, as the other members of the Board of Directors; and
(iv) subject to the fiduciary duties of the members of the
Nominating Committee to Scotts' shareholders, Scotts will use its best
efforts to cause the Nominating Committee to recommend for election to
the class of directors whose terms expire in any year, one Miracle-Gro
Director; provided, that if the Shareholders vote all of their
outstanding shares of Voting Stock in favor of the election of such
Miracle-Gro Director and such Miracle-Gro Director nevertheless is not
elected by the shareholders of Scotts, or if such Miracle-Gro Director
is not nominated for election or is not recommended for election by
the Scotts Board, the provisions of this Article VI shall no longer be
in effect.
I-27
188
SECTION 6.03. RULE 145. With a view to making available to the
Shareholders the benefits of Rule 145 promulgated under the Securities Act, and
any other similar rules or regulations of the SEC which may at any time permit
the Shareholders to sell or distribute without registration the Scotts Common
Stock issued upon conversion of the Convertible Preferred Stock or upon
exercise of the Warrants, Scotts agrees to use its best efforts to file with
the SEC in a timely manner all reports and other documents required to be
filed by it under the Exchange Act.
SECTION 6.04. REGISTRATION RIGHTS. Scotts will comply with the
provisions regarding registration rights contained in Annex E hereto.
SECTION 6.05. RESERVATION OF SHARES. Scotts will reserve and keep
available out of its authorized but unissued shares of Scotts Common Stock the
full number of shares at any time deliverable on conversion of the Convertible
Preferred Stock or exercise of the Warrants.
SECTION 6.06. STANDSTILL RESTRICTIONS. Until the fifth anniversary
of the Effective Time, the Shareholders covenant and agree as follows:
(a) Without the prior written consent of Scotts, the Shareholders
shall not, and shall not permit any of their respective Affiliates or
Associates to, directly or indirectly, authorize or make a tender or exchange
offer for, or purchase or otherwise acquire, or agree to acquire or obtain,
directly or indirectly, beneficial ownership of any Voting Stock, if the effect
of such acquisition would be to increase the outstanding number of shares of
Voting Stock then beneficially owned by the Shareholders, their Affiliates and
their Associates, in the aggregate, to an amount representing more than the
Standstill Percentage. It is expressly understood and agreed that, for
purposes of this Section 6.06 only, the Warrants, until exercised and subject
to the terms of such exercise, do not constitute beneficial ownership of
outstanding shares of Voting Stock.
(b) Notwithstanding the foregoing, the Shareholders shall not be
obligated to dispose of any shares of Voting Stock if their aggregate
percentage of Total Voting Power is increased as a result of a recapitalization
of Scotts or a repurchase of securities by Scotts or any other action taken by
Scotts or its Subsidiaries; provided, that, to the extent that any such
recapitalization or repurchase would increase the Standstill Percentage by more
than 1%, such Shareholders shall be obligated to dispose of shares of Voting
Stock sufficient to reduce their aggregate percentage of Total Voting Power to
less than the Standstill Percentage plus 1%. If Scotts repurchases any of its
Voting Stock and such repurchases result in the Shareholders owning more than
the Standstill Percentage, but less than the Standstill Percentage plus 1%, at
the effective time of such repurchases, the Shareholders shall not be obligated
to divest themselves of the Voting Stock to fall within the foregoing
percentage limitation, but shall not acquire any additional Voting Stock unless
such acquisition would otherwise be permitted under this Section 6.06.
(c) Subject to the limitations of subparagraph (a) of this Section
6.06, the Shareholders, their Affiliates and Associates, as a group, shall have
the right to purchase Voting Stock in the open market in an amount up to the
Standstill Percentage.
(d) Except as otherwise provided herein, no Shareholder shall join
any group or otherwise act in concert with any third person other than
Permitted Transferees for the purpose of acquiring, holding or disposing of
Voting Stock.
SECTION 6.07. ADDITIONAL STANDSTILL RESTRICTIONS. After the fifth
anniversary of the Effective Time, the Shareholders covenant and agree as
follows:
I-28
189
(a) The Shareholders shall not, and shall not permit any of their
respective Affiliates or Associates to, directly or indirectly, authorize or
make a tender or exchange offer for, or purchase or otherwise acquire, or agree
to acquire or obtain, directly or indirectly, beneficial ownership of any
Voting Stock, if the effect of such acquisition would be to increase the number
of shares of Voting Stock then beneficially owned by the Shareholders, their
Affiliates and their Associates, in the aggregate, to an amount representing
more than 49% of Total Voting Power, unless such acquisition is made pursuant
to a tender offer for 100% of Total Voting Power which tender offer is (i) made
at a price per share which is not less than the Market Price per share on the
last trading day before the announcement of such tender offer and (ii)
conditioned upon the acquisition by the Shareholders, their Affiliates and
their Associates of beneficial ownership of shares of Voting Stock representing
at least 50% of the then outstanding Total Voting Power not beneficially owned
by the Shareholders or their Affiliates or Associates. It is expressly
understood and agreed that, for purposes of this Section 6.07, the Warrants,
until exercised and subject to the terms of such exercise, do not constitute
beneficial ownership of outstanding shares of Voting Stock.
(b) Subject to the limitations of subparagraph (a) of this Section
6.07, the Shareholders, their Affiliates and Associates, in the aggregate,
shall have the right to purchase Voting Stock in the open market in an amount
up to their aggregate percentage ownership permitted under such subparagraph
(a).
(c) Except as otherwise provided herein, no Shareholder shall join
any group or otherwise act in concert with any third person other than
Permitted Transferees for the purpose of acquiring, holding or disposing of
Voting Stock.
SECTION 6.08. VOTING. Until the earlier of the fifth anniversary of
the Effective Time and such time as the Shareholders no longer beneficially own
at least 19% of the Voting Stock:
(a) The Shareholders will take all such action as may be required so
that all shares of Voting Stock owned by the Shareholders, their Affiliates and
Associates, as a group, are voted (in person or by proxy) (i) for Scotts'
nominees to the Board of Directors of Scotts, in accordance with the
recommendation of the Nominating Committee of the Board of Directors, 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 Ohio Law relating to (v) an
acquisition of Voting Stock of Scotts, (w) a merger or consolidation, (x) a
sale of all or substantially all of the assets of Scotts, (y) a
recapitalization of Scotts or (z) an amendment to the Articles of Incorporation
or Code of Regulations of Scotts which would materially adversely affect the
rights of the Shareholders. Each Shareholder shall be present, in person or by
proxy, at all duly held meetings of shareholders of Scotts so that all shares
of Voting Stock held by the Shareholders may be counted for the purposes of
determining the presence of a quorum at such meetings.
(b) Except as consented to by Scotts in writing, no Shareholder shall
deposit any shares of Voting Stock owned by him or her in a voting trust that
is not a Permitted Transferee or, subject any such shares to any similar
arrangement or agreement with or for the benefit of any Person that is not a
Permitted Transferee with respect to the voting of such shares.
(c) Without Scotts' prior written consent, no Shareholder shall
solicit proxies with respect to any Voting Stock or become a participant 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.
(d) Without the prior consent of the Shareholder Representative,
Scotts shall not (i) issue Voting Stock or Voting Stock Equivalents
constituting in the aggregate more than 12.5% of Total Voting Power, other than
pursuant to stock option or other employee benefit plans in the ordinary course
of business, consistent with past practice; or (ii)
I-29
190
in any single transaction or series of related transactions outside of the
ordinary course of business, make an acquisition or disposition of assets which
would require disclosure pursuant to Item 2 of Form 8- K under the Exchange
Act; provided, however, that if five-sixths of the Board of Directors of Scotts
determines that it is in the best interests of Scotts and its shareholders to
make an acquisition pursuant to clause (ii) above without the consent of the
Shareholder Representative, such acquisition may be made without the consent of
the Shareholder Representative.
SECTION 6.09. RESTRICTIONS ON TRANSFERS OF VOTING STOCK AND WARRANTS.
(a) Prior to the fifth anniversary of the Effective Time, no Shareholder
shall, directly or indirectly, sell or transfer any Scotts Common Stock except:
(i) to Scotts or any Person or group approved by Scotts;
(ii) to any Permitted Transferee;
(iii) pursuant to a merger or consolidation of Scotts or
pursuant to a plan of liquidation of Scotts, which has been approved
by the Board of Directors of Scotts;
(iv) provided that the rights of the Shareholders under this
Agreement shall not transfer to the transferee of such securities,
pursuant to a bona fide public offering registered under the
Securities Act (which shall be structured to distribute such shares or
other securities, if any, through an underwriter or otherwise in such
a manner as, to the extent practicable, will not result in any Person
or group beneficially owning 3% or more of Total Voting Power being
transferred to a single person or group);
(v) subject to Section 6.10, provided that the rights of the
Shareholders under this Agreement shall not transfer to the transferee
of such securities, pursuant to Rule 144, Rule 145 or Rule 144A under
the Securities Act or otherwise, (x) if any such sale will not, to the
knowledge of the Shareholder, result in any Person or group
beneficially owning 3% or more of Total Voting Power to a single
person or group and (y) if all such sales by the Shareholders within
the preceding three months do 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 an offer to purchase or exchange for
cash or other consideration any Voting Stock (x) which is made by or
on behalf of Scotts, or (y) which is made by another person or group
and is approved by the Board of Directors of Scotts within the time
such Board is required, pursuant to regulations under the Exchange
Act, to advise the shareholders of Scotts of such Board's position on
such offer; or
(vii) subject to Section 6.10, in any transfer not otherwise
described herein so long as such transfer does not, directly or
indirectly, result, to the best knowledge of the Shareholder, after
reasonable inquiry, in any Person or group beneficially owning 3% or
more of Total Voting Power.
(b) No Shareholder shall, directly or indirectly, sell or transfer
(x) any Convertible Preferred Stock or other Voting Stock or Voting Stock
Equivalents (other than Scotts Common Stock) or (y) prior to the fifth
anniversary of the Effective Time, any Warrants, except:
(i) to Scotts or any Person or group approved by Scotts;
(ii) to any Permitted Transferee; or
(iii) pursuant to a merger or consolidation of Scotts or
pursuant to a plan of liquidation of Scotts.
I-30
191
(iv) Convertible Preferred Stock convertible into Scotts
Common Stock representing in the aggregate no more than 15% of the
outstanding shares of Scotts Common Stock on a fully diluted basis or
any number of Warrants:
(1) subject to Section 6.10, provided that the
rights of the Shareholders under this Agreement shall not
transfer to the transferee of such securities and provided
that the Shareholders do not sell or transfer Warrants
pursuant to this clause (1) more than once per fiscal quarter
in the aggregate, pursuant to Rule 145 or Rule 144A under the
Securities Act or otherwise, (x) if any such sale will not to
the knowledge of the Shareholder, result in any Person or
group beneficially owning 3% or more of Total Voting Power
and (y) if all such sales by the Shareholders within the
preceding three months do not exceed, in the aggregate, the
greatest of the limits set forth in Rule 144(e)(1) under the
Securities Act; or
(2) subject to Section 6.10, in any transfer not
otherwise described herein so long as such transfer does not,
directly or indirectly, result, to the best knowledge of the
Shareholder, after reasonable inquiry, in any Person or group
beneficially owning 3% or more of Total Voting Power.
SECTION 6.10. RIGHT OF FIRST OFFER. Prior to making any sale or
transfer of shares of Scotts Common Stock pursuant to Section 6.09(a) (v) or
(vii) or of the Convertible Preferred Stock or Warrants pursuant to Section
6.09(b)(iv), the selling Shareholder (the "Selling Shareholder") will give
Scotts the opportunity to purchase such shares in the following manner:
(a) The Selling Shareholder shall give notice (the "Transfer Notice")
to Scotts in writing of such intention specifying the number of shares of
Scotts Common Stock or Convertible Preferred Stock proposed to be sold or
transferred, the proposed price therefor (the "Transfer Consideration") and the
other material terms upon which such disposition is proposed to be made;
provided, that in the case of a sale or transfer of Convertible Preferred Stock
made pursuant to Section 6.09(b)(iv), the Transfer Consideration shall be equal
to (x) the aggregate Market Price of the shares of Scotts Common Stock into
which such shares of Convertible Preferred Stock could be converted at the time
of such Transfer Notice multiplied by (B) 105%.
(b) Scotts shall have the right, exercisable by written notice given
by Scotts to the Selling Shareholder within two business days after receipt of
the Transfer Notice (except in the case of a sale or transfer of Convertible
Preferred Stock made pursuant to Section 6.09(b)(iv), in which case, ten
business days after receipt of the Transfer Notice), to purchase all or any
part of the shares of Scotts Common Stock or Convertible Preferred Stock or the
number of Warrants specified in such Transfer Notice for cash in an amount
equivalent to the Transfer Consideration.
(c) If Scotts exercises its right of first offer hereunder, the
closing of the purchase of the shares of Scotts Common Stock or Convertible
Preferred Stock with respect to which such right has been exercised shall take
place within ten business days after Scotts gives notice of such exercise,
which period of time shall be extended, as necessary, in order to comply with
applicable securities and other applicable laws and regulations. Upon exercise
of its right of first offer, Scotts and the Selling Shareholder shall be
legally obligated to consummate the purchase contemplated thereby and shall use
their best efforts to secure any approvals required in connection therewith.
(d) If Scotts does not exercise its right of first offer hereunder
within the time specified for such exercise, the Selling Shareholder shall be
free, during the period of 90 calendar days following the expiration of such
time for exercise, to sell the shares of Scotts Common Stock or Convertible
Preferred Stock or the number of Warrants
I-31
192
specified in the Transfer Notice pursuant to Section 6.09(a)(v) or (vii) or
Section 6.09(b)(iv), respectively, at a price not less than the Transfer
Consideration.
(e) In the event that Scotts elects to exercise any of its rights
under this Section 6.10, Scotts may specify, prior to closing such purchase,
another person as its designee to purchase the shares of Scotts Common Stock or
Convertible Preferred Stock to which such notice of intention to exercise such
rights relates. If Scotts designates another person as the purchaser pursuant
to this Section 6.10, Scotts shall be legally obligated to complete such
purchase if its designee fails to do so.
ARTICLE VII
COVENANTS OF SCOTTS AND MERGER SUBSIDIARY
Scotts agrees that:
SECTION 7.01. CONDUCT OF THE BUSINESS OF SCOTTS. From the date
hereof until the Effective Time, unless the Company shall otherwise have
consented in writing, Scotts shall, and shall cause its Subsidiaries to,
conduct its business in the ordinary course consistent with past practice and
shall use its best efforts to preserve intact its business organization and
relationships with third parties. Except as contemplated or required by this
Agreement or set forth in Section 7.01 of the Scotts Disclosure Schedule,
Scotts shall not, and shall cause its Subsidiaries not to, do, or propose or
agree to do, any of the following without the prior written consent of the
Company:
(a) adopt or propose any change in its Articles of Incorporation or
Code of Regulations;
(b) merge or consolidate with any other Person or acquire a material
amount of assets of any other Person;
(c) lease, license or dispose of any assets or property, which assets
or property is material to Scotts and its Subsidiaries, taken as a whole,
except (i) pursuant to existing contracts or commitments or (ii) in the
ordinary course consistent with past practice ;
(d) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect to
any of Scotts' capital stock;
(e) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, a material amount of its capital
stock;
(f) agree or commit to do any of the foregoing; or
(g) take or agree or commit to take any action that would make any
representation and warranty of Scotts or Merger Subsidiary hereunder inaccurate
in any respect at, or as of any time prior to the Effective Time.
SECTION 7.02. ACCESS TO INFORMATION; CONFIDENTIALITY. (a) From the
date hereof until the Effective Time, Scotts shall afford the Company, its
officers, directors, employees, counsel, financial advisors, auditors and other
authorized representatives (the "Company Representatives") reasonable access to
the offices, properties, books and records of Scotts and Merger Subsidiary,
will furnish to the Company and the Company Representatives such financial and
operating data and other information as such Persons may reasonably request and
will instruct Scotts' employees, counsel and financial advisors to cooperate
with the Company in its investigation of the business of Scotts
I-32
193
and its Subsidiaries; provided that no investigation pursuant to this Section
shall affect any representation or warranty given by Scotts and Merger
Subsidiary to the Company and the Shareholders hereunder.
(b) All information obtained by the Company pursuant to this Section
shall be kept confidential in accordance with the confidentiality agreements
dated as of October 3, 1994, between Scotts and the Company.
SECTION 7.03. OBLIGATIONS OF MERGER SUBSIDIARY. Scotts will take all
action necessary to cause Merger Subsidiary to perform its obligations under
this Agreement and to consummate the Merger on the terms and conditions set
forth in this Agreement.
SECTION 7.04. OTHER OFFERS. From the date hereof until the later of
the termination of this Agreement and the Effective Time, neither Scotts nor
any officer, director, employee or other agent of Scotts will, directly or
indirectly, (i) take any action to solicit, initiate or encourage any inquiries
or the making or implementation of any proposal or offer with respect to a
merger, acquisition, consolidation or similar transaction involving, or any
purchase of all or any significant portion of the assets or any equity
securities of, Scotts (a "Scotts Acquisition Proposal"), other than the
transactions contemplated by this Agreement, or (ii) engage in negotiations
with, or disclose any nonpublic information relating to Scotts or afford access
to the properties, books or records of Scotts to, any Person that Scotts
believes may be considering making, or has made, a Scotts Acquisition Proposal.
Scotts will promptly notify the Company upon receipt of any Scotts Acquisition
Proposal or any indication that any Person is considering making a Scotts
Acquisition Proposal or any request for nonpublic information relating to
Scotts or for access to the properties, books or records of Scotts by any
Person that may be considering making, or has made, a Scotts Acquisition
Proposal and will keep the Company fully informed of the status and details of
any such Scotts Acquisition Proposal, indication or request.
SECTION 7.05. NOTICES OF CERTAIN EVENTS. Scotts shall promptly
notify the Company of:
(i) any notice or other communication from any Person
alleging that the consent of such Person is or may be required in
connection with the transactions contemplated by this Agreement;
(ii) any notice or other communication from any governmental
or regulatory agency or authority in connection with the transactions
contemplated by this Agreement;
(iii) the occurrence, or non-occurrence, of any event the
occurrence, or non-occurrence, of which would be likely to cause (x)
any representation or warranty contained in this Agreement to be
untrue or inaccurate or (y) any covenant, condition or agreement
contained in this Agreement not to be complied with or satisfied; and
(iv) any failure of Scotts or Merger Subsidiary to comply
with or satisfy any covenant, condition or agreement to be complied
with or satisfied by it hereunder;
provided, however, that the delivery of any notice pursuant to this Section
shall not limit or otherwise affect the remedies available hereunder to the
Company.
