FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended 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 14 pages
Exhibit Index at page 12
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
Part II. Other Information
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
Exhibit Index 12
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 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 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) $ (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 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 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
LIABLITIES 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 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 367,371 411,557 360,424
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) 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
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.
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
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) $ (2,641)
Net income 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 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 $44,169,000 increased by $13,230,000 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 and increased distribution expense related to higher
sales.
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 $3,138,000 increased by $1,581,000 or
approximately 101.5%, primarily due to increased interest
expense which is 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 $298,694,000 increased by $48,440,000
compared with current assets at September 30, 1994 and by
$52,910,000 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 due to
Page 8
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 $163,267,000 increased by $53,579,000
compared with current liabilities at September 30, 1994 and
by $30,200,000 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 $165,061,000 decreased by $3,099,000
compared with shareholders' equity at September 30, 1994 and
increased by $23,690,000 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
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No response required.
Item 2-5.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index at page 12 for a list of the
exhibits included herewith.
(b) No reports on Form 8-K were filed during the
fiscal quarter ended December 31, 1994.
Page 10
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___February 3, 1995___ /s/ Paul D. Yeager____________
Paul D. Yeager
Executive Vice President
Chief Financial Officer
Principal Accounting Officer
Page 11
THE SCOTTS COMPANY
QUARTERLY REPORT ON FORM 10-Q 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
Stern's Miracle-Gro Products, the Registration
Inc., 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, Securities and Exchange
James Hagedorn, Katherine Hagedorn Commission on
Littlefield, Paul Hagedorn, Peter 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 13
Common Share
27 Financial Data Schedule 14
Page 12
Exhibit 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) $ (3,138)
Net loss per common share:
Net loss per common share $ (.08) (.17)
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
per common share 18,658,535(1) 18,667,064(1)
______________
(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.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5
1000
U.S. DOLLARS
QTR-1
SEP-30-1995
OCT-01-1994
DEC-31-1994
1
5,410
0
131,667
3,213
145,095
298,694
212,174
70,618
576,618
163,267
0
211
0
0
164,850
576,618
98,019
98,182
53,520
96,694
1,158
0
5,694
(5,364)
(2,226)
(3,138)
0
0
0
(3,138)
(.17)
(.17)
