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FORM 10-Q/A
AMENDMENT NUMBER 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-19768
THE SCOTTS COMPANY
(Exact name of registrant as specified in its charter)
Ohio 31-1199481
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14111 Scottslawn Road
Marysville, Ohio 43041
(Address of principal executive offices)
(Zip Code)
(513) 644-0011
(Registrant's telephone number, including area code)
No change
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
18,667,064 Outstanding at January 15, 1995
___________________________________ _______________________________
Common Shares, voting, no par value
Page 1 of 13 pages
Exhibit Index at page 11
THE SCOTTS COMPANY AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Income - Three month periods
ended January 1, 1994 and December 31, 1994 3
Consolidated Statements of Cash Flows - Three month periods
ended January 1, 1994 and December 31, 1994 4
Consolidated Balance Sheets -
January 1, 1994, December 31, 1994 and September 30, 1994 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-9
Signatures 10
Exhibit Index 11
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands)
Three Months Ended
January 1 December 31
1994 1994
Net sales .................................... $ 68,326 $ 98,019
Cost of sales ................................ 37,364 53,520
-------- --------
Gross profit ................................. 30,962 44,499
-------- --------
Marketing .................................... 12,921 22,397
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 (loss) from operations ................ 23 (2,165)
Interest expense ............................. 2,640 5,694
Loss before income tax benefit ............... (2,617) (7,859)
Income tax benefit ........................... (1,060) (3,261)
-------- --------
Net loss ..................................... $ (1,557) $ (4,598)
======== ========
Net loss per common share .................... $ (.08) $ (.25)
======== ========
Weighted average number of
common shares outstanding ................. 18,659 18,667
======== ========
See Notes to Consolidated Financial Statements
Page 3
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
January 1 December 31
1994 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................ $ (1,557) $ (4,598)
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) (45,543)
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 ...... 53,598 44,646
credit, net --------- --------
Net cash provided by financing ........ 178,457 43,919
activities --------- --------
Effect of exchange rate changes on cash ........... (116) (122)
--------- --------
Net increase (decrease) in cash ................... 3,924 (5,285)
Cash at beginning of period ....................... 2,323 10,695
--------- --------
Cash at 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
Detail of entities 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
Page 4
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
ASSETS
January 1 December 31 September 30
1994 1994 1994
_________ ___________ ____________
Current Assets:
Cash and cash equivalents ................. $ 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 17,240 17,151
--------- --------- ---------
Total current assets ..................... 245,784 296,199 250,254
--------- --------- ---------
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 $ 574,123 $ 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 35,065 35,550
--------- --------- ---------
Total current liabilities ................ 133,067 162,232 109,688
--------- --------- ---------
Long-term debt, less current portion ........ 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 ........................ 367,371 410,522 360,424
--------- --------- ---------
Commitments and Contingencies
Shareholders' Equity:
Preferred Stock, $.01 par value in 1993 ... --
Common Shares ............................. 211 211 211
Capital in excess of par value ............ 193,353 193,418 193,450
Retained earnings (deficit) ............... (10,565) 9,277 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 ............... 141,371 163,601 168,160
--------- --------- ---------
Total Liabilities and Shareholders' ...... $ 508,742 $ 574,123 $ 528,584
Equity ................................ ======= ======= =======
See Notes to Consolidated Financial Statements
Page 5
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 Scott-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.
The financial statements included in this Form 10-Q/A, Amendment No.
1 have been revised to reflect a change in the timing of expense
recognition related to a promotional allowance offered to retail
customers introduced for the first time in fiscal 1995. The impact of
this revision is on timing of marketing promotional expense recognition
in the first three quarters of the Company's fiscal year and did not
impact the full fiscal year results of operations.
2. Inventories
(in thousands)
Inventories consisted of the following:
January 1 December 31 September 30
1994 1994 1994
==== ==== ====
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.
Page 6
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
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
(in thousands, except per share amounts)
January 1
1994
Net sales $ 89,152
======
Net income (loss) $ (4,101)
======
Net income per common share $ (.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.
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 a 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.
Page 7
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended December 31, 1994, versus Three Months Ended January 1, 1994
Net sales of $98,019,000 increased by $29,693,000 or approximately 43.5%.
Net sales included net sales for Sierra, which was acquired by Scotts 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 $8,867,000 or approximately 9.9%. Consumer
Business Group sales of $55,748,000 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
$27,906,000 increased by 46.1% but decreased, on a pro forma basis, by
approximately 10.2%. Scotts management feels 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 $14,365,000 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 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 $46,664,000 increased by $15,725,000 or
approximately 50.8%. The increase results primarily from the increase in sales
(42.7%) and higher marketing expense as a result of a promotional allowance to
retailers (8.1%) introduced in the first quarter of fiscal 1995. This
promotional allowance replaces the Company's point of sale fertilizer rebates
offered to consumers and is designed to provide retail customers with the
ability to customize and differentiate promotions of Scotts products. On a pro
forma basis, including Sierra operating expenses from October 1, 1992,
operating expenses increased by approximately 14.6% reflecting higher
marketing expense related to the promotional allowance to retailers (6.2%),
and increased distribution and other marketing expenses related to higher
sales (8.4%).