SECTION 7.06. PROXY STATEMENT AND SHAREHOLDER VOTE. (a) As promptly
as practicable after the execution of this Agreement, Scotts shall prepare and
file with the SEC (i) the Scotts Proxy Statement relating to Scotts' 1995
Annual Meeting of Shareholders or a Special Meeting of Shareholders at which
the Scotts Shareholder Consent will be solicited (the "Scotts Shareholder
Meeting"), (ii) a registration statement on Form S-4 in which the Proxy
Statement shall be included as a prospectus, in connection with the
registration under the Securities Act of the
I-33
194
Merger Consideration (the "Registration Statement"). Scotts shall use its best
efforts to cause the Registration Statement to become effective as promptly as
practicable, and shall take all actions required under any applicable federal
or state securities laws in connection with the issuance of the Merger
Consideration. Scotts shall take such action as is necessary to ensure that
the Proxy Statement and the Registration Statement comply with the Exchange Act
and the Securities Act, respectively. As promptly as practicable after review
by the SEC, Scotts shall mail the Scotts Proxy Statement to its shareholders.
The Scotts Proxy Statement shall include the recommendation of the Board of
Directors of Scotts in favor of (i) the amendment of Scotts' Articles of
Incorporation to authorize the Convertible Preferred Stock; (ii) the
acquisition by the Shareholders of more than 33-1/3% (but less than 50%) of
Scotts' voting power, as contemplated by Section 1701.831 of the Ohio Law; and
(iii) the amendment of Scotts' Code of Regulations to implement a classified
Board of Directors consisting of three classes of up to four directors each, to
require a two-thirds vote of Shareholders on certain matters and to implement
certain limitations on the ability of shareholders to call special meetings.
Attached hereto as Annex G is each of the amendments to Scotts' Articles of
Incorporation and Code of Regulations which is proposed to be adopted by the
shareholders of Scotts at the Scotts Shareholder Meeting.
(b) Scotts will ensure that the Scotts Proxy Statement and the
Registration Statement will not, at the time (i) each such document is filed
with the SEC, (ii) each such document is first published, sent or given to
shareholders of Scotts, (iii) the Registration Statement is declared effective
by the SEC, (iv) the Scotts Shareholder Meeting is convened and (v) the
Effective Time occurs, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances under which they are
made, not misleading (except to the extent that any untrue statement or
omission or alleged untrue statement or omission was made or omitted in
reliance upon information furnished to Scotts by the Company or the
Shareholders).
SECTION 7.07. DIRECTOR AND OFFICER INDEMNIFICATION. From and after
the Effective Time, Scotts will cause the Surviving Corporation to indemnify
and hold harmless the present and former officers and directors of the
Miracle-Gro Constituent Companies in respect of acts or omissions occurring
prior to the Effective Time to the extent provided under such Miracle-Gro
Constituent Company's certificate of incorporation and by-laws, or equivalent
organizational documents, in effect on the date hereof; provided, that such
indemnification shall be subject to any limitation imposed from time to time
under applicable law, and, provided, further, that such indemnification shall
not apply to claims made by or on behalf of any stockholder or former
stockholder of any Miracle-Gro Constituent Company.
SECTION 7.08. EMPLOYEE BENEFITS. From and after the Effective Time
through the later of December 31, 1995 and such date as the employees of the
Miracle-Gro Constituent Companies commence participation in Scotts' employee
benefits plans, as described in the following sentence (the "Plan Transfer
Date"), Scotts will cause the Surviving Corporation and/or New Miracle-Gro to
provide benefits to the Miracle-Gro Constituent Companies' employees that are
comparable to those provided by the Miracle-Gro Constituent Companies
immediately prior to the Effective Time. From and after the Plan Transfer
Date, all employees of the Surviving Corporation shall become participants in
the employee benefit plans and programs maintained by Scotts for similarly
situated employees of Scotts. Such employee benefit plans that are health
benefit plans shall (i) recognize expenses and claims that were incurred by
such employees in the year in which the Effective Time occurs and recognized
for similar purposes under the Miracle-Gro Constituent Companies' plans as of
the Effective Time, and (ii) provide coverage (without any required waiting
period) for pre-existing health conditions to the extent covered under the
applicable plans or programs of the Miracle-Gro Constituent Companies' plans as
of the Effective Time. In addition, such employee benefit plans and programs
shall credit such employees with years of service with the Miracle-Gro
Constituent Companies for all plan purposes; provided, however, that no such
crediting shall be required to the extent that it
I-34
195
would result in a duplication of benefits. Scotts will cause New Miracle-Gro,
as successor corporation, to perform the obligations of the Company under the
agreements set forth in Section 7.08 of the Miracle-Gro Disclosure Schedule.
SECTION 7.09. EMPLOYEE STOCK OPTIONS. Subject to the fiduciary
duties of Scotts' Board of Directors and appropriate authorization therefrom,
Scotts agrees to use reasonable efforts to fund the issuance of Scotts Common
Stock pursuant to the exercise of employee stock options granted after the date
hereof through shares of Scotts Common Stock held as treasury stock, which are
acquired after the date hereof, or through open market or privately negotiated
repurchases of Scotts Common Stock.
ARTICLE VIII
COVENANTS OF SCOTTS, THE MIRACLE-GRO
CONSTITUENT COMPANIES AND THE SHAREHOLDERS
The parties hereto agree that:
SECTION 8.01. BEST EFFORTS. Subject to the terms and conditions of
this Agreement, each party will use its best efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable under applicable laws and regulations to consummate the
transactions contemplated by this Agreement as promptly as possible.
SECTION 8.02. CERTAIN FILINGS. The Miracle-Gro Constituent Companies
and Scotts shall cooperate with one another (a) in connection with the
preparation of the Scotts Proxy Statement and the Registration Statement
(including, but not limited to, the preparation of any financial statements or
pro forma financial statements required to be included therein), and (b) in
determining whether any action by or in respect of, or filing with, any
governmental body, agency or official, or authority is required, or any
actions, consents, approvals or waivers are required to be obtained from
parties to any material contracts, in connection with the consummation of the
transactions contemplated by this Agreement and (c) in seeking any such
actions, consents, approvals or waivers or making any such filings, furnishing
information required in connection therewith or with the Scotts Proxy Statement
or the Registration Statement and seeking timely to obtain any such actions,
consents, approvals or waivers.
SECTION 8.03. PUBLIC ANNOUNCEMENTS. Scotts and the Company will
consult with each other before issuing any press release or otherwise making
any public statement with respect to this Agreement or any transaction
contemplated herein and, except as may be required by applicable law or any
listing agreement with any national securities exchange, Scotts will not issue
any such press release or make any such public statement prior to such
consultation and no Miracle-Gro Constituent Company will issue any such press
release or make any such public statement without the prior written consent of
Scotts, which shall not be unreasonably withheld.
SECTION 8.04. FURTHER ASSURANCES. At and after the Effective Time,
the officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company or Merger
Subsidiary, any deeds, bills of sale, assignments or assurances and to take and
do, in the name and on behalf of the Company or Merger Subsidiary, any other
actions and things to vest, perfect or confirm of record or otherwise in the
Surviving Corporation any and all right, title and interest in, to and under
any of the rights, properties or assets of the Company acquired or to be
acquired by the Surviving Corporation as a result of, or in connection with,
the Merger.
I-35
196
SECTION 8.05. TAX MATTERS. (a) The Shareholders shall be solely
responsible for preparing and filing on a timely basis all Tax Returns with
respect to the income, business, assets, operations, activities, status or
other matters of the Miracle-Gro Constituent Companies for all taxable periods
ending at or before the Effective Time. The Shareholders shall be solely
responsible for and shall pay on a timely basis all taxes due thereon.
(b) Scotts shall be solely responsible for preparing and filing on a
timely basis all Tax Returns with respect to the income, business, assets,
operations, activities, status or other matters of the Company for all taxable
periods beginning after the Effective Time. Scotts shall be solely responsible
for and shall pay on a timely basis all taxes due thereon.
(c) The Shareholders and Scotts shall jointly prepare all Tax Returns
with respect to the income, business, assets, operations, activities, status or
other matters of the Miracle-Gro Constituent Companies for all taxable periods
beginning before and ending after the Effective Time ("Straddle Periods"). The
Shareholders and Scotts shall allocate any liability for taxes relating to
Straddle Periods on the basis of an interim closing of the books as of the
Effective Time.
(d) The Shareholders and Scotts agree to furnish to each other, upon
written request, as promptly as practicable, such information and reasonable
assistance relating to the Miracle-Gro Constituent Companies as is necessary
for the filing of any Tax Return required to be filed after the Effective Time.
The Shareholders and Scotts also agree to cooperate with each other in the
conduct of any audit or other proceeding involving one or more of the
Miracle-Gro Constituent Companies or any successor corporation. In any such
case, each party shall use its best efforts to cause its financial advisors,
auditors and other authorized representatives to cooperate therewith.
SECTION 8.06. TAX TREATMENT. (a) The Company and the Shareholders
agree to accept the opinion of Skadden, Arps, Slate, Meagher & Flom,
substantially in the form of Annex H hereto, in satisfaction of the condition
set forth in Section 9.03(iv). The Company agrees that the representations and
warranties set forth in the officer's certificate with respect to each of the
Miracle-Gro Companies, which certificates are attached to such Annex H, are
true and correct in all material respects as of the date hereof, and, assuming
such representations and warranties continue to be true and correct in all
material respects immediately prior to the Effective Time and that an
authorized officer of Scotts and Merger Subsidiary executes the officer's
certificate of Scotts and Merger Subsidiary attached to such Annex H, agree to
cause an authorized officer of each of the Miracle-Gro Constituent Companies to
execute such officer's certificates.
(b) None of the Shareholders, the Miracle-Gro Constituent Companies,
Scotts or Merger Subsidiary has taken, or will take, any action or omitted to
take any action which would (i) cause the representations and warranties in the
officer's certificates (attached to Annex H) not to be true and correct in all
material respects and (ii) cause any of the Merger Transactions to fail to
qualify as a reorganization under Section 368(a) of the Code or otherwise
jeopardize the status of any of the Merger Transactions as a tax-free
reorganization within the meaning of Section 368(a) of the Code. The
Shareholders and the Miracle-Gro Constituent Companies agree to use their best
efforts to cause each of the Merger Transactions to qualify as tax-free
reorganizations within the meaning of Section 368(a) of the Code.
(c) Scotts agrees to cause the Surviving Corporation and New
Miracle-Gro not to take any action or omit to take any action at or after the
Effective Time if Scotts reasonably believes after consultation with counsel
that such action or inaction, respectively, would jeopardize the status of any
of the Merger and the Subsequent Mergers as a tax-free reorganization within
the meaning of Section 368(a) of the Code.
I-36
197
SECTION 8.07. TAX GROSS-UP. (a) Notwithstanding anything herein to
the contrary, the parties hereby agree that prior to the Effective Time the
Miracle-Gro Constituent Companies shall distribute to the Shareholders an
amount equal to $22 million. The Company may borrow funds to finance the
payment of such distribution. Unless specifically requested by the Shareholder
Representative, (i) no funds or assets will be supplied by Scotts directly or
indirectly to repay such loan, and (ii) in the event that the Surviving
Corporation determines that it does not have sufficient funds to repay such
loan, it shall use its best efforts to borrow funds for such repayment without
a guarantee or other credit support from Scotts.
(b) In the event that pursuant to Section 1366 of the Code, the
aggregate taxable income of the Shareholders with respect to the aggregate
income of the Miracle-Gro Constituent Companies for the fiscal year commencing
October 1, 1994, and ending at the Effective Time exceeds $22 million by up to
$1 million (such excess being the "Excess Amount"), Scotts shall cause New
Miracle-Gro to distribute to the Shareholders an additional amount of cash
equal to 46% of such Excess Amount. The foregoing distribution shall be made
so as to qualify under Section 1371(e)(1) of the Code and, in any event, shall
be made not later than 30 days following the date on which the said aggregate
income of the Miracle-Gro Constituent Companies, or any portion thereof, is
determined to exceed $22 million.
(c) In the event that the distribution contemplated by Section
8.07(b) does not qualify as a distribution under Section 1371(e)(1) of the
Code, Scotts shall pay the Shareholders an amount which, after the payment of
all Taxes due from the Shareholders with respect to such amount, shall equal
46% of the Excess Amount. The amount to be paid to the Shareholders pursuant
to this subsection shall not exceed $852,000.
ARTICLE IX
CONDITIONS TO THE MERGER
SECTION 9.01. CONDITIONS TO THE OBLIGATIONS OF EACH PARTY. The
respective obligations of the Company, the Shareholders, Scotts and Merger
Subsidiary to consummate the Merger are subject to the satisfaction of the
following conditions, any or all of which may be waived, in whole or in part,
to the extent permitted by this Agreement and by applicable law:
(i) Scotts shall have received the consent of the Requisite
Banks (as defined in the Third Amended and Restated Credit Agreement
dated as of April 7, 1992, as amended (the "Credit Agreement"), among
Scotts, the Banks listed therein and Chemical Bank, as Agent) to the
Merger Transactions and the other transactions contemplated herein,
and the Credit Agreement provisions relating to restricted payments,
operating and financial condition ratios and events of default shall
have been appropriately amended in contemplation of the transactions
contemplated by this Agreement, all of which shall be reasonably
satisfactory to the Miracle-Gro Constituent Companies;
(ii) Scotts shall have received the consent to the Merger
Transactions and the other transactions contemplated herein by the
holders of a majority of aggregate principal amount of Scotts'
outstanding 9-7/8% Senior Subordinated Notes due August 1, 2004,
pursuant to the terms of the Indenture dated as of June 1, 1994, as
supplemented (the "Notes Indenture"), between Scotts and Chemical
Bank, as trustee;
(iii) Scotts' shareholders shall have approved the
acquisition by the Shareholders of more than 33-1/3% (but less than
50%) of Scotts' voting power, in accordance with the provisions of
Section 1701.831 of Ohio Law;
I-37
198
(iv) shareholders representing more than 66-2/3% of the
outstanding Scotts Common Stock shall have approved the amendment of
Scotts' Articles of Incorporation to authorize the issuance of the
Convertible Preferred Stock;
(v) shareholders representing more than a majority of the
outstanding Scotts Common Stock shall have approved the amendment of
Scotts' Code of Regulations to authorize a classified Board of
Directors;
(vi) the applicable waiting period under the HSR Act
relating to the Merger shall have expired or been terminated;
(vii) no provision of any applicable law or regulation and
no judgment, injunction, order or decree shall prohibit the
consummation of the Merger;
(viii) other than the filing of certificates of merger
and/or other merger documents in accordance with New Jersey Law and
Ohio Law, all authorizations, consents, waivers, orders or approvals
required to be obtained, and all filings, notices or declarations
required to be made, by the Company, Scotts and Merger Subsidiary
prior to the consummation of the Merger shall have been obtained from,
and made with, all required governmental or regulatory authorities
except for such authorizations, consents, waivers, orders, approvals,
filings, notices or declarations the failure of which to obtain or
make would not, at or after the Effective Time, individually or in
the aggregate, have a Company Material Adverse Effect or a Scotts
Material Adverse Effect; and
(ix) the Registration Statement shall have been declared
effective under the Securities Act and there shall be no stop order or
threatened stop order with respect thereto.
SECTION 9.02. CONDITIONS TO THE OBLIGATIONS OF SCOTTS AND MERGER
SUBSIDIARY. The obligations of Scotts and Merger Subsidiary to consummate the
Merger are subject to the satisfaction of the following further conditions, any
or all of which may be waived, in whole or in part, to the extent permitted by
this Agreement and by applicable law:
(i) the Miracle-Gro Constituent Companies and the
Shareholders shall have performed in all material respects their
respective agreements and covenants required by this Agreement to be
performed by them at or prior to the Effective Time; the
representations and warranties of the Miracle-Gro Constituent
Companies and the Shareholders contained in this Agreement and in any
certificate delivered by any Miracle-Gro Constituent Company or
Shareholder pursuant hereto shall be true and correct in all material
respects at and as of the Effective Time as if made at and as of such
time, and Scotts shall have received a certificate signed by the Chief
Executive Officer and Chief Financial Officer of the Company to the
foregoing effect;
(ii) since the date of this Agreement, there shall have been
no change, occurrence or circumstance in the business, results of
operations or condition (financial or otherwise) of the Miracle-Gro
Constituent Companies having or reasonably likely to have,
individually or in the aggregate, a Company Material Adverse Effect,
and Scotts shall have received a certificate of the Chief Executive
Officer of the Company to such effect;
I-38
199
(iii) no court, arbitrator or governmental body, agency or
official shall have issued any order, and there shall not be any
statute, rule or regulation, restraining or prohibiting the
consummation of the Merger or the effective operation of the business
of the Company after the Effective Time;
(iv) Scotts shall have received Employment Agreements
substantially in the forms attached hereto as Annex F-1, F-2 and F-3
executed by Horace Hagedorn, John Kenlon and James Hagedorn,
respectively; and
(v) Scotts shall have received all documents it may
reasonably request relating to the existence of the Company and the
authority of the Company to enter to, deliver and perform this
Agreement, all in form and substance satisfactory to Scotts.
