Back to GetFilings.com

UNITED STATES

FORM 10-K

( X )	ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2004

OR

(    )	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to

Commission file number 1-13292

The Scotts Company

Registrant’s telephone number, including area code:          937-644-0011

Securities registered pursuant to Section 12(b) of the Act: 

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  X      No      .

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X )

The number of Common Shares of the registrant outstanding as of November 1, 2004 was 32,884,347.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  X      No      .

The aggregate market value of Common Shares (the only common equity of the registrant) held by non-affiliates of the registrant computed by reference to the price at which Common Shares were last sold as of the last business day of the registrant’s most recently completed second fiscal quarter (March 26, 2004) was approximately $1,361,700,000.

DOCUMENT INCORPORATED BY REFERENCE:

Portions of the definitive Proxy Statement for Registrant’s 2005 Annual Meeting of Shareholders to be held January 27, 2005, which is included in the Registration Statement on Form S-4, filed on the date hereof, are incorporated by reference into Part III hereof.

PART I

ITEM 1. BUSINESS

General

     The Scotts Company, an Ohio corporation, is the combination of two of the most innovative companies in the consumer lawn and garden market: O.M. Scott & Sons, which traces its heritage back to a company founded by O.M. Scott in Marysville, Ohio in 1868, and Stern’s Miracle-Gro Products, Inc., which traces its heritage back to a company formed on Long Island by Horace Hagedorn and his partner in 1951. In the mid 1900’s, Scotts had become widely known for innovation in the development of quality lawn fertilizers and grass seeds that led to the creation of a new industry — consumer lawn care. Today, we believe the Scotts®, Turf Builder®, Miracle-Gro® and Ortho