Interest expense of $5,694,000 increased by $3,054,000 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 Scotts last summer compared
with the floating rate bank debt the notes replaced.
The net loss of $4,598,000 increased by $3,041,000, primarily due to
increased marketing and interest expense as discussed above.
Financial Position as at December 31, 1994
Capital expenditures for the year ending September 30, 1995 are expected
to be approximately $23,000,000 which will be financed with cash provided by
operations and utilization of existing credit facilities.
Current assets of $296,199,000 increased by $45,945,000 compared with
current assets at September 30, 1994 and by $50,415,000 compared with current
assets at January 1, 1994. The increase compared with September 30, 1994 is
primarily attributable to the seasonal nature of Scotts' business, with
inventory and accounts receivable levels generally being higher in December
relative to September. The increase compared with January 1, 1994 was partly
Page 8
due to increased accounts receivable related to higher sales and also, in
part, to higher inventory levels for Scotts and Hyponex 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 $162,232,000 increased by $52,544,000 compared
with current liabilities at September 30, 1994 and by $29,165,000 compared
with current liabilities at January 1, 1994. The increase compared with
September 30, 1994 is primarily caused by the seasonality of Scotts' 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 $163,601,000 decreased by $4,559,000 compared
with shareholders' equity at September 30, 1994 and increased by $22,230,000
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 primary sources of liquidity for the Company are funds generated by
operations and borrowings under the Company's Credit Agreement. As amended,
the Credit Agreement provides a revolving credit commitment of $150,000,000
through March 31, 1996 and provided $195,000,000 of term debt with scheduled
maturities extending through September 30, 2000 until the prepayment discussed
below. As of the date of this report, the Credit Agreement provides $93.1
million of term debt. The 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.
On July 19, 1994, the Company issued $100,000,000 of 9 7/8% Senior
Subordinated Notes due August 1, 2004 ("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
Credit Agreement. Scheduled term debt maturities were adjusted to reflect the
prepayment in accordance with the terms of the 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 Notes
indenture. In order to redeem the Notes, the Company must obtain approval of
the banks party to the 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 Credit Agreement.
The proposed merger of the Company and Stern's Miracle-Gro is described
in Footnote No. 6 on page 7 of this Report. Any additional working capital
needs resulting from the merger are expected to be financed through an
increase in the amount of revolving credit available under the Company's
Credit Agreement.
The seasonal volume 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 Scotts' management, cash flows from operations and
capital resources will be sufficient to meet future debt service and working
capital needs.
Page 9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE SCOTTS COMPANY
Date December 27, 1995 /s/ Paul D. Yeager
_________________________ Paul D. Yeager
Executive Vice President
Chief Financial Officer
Principal Accounting Officer
Page 10
THE SCOTTS COMPANY
QUARTERLY REPORT ON FORM 10-Q/A FOR
FISCAL QUARTER ENDED DECEMBER 31, 1994
EXHIBIT INDEX
Exhibit Page
Number Description Number
2 Agreement and Plan of Merger dated Incorporated herein
as of January 26, 1995 among by reference to the
Stern's Miracle-Gro Products, Inc., Registration
Stern's Nurseries, Inc., Statement on
Miracle-Gro Lawn Products, Inc., Form S-4 of The
and Miracle-Gro Products Limited Scotts Company
(the "Miracle-Gro Constituent filed with the
Companies"), Horace Hagedorn, James Securities and
Hagedorn, Katherine Hagedorn Exchange Commission
Littlefield, Paul Hagedorn, Peter on February 3, 1995
Hagedorn, Robert Hagedorn, Susan (Exhibit 2)
Hagedorn and John Kenlon (the
"Shareholders"), The Scotts Company
("Scotts") and XYZ Corporation
("Merger Subsidiary")
11 Computation of Net Income Per
Common Share 12
27 Financial Data Schedule 13
Page 11
THE SCOTTS COMPANY
Computation of Net Income Per Common Share
Primary (Unaudited)
(Dollars in thousands except per share amounts)
For the Three Months Ended
January 1 December 31
1994 1994
Net loss for computing net loss per common share:
Net loss $ (1,557) $ (4,598)
======== ========
Net loss per common share:
Net loss per common share $ (.08) $ (.25)
======== ========
Computation of Weighted Average Number
of Common Shares Outstanding (Unaudited)
For the Three Months Ended
January 1 December 31
1994 1994
Weighted average number of
shares for computing net loss 18,658,535(1) 18,667,064(1)
per common share ============ ============
_________________
(1) On a fully diluted basis, weighted average shares outstanding did not
differ from the primary calculation due to the antidilutive effect of
common stock equivalents in a loss period.
Page 12