SECTION 9.03. CONDITIONS TO THE OBLIGATIONS OF THE MIRACLE-GRO
CONSTITUENT COMPANIES AND THE SHAREHOLDERS. The obligations of the Miracle-Gro
Constituent Companies and the Shareholders to consummate the Merger
Transactions are subject to the satisfaction of the following further
conditions, any or all of which may be waived, in whole or in part, to the
extent permitted by this Agreement and by applicable law:
(i) Scotts and Merger Subsidiary shall have performed in all
material respects their respective agreements and covenants required
by this Agreement to be performed by them at or prior to the Effective
Time; the representations and warranties of Scotts and Merger
Subsidiary contained in this Agreement and in any certificate
delivered by Scotts or Merger Subsidiary pursuant hereto shall be true
and correct in all material respects at and as of the Effective Time
as if made at and as of such time, and the Company shall have received
a certificate signed by the Chief Executive Officer and Chief
Financial Officer of Scotts to the foregoing effect;
(ii) since the date of this Agreement, there shall have been
no change, occurrence or circumstance in the business, results of
operations or condition (financial or otherwise) of Scotts having or
reasonably likely to have, individually or in the aggregate, a Scotts
Material Adverse Effect, and the Company shall have received a
certificate of the Chief Executive Officer of Scotts to such effect;
(iii) no court, arbitrator or governmental body, agency or
official shall have issued any order, and there shall not be any
statute, rule or regulation, restraining or prohibiting the
consummation of the Merger or the effective operation of the business
of Scotts after the Effective Time;
(iv) the Company and the Shareholders shall have received
the opinion of Skadden, Arps, Slate, Meagher & Flom substantially in
the form attached hereto as Annex H to the effect that each of the
Merger and each of the Subsequent Mergers constitutes a tax-free
reorganization pursuant to Section 368(a) of the Code; and
(v) the Company shall have received all documents it may
reasonably request relating to the existence of Scotts and Merger
Subsidiary and the authority of Scotts and Merger Subsidiary to enter
to, deliver and perform this Agreement, all in form and substance
satisfactory to the Company.
I-39
200
ARTICLE X
TERMINATION
SECTION 10.01. TERMINATION. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time
(notwithstanding any approval of this Agreement by the Shareholders or of the
shareholders of Scotts):
(a) by mutual written consent of the parties hereto;
(b) by any party if the Merger has not been consummated by
September 30, 1995;
(c) by any party if, prior to the Effective Time, the Market
Price (as defined in Section 6.01) of Scotts Common Stock shall be
less than the "Target Amount" for ten consecutive trading days, the
"Target Amount" being the lesser of $12 per share and the amount
determined by multiplying $12 by a percentage equal to 100% minus the
percentage decline, if any, in the Standard & Poors 500 Index (as
reported by The Wall Street Journal) from the date of this Agreement
to the date of the first day of such ten consecutive day trading
period;
(d) by any party if there shall be any law or regulation
that makes consummation of the Merger illegal or otherwise prohibited
or if any judgment, injunction, order or decree enjoining Scotts or
any Miracle-Gro Constituent Company from consummating any of the
Merger Transactions is entered and such judgment, injunction, order or
decree shall become final and nonappealable; and
(e) by Scotts, upon a breach of any representation,
warranty, covenant or agreement on the part of any Miracle-Gro
Constituent Company or any Shareholder set forth in this Agreement, or
if any representation or warranty of the Miracle-Gro Constituent
Companies and the Shareholders shall have become untrue, in either
case such that the conditions set forth in Section 9.02 would be
incapable of being satisfied by September 30, 1995 (or as otherwise
extended); provided that, in any case, a willful breach shall be
deemed to cause such conditions to be incapable of being satisfied for
purposes of this Section 10.01(e);
(f) by the Miracle-Gro Constituent Companies and the
Shareholders, upon a breach of any representation, warranty, covenant
or agreement on the part of Scotts or Merger Subsidiary set forth in
this Agreement, or if any representation or warranty of Scotts or
Merger Subsidiary shall have become untrue, in either case such that
the conditions set forth in Section 9.03 would be incapable of being
satisfied by September 30, 1995 (or as otherwise extended); provided
that, in any case, a willful breach shall be deemed to cause such
conditions to be incapable of being satisfied for purposes of this
Section 10.01(f); and
(g) by any party hereto if the Scotts' Shareholders shall
fail to approve the acquisition contemplated by Section 9.01(iii) at
the Scotts Shareholder Meeting.
SECTION 10.02. EFFECT OF TERMINATION. If this Agreement is
terminated pursuant to Section 10.01, this Agreement shall become void and of
no effect with no liability on the part of any party hereto, except that the
agreements contained in Sections 5.02, 7.02 and 12.03 shall survive the
termination hereof; provided, however, that nothing herein shall relieve any
party from liability for the willful breach of any of its representations,
warranties, covenants or agreements set forth in this Agreement.
I-40
201
ARTICLE XI
SURVIVAL; INDEMNIFICATION
SECTION 11.01. SURVIVAL. The representations and warranties of the
parties hereto contained in this Agreement or in any certificate or other
writing delivered pursuant hereto or in connection herewith shall survive until
the Effective Time and shall thereupon terminate and be of no further force and
effect; provided, that the representations and warranties contained in Sections
3.12 and 4.11 shall survive until expiration of the applicable statutory period
of limitations (giving effect to any waiver, mitigation or extension thereof),
if later. Notwithstanding the preceding sentence, any representation or
warranty in respect of which indemnity may be sought under Section 11.02 or
11.03 shall survive the time at which it would otherwise terminate pursuant to
the preceding sentence, if notice of the specific inaccuracy or breach thereof
giving rise to such right to indemnity shall have been given to the party
against whom such indemnity may be sought prior to such time.
SECTION 11.02. INDEMNIFICATION. (a) The Company and each Shareholder
hereby jointly and severally indemnify Scotts against and agree to hold it
harmless from any and all damage, loss, liability and expense (including,
without limitation, reasonable expenses of investigation and reasonable
attorneys' fees and expenses in connection with any action, suit or proceeding)
(collectively, "Loss") incurred or suffered by Scotts arising out of any
misrepresentation or breach of warranty, covenant or agreement made or to be
performed by the Company or the Shareholders pursuant to this Agreement.
(b) Scotts hereby indemnifies the Company and the Shareholders
against and agrees to hold them harmless from any and all Loss incurred or
suffered by the Company and/or the Shareholders arising out of any
misrepresentation or breach of warranty, covenant or agreement made or to be
performed by Scotts pursuant to this Agreement.
SECTION 11.03. PROCEDURES. (a) The party seeking indemnification
under Section 11.02 (the "Indemnified Party") agrees to give prompt notice to
the party against whom indemnity is sought (the "Indemnifying Party") of the
assertion of any claim, or the commencement of any suit, action or proceeding
in respect of which indemnity may be sought under such Section. The
Indemnifying Party may, and at the request of the Indemnified Party shall,
participate in and control the defense of any such suit, action or proceeding
at its own expense. The Indemnifying Party shall not be liable under Section
11.02 for any settlement effected without its consent of any claim, litigation
or proceeding in respect of which indemnity may be sought hereunder; provided
that such consent is not unreasonably withheld.
(b) The Indemnified Party shall cooperate fully in all aspects of any
matter for which indemnity is sought pursuant to this Article XI with respect
to an action brought by a third party, including, in such case, by providing
reasonable access to employees and officers (as witnesses or otherwise) and
other information.
I-41
202
ARTICLE XII
MISCELLANEOUS
SECTION 12.01. NOTICES. All notices, requests and other
communications to any party hereunder shall be in writing (including telecopy,
telex or similar writing) and shall be given,
if to Scotts or Merger Subsidiary, to:
The Scotts Company
14111 Scottslawn Road
Marysville, OH 43041
Attn.: Craig D. Walley, General Counsel
Telecopy: (513) 644-7072
with a copy to:
G. Robert Lucas, II
Vorys, Sater, Seymour and Pease
52 East Gay Street
Columbus, OH 43215
Telecopy: (614) 464-6350
if to the Company, the Shareholders or the Shareholder Representative,
to:
Stern's Miracle-Gro Products, Inc.
800 Port Washington Boulevard
Port Washington, NY 11050
Attn.: John Kenlon, President
Telecopy: (516) 883-6563
with a copy to:
Horace Hagedorn
800 Port Washington Boulevard
Port Washington, NY 11050
Telecopy: (516) 883-6563
with a further copy to:
J. Michael Schell
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, NY 10022
Telecopy: (212) 735-2000
I-42
203
and a further copy to:
Jonathan R. Karis
Hutchins, Wheeler & Dittmar
101 Federal Street
Boston, MA 02110
Telecopy: (617) 951-1295
or such other address or telecopy number as such party may hereafter specify
for the purpose by notice to the other parties hereto. Each such notice,
request or other communication shall be effective (i) if given by telecopy,
when such telecopy is transmitted to the telecopy number specified in this
Section and the appropriate confirmation is received or (ii) if given by any
other means, when delivered at the address specified in this Section.
SECTION 12.02. AMENDMENTS; NO WAIVERS. Any provision of this
Agreement may be amended or waived prior to the Effective Time if, and only if,
such amendment or waiver is in writing and signed, in the case of an amendment,
by the parties hereto or in the case of a waiver, by the party against whom the
waiver is to be effective; provided that after the adoption of this Agreement
by the shareholders of Scotts, no such amendment or waiver shall, without the
further approval of such shareholders, alter or change (i) the amount or kind
of consideration to be received in exchange for any shares of capital stock of
the Company, (ii) any term of the Articles of Incorporation of the Surviving
Corporation or (iii) any of the terms or conditions of this Agreement if such
alteration or change would adversely affect the holders of any shares of
capital stock of Scotts.
(b) No failure or delay by any party in exercising any right, power
or privilege hereunder shall operate as a waiver thereof nor shall any single
or partial exercise thereof preclude any other or further exercise thereof or
the exercise of any other right, power or privilege. The rights and remedies
herein provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
SECTION 12.03. EXPENSES; TAXES. All costs and expenses incurred in
connection with this Agreement shall be paid by Scotts in the case of the costs
and expenses of Scotts and Merger Subsidiary, and by the Shareholders in the
case of the costs and expenses of the Miracle-Gro Constituent Companies and the
Shareholders which have not been paid at the Effective Time. Notwithstanding
the foregoing, all applicable sales, use or transfer taxes, if any, and all
capital gains or income taxes of any of the Shareholders or any of the
Miracle-Gro Constituent Companies, in each case, that may be due and payable as
a result of the Merger or the transactions contemplated by this Agreement,
whether levied on any Miracle-Gro Constituent Company, any of the Shareholders,
Scotts or Merger Subsidiary, shall be borne by the Shareholders.
SECTION 12.04. HEADINGS. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 12.05. SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or
other provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible to the fullest
I-43
204
extent permitted by applicable law in an acceptable manner to the end
that the transactions contemplated hereby are fulfilled to the extent possible.
SECTION 12.06. ENTIRE AGREEMENT. This Agreement (together with the
exhibits and annexes, the Company Disclosure Schedule, the Scotts Disclosure
Schedule and the other documents delivered pursuant hereto) and the
confidentiality agreements between the Company and Scotts constitute the entire
agreement of the parties and supersede all prior agreements and undertakings,
both written and oral, among the parties, or any of them, with respect to the
subject matter hereof.
SECTION 12.07. SUCCESSORS AND ASSIGNS. The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, provided that no party may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the written consent of the other parties.
SECTION 12.08. GOVERNING LAW. This Agreement shall be construed in
accordance with and governed by the law of the State of Ohio.
SECTION 12.09. COUNTERPARTS; EFFECTIVENESS. This Agreement may be
signed in any number of counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement shall become effective when each party hereto shall
have received counterparts hereof signed by all of the other parties hereto.
I-44
205
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and year
first above written.
MIRACLE-GRO CONSTITUENT COMPANIES:
STERN'S MIRACLE-GRO PRODUCTS, INC.
By /s/ Horace Hagedorn
----------------------------------
Title: Chairman and Chief Executive Officer
STERN'S NURSERIES, INC.
By /s/ Horace Hagedorn
----------------------------------
Title: Chief Executive Officer
MIRACLE-GRO LAWN PRODUCTS INC.
By /s/ John Kenlon
----------------------------------
Title: President
MIRACLE-GRO PRODUCTS LIMITED
By /s/ James Hagedorn
----------------------------------
Title: Executive Vice President
SHAREHOLDERS:
/s/ Horace Hagedorn
------------------------------------
HORACE HAGEDORN
/s/ James Hagedorn
------------------------------------
JAMES HAGEDORN
/s/ Katherine Hagedorn Littlefield
------------------------------------
KATHERINE HAGEDORN LITTLEFIELD
/s/ Paul Hagedorn
------------------------------------
PAUL HAGEDORN
I-45
206
/s/ Peter Hagedorn
-------------------------------
PETER HAGEDORN
/s/ Robert Hagedorn
-------------------------------
ROBERT HAGEDORN
/s/ Susan Hagedorn
-------------------------------
SUSAN HAGEDORN
/s/ John Kenlon
-------------------------------
JOHN KENLON
SCOTTS:
THE SCOTTS COMPANY
By /s/ Tadd C. Seitz
-----------------------------
Title: Chief Executive Officer
MERGER SUBSIDIARY:
ZYX CORPORATION, an Ohio corporation
By /s/ Theodore J. Host
-----------------------------
Title: President
I-46
207
SCHEDULE 2.03
OFFICERS OF SURVIVING CORPORATION
AND NEW MIRACLE-GRO
Horace Hagedorn - Chairman and Chief Executive Officer
John Kenlon - President and Chief Operating Officer
James Hagedorn - Executive Vice President
Craig D. Walley - Secretary
208
ANNEX A
TERMS OF
CLASS A CONVERTIBLE PREFERRED STOCK
1. DESIGNATION. This series of Preferred Stock shall be
designated Class A Convertible Preferred Stock, without par value (the "Class A
Preferred").
2. AUTHORIZED NUMBER. The number of shares constituting the
Class A Preferred shall be One Hundred Ninety-Five Thousand (195,000) shares.
3. DIVIDENDS. (a) The holders of the Class A Preferred shall
be entitled to receive, ratably with the holders of any other series of
Preferred Stock with Parity Rights (as defined below) as to dividends based on
their respective dividend rates, annual cumulative dividends in cash on each
outstanding share of Class A Preferred at the rate of $50.00 per share per
annum. Such cumulative dividends shall be paid in equal amounts (other than
with respect to the initial dividend period) quarterly on June 30, September
30, December 31 and March 31 of each year (unless such day is not a business
day, in which event on the next business day) as declared by the Board of
Directors to the extent legally permitted, to holders of record as they appear
on the register for the Class A Preferred on the June 15, September 15,
December 15 and March 15 immediately preceding the relevant Dividend Payment
Date (as hereinafter defined), out of any funds at the time legally available
therefor, shall accrue until so paid from the date of issuance of the
applicable shares of Class A Preferred, and shall be deemed to accrue from day
to day, whether or not declared. A quarterly dividend period shall begin on
the day following each June 30, September 30, December 31 and March 31 (each a
"Dividend Payment Date," whether or not a dividend is paid on such date) and
end on the next succeeding Dividend Payment Date. Notwithstanding the
foregoing, the first quarterly dividend period shall commence on the date of
issue, and such dividend shall be paid on June 30, 1995 for the actual number
of days in such period. If dividends shall not have been paid, or declared and
set apart for payment, upon all outstanding shares of Class A Preferred at the
aforesaid times and rates, such deficiency shall be cumulative in full. Any
accumulation of dividends shall not bear interest.
(b) No dividends or other distribution (other than dividends payable
in Common Stock), and no redemption, purchase or other acquisition for value
(other than redemptions, purchases or acquisitions payable in Common Stock or
repurchases of Common Stock from employees of the Company pursuant to
obligations existing as of the date hereof or upon foreclosure pursuant to
loans existing as of the date hereof to employees of the Company secured by
Common Stock), shall be made with respect to the Common Stock or any other
class or series of the Company's capital stock ranking junior to the Class A
Preferred with respect to dividends or liquidation preferences until cumulative
dividends on the Class A Preferred in the full amounts as set forth above for
all dividend periods ending, and all amounts payable upon redemption of Class A
Preferred, on or prior to the date on which the proposed dividend or
distribution is paid, or the proposed redemption, purchase or other acquisition
is effected, have been declared and paid or set apart for payment.
(c) (i) If on any Dividend Payment Date all or any portion of the
dividend payable on such date is not so paid and at such time all or any
portion of the dividend payable on the next preceding Dividend Payment Date
remains in arrears, then from such second Dividend Payment Date (herein the
commencement of a default period) until all accrued and unpaid dividends for
all previous quarterly dividend periods and for the current quarterly dividend
period on all shares of Class A Preferred then outstanding shall have been
A-1
209
declared and paid, all holders of Class A Preferred, voting separately as a
class, shall have the right to elect three directors to the Company's Board of
Directors ("Directors").
(ii) Such Directors shall be designated by the Shareholder
Representative (as defined in the Merger Agreement) and shall be appointed to
the Board, to fill vacancies newly created for such purpose, immediately upon
such designation. After the holders of the Class A Preferred shall have
exercised their right to elect Directors in any default period and during the
continuance of such period, the number of Directors shall not be increased or
decreased except by vote of the holders of Class A Preferred as herein
provided.
(iii) Immediately upon the expiration of a default period, (x) the
right of the holders of Class A Preferred as a class to elect Directors
pursuant to this Section 3(c) shall cease, (y) the term of any Directors
elected by the holders of Class A Preferred as a class pursuant to this Section
3(c) shall terminate, and (z) the number of Directors shall be such number as
was in effect immediately prior to the increase contemplated by this
Section 3(c).
4. LIQUIDATION PREFERENCE. In the event of any liquidation,
dissolution, or winding up of the Company, either voluntary or involuntary,
distributions to the shareholders of the Company shall be made in the following
manner:
(a) The holders of the Class A Preferred shall be entitled to
receive, ratably with the holders of any other series of Preferred Stock with
Parity Rights (as defined below) as to liquidation preferences based on their
respective preference amounts (which, in the case of the Class A Preferred,
shall include any amounts owing in respect of accrued and unpaid dividends),
prior and in preference to any distribution of any of the assets or funds of
the Company to the holders of the Common Stock (or any other securities of the
Company ranking junior to the Class A Preferred as to liquidation preferences),
the preference amount (in cash) of $1,000 per share for each share of Class A
Preferred then held by them plus an amount equal to all accrued but unpaid
dividends (whether or not declared) on the Class A Preferred to the date of
liquidation, dissolution or winding up. If the assets and funds thus
distributed among the holders of the Class A Preferred and of any other series
of Preferred Stock with Parity Rights as to liquidation preferences are
insufficient to permit the payment to such holders of the full preferential
amount described above, then the entire assets and funds of the Company legally
available for distribution shall be distributed among the holders of the Class
A Preferred and of any other series of Preferred Stock with Parity Rights as to
liquidation preferences in the proportion that the aggregate preferential
amount of shares of Class A Preferred and of any other series of Preferred
Stock with Parity Rights as to liquidation preferences held by each such holder
bears to the aggregate preferential amount of all shares of Class A Preferred
and of any other series of Preferred Stock with Parity Rights as to liquidation
preferences. After payment has been made to the holders of the Class A
Preferred and of any other series of Preferred Stock with Parity Rights as to
liquidation preferences of the full amounts to which they are entitled, no
further amounts shall be paid with respect to the Class A Preferred, and the
remaining assets of the Company shall be distributed among the holders of the
Common Stock (and other junior securities with regard to liquidation
preferences) in accordance with the Restated Articles of Incorporation and
applicable law.
(b) For purposes of this Section 4, a merger or consolidation of the
Company with or into any other corporation or corporations in which the Company
is not the surviving corporation, or a voluntary sale of all or substantially
all of the assets of the Company, shall not be treated as a liquidation,
dissolution or winding up of the Company (unless in connection therewith, the
liquidation, dissolution or winding up of the Company is specifically
approved), but shall be treated as provided in Section 7(e) hereof.
A-2
210
5. PROVISIONS GENERALLY APPLICABLE TO DIVIDENDS AND LIQUIDATION.
(a) The term "Parity Rights," as used in this Article FOURTH of the
Restated Articles of Incorporation, shall mean dividend rights and liquidation
preferences of any series of Preferred Stock of the Company which have
preferences upon any liquidation, dissolution, or winding up of the Company or
rights with respect to the declaration, payment and setting aside of dividends
on a parity with those of the Class A Preferred.
(b) Except as otherwise permitted by the Agreement and Plan of
Merger dated as of January 26, 1995 among Stern's Miracle-Gro Products, Inc.,
Stern's Nurseries, Inc., Miracle-Gro Lawn Products Inc., Miracle-Gro Products
Limited, the Shareholders listed therein, the Company and ZYX Corporation (the
"Merger Agreement"), the Company will not, by amendment of its Restated
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed hereunder by the Company, but will at
all times in good faith assist in the carrying out of all the provisions of
Sections 3 and 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the dividend and liquidation rights of the
holders of the Class A Preferred against impairment; provided, however, that
nothing herein will prevent the Company from creating any new series of
Preferred Stock with higher dividend rates or liquidation payments so long as
the priority of such rights is not senior to the rights of the Class A
Preferred.
6. VOTING RIGHTS. Except as otherwise required by law, the
holder of each share of Class A Preferred shall be entitled to the number of
votes equal to the number of shares of Common Stock into which such share of
Class A Preferred could be converted at the record date for determination of
the shareholders entitled to vote on such matters, such votes to be counted
together with all other shares of stock of the Company having general voting
power and not separately as a class or series. Holders of Class A Preferred
shall be entitled to receive the same notice of any shareholders' meeting as is
provided to holders of Common Stock. Fractional votes by the holders of Class
A Preferred shall not, however, be permitted, and any fractional voting rights
shall (after aggregating all shares into which shares of Class A Preferred held
by each holder could be converted) be rounded to the nearest whole number. The
Company will, or will cause the registrar to, transmit to the registered
holders of the Class A Preferred all reports and communications from the
Company that are generally mailed to holders of its Common Stock.
7. CONVERSION. The holders of the Class A Preferred have
conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Class A Preferred shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share and prior to the close of business of the Company on the
business day next preceding any date set for the redemption thereof (provided
that funds sufficient to redeem all shares to be redeemed on such date have
been paid or made available for payment as described in Section 8(b)(iii)), at
the office of the Company or any transfer agent for the Class A Preferred, into
such number of fully paid and nonassessable shares of Common Stock as is
determined by dividing $1,000 by the Conversion Price, determined as
hereinafter provided, in effect at the time of conversion. The price at which
shares of Common Stock shall be deliverable upon conversion (the "Conversion
Price") shall initially be $19 per share of Common Stock. Such initial
Conversion Price shall be subject to adjustment as hereinafter provided.
A-3
211
(b) ACCRUED DIVIDENDS AND FRACTIONAL SHARES. Dividends shall cease
to accrue on shares of Class A Preferred surrendered for conversion into Common
Stock; provided, however, that any dividends (whether or not declared) upon
such shares which were accrued as of but not paid on or before the Dividend
Payment Date immediately preceding the conversion date shall be paid in cash
upon such conversion or as soon thereafter as permitted by law.
No fractional shares of Common Stock shall be issued upon conversion
of Class A Preferred. In lieu of any fractional shares to which the holder
would otherwise be entitled, the Company shall, after aggregation of all
fractional share interests held by each holder, pay cash equal to such
remaining fractional interest multiplied by the Market Price at the time of
conversion.
(c) MECHANICS OF CONVERSION. Before any holder of Class A Preferred
shall be entitled to convert the same into full shares of Common Stock and to
receive certificates therefor, such holder shall surrender the certificate or
certificates for the Class A Preferred to be converted, duly endorsed, at the
office of the Company or of any transfer agent for the Class A Preferred, and
shall give written notice to the Company at such office that such holder elects
to convert the same. The Company shall, as soon as practicable after such
delivery, issue and deliver at such office to such holder of Class A Preferred
(or to any other person specified in the notice delivered by such holder), a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid and a check payable to the holder
for any cash amounts payable as the result of a conversion into fractional
shares of Common Stock. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Class A Preferred to be converted, and the person or persons entitled
to receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on such date. In case any certificate for shares of Class A
Preferred shall be surrendered for conversion of only a part of the shares
represented thereby, the Company shall deliver at such office to or upon the
written order of the holder thereof, a certificate or certificates for the
number of shares of Class A Preferred represented by such surrendered
certificate which are not being converted. Notwithstanding the foregoing, the
Company shall not be obligated to issue certificates evidencing the shares of
Common Stock issuable upon such conversion unless the certificates evidencing
Class A Preferred are either delivered to the Company or its transfer agent, or
the holder notifies the Company or its transfer agent that such certificates
have been lost, stolen or destroyed and executes an agreement satisfactory to
the Company to indemnify the Company from any loss incurred by it in connection
with such certificates. The issuance of certificates for shares of Common
Stock issuable upon conversion of shares of Class A Preferred shall be made
without charge to the converting holder for any tax imposed in respect of the
issuance thereof; provided that the Company shall not be required to pay any
tax which may be payable with respect to any transfer involved in the issue and
delivery of any certificate in a name other than that of the holder of the
shares of Class A Preferred being converted.
(d) EFFECTS OF CERTAIN EVENTS.
(i) COMMON STOCK DIVIDENDS, SUBDIVISIONS OR COMBINATIONS. In case
the Company shall (A) pay or make a dividend or other distribution to all
holders of its Common Stock in shares of its Common Stock, (B) subdivide, split
or reclassify the outstanding shares of its Common Stock into a larger number
of shares or (C) combine or reclassify the outstanding shares of its Common
Stock into a smaller number of shares, the Conversion Price in effect
immediately prior thereto shall be adjusted so that the holder of each
outstanding share of Class A Preferred shall thereafter be entitled to receive
upon the conversion of such share the number of shares of Common Stock which
such holder would have owned and been entitled to receive had such shares of
Class A Preferred been converted immediately prior to the happening of any of
the events described above
A-4
212
or, in the case of a stock dividend or other distribution, prior to the record
date for determination of shareholders entitled thereto. An adjustment made
pursuant to this clause (i) shall become effective immediately after such
record date in the case of a dividend or distribution and immediately after the
effective date in the case of a subdivision, split, combination or
reclassification.
(ii) DISTRIBUTIONS OF ASSETS OR SECURITIES OTHER THAN COMMON STOCK.
In case the Company shall, by dividend or otherwise, distribute to all holders
of its Common Stock shares of any of its capital stock (other than Common
Stock), rights or warrants to purchase any of its securities (other than those
referred to in (iii) below), cash (other than any regular quarterly or
semi-annual dividend which the Board of Directors of the Company determines),
other assets or evidences of its indebtedness, then in each such case the
Conversion Price shall be adjusted by multiplying the Conversion Price in
effect immediately prior to the date of such dividend or distribution by a
fraction, of which the numerator shall be the Average Market Price per share of
Common Stock at the record date for determining shareholders entitled to such
dividend or distribution less the fair market value (as determined in good
faith by the Board of Directors) of the portion of the securities, cash, assets
or evidences of indebtedness so distributed applicable to one share of Common
Stock, and of which the denominator shall be such Average Market Price per
share. An adjustment made pursuant to this clause (ii) shall become effective
immediately after such record date.
(iii) BELOW MARKET DISTRIBUTIONS OR ISSUANCES. In case the Company
shall issue Common Stock (or rights, warrants or other securities convertible
into or exchangeable or exercisable for shares of Common Stock) to all holders
of Common Stock at a price per share (or having an effective exercise, exchange
or conversion price per share) less than the Average Market Price per share of
Common Stock at the record date for the determination of shareholders entitled
to receive such Common Stock (or rights, warrants or other securities
convertible into or exchangeable or exercisable for shares of Common Stock),
then in each such case the Conversion Price shall be adjusted by multiplying
the Conversion Price in effect immediately prior to the date of issuance of
such Common Stock (or rights, warrants or other securities) by a fraction, the
numerator of which shall be the sum of (A) the number of shares of Common Stock
outstanding on the date of such issuance (without giving effect to any such
issuance) and (B) the number of shares which the aggregate consideration
receivable by the Company for the total number of shares of Common Stock so
issued (or into or for which such rights, warrants or other securities are
convertible, exchangeable or exercisable) would purchase at such Average Market
Price, and the denominator of which shall be the sum of (A) the number of
shares of Common Stock outstanding on the date of such issuance (without giving
effect to any such issuance) and (B) the number of additional shares of Common
Stock so issued (or into or for which such rights, warrants or other securities
are convertible, exchangeable or exercisable). An adjustment made pursuant to
this clause (iii) shall become effective immediately after the record date for
determination of shareholders entitled to receive or purchase such Common Stock
(or rights, warrants or other securities convertible into or exchangeable or
exercisable for shares of Common Stock). For purposes of this clause (iii),
the issuance of any options, rights or warrants or any shares of Common Stock
(whether treasury shares or newly issued shares) pursuant to any employee
(including consultants and directors) benefit or stock option or purchase plan
or program of the Company shall not be deemed to constitute an issuance of
Common Stock or options, rights or warrants to which this clause (iii) applies.
Notwithstanding anything herein to the contrary, no further adjustment to the
Conversion Price shall be made (i) upon the issuance or sale of Common Stock
upon the exercise of any rights or warrants or (ii) upon the issuance or sale
of Common Stock upon conversion or exchange of any convertible securities, if
any adjustment in the Conversion Price was made or required to be made upon the
issuance or sale of such rights, warrants or securities.
(iv) REPURCHASES. In case at any time or from time to time the
Company or any subsidiary thereof shall repurchase, by self tender offer or
otherwise, any shares of Common Stock of the Company at a weighted
A-5
213
average purchase price in excess of the Average Market Price on the business
day immediately prior to the earliest of the date of such repurchase, the
commencement of an offer to repurchase or the public announcement of either
(such date being referred to as the "Determination Date"), the Conversion Price
in effect as of such Determination Date shall be adjusted by multiplying such
Conversion Price by a fraction, the numerator of which shall be (A) the product
of (x) the number of shares of Common Stock outstanding on such Determination
Date and (y) the Average Market Price of the Common Stock on such Determination
Date minus (B) the aggregate purchase price of such repurchase and the
denominator of which shall be the product of (x) the number of shares of Common
Stock outstanding on such Determination Date minus the number of shares of
Common Stock repurchased by the Company or any subsidiary thereof in such
repurchase and (y) the Average Market Price of the Common Stock on such
Determination Date. For purposes of this clause (iv), the repurchase or
repurchases by the Company or any subsidiary thereof within any 12 month period
of not more than 15% of the shares of Common Stock outstanding as of the first
date of such period, at a price not in excess of 120% of the Average Market
Price as of the Determination Date of any such repurchase, shall not be deemed
to constitute a repurchase to which this clause (iv) applies. An adjustment
made pursuant to this clause (iv) shall become effective immediately after the
effective date of such repurchase.
(e) CERTAIN REORGANIZATIONS. In the event of any change,
reclassification, conversion, exchange or cancellation of outstanding shares of
Common Stock of the Company (other than any reclassification referred to in
Section 7(d)(i)), whether pursuant to a merger, consolidation, reorganization
or otherwise, or the sale or other disposition of all or substantially all of
the assets and properties of the Company, the shares of Class A Preferred
shall, after such merger, consolidation, reorganization or other transaction,
sale or other disposition, be convertible into the kind and number of shares of
stock or other securities or property, of the Company or otherwise, to which
such holder would have been entitled if immediately prior to such event such
holder had converted its shares of Class A Preferred into Common Stock at the
Conversion Price in effect as of the consummation of such event. The
provisions of this Section 7(e) shall similarly apply to successive changes,
reclassifications, conversions, exchange or cancellations.
(f) NO IMPAIRMENT. Except as permitted by the Merger Agreement, the
Company will not, by amendment of its Restated Articles of Incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all times in good
faith assist in the carrying out of all the provisions of this Section 7 and in
the taking of all such action as may be necessary or appropriate in order to
protect the conversion rights of the holders of the Class A Preferred against
impairment.
(g) CALCULATION OF ADJUSTMENTS. No adjustment in the Conversion
Price shall be required unless such adjustment would require an increase or
decrease of at least 1% in such price; provided, however, that any adjustments
which by reason of this subsection (g) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations under this Section 7 shall be made by the Company and shall be
made to the nearest cent or to the nearest one hundredth of a share, as the
case may be. Anything in this Section 7 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Conversion Price, in
addition to those required by this Section 7, as it in its sole discretion
shall determine to be advisable in order that any stock dividends, subdivision
of shares, distribution of rights to purchase stock or securities, or a
distribution of securities convertible into or exchangeable for stock hereafter
made by the Company to its shareholders shall not be taxable.
(h) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Section 8,
the Company at its expense shall promptly compute such
A-6
214
adjustment or readjustment in accordance with the terms hereof and furnish to
each holder of Class A Preferred a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Company shall, upon the written request at any time
of any holder of Class A Preferred, furnish or cause to be furnished to such
holder a like certificate setting forth (i) such adjustments and readjustments,
(ii) the Conversion Price at the time in effect, and (iii) the number of shares
of Common Stock and the amount, if any, of other property which at the time
would be received upon the conversion of Class A Preferred.
(i) NOTICES.
(A) In the event that the Company shall propose at any time:
(1) to declare any dividend or distribution upon its
Common Stock;
(2) to offer for subscription pro rata to the holders of any
class or series of its stock any additional shares of stock of any class
or series or other rights; or
(3) to effect any transaction of the type described in Section
7(e) hereof involving a change in the Common Stock;
then, in connection with each such event, the Company shall send to the
holders of the Class A Preferred:
(i) at least 20 days' prior written notice of the date on
which a record shall be taken for such dividend or distribution (and
specifying the date on which the holders of Common Stock shall be
entitled thereto) or for determining rights to vote in respect of the
matters referred to in (1) and (2) above; and
(ii) in the case of the matters referred to in (3) above,
at least 20 days' prior written notice of the date when the same
shall take place (and specifying the time on which the holders of
Common Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable upon the occurrence of such
event).
(B) In the event of any voluntary or involuntary dissolution,
liquidation or winding up of the Company, the Company shall send to the
holders of the Class A Preferred at least 20 days' prior written notice.
(C) The Company shall send written notice immediately upon any
public announcement with respect to an open market repurchase program, any
self tender offer for shares of Common Stock and any other repurchase
other than a repurchase of stock of an employee or consultant pursuant to
any benefit plan or agreement.
8. REDEMPTION.
(a) REDEMPTION. The Class A Preferred shall not be subject to redemption
prior to the last day of the month in which the fifth anniversary of the date
of issuance occurs. On or after such date, the Company may, at its option,
redeem all or from time to time any part of the shares of Class A Preferred,
out of funds legally available therefor, upon giving the Redemption Notice as
set forth in Section 8(b) hereof. The redemption
A-7
215
payment for each share of Class A Preferred shall be an amount (the "Redemption
Payment") in cash equal to the sum of (i) the amount of all accrued and unpaid
dividends (whether or not declared) thereon to and including the date fixed for
redemption plus (ii) $1000. In the event of a redemption of only a part of the
then outstanding Class A Preferred, the Company shall effect such redemption
ratably according to the number of shares held by each holder of Class A
Preferred.
(b) MECHANICS OF REDEMPTION.
(i) At least 30 days, but no more than 60 days, prior to the date fixed
for any redemption pursuant to Section 8(a) (the "Redemption Date"), the
Company shall send a written notice (the "Redemption Notice") to the holders of
shares to be redeemed on such date (the "Redemption Shares") stating: (A) the
total number of shares being redeemed; (B) the number of Redemption Shares held
by such holder; (C) the Redemption Date and the Redemption Payment; (D) the
date on which such holder's conversion rights as to such shares shall
terminate; and (E) the manner in which and the place at which such holder is to
surrender to the Company the certificate or certificates representing the
Redemption Shares.
(ii) Upon the surrender to the Company, in the manner and at the place
designated, of a certificate or certificates representing Redemption Shares,
the Redemption Payment for such shares shall be payable to the order of the
person whose name appears on such certificate or certificates as the owner
thereof. All such surrendered certificates shall be cancelled. Upon
redemption of only a portion of the shares of Class A Preferred represented by
a certificate surrendered for redemption, the Company shall issue and deliver
to or upon the written order of the holder of the certificate so surrendered,
at the expense of the Company (except for expenses relating to the issuance of
such shares to a person other than the record holder of the Redemption Shares),
a new certificate representing the unredeemed shares of Class A Preferred
represented by the certificate so surrendered.
(iii) On or prior to the Redemption Date, the Company shall have the
option to deposit the aggregate of all Redemption Payments for all Redemption
Shares (other than Redemption Shares surrendered for conversion prior to such
date) in a bank or trust company (designated in the notice of such redemption)
doing business in the State of Ohio or the City of New York, having aggregate
capital and surplus in excess of $500,000,000, as a trust fund for the benefit
of the respective holders of Redemption Shares, with irrevocable instructions
and authority to the bank or trust company to pay the appropriate Redemption
Payment to the holders of Redemption Shares upon receipt of notification from
the Company that such holder has surrendered the certificate representing such
shares to the Company. Such instructions shall also provide that any such
moneys remaining unclaimed at the expiration of one year following the
Redemption Date shall thereafter be returned to the Company upon its request as
expressed in a resolution of its Board of Directors. The holder of any
Redemption Shares in respect of which such deposit has been returned to the
Company pursuant to the preceding sentence shall have a claim as an unsecured
creditor against the Company for the Redemption Payment in respect thereof,
without interest.
(iv) Provided that the Company has given the Redemption Notice described
in Section 8(b)(i) and has on or prior to the Redemption Date either paid or
made available (as described in Section 8(b)(iii)) Redemption Payments to the
holders of Redemption Shares, all Redemption Shares shall be deemed to have
been redeemed as of the close of business of the Company on the applicable
Redemption Date. Thereafter, the holder of such shares shall no longer be
treated for any purposes as the record holder of such shares of Class A
Preferred, regardless of whether the certificates representing such shares are
surrendered to the Company or its transfer agent, excepting only the right of
the holder to receive the appropriate Redemption Payment, without
A-8
216
interest, upon such surrender. Such shares so redeemed shall not be
transferred on the books of the Company or be deemed to be outstanding for any
purpose whatsoever.
(v) The Company shall not be obligated to pay the Redemption Payment to
any holder of Redemption Shares unless the certificates evidencing such shares
are either delivered to the Company or its transfer agent, or the holder
notifies the Company or its transfer agent that such certificates have been
lost, stolen or destroyed and executes an agreement satisfactory to the Company
to indemnify the Company from any loss incurred by it in connection with such
certificates.
(c) LIMITATION ON REDEMPTION. The Company shall not be obligated to
redeem any shares of Class A Preferred which have previously been converted
into Common Stock. The Company shall not be obligated to redeem shares
pursuant to this Section 8 if such redemption would violate any provisions of
applicable law. If, after giving the Redemption Notice, the Company is unable,
pursuant to applicable law, to redeem some or all unconverted Redemption Shares
on any particular Redemption Date, the Company shall promptly notify the
holders thereof of the facts that prevent the Company from so redeeming such
shares. Thereafter, the Company shall redeem such unredeemed Redemption Shares
at such time as it is lawfully able to do so.
9. STATUS OF CONVERTED SHARES. If shares of Class A Preferred are
converted pursuant to Section 7 hereof or redeemed pursuant to Section 8
hereof, the shares so converted or redeemed shall resume the status of
authorized but unissued shares of Preferred Stock of the Company unless
otherwise prohibited by applicable law.
10. NOTICES. All notices, requests, demands, and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or when sent by telegram or telecopier (with receipt
confirmed), provided a copy is also sent by express (overnight, if possible)
courier, addressed (i) in the case of a holder of Class A Preferred, to such
holder's address of record, and (ii) in the case of the Company, to the
Company's principal executive offices to the attention of the Company's
secretary.
11. AMENDMENTS AND WAIVERS. Any right, preference, privilege or power
of, or restriction provided for the benefit of, the Class A Preferred set forth
herein may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively) with the written consent of the Company and the affirmative vote
or written consent of the holders of not less than a majority of the shares of
Class A Preferred then outstanding, and any amendment or waiver so effected
shall be binding upon the Company and all holders of Class A Preferred.
12. ADDITIONAL DEFINITIONS. As used herein the term "Trading Day" means
each Monday, Tuesday, Wednesday, Thursday and Friday which is a day on which
the New York Stock Exchange, Inc. is open for trading.
As used herein, the term "Market Price" of a share of Common Stock or of
any other security of the Company on any date shall mean: (i) the last
reported sales price of the Common Stock or such other security on the
principal national securities exchange on which such Common Stock or other
security is listed or admitted to trading or, if no such reported sale takes
place on such date, the average of the closing bid and asked prices thereon, as
reported in THE WALL STREET JOURNAL, or (ii) if such Common Stock or other
security shall not be listed or admitted to trading on a national securities
exchange, the last reported sales price on the NASDAQ National Market or, if no
such reported sales takes place on any such date, the average of the closing
bid and asked prices thereon, as reported in THE WALL STREET JOURNAL, or (iii)
if such Common Stock or other security shall not be quoted on such National
Market nor listed or admitted to trading on a national
A-9
217
securities exchange, then the average of the closing bid and asked prices, as
reported by THE WALL STREET JOURNAL for the over-the-counter market, or (iv) if
there is no public market for such Common Stock or other security, the fair
market value of a share of such Common Stock or a unit of such other security
as determined in good faith by the Board of Directors of the Company.
The term "Average Market Price" shall mean the average of the Market
Prices for the 30 consecutive trading days immediately preceding the date in
question.
A-10
218
ANNEX B
SERIES A WARRANT TO PURCHASE COMMON SHARES
of
THE SCOTTS COMPANY
THIS WARRANT WAS ISSUED PURSUANT TO THE AGREEMENT AND PLAN OF MERGER DATED
AS OF JANUARY 26, 1995 (THE "MERGER AGREEMENT"), AMONG STERN'S MIRACLE-GRO
PRODUCTS, INC., STERN'S NURSERIES, INC., MIRACLE-GRO LAWN PRODUCTS INC.,
MIRACLE-GRO PRODUCTS LIMITED, THE SHAREHOLDERS LISTED THEREIN, THE SCOTTS
COMPANY AND ZYX CORPORATION. NO TRANSFER MAY OCCUR EXCEPT IN CONFORMITY WITH
THE TERMS OF THE MERGER AGREEMENT.
No. WA-1 Warrant to Purchase ______ Common
Shares, without par value (subject to
adjustment)
Void after [September 30], 2003
For value received, THE SCOTTS COMPANY, an Ohio corporation (the
"Company"), hereby certifies that ___________, or registered assigns (the
"Holder"), is entitled, subject to the terms set forth below and to the Merger
Agreement, to purchase from the Company, ______ Common Shares, without par
value, of the Company ("Common Stock"), as constituted on [March 31], 1995 (the
"Warrant Issue Date"), upon surrender hereof at the principal office of the
Company referred to below, with the Notice of Exercise attached hereto duly
executed, and simultaneous payment therefor in lawful money of the United
States as hereinafter provided at the per share price of $21 (the "Exercise
Price"). The number, character and Exercise Price of such shares of Common
Stock are subject to adjustment as provided below. The term "Warrant" as used
herein shall include this Warrant and any warrants delivered in substitution or
exchange therefor as provided herein. This Warrant is registered and its
transfer may be registered upon the books maintained for that purpose by the
Company by delivery of this Warrant duly endorsed.
Terms used herein and not otherwise defined shall have the meanings
ascribed thereto in the Merger Agreement.
1. TERM OF WARRANT. Subject to the terms and conditions set forth
herein, this Warrant shall be exercisable, in whole or in part, during the term
commencing on [March 31], 1995 and ending at 5:00 p.m., Eastern time, on the
date eight years and six months after the Warrant Issue Date, and shall be void
thereafter.
B-1
219
2. EXERCISE OF WARRANT.
2.1 METHOD. The purchase rights represented by this Warrant are
exercisable by the Holder in whole or in part, at any time, or from time to
time, during the term hereof as described in Section 1 above and subject to
Section 2.5, by the surrender of this Warrant and the Notice of Exercise
annexed hereto duly completed and executed by the Holder at the principal
executive office of the Company at 14111 Scottslawn Road, Marysville, Ohio
43041 (or such other office or agency of the Company as it may designate by
notice in writing to the Holder), upon payment in cash or by wire transfer to a
bank account designated by the Company or by a certified or cashier's check of
the aggregate Exercise Price of the shares to be purchased; provided, however,
that, in lieu of cash, such Holder may pay such Exercise Price by exchanging
shares of Common Stock having an aggregate Market Price equal to the aggregate
Exercise Price or by reducing the number of shares of Common Stock such Holder
would otherwise be entitled to upon such exercise by a number of shares of
Common Stock having an aggregate Market Price equal to the aggregate Exercise
Price.
2.2 EFFECT. This Warrant shall be deemed to have been exercised at
the time of its surrender for exercise together with full payment as provided
above, and the person entitled to receive the shares of Common Stock issuable
upon such exercise shall be treated for all purposes as the holder of record of
such shares at and after such time. As promptly as practicable on or after
such date the Company at its expense shall issue to the person entitled to
receive the same a certificate for the number of shares of Common Stock
issuable upon such exercise. If this Warrant is exercised in part, the Company
at its expense will execute and deliver a new Warrant exercisable for the
number of shares for which this Warrant may then be exercised.
2.3 HOLDER NOT A SHAREHOLDER. The Holder shall neither be entitled
to vote nor receive dividends nor be deemed the holder of Common Stock or any
other securities of the Company that may at any time be issuable on the
exercise hereof for any purpose until the Warrant has been exercised for shares
of Common Stock as provided in this Section 2.
2.4 NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional shares of Common Stock shall be issued upon the
exercise of this Warrant. In lieu of any fractional share to which the Holder
would otherwise be entitled, the Company shall make a cash payment equal to the
Exercise Price multiplied by such fraction.
2.5 EXERCISE FOR CASH IN CERTAIN CIRCUMSTANCES. Notwithstanding the
foregoing, (a) until the fifth anniversary of the Warrant Issue Date, in the
event, and to the extent that, the exercise of this Warrant would cause the
Total Voting Power of the Shareholders to exceed the Standstill Percentage,
this Warrant shall not be exercisable for shares of Common Stock but rather
shall be exercisable solely for the difference at the time of exercise between
the Market Price and the Exercise Price at such time and (b) thereafter, in the
event, and to the extent that, the exercise of this Warrant would cause the
Total Voting Power of the Shareholders to exceed 49%, this Warrant shall not be
exercisable for shares of Common Stock but rather shall be exercisable solely
for the difference at the time of exercise between the Market Price and the
Exercise Price at such time.
B-2
220
3. REGISTERED WARRANTS.
3.1 SERIES. This Warrant is one of a series of Warrants, designated
as Series A, which are identical except as to the number of shares of Common
Stock purchasable and as to any restriction on the transfer thereof in order to
comply with the Securities Act of 1933 (the "Act") and the regulations of the
Securities and Exchange Commission promulgated thereunder or state securities
or blue sky laws. Such Warrants are referred to herein collectively as the
"Warrants."
3.2 RECORD OWNERSHIP. The Company shall maintain a register of the
Holders of the Warrants (the "Register") showing their names and addresses and
the serial numbers and number of Common Shares purchasable, issued to or
transferred of record by them from time to time. The Register may be
maintained in electronic, magnetic or other computerized form. The Company may
treat the person named as the Holder of this Warrant in the Register as the
sole owner of this Warrant. The Holder of this Warrant is the person
exclusively entitled to receive notifications with respect to this Warrant,
exercise it to purchase shares of Common Stock and otherwise exercise all of
the rights and powers as the absolute owner hereof.
3.3 REGISTRATION OF TRANSFER. To the extent permitted under the
Merger Agreement, transfers of this Warrant may be registered on the Register.
Transfers shall be registered when this Warrant is presented to the Company
duly endorsed with a request to register the transfer hereof in accordance with
the terms of the Merger Agreement. When this Warrant is presented for transfer
and duly transferred hereunder, it shall be cancelled and a new Warrant showing
the name of the transferee as the Holder thereof shall be issued in lieu
hereof. No transfer of this Warrant may take place except in accordance with
the terms of the Merger Agreement.
3.4 WORN AND LOST WARRANTS. If this Warrant becomes worn, defaced
or mutilated but is still substantially intact and recognizable, the Company or
its agent may issue a new Warrant in lieu hereof upon its surrender. If this
Warrant is lost, destroyed or wrongfully taken, the Company shall issue a new
Warrant in place of the original Warrant if the Holder so requests by written
notice to the Company and the Holder has delivered to the Company an indemnity
agreement reasonably satisfactory to the Company with an affidavit of the
Holder that this Warrant has been lost, destroyed or wrongfully taken.
3.5 RESTRICTIONS ON TRANSFER. (a) This Warrant and the Common
Stock issuable upon the exercise hereof have been registered under the Act on
Form S-4, and therefore this Warrant and the Common Stock issuable upon the
exercise of this Warrant may not be offered for sale, sold or otherwise
transferred unless such offer, sale or other transfer complies with Rule 145
under the Act and is otherwise registered under the appropriate state
securities or Blue Sky laws or such transfer is exempt from such registration.
(b) No transfer of this Warrant or the Common Stock issuable upon
the exercise hereof may be made except in accordance with the terms of the
Merger Agreement.
3.6 WARRANT AGENT. The Company may, by written notice to the
Holder, appoint an agent for the purpose of maintaining the Register, issuing
Common Stock or other securities then issuable upon the exercise of this
Warrant, exchanging or transferring this Warrant, or any or all of the
foregoing.
B-3
221
Thereafter, any such registration, issuance, exchange, or transfer,
as the case may be, shall be made at the office of such agent.
4. RESERVATION OF STOCK. The Company covenants that, during the term
this Warrant is exercisable, the Company will reserve from its authorized and
unissued Common Stock or Common Stock held in Treasury a sufficient number of
shares to provide for the issuance of Common Stock upon the exercise of this
Warrant. The Company further covenants that all shares that may be issued upon
the exercise of rights represented by this Warrant, upon exercise of the rights
represented by this Warrant and payment of the Exercise Price, all as set forth
herein, will be duly authorized, validly issued, fully paid and non-
assessable. The Company agrees that its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates
for shares of Common Stock upon the exercise of this Warrant.
5. EFFECTS OF CERTAIN EVENTS.
5.1 COMMON STOCK DIVIDENDS, SUBDIVISIONS OR COMBINATIONS. In case
the Company shall (A) pay or make a dividend or other distribution to all
holders of its Common Stock in shares of its Common Stock, (B) subdivide, split
or reclassify the outstanding shares of its Common Stock into a larger number
of shares or (C) combine or reclassify the outstanding shares of its Common
Stock into a smaller number of shares, the Exercise Price in effect immediately
prior thereto shall be adjusted so that the Holder of this Warrant shall
thereafter be entitled to receive upon the exercise of this Warrant, subject to
Section 2.5, the number of shares of Common Stock which such Holder would have
owned and been entitled to receive had such Warrant been exercised immediately
prior to the happening of any of the events described above or, in the case of
a stock dividend or other distribution, prior to the record date for
determination of shareholders entitled thereto. An adjustment made pursuant to
this Section 5.1 shall become effective immediately after such record date in
the case of a dividend or distribution and immediately after the effective date
in the case of a subdivision, split, combination or reclassification.
5.2 DISTRIBUTIONS OF ASSETS OR SECURITIES OTHER THAN COMMON STOCK.
In case the Company shall, by dividend or otherwise, distribute to all holders
of its Common Stock shares of any of its capital stock (other than Common
Stock), rights or warrants to purchase any of its securities (other than those
referred to in Section 5.3 below), cash (other than any regular quarterly or
semi-annual dividend which the Board of Directors of the Company determines),
other assets or evidences of its indebtedness, then in each such case the
Exercise Price shall be adjusted by multiplying the Exercise Price in effect
immediately prior to the date of such dividend or distribution by a fraction,
of which the numerator shall be the Average Market Price per share of Common
Stock at the record date for determining shareholders entitled to such dividend
or distribution less the fair market value (as determined in good faith by the
Board of Directors) of the portion of the securities, cash, assets or evidences
of indebtedness so distributed applicable to one share of Common Stock, and of
which the denominator shall be such Average Market Price per share. An
adjustment made pursuant to this Section 5.2 shall become effective immediately
after such record date.
5.3 BELOW MARKET DISTRIBUTIONS OR ISSUANCES. In case the Company
shall issue Common Stock (or rights, warrants or other securities convertible
into or exchangeable or exercisable for shares of Common Stock) to all holders
of Common Stock at a price per share (or having an effective exercise, exchange
or conversion price per share) less than the Average Market Price per share of
Common Stock at the record date for the determination of shareholders entitled
to receive such Common Stock (or rights, warrants
B-4
222
or other securities convertible into or exchangeable or exercisable for shares
of Common Stock), then in each such case the Exercise Price shall be adjusted
by multiplying the Exercise Price in effect immediately prior to the date of
issuance of such Common Stock (or rights, warrants or other securities) by a
fraction, the numerator of which shall be the sum of (A) the number of shares
of Common Stock outstanding on the date of such issuance (without giving effect
to any such issuance) and (B) the number of shares which the aggregate
consideration receivable by the Company for the total number of shares of
Common Stock so issued (or into or for which such rights, warrants or other
securities are convertible, exchangeable or exercisable) would purchase at such
Average Market Price, and the denominator of which shall be the sum of (A) the
number of shares of Common Stock outstanding on the date of such issuance
(without giving effect to any such issuance) and (B) the number of additional
shares of Common Stock so issued (or into or for which such rights, warrants or
other securities are convertible, exchangeable or exercisable). An adjustment
made pursuant to this Section 5.3 shall become effective immediately after the
record date for determination of shareholders entitled to receive or purchase
such Common Stock (or rights, warrants or other securities convertible into or
exchangeable or exercisable for shares of Common Stock). For purposes of this
Section 5.3, the issuance of any options, rights or warrants or any shares of
Common Stock (whether treasury shares or newly issued shares) pursuant to any
employee (including consultants and directors) benefit or stock option or
purchase plan or program of the Company shall not be deemed to constitute an
issuance of Common Stock or options, rights or warrants to which this Section
5.3 applies. Notwithstanding anything herein to the contrary, no further
adjustment to the Exercise Price shall be made (i) upon the issuance or sale of
Common Stock upon the exercise of any rights or warrants or (ii) upon the
issuance or sale of Common Stock upon conversion or exchange of any convertible
securities, if any adjustment in the Exercise Price was made or required to be
made upon the issuance or sale of such rights, warrants or securities.
5.4 REPURCHASES. In case at any time or from time to time the
Company or any subsidiary thereof shall repurchase, by self tender offer or
otherwise, any shares of Common Stock of the Company at a weighted average
purchase price in excess of the Average Market Price on the business day
immediately prior to the earliest of the date of such repurchase, the
commencement of an offer to repurchase or the public announcement of either
(such date being referred to as the "Determination Date"), the Exercise Price
in effect as of such Determination Date shall be adjusted by multiplying such
Exercise Price by a fraction, the numerator of which shall be (A) the product
of (x) the number of shares of Common Stock outstanding on such Determination
Date and (y) the Average Market Price of the Common Stock on such Determination
Date minus (B) the aggregate purchase price of such repurchase and the
denominator of which shall be the product of (x) the number of shares of Common
Stock outstanding on such Determination Date minus the number of shares of
Common Stock repurchased by the Company or any subsidiary thereof in such
repurchase and (y) the Average Market Price of the Common Stock on such
Determination Date. For purposes of this clause (iv), the repurchase or
repurchases by the Company or any subsidiary thereof within any 12 month period
of not more than 15% of the shares of Common Stock outstanding as of the first
date of such period, at a price not in excess of 120% of the Average Market
Price as of the Determination Date of any such repurchase, shall not be deemed
to constitute a repurchase to which this Section 5.4 applies. An adjustment
made pursuant to this Section 5.4 shall become effective immediately after the
effective date of such repurchase.
6. CERTAIN REORGANIZATIONS. In the event of any change,
reclassification, conversion, exchange or cancellation of outstanding shares of
Common Stock of the Company (other than any reclassification referred to in
Section 5.1), whether pursuant to a merger, consolidation, reorganization or
otherwise, or the sale or other disposition of all or substantially all of the
assets and properties of the Company, this Warrant
B-5
223
shall, after such merger, consolidation, reorganization or other transaction,
sale or other disposition, be exercisable for the kind and number of shares of
stock or other securities or property, of the Company or otherwise, to which
the Holder would have been entitled if immediately prior to such event such
Holder had exercised this Warrant for Common Stock at the Exercise Price in
effect as of the consummation of such event. The provisions of this Section 6
shall similarly apply to successive changes, reclassifications, conversions,
exchange or cancellations.
7. NO IMPAIRMENT. Except as permitted by the Merger Agreement, the
Company will not, by amendment of its Restated Articles of Incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all times in good
faith assist in the carrying out of all the provisions of this Warrant and in
the taking of all such action as may be necessary or appropriate in order to
protect the exercise rights of the Holder hereof against impairment.
8. CALCULATION OF ADJUSTMENTS. No adjustment in the Exercise Price
shall be required unless such adjustment would require an increase or decrease
of at least 1% in such price; provided, however, that any adjustments which by
reason of this Section 8 are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under
this Warrant shall be made by the Company and shall be made to the nearest cent
or to the nearest one hundredth of a share, as the case may be. Anything in
this Warrant to the contrary notwithstanding, the Company shall be entitled to
make such reductions in the Exercise Price, in addition to those required by
this Warrant, as it in its sole discretion shall determine to be advisable in
order that any stock dividends, subdivision of shares, distribution of rights
to purchase stock or securities, or a distribution of securities convertible
into or exchangeable for stock hereafter made by the Company to its
shareholders shall not be taxable.
9. CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Exercise Price pursuant to this Warrant, the
Company at its expense shall promptly compute such adjustment or readjustment
in accordance with the terms hereof and furnish to the Holder of this Warrant a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Company
shall, upon the written request at any time of the Holder of this Warrant,
furnish or cause to be furnished to such Holder a like certificate setting
forth (i) such adjustments and readjustments, (ii) the Exercise Price at the
time in effect, and (iii) the number of shares of Common Stock and the amount,
if any, of other property which at the time would be received upon the exercise
of this Warrant; provided, however, that the Company shall not be required to
calculate the effect of Section 2.5 upon such exercise.
10. NOTICES.
10.1 DILUTIVE EVENTS. In the event that the Company shall propose at
any time:
(1) to declare any dividend or distribution upon its Common Stock;
(2) to offer for subscription pro rata to the holders of any class
or series of its stock any additional shares of stock of any class or series or
other rights; or
B-6
224
(3) to effect any transaction of the type described in Section 6 hereof
involving a change in the Common Stock;
then, in connection with each such event, the Company shall send to the Holders
of this Warrant:
(A) at least 20 days' prior written notice of the date on which a record
shall be taken for such dividend or distribution (and specifying the date on
which the holders of Common Stock shall be entitled thereto) or for determining
rights to vote in respect of the matters referred to in (1) and (2) above; and
(B) in the case of the matters referred to in (3) above, at least 20 days'
prior written notice of the date when the same shall take place (and specifying
the time on which the holders of Common Stock shall be entitled to exchange
their Common Stock for securities or other property deliverable upon the
occurrence of such event).
10.2 DISSOLUTION; LIQUIDATION. In the event of any voluntary or involuntary
dissolution, liquidation or winding up of the Company, the Company shall send
to the Holder of this Warrant at least 20 days' prior written notice.
10.3 REPURCHASE PROGRAMS. The Company shall send written notice immediately
upon any public announcement with respect to an open market repurchase program,
any self tender offer for shares of Common Stock and any other repurchase other
than a repurchase of stock of an employee or consultant pursuant to any benefit
plan or agreement.
11. AMENDMENTS. This Warrant may not be amended without the prior written
consent of the Holder.
12. ADDITIONAL DEFINITION. As used herein, the term "Average Market Price"
shall mean the average of the Market Prices for the 30 consecutive trading
immediately preceding the date in question.
13. NOTICES. Any notice, certificate or other communication which is required
or convenient under the terms of this Warrant shall be duly given if it is in
writing and delivered in person or mailed by first class mail, postage prepaid,
and directed to the Holder of the Warrant at its address as it appears on the
Register or if to the Company to its principal executive offices. The time
when such notice is sent shall be the time of the giving of the notice.
14. TIME. Where this Warrant provides for a payment or performance on a
Saturday or Sunday or a public holiday in the State of Ohio, such payment or
performance may be made on the next succeeding business day, without liability
of the Company for interest on any such payment.
15. RULES OF CONSTRUCTION. In this Warrant, unless the context otherwise
requires, words in the singular number include the plural, and in the plural
include the singular, and words of the masculine gender include the feminine
and the neuter, and when the sense so indicates, words of the neuter gender may
refer to any gender. The numbers and titles of sections contained in this
Warrant are inserted for convenience of reference only, and they neither form a
part of this Warrant nor are they to be used in the construction or
interpretation hereof.
B-7
225
16. GOVERNING LAW. This Warrant shall be construed in accordance with and
governed by the law of the State of Ohio.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its
officer thereto duly authorized.
THE SCOTTS COMPANY
By: ______________________________________
Name:
Title:
B-8
226
ASSIGNMENT OF WARRANT
The undersigned hereby sell(s) and assign(s) and transfer(s) unto
________________________________________________________________________________
________________________________________________________________________________
(name, address and SSN or EIN of assignee)
____________________________________ of this Warrant.
(portion of Warrant)
Date: _____________________ Sign: ________________________________________
(Signature must conform in all respects to
name of Holder shown on face of Warrant)
Signature Guaranteed:
B-9
227
NOTICE OF EXERCISE
[To be completed and signed only upon exercise of Warrant]
The undersigned, the Holder of this Warrant, hereby irrevocably elects
to exercise the right to purchase Common Stock, without par value, of The
Scotts Company as follows:
________________________________________________________
(whole number of Warrants exercised)
Dollars ($ )
________________________________________________________
(number of Warrants exercised times Exercise Price)
Shares ( )
________________________________________________________
Dollars ($ )
________________________________________________________
(number of shares and Market Price of Common
Stock in cashless exercise)
[Signature must be _____________________________________________________
guaranteed if name of (name of holder of shares if different
holder of shares than Holder of Warrant)
differs from registered
Holder of Warrant] _____________________________________________________
(address of holder of shares if different than address
of Holder of Warrant)
_____________________________________________________
(Social Security or EIN of holder of shares if
different than Holder of Warrant)
Date:_______________ Sign:______________________________________________
(Signature must conform in all respects to name of
Holder shown on face of this Warrant)
Signature Guaranteed:
B-10
228
RECEIPT FOR WARRANTS
Each of the undersigned individuals hereby acknowledges receipt from The
Scotts Company (the "Company") on this [31]st day of [March], 1995, of a
separate warrant for the purchase of that number of common shares of the
Company indicated opposite the signature of each undersigned individual,
respectively, subject to the terms and conditions contained in the warrant.
SIGNATURE NUMBER OF SHARES
______________________________
Horace Hagedorn
______________________________
James Hagedorn
______________________________
Katherine Hagedorn Littlefield
______________________________
Paul Hagedorn
______________________________
Robert Hagedorn
______________________________
Susan Hagedorn
______________________________
John Kenlon
B-11
229
ANNEX C
SERIES B WARRANT TO PURCHASE COMMON SHARES
of
THE SCOTTS COMPANY
THIS WARRANT WAS ISSUED PURSUANT TO THE AGREEMENT AND PLAN OF MERGER
DATED AS OF JANUARY 26, 1995 (THE "MERGER AGREEMENT"), AMONG STERN'S MIRACLE-GRO
PRODUCTS, INC., STERN'S NURSERIES, INC., MIRACLE-GRO LAWN PRODUCTS INC.,
MIRACLE-GRO PRODUCTS LIMITED, THE SHAREHOLDERS LISTED THEREIN, THE SCOTTS
COMPANY AND ZYX CORPORATION. NO TRANSFER MAY OCCUR EXCEPT IN CONFORMITY WITH
THE TERMS OF THE MERGER AGREEMENT.
No. WB-1
Warrant to Purchase ______ Common
Shares, without par value (subject to
adjustment)
Void after [September 30], 200
For value received, THE SCOTTS COMPANY, an Ohio corporation (the
"Company"), hereby certifies that ___________, or registered assigns (the
"Holder"), is entitled, subject to the terms set forth below and to the Merger
Agreement, to purchase from the Company, ______ Common Shares, without par
value, of the Company ("Common Stock"), as constituted on [March 31], 1995 (the
"Warrant Issue Date"), upon surrender hereof at the principal office of the
Company referred to below, with the Notice of Exercise attached hereto duly
executed, and simultaneous payment therefor in lawful money of the United
States as hereinafter provided at the per share price of $25 (the "Exercise
Price"). The number, character and Exercise Price of such shares of Common
Stock are subject to adjustment as provided below. The term "Warrant" as used
herein shall include this Warrant and any warrants delivered in substitution or
exchange therefor as provided herein. This Warrant is registered and its
transfer may be registered upon the books maintained for that purpose by the
Company by delivery of this Warrant duly endorsed.
Terms used herein and not otherwise defined shall have the meanings
ascribed thereto in the Merger Agreement.
1. TERM OF WARRANT. Subject to the terms and conditions set forth
herein, this Warrant shall be exercisable, in whole or in part, during the term
commencing on [March 31], 1995 and ending at 5:00 p.m., Eastern time, on the
date eight years and six months after the Warrant Issue Date, and shall be void
thereafter.
C-1
230
2. EXERCISE OF WARRANT.
2.1 METHOD. The purchase rights represented by this Warrant are
exercisable by the Holder in whole or in part, at any time, or from time to
time, during the term hereof as described in Section 1 above and subject to
Section 2.5, by the surrender of this Warrant and the Notice of Exercise
annexed hereto duly completed and executed by the Holder at the principal
executive office of the Company at 14111 Scottslawn Road, Marysville, Ohio
43041 (or such other office or agency of the Company as it may designate by
notice in writing to the Holder), upon payment in cash or by wire transfer to a
bank account designated by the Company or by a certified or cashier's check of
the aggregate Exercise Price of the shares to be purchased; provided, however,
that, in lieu of cash, such Holder may pay such Exercise Price by exchanging
shares of Common Stock having an aggregate Market Price equal to the aggregate
Exercise Price or by reducing the number of shares of Common Stock such Holder
would otherwise be entitled to upon such exercise by a number of shares of
Common Stock having an aggregate Market Price equal to the aggregate Exercise
Price.
2.2 EFFECT. This Warrant shall be deemed to have been exercised at
the time of its surrender for exercise together with full payment as provided
above, and the person entitled to receive the shares of Common Stock issuable
upon such exercise shall be treated for all purposes as the holder of record of
such shares at and after such time. As promptly as practicable on or after
such date the Company at its expense shall issue to the person entitled to
receive the same a certificate for the number of shares of Common Stock
issuable upon such exercise. If this Warrant is exercised in part, the Company
at its expense will execute and deliver a new Warrant exercisable for the
number of shares for which this Warrant may then be exercised.
2.3 HOLDER NOT A SHAREHOLDER. The Holder shall neither be entitled
to vote nor receive dividends nor be deemed the holder of Common Stock or any
other securities of the Company that may at any time be issuable on the
exercise hereof for any purpose until the Warrant has been exercised for shares
of Common Stock as provided in this Section 2.
2.4 NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional shares of Common Stock shall be issued upon the
exercise of this Warrant. In lieu of any fractional share to which the Holder
would otherwise be entitled, the Company shall make a cash payment equal to the
Exercise Price multiplied by such fraction.
2.5 EXERCISE FOR CASH IN CERTAIN CIRCUMSTANCES. Notwithstanding the
foregoing, (a) until the fifth anniversary of the Warrant Issue Date, in the
event, and to the extent that, the exercise of this Warrant would cause the
Total Voting Power of the Shareholders to exceed the Standstill Percentage,
this Warrant shall not be exercisable for shares of Common Stock but rather
shall be exercisable solely for the difference at the time of exercise between
the Market Price and the Exercise Price at such time and (b) thereafter, in the
event, and to the extent that, the exercise of this Warrant would cause the
Total Voting Power of the Shareholders to exceed 49%, this Warrant shall not be
exercisable for shares of Common Stock but rather shall be exercisable solely
for the difference at the time of exercise between the Market Price and the
Exercise Price at such time.
C-2
231
3. REGISTERED WARRANTS.
3.1 SERIES. This Warrant is one of a series of Warrants, designated
as Series B, which are identical except as to the number of shares of Common
Stock purchasable and as to any restriction on the transfer thereof in order to
comply with the Securities Act of 1933 (the "Act") and the regulations of the
Securities and Exchange Commission promulgated thereunder or state securities
or blue sky laws. Such Warrants are referred to herein collectively as the
"Warrants."
3.2 RECORD OWNERSHIP. The Company shall maintain a register of the
Holders of the Warrants (the "Register") showing their names and addresses and
the serial numbers and number of Common Shares purchasable, issued to or
transferred of record by them from time to time. The Register may be
maintained in electronic, magnetic or other computerized form. The Company may
treat the person named as the Holder of this Warrant in the Register as the
sole owner of this Warrant. The Holder of this Warrant is the person
exclusively entitled to receive notifications with respect to this Warrant,
exercise it to purchase shares of Common Stock and otherwise exercise all of
the rights and powers as the absolute owner hereof.
3.3 REGISTRATION OF TRANSFER. To the extent permitted under the
Merger Agreement, transfers of this Warrant may be registered on the Register.
Transfers shall be registered when this Warrant is presented to the Company
duly endorsed with a request to register the transfer hereof in accordance with
the terms of the Merger Agreement. When this Warrant is presented for transfer
and duly transferred hereunder, it shall be cancelled and a new Warrant showing
the name of the transferee as the Holder thereof shall be issued in lieu
hereof. No transfer of this Warrant may take place except in accordance with
the terms of the Merger Agreement.
3.4 WORN AND LOST WARRANTS. If this Warrant becomes worn, defaced
or mutilated but is still substantially intact and recognizable, the Company or
its agent may issue a new Warrant in lieu hereof upon its surrender. If this
Warrant is lost, destroyed or wrongfully taken, the Company shall issue a new
Warrant in place of the original Warrant if the Holder so requests by written
notice to the Company and the Holder has delivered to the Company an indemnity
agreement reasonably satisfactory to the Company with an affidavit of the
Holder that this Warrant has been lost, destroyed or wrongfully taken.
3.5 RESTRICTIONS ON TRANSFER. (a) This Warrant and the Common
Stock issuable upon the exercise hereof have been registered under the Act on
Form S-4, and therefore this Warrant and the Common Stock issuable upon the
exercise of this Warrant may not be offered for sale, sold or otherwise
transferred unless such offer, sale or other transfer complies with Rule 145
under the Act and is otherwise registered under the appropriate state
securities or Blue Sky laws or such transfer is exempt from such registration.
(b) No transfer of this Warrant or the Common Stock issuable upon
the exercise hereof may be made except in accordance with the terms of the
Merger Agreement.
3.6 WARRANT AGENT. The Company may, by written notice to the
Holder, appoint an agent for the purpose of maintaining the Register, issuing
Common Stock or other securities then issuable upon the exercise of this
Warrant, exchanging or transferring this Warrant, or all of the foregoing.
C-3
232
Thereafter, any such registration, issuance, exchange, or transfer, as the case
may be, shall be made at the office of such agent.
4. RESERVATION OF STOCK. The Company covenants that, during the term
this Warrant is exercisable, the Company will reserve from its authorized and
unissued Common Stock or Common Stock held in Treasury a sufficient number of
shares to provide for the issuance of Common Stock upon the exercise of this
Warrant. The Company further covenants that all shares that may be issued upon
the exercise of rights represented by this Warrant, upon exercise of the rights
represented by this Warrant and payment of the Exercise Price, all as set forth
herein, will be duly authorized, validly issued, fully paid and non-assessable.
The Company agrees that its issuance of this Warrant shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of
Common Stock upon the exercise of this Warrant.
5. EFFECTS OF CERTAIN EVENTS.
5.1 COMMON STOCK DIVIDENDS, SUBDIVISIONS OR COMBINATIONS. In case
the Company shall (A) pay or make a dividend or other distribution to all
holders of its Common Stock in shares of its Common Stock, (B) subdivide, split
or reclassify the outstanding shares of its Common Stock into a larger number
of shares or (C) combine or reclassify the outstanding shares of its Common
Stock into a smaller number of shares, the Exercise Price in effect immediately
prior thereto shall be adjusted so that the Holder of this Warrant shall
thereafter be entitled to receive upon the exercise of this Warrant, subject to
Section 2.5, the number of shares of Common Stock which such Holder would have
owned and been entitled to receive had such Warrant been exercised immediately
prior to the happening of any of the events described above or, in the case of
a stock dividend or other distribution, prior to the record date for
determination of shareholders entitled thereto. An adjustment made pursuant to
this Section 5.1 shall become effective immediately after such record date in
the case of a dividend or distribution and immediately after the effective date
in the case of a subdivision, split, combination or reclassification.
5.2 DISTRIBUTIONS OF ASSETS OR SECURITIES OTHER THAN COMMON STOCK.
In case the Company shall, by dividend or otherwise, distribute to all holders
of its Common Stock shares of any of its capital stock (other than Common
Stock), rights or warrants to purchase any of its securities (other than those
referred to in Section 5.3 below), cash (other than any regular quarterly or
semi-annual dividend which the Board of Directors of the Company determines),
other assets or evidences of its indebtedness, then in each such case the
Exercise Price shall be adjusted by multiplying the Exercise Price in effect
immediately prior to the date of such dividend or distribution by a fraction,
of which the numerator shall be the Average Market Price per share of Common
Stock at the record date for determining shareholders entitled to such dividend
or distribution less the fair market value (as determined in good faith by the
Board of Directors) of the portion of the securities, cash, assets or evidences
of indebtedness so distributed applicable to one share of Common Stock, and of
which the denominator shall be such Average Market Price per share. An
adjustment made pursuant to this Section 5.2 shall become effective immediately
after such record date.
5.3 BELOW MARKET DISTRIBUTIONS OR ISSUANCES. In case the Company
shall issue Common Stock (or rights, warrants or other securities convertible
into or exchangeable or exercisable for shares of Common Stock) to all holders
of Common Stock at a price per share (or having an effective exercise, exchange
or conversion price per share) less than the Average Market Price per share of
Common Stock at the record date for the determination of shareholders entitled
to receive such Common Stock (or rights, warrants
C-4
233
or other securities convertible Exercise Price in effect immediately prior to
the date of issuance of such Common Stock (or rights, warrants or other
securities) by a fraction, the numerator of which shall be the sum of (A) the
number of shares of Common Stock outstanding on the date of such issuance
(without giving effect to any such issuance) and (B) the number of shares which
the aggregate consideration receivable by the Company for the total number of
shares of Common Stock so issued (or into or for which such rights, warrants or
other securities are convertible, exchangeable or exercisable) would purchase
at such Average Market Price, and the denominator of which shall be the sum of
(A) the number of shares of Common Stock outstanding on the date of such
issuance (without giving effect to any such issuance) and (B) the number of
additional shares of Common Stock so issued (or into or for which such rights,
warrants or other securities are convertible, exchangeable or exercisable). An
adjustment made pursuant to this Section 5.3 shall become effective immediately
after the record date for determination of shareholders entitled to receive or
purchase such Common Stock (or rights, warrants or other securities convertible
into or exchangeable or exercisable for shares of Common Stock). For purposes
of this Section 5.3, the issuance of any options, rights or warrants or any
shares of Common Stock (whether treasury shares or newly issued shares)
pursuant to any employee (including consultants and directors) benefit or stock
option or purchase plan or program of the Company shall not be deemed to
constitute an issuance of Common Stock or options, rights or warrants to which
this Section 5.3 applies. Notwithstanding anything herein to the contrary, no
further adjustment to the Exercise Price shall be made (i) upon the issuance or
sale of Common Stock upon the exercise of any rights or warrants or (ii) upon
the issuance or sale of Common Stock upon conversion or exchange of any
convertible securities, if any adjustment in the Exercise Price was made or
required to be made upon the issuance or sale of such rights, warrants or
securities.
5.4 REPURCHASES. In case at any time or from time to time the
Company or any subsidiary thereof shall repurchase, by self tender offer or
otherwise, any shares of Common Stock of the Company at a weighted average
purchase price in excess of the Average Market Price on the business day
immediately prior to the earliest of the date of such repurchase, the
commencement of an offer to repurchase or the public announcement of either
(such date being referred to as the "Determination Date"), the Exercise Price
in effect as of such Determination Date shall be adjusted by multiplying such
Exercise Price by a fraction, the numerator of which shall be (A) the product
of (x) the number of shares of Common Stock outstanding on such Determination
Date and (y) the Average Market Price of the Common Stock on such Determination
Date minus (B) the aggregate purchase price of such repurchase and the
denominator of which shall be the product of (x) the number of shares of Common
Stock outstanding on such Determination Date minus the number of shares of
Common Stock repurchased by the Company or any subsidiary thereof in such
repurchase and (y) the Average Market Price of the Common Stock on such
Determination Date. For purposes of this clause (iv), the repurchase or
repurchases by the Company or any subsidiary thereof within any 12 month period
of not more than 15% of the shares of Common Stock outstanding as of the first
date of such period, at a price not in excess of 120% of the Average Market
Price as of the Determination Date of any such repurchase, shall not be deemed
to constitute a repurchase to which this Section 5.4 applies. An adjustment
made pursuant to this Section 5.4 shall become effective immediately after the
effective date of such repurchase.
6. CERTAIN REORGANIZATIONS. In the event of any change,
reclassification, conversion, exchange or cancellation of outstanding shares of
Common Stock of the Company (other than any reclassification referred to in
Section 5.1), whether pursuant to a merger, consolidation, reorganization or
otherwise, or the sale or other disposition of all or substantially all of the
assets and properties of the Company, this Warrant
C-5
234
shall, after such merger, consolidation, reorganization or other transaction,
sale or other disposition, be exercisable for the kind and number of shares of
stock or other securities or property, of the Company or otherwise, to which
the Holder would have been consummation of such event. The provisions of this
Section 6 shall similarly apply to successive changes, reclassifications,
conversions, exchange or cancellations.
7. NO IMPAIRMENT. Except as permitted by the Merger Agreement, the
Company will not, by amendment of its Restated Articles of Incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all times in good
faith assist in the carrying out of all the provisions of this Warrant and in
the taking of all such action as may be necessary or appropriate in order to
protect the exercise rights of the Holder hereof against impairment.
8. CALCULATION OF ADJUSTMENTS. No adjustment in the Exercise Price
shall be required unless such adjustment would require an increase or decrease
of at least 1% in such price; provided, however, that any adjustments which by
reason of this Section 8 are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under
this Warrant shall be made by the Company and shall be made to the nearest cent
or to the nearest one hundredth of a share, as the case may be. Anything in
this Warrant to the contrary notwithstanding, the Company shall be entitled to
make such reductions in the Exercise Price, in addition to those required by
this Warrant, as it in its sole discretion shall determine to be advisable in
order that any stock dividends, subdivision of shares, distribution of rights
to purchase stock or securities, or a distribution of securities convertible
into or exchangeable for stock hereafter made by the Company to its
shareholders shall not be taxable.
9. CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Exercise Price pursuant to this Warrant, the
Company at its expense shall promptly compute such adjustment or readjustment
in accordance with the terms hereof and furnish to the Holder of this Warrant a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Company
shall, upon the written request at any time of the Holder of this Warrant,
furnish or cause to be furnished to such Holder a like certificate setting
forth (i) such adjustments and readjustments, (ii) the Exercise Price at the
time in effect, and (iii) the number of shares of Common Stock and the amount,
if any, of other property which at the time would be received upon the exercise
of this Warrant; provided, however, that the Company shall not be required to
calculate the effect of Section 2.5 upon such exercise.
10. NOTICES.
10.1 DILUTIVE EVENTS. In the event that the Company shall propose
any time:
(1) to declare any dividend or distribution upon its Common Stock;
(2) to offer for subscription pro rata to the holders of any class
or series of its stock any additional shares of stock of any class or series or
other rights; or
C-6
235
(3) to effect any transaction of the type described in Section 6
hereof involving a change in the Common Stock;
then, in connection with each such event, the Company shall send to the Holders
of this Warrant:
(A) at least 20 days' prior written notice of the date on which a
record shall be taken for such dividend or distribution (and specifying the
date on which the holders of Common Stock shall be entitled thereto) or for
determining rights to vote in respect of the matters referred to in (1) and (2)
above; and
(B) in the case of the matters referred to in (3) above, at least 20
days' prior written notice of the date when the same shall take place (and
specifying the time on which the holders of Common Stock shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
the occurrence of such event).
10.2 DISSOLUTION; LIQUIDATION. In the event of any voluntary or
involuntary dissolution, liquidation or winding up of the Company, the Company
shall send to the Holder of this Warrant at least 20 days' prior written
notice.
10.3 REPURCHASE PROGRAMS. The Company shall send written notice
immediately upon any public announcement with respect to an open market
repurchase program, any self tender offer for shares of Common Stock and any
other repurchase other than a repurchase of stock of an employee or consultant
pursuant to any benefit plan or agreement.
11. AMENDMENTS. This Warrant may not be amended without the prior
written consent of the Holder.
12. ADDITIONAL DEFINITION. As used herein, the term "Average Market
Price" shall mean the average of the Market Prices for the 30 consecutive
trading immediately preceding the date in question.
13. NOTICES. Any notice, certificate or other communication which is
required or convenient under the terms of this Warrant shall be duly given if
it is in writing and delivered in person or mailed by first class mail, postage
prepaid, and directed to the Holder of the Warrant at its address as it appears
on the Register or if to the Company to its principal executive offices. The
time when such notice is sent shall be the time of the giving of the notice.
14. TIME. Where this Warrant provides for a payment or performance on a
Saturday or Sunday or a public holiday in the State of Ohio, such payment or
performance may be made on the next succeeding business day, without liability
of the Company for interest on any such payment.
15. RULES OF CONSTRUCTION. In this Warrant, unless the context otherwise
requires, words in the singular number include the plural, and in the plural
include the singular, and words of the masculine gender include the feminine
and the neuter, and when the sense so indicates, words of the neuter gender may
refer to any gender. The numbers and titles of sections contained in this
Warrant are inserted for convenience of reference only, and they neither form a
part of this Warrant nor are they to be used in the construction or
interpretation hereof.
C-7
236
16. Governing Law. This Warrant shall be construed in accordance with
and governed by the law of the State of Ohio.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its
officer thereto duly authorized.
THE SCOTTS COMPANY
By:______________________________________
Name:
Title:
C-8
237
Assignment of Warrant
The undersigned hereby sell(s) and assign(s) and transfer(s) unto
______________________________________________________________________________
______________________________________________________________________________
(name, address and SSN or EIN of assignee)
__________________________________ of this Warrant.
(portion of Warrant)
Date:_____________________ Sign:________________________________________
(Signature must conform in all respects to
name of Holder shown on face of Warrant)
Signature Guaranteed:
C-9
238
Notice of Exercise
[To be completed and signed only upon exercise of Warrant]
The undersigned, the Holder of this Warrant, hereby irrevocably elects to
exercise the right to purchase Common Stock, without par value, of The Scotts
Company as follows:
________________________________________________________
(whole number of Warrants exercised)
Dollars ($ )
________________________________________________________
(number of Warrants exercised times Exercise Price)
Shares ( )
________________________________________________________
Dollars ($ )
________________________________________________________
(number of shares and Market Price of Common
Stock in cashless exercise)
[Signature must be ________________________________________________________
guaranteed if name of (name of holder of shares if different than Holder
holder of shares differs of Warrant)
from registered Holder
of Warrant]
________________________________________________________
(address of holder of shares if different than address
of Holder of Warrant)
________________________________________________________
(Social Security or EIN of holder of shares if
different than Holder of Warrant)
Date:_______________ Sign:___________________________________________________
(Signature must conform in all respects to name of
Holder shown on face of this Warrant)
Signature Guaranteed:
C-10
239
RECEIPT FOR WARRANTS
Each of the undersigned individuals hereby acknowledges receipt from
The Scotts Company (the "Company") on this [31]st day of [March], 1995, of a
separate warrant for the purchase of that number of common shares of the
Company indicated opposite the signature of each undersigned individual,
respectively, subject to the terms and conditions contained in the warrant.
SIGNATURE NUMBER OF SHARES
______________________________
Horace Hagedorn
______________________________
James Hagedorn
______________________________
Katherine Hagedorn Littlefield
______________________________
Paul Hagedorn
______________________________
Robert Hagedorn
______________________________
Susan Hagedorn
______________________________
John Kenlon
C-11
240
ANNEX D
SERIES C WARRANT TO PURCHASE COMMON SHARES
of
THE SCOTTS COMPANY
THIS WARRANT WAS ISSUED PURSUANT TO THE AGREEMENT AND PLAN OF MERGER DATED
AS OF JANUARY 26, 1995 (THE "MERGER AGREEMENT"), AMONG STERN'S MIRACLE-GRO
PRODUCTS, INC., STERN'S NURSERIES, INC., MIRACLE-GRO LAWN PRODUCTS INC.,
MIRACLE-GRO PRODUCTS LIMITED, THE SHAREHOLDERS LISTED THEREIN, THE SCOTTS
COMPANY AND ZYX CORPORATION. NO TRANSFER MAY OCCUR EXCEPT IN CONFORMITY WITH
THE TERMS OF THE MERGER AGREEMENT.
No. WC-1 Warrant to Purchase ______ Common
Shares, without par value (subject to
adjustment)
Void after [September 30], 2003
For value received, THE SCOTTS COMPANY, an Ohio corporation (the
"Company"), hereby certifies that ___________, or registered assigns (the
"Holder"), is entitled, subject to the terms set forth below and to the Merger
Agreement, to purchase from the Company, ______ Common Shares, without par
value, of the Company ("Common Stock"), as constituted on [March 31], 1995 (the
"Warrant Issue Date"), upon surrender hereof at the principal office of the
Company referred to below, with the Notice of Exercise attached hereto duly
executed, and simultaneous payment therefor in lawful money of the United
States as hereinafter provided at the per share price of $29 (the "Exercise
Price"). The number, character and Exercise Price of such shares of Common
Stock are subject to adjustment as provided below. The term "Warrant" as used
herein shall include this Warrant and any warrants delivered in substitution or
exchange therefor as provided herein. This Warrant is registered and its
transfer may be registered upon the books maintained for that purpose by the
Company by delivery of this Warrant duly endorsed.
Terms used herein and not otherwise defined shall have the meanings
ascribed thereto in the Merger Agreement.
1. TERM OF WARRANT. Subject to the terms and conditions set forth
herein, this Warrant shall be exercisable, in whole or in part, during the term
commencing on [March 31], 1995 and ending at 5:00 p.m., Eastern time, on the
date eight years and six months after the Warrant Issue Date, and shall be void
thereafter.
D-1
241
2. EXERCISE OF WARRANT.
2.1 METHOD. The purchase rights represented by this Warrant are
exercisable by the Holder in whole or in part, at any time, or from time to
time, during the term hereof as described in Section 1 above and subject to
Section 2.5, by the surrender of this Warrant and the Notice of Exercise
annexed hereto duly completed and executed by the Holder at the principal
executive office of the Company at 14111 Scottslawn Road, Marysville, Ohio
43041 (or such other office or agency of the Company as it may designate by
notice in writing to the Holder), upon payment in cash or by wire transfer to a
bank account designated by the Company or by a certified or cashier's check of
the aggregate Exercise Price of the shares to be purchased; provided, however,
that, in lieu of cash, such Holder may pay such Exercise Price by exchanging
shares of Common Stock having an aggregate Market Price equal to the aggregate
Exercise Price or by reducing the number of shares of Common Stock such Holder
would otherwise be entitled to upon such exercise by a number of shares of
Common Stock having an aggregate Market Price equal to the aggregate Exercise
Price.
2.2 EFFECT. This Warrant shall be deemed to have been exercised at
the time of its surrender for exercise together with full payment as provided
above, and the person entitled to receive the shares of Common Stock issuable
upon such exercise shall be treated for all purposes as the holder of record of
such shares at and after such time. As promptly as practicable on or after
such date the Company at its expense shall issue to the person entitled to
receive the same a certificate for the number of shares of Common Stock
issuable upon such exercise. If this Warrant is exercised in part, the Company
at its expense will execute and deliver a new Warrant exercisable for the
number of shares for which this Warrant may then be exercised.
2.3 HOLDER NOT A SHAREHOLDER. The Holder shall neither be entitled
to vote nor receive dividends nor be deemed the holder of Common Stock or any
other securities of the Company that may at any time be issuable on the
exercise hereof for any purpose until the Warrant has been exercised for shares
of Common Stock as provided in this Section 2.
2.4 NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional shares of Common Stock shall be issued upon the
exercise of this Warrant. In lieu of any fractional share to which the Holder
would otherwise be entitled, the Company shall make a cash payment equal to the
Exercise Price multiplied by such fraction.
2.5 EXERCISE FOR CASH IN CERTAIN CIRCUMSTANCES. Notwithstanding the
foregoing, (a) until the fifth anniversary of the Warrant Issue Date, in the
event, and to the extent that, the exercise of this Warrant would cause the
Total Voting Power of the Shareholders to exceed the Standstill Percentage,
this Warrant shall not be exercisable for shares of Common Stock but rather
shall be exercisable solely for the difference at the time of exercise between
the Market Price and the Exercise Price at such time and (b) thereafter, in the
event, and to the extent that, the exercise of this Warrant would cause the
Total Voting Power of the Shareholders to exceed 49%, this Warrant shall not be
exercisable for shares of Common Stock but rather shall be exercisable solely
for the difference at the time of exercise between the Market Price and the
Exercise Price at such time.
D-2
242
3. Registered Warrants.
3.1 SERIES. This Warrant is one of a series of Warrants, designated
as Series C, which are identical except as to the number of shares of Common
Stock purchasable and as to any restriction on the transfer thereof in order to
comply with the Securities Act of 1933 (the "Act") and the regulations of the
Securities and Exchange Commission promulgated thereunder or state securities
or blue sky laws. Such Warrants are referred to herein collectively as the
"Warrants."
3.2 RECORD OWNERSHIP. The Company shall maintain a register of the
Holders of the Warrants (the "Register") showing their names and addresses and
the serial numbers and number of Common Shares purchasable, issued to or
transferred of record by them from time to time. The Register may be
maintained in electronic, magnetic or other computerized form. The Company may
treat the person named as the Holder of this Warrant in the Register as the
sole owner of this Warrant. The Holder of this Warrant is the person
exclusively entitled to receive notifications with respect to this Warrant,
exercise it to purchase shares of Common Stock and otherwise exercise all of
the rights and powers as the absolute owner hereof.
3.3 REGISTRATION OF TRANSFER. To the extent permitted under the
Merger Agreement, transfers of this Warrant may be registered on the Register.
Transfers shall be registered when this Warrant is presented to the Company
duly endorsed with a request to register the transfer hereof in accordance with
the terms of the Merger Agreement. When this Warrant is presented for transfer
and duly transferred hereunder, it shall be cancelled and a new Warrant showing
the name of the transferee as the Holder thereof shall be issued in lieu
hereof. No transfer of this Warrant may take place except in accordance with
the terms of the Merger Agreement.
3.4 WORN AND LOST WARRANTS. If this Warrant becomes worn, defaced
or mutilated but is still substantially intact and recognizable, the Company or
its agent may issue a new Warrant in lieu hereof upon its surrender. If this
Warrant is lost, destroyed or wrongfully taken, the Company shall issue a new
Warrant in place of the original Warrant if the Holder so requests by written
notice to the Company and the Holder has delivered to the Company an indemnity
agreement reasonably satisfactory to the Company with an affidavit of the
Holder that this Warrant has been lost, destroyed or wrongfully taken.
3.5 RESTRICTIONS ON TRANSFER. (a) This Warrant and the Common
Stock issuable upon the exercise hereof have been registered under the Act on
Form S-4, and therefore this Warrant and the Common Stock issuable upon the
exercise of this Warrant may not be offered for sale, sold or otherwise
transferred unless such offer, sale or other transfer complies with Rule 145
under the Act and is otherwise registered under the appropriate state
securities or Blue Sky laws or such transfer is exempt from such registration.
(b) No transfer of this Warrant or the Common Stock issuable upon
the exercise hereof may be made except in accordance with the terms of the
Merger Agreement.
3.6 WARRANT AGENT. The Company may, by written notice to the
Holder, appoint an agent for the purpose of maintaining the Register, issuing
Common Stock or other securities then issuable upon the exercise of this
Warrant, exchanging or transferring this Warrant, or any or all of the
foregoing.
D-3
243
Thereafter, any such registration, issuance, exchange, or transfer, as the case
may be, shall be made at the office of such agent.
4. RESERVATION OF STOCK. The Company covenants that, during the term
this Warrant is exercisable, the Company will reserve from its authorized and
unissued Common Stock or Common Stock held in Treasury a sufficient number of
shares to provide for the issuance of Common Stock upon the exercise of this
Warrant. The Company further covenants that all shares that may be issued upon
the exercise of rights represented by this Warrant, upon exercise of the rights
represented by this Warrant and payment of the Exercise Price, all as set forth
herein, will be duly authorized, validly issued, fully paid and non-assessable.
The Company agrees that its issuance of this Warrant shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of
Common Stock upon the exercise of this Warrant.
5. EFFECTS OF CERTAIN EVENTS.
5.1 COMMON STOCK DIVIDENDS, SUBDIVISIONS OR COMBINATIONS. In case
the Company shall (A) pay or make a dividend or other distribution to all
holders of its Common Stock in shares of its Common Stock, (B) subdivide, split
or reclassify the outstanding shares of its Common Stock into a larger number
of shares or (C) combine or reclassify the outstanding shares of its Common
Stock into a smaller number of shares, the Exercise Price in effect immediately
prior thereto shall be adjusted so that the Holder of this Warrant shall
thereafter be entitled to receive upon the exercise of this Warrant, subject to
Section 2.5, the number of shares of Common Stock which such Holder would have
owned and been entitled to receive had such Warrant been exercised immediately
prior to the happening of any of the events described above or, in the case of
a stock dividend or other distribution, prior to the record date for
determination of shareholders entitled thereto. An adjustment made pursuant to
this Section 5.1 shall become effective immediately after such record date in
the case of a dividend or distribution and immediately after the effective date
in the case of a subdivision, split, combination or reclassification.
5.2 DISTRIBUTIONS OF ASSETS OR SECURITIES OTHER THAN COMMON STOCK.
In case the Company shall, by dividend or otherwise, distribute to all holders
of its Common Stock shares of any of its capital stock (other than Common
Stock), rights or warrants to purchase any of its securities (other than those
referred to in Section 5.3 below), cash (other than any regular quarterly or
semi-annual dividend which the Board of Directors of the Company determines),
other assets or evidences of its indebtedness, then in each such case the
Exercise Price shall be adjusted by multiplying the Exercise Price in effect
immediately prior to the date of such dividend or distribution by a fraction,
of which the numerator shall be the Average Market Price per share of Common
Stock at the record date for determining shareholders entitled to such dividend
or distribution less the fair market value (as determined in good faith by the
Board of Directors) of the portion of the securities, cash, assets or evidences
of indebtedness so distributed applicable to one share of Common Stock, and of
which the denominator shall be such Average Market Price per share. An
adjustment made pursuant to this Section 5.2 shall become effective immediately
after such record date.
5.3 BELOW MARKET DISTRIBUTIONS OR ISSUANCES. In case the Company
shall issue Common Stock (or rights, warrants or other securities convertible
into or exchangeable or exercisable for shares of Common Stock) to all holders
of Common Stock at a price per share (or having an effective exercise, exchange
or conversion price per share) less than the Average Market Price per share of
D-4
244
Common Stock at the record date for the determination of shareholders entitled
to receive such Common Stock (or rights, warrants or other securities
convertible into or exchangeable or exercisable for shares of Common Stock),
then in each such case the Exercise Price shall be adjusted by multiplying the
Exercise Price in effect immediately prior to the date of issuance of such
Common Stock (or rights, warrants or other securities) by a fraction, the
numerator of which shall be the sum of (A) the number of shares of Common Stock
outstanding on the date of such issuance (without giving effect to any such
issuance) and (B) the number of shares which the aggregate consideration
receivable by the Company for the total number of shares of Common Stock so
issued (or into or for which such rights, warrants or other securities are
convertible, exchangeable or exercisable) would purchase at such Average Market
Price, and the denominator of which shall be the sum of (A) the number of
shares of Common Stock outstanding on the date of such issuance (without giving
effect to any such issuance) and (B) the number of additional shares of Common
Stock so issued (or into or for which such rights, warrants or other securities
are convertible, exchangeable or exercisable). An adjustment made pursuant to
this Section 5.3 shall become effective immediately after the record date for
determination of shareholders entitled to receive or purchase such Common Stock
(or rights, warrants or other securities convertible into or exchangeable or
exercisable for shares of Common Stock). For purposes of this Section 5.3, the
issuance of any options, rights or warrants or any shares of Common Stock
(whether treasury shares or newly issued shares) pursuant to any employee
(including consultants and directors) benefit or stock option or purchase plan
or program of the Company shall not be deemed to constitute an issuance of
Common Stock or options, rights or warrants to which this Section 5.3 applies.
Notwithstanding anything herein to the contrary, no further adjustment to the
Exercise Price shall be made (i) upon the issuance or sale of Common Stock upon
the exercise of any rights or warrants or (ii) upon the issuance or sale of
Common Stock upon conversion or exchange of any convertible securities, if any
adjustment in the Exercise Price was made or required to be made upon the
issuance or sale of such rights, warrants or securities.
5.4 REPURCHASES. In case at any time or from time to time the
Company or any subsidiary thereof shall repurchase, by self tender offer or
otherwise, any shares of Common Stock of the Company at a weighted average
purchase price in excess of the Average Market Price on the business day
immediately prior to the earliest of the date of such repurchase, the
commencement of an offer to repurchase or the public announcement of either
(such date being referred to as the "Determination Date"), the Exercise Price
in effect as of such Determination Date shall be adjusted by multiplying such
Exercise Price by a fraction, the numerator of which shall be (A) the product
of (x) the number of shares of Common Stock outstanding on such Determination
Date and (y) the Average Market Price of the Common Stock on such Determination
Date minus (B) the aggregate purchase price of such repurchase and the
denominator of which shall be the product of (x) the number of shares of Common
Stock outstanding on such Determination Date minus the number of shares of
Common Stock repurchased by the Company or any subsidiary thereof in such
repurchase and (y) the Average Market Price of the Common Stock on such
Determination Date. For purposes of this clause (iv), the repurchase or
repurchases by the Company or any subsidiary thereof within any 12 month period
of not more than 15% of the shares of Common Stock outstanding as of the first
date of such period, at a price not in excess of 120% of the Average Market
Price as of the Determination Date of any such repurchase, shall not be deemed
to constitute a repurchase to which this Section 5.4 applies. An adjustment
made pursuant to this Section 5.4 shall become effective immediately after the
effective date of such repurchase.
6. CERTAIN REORGANIZATIONS. In the event of any change,
reclassification, conversion, exchange or cancellation of outstanding shares of
Common Stock of the Company (other than any
D-5
245
reclassification referred to in Section 5.1), whether pursuant to a merger,
consolidation, reorganization or otherwise, or the sale or other disposition of
all or substantially all of the assets and properties of the Company, this
Warrant shall, after such merger, consolidation, reorganization or other
transaction, sale or other disposition, be exercisable for the kind and number
of shares of stock or other securities or property, of the Company or
otherwise, to which the Holder would have been entitled if immediately prior to
such event such Holder had exercised this Warrant for Common Stock at the
Exercise Price in effect as of the consummation of such event. The provisions
of this Section 6 shall similarly apply to successive changes,
reclassifications, conversions, exchange or cancellations.
7. NO IMPAIRMENT. Except as permitted by the Merger Agreement, the
Company will not, by amendment of its Restated Articles of Incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all times in good
faith assist in the carrying out of all the provisions of this Warrant and in
the taking of all such action as may be necessary or appropriate in order to
protect the exercise rights of the Holder hereof against impairment.
8. CALCULATION OF ADJUSTMENTS. No adjustment in the Exercise Price
shall be required unless such adjustment would require an increase or decrease
of at least 1% in such price; provided, however, that any adjustments which by
reason of this Section 8 are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under
this Warrant shall be made by the Company and shall be made to the nearest cent
or to the nearest one hundredth of a share, as the case may be. Anything in
this Warrant to the contrary notwithstanding, the Company shall be entitled to
make such reductions in the Exercise Price, in addition to those required by
this Warrant, as it in its sole discretion shall determine to be advisable in
order that any stock dividends, subdivision of shares, distribution of rights
to purchase stock or securities, or a distribution of securities convertible
into or exchangeable for stock hereafter made by the Company to its
shareholders shall not be taxable.
9. CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Exercise Price pursuant to this Warrant, the
Company at its expense shall promptly compute such adjustment or readjustment
in accordance with the terms hereof and furnish to the Holder of this Warrant a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Company
shall, upon the written request at any time of the Holder of this Warrant,
furnish or cause to be furnished to such Holder a like certificate setting
forth (i) such adjustments and readjustments, (ii) the Exercise Price at the
time in effect, and (iii) the number of shares of Common Stock and the amount,
if any, of other property which at the time would be received upon the exercise
of this Warrant; provided, however, that the Company shall not be required to
calculate the effect of Section 2.5 upon such exercise.
10. NOTICES.
10.1 Dilutive Events. In the event that the Company shall propose at
any time:
(1) to declare any dividend or distribution upon its Common Stock;
D-6
246
(2) to offer for subscription pro rata to the holders of any class
or series of its stock any additional shares of stock of any class or series or
other rights; or
(3) to effect any transaction of the type described in Section 6
hereof involving a change in the Common Stock;
then, in connection with each such event, the Company shall send to the Holders
of this Warrant:
(A) at least 20 days' prior written notice of the date on which a
record shall be taken for such dividend or distribution (and specifying the
date on which the holders of Common Stock shall be entitled thereto) or for
determining rights to vote in respect of the matters referred to in (1) and (2)
above; and
(B) in the case of the matters referred to in (3) above, at least 20
days' prior written notice of the date when the same shall take place (and
specifying the time on which the holders of Common Stock shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
the occurrence of such event).
10.2 DISSOLUTION; LIQUIDATION. In the event of any voluntary or
involuntary dissolution, liquidation or winding up of the Company, the Company
shall send to the Holder of this Warrant at least 20 days' prior written
notice.
10.3 REPURCHASE PROGRAMS. The Company shall send written notice
immediately upon any public announcement with respect to an open market
repurchase program, any self tender offer for shares of Common Stock and any
other repurchase other than a repurchase of stock of an employee or consultant
pursuant to any benefit plan or agreement.
11. AMENDMENTS. This Warrant may not be amended without the prior
written consent of the Holder.
12. ADDITIONAL DEFINITION. As used herein, the term "Average Market
Price" shall mean the average of the Market Prices for the 30 consecutive
trading immediately preceding the date in question.
13. NOTICES. Any notice, certificate or other communication which is
required or convenient under the terms of this Warrant shall be duly given if
it is in writing and delivered in person or mailed by first class mail, postage
prepaid, and directed to the Holder of the Warrant at its address as it appears
on the Register or if to the Company to its principal executive offices. The
time when such notice is sent shall be the time of the giving of the notice.
14. TIME. Where this Warrant provides for a payment or performance on a
Saturday or Sunday or a public holiday in the State of Ohio, such payment or
performance may be made on the next succeeding business day, without liability
of the Company for interest on any such payment.
15. RULES OF CONSTRUCTION. In this Warrant, unless the context otherwise
requires, words in the singular number include the plural, and in the plural
include the singular, and words of the masculine gender include the feminine
and the neuter, and when the sense so indicates, words of the neuter gender
D-7
247
may refer to any gender. The numbers and titles of sections contained in this
Warrant are inserted for convenience of reference only, and they neither form a
part of this Warrant nor are they to be used in the construction or
interpretation hereof.
16. GOVERNING LAW. This Warrant shall be construed in accordance with
and governed by the law of the State of Ohio.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its
officer thereto duly authorized.
THE SCOTTS COMPANY
By:______________________________________
Name:
Title:
D-8
248
ASSIGNMENT OF WARRANT
The undersigned hereby sell(s) and assign(s) and transfer(s) unto
________________________________________________________________________________
________________________________________________________________________________
(name, address and SSN or EIN of assignee)
__________________________________ of this Warrant.
(portion of Warrant)
Date:_____________________ Sign:________________________________________
(Signature must conform in all respects to
name of Holder shown on face of Warrant)
Signature Guaranteed:
D-9
249
NOTICE OF EXERCISE
[To be completed and signed only upon exercise of Warrant]
The undersigned, the Holder of this Warrant, hereby irrevocably elects to
exercise the right to purchase Common Stock, without par value, of The Scotts
Company as follows:
___________________________________________________
(whole number of Warrants exercised)
Dollars ($ )
___________________________________________________
(number of Warrants exercised times Exercise Price)
Shares ( )
__________________________________________________
Dollars ($ )
__________________________________________________
(number of shares and Market Price of Common
Stock in cashless exercise)
[Signature must be __________________________________________________
guaranteed if name of (name of holder of shares if different than
holder of shares differs Holder of Warrant)
from registered Holder
of Warrant]
__________________________________________________
(address of holder of shares if different than
address of Holder of Warrant)
__________________________________________________
(Social Security or EIN of holder of shares if
different than Holder of Warrant)
Date:_______________ Sign:_____________________________________________
(Signature must conform in all respects to name of
Holder shown on face of this Warrant)
Signature Guaranteed:
D-10
250
RECEIPT FOR WARRANTS
Each of the undersigned individuals hereby acknowledges receipt from The
Scotts Company (the "Company") on this [31]st day of [March], 1995, of a
separate warrant for the purchase of that number of common shares of the
Company indicated opposite the signature of each undersigned individual,
respectively, subject to the terms and conditions contained in the warrant.
SIGNATURE NUMBER OF SHARES
______________________________
Horace Hagedorn
______________________________
James Hagedorn
______________________________
Katherine Hagedorn Littlefield
______________________________
Paul Hagedorn
______________________________
Robert Hagedorn
______________________________
Susan Hagedorn
______________________________
John Kenlon
D-11
251
ANNEX E
REGISTRATION RIGHTS
SECTION 1. REPRESENTATIVE. The Shareholder Representative shall act on
behalf of the Shareholders in connection with the matters set forth in this
Annex E. Scotts shall be entitled to rely on any notices from the Shareholder
Representative as if it came from the Shareholders.
SECTION 2. DEMAND REGISTRATION. (a) The Shareholder Representative may at
any time request Scotts, in writing, to register under the Securities Act any
or all of the shares of Scotts Common Stock owned by the Shareholders (or any
securities issued in respect of the Scotts Common Stock, by dividend,
reclassification, merger or otherwise) (the "Registrable Securities"). Scotts
shall use its best efforts to cause the number of Registrable Securities
specified in such request to be registered as soon as reasonably practicable so
as to permit the sale thereof as specified in such request, and in connection
therewith prepare and file as promptly as practicable with the SEC a
registration statement under the Securities Act to effect such registration on
such appropriate form as Scotts shall reasonably determine, provided that each
such request shall (i) specify the number of Registrable Securities intended to
be offered and sold; (ii) express the present intention of the applicable
Shareholders to offer or cause the offering of such number of Registrable
Securities for distribution; (iii) describe the nature or method of the
proposed offer and sale thereof, including the plan of distribution therefor
(including, but not limited to, unless Scotts shall otherwise agree, no more
than one offering on a delayed or continuous basis pursuant to Rule 415 (or any
successor rule to similar effect) promulgated under the Securities Act (a "Rule
415 Offering")); (iv) cover an aggregate number of Registrable Securities equal
to at least 30% of the Registrable Securities held in the aggregate by the
Shareholders at such time; (v) not be made less than one year after the
effective date of any other registration statement filed under this Section 2;
and (vi) contain the undertaking of the Shareholders to provide all such
information and materials and take all such action as may be required in order
to permit Scotts to comply with all applicable requirements of the SEC and to
obtain any desired acceleration of the effective date of such registration
statement. The obligation of Scotts to register any Registrable Securities on
demand in accordance with this Section 2 shall expire after Scotts has filed
registration statements by reason of such demands on three separate occasions;
provided, that a registration statement shall not be deemed to have been filed
if it shall be subject to a stop order, injunction or other governmental action
restricting distribution thereunder.
(b) The obligation of Scotts to use its best efforts to cause the
Registrable Securities to be registered under the Securities Act is subject to
the limitation that Scotts shall be entitled to postpone for a reasonable
period of time, but not more than ninety calendar days from the receipt of the
Shareholder Representative's notice, the filing of any registration statement
otherwise required to be prepared and filed by it pursuant hereto if, at the
time it receives a request for such registration, Scotts, based on advice of
counsel, determines, in its reasonable judgment, that such registration and
sale (i) would interfere with any financing, acquisition, corporate
reorganization or other material transaction involving Scotts or (ii) would
require the disclosure of material information and such disclosure would
adversely affect Scotts, and, in either case, promptly gives written notice of
such determination. If Scotts shall so postpone the filing of a registration
statement, the Shareholders shall have the right to withdraw the request for
registration by giving written notice to Scotts within thirty calendar days
after receipt of the notice of postponement (and, in the event of such
withdrawal, such request shall not be counted as a request for
E-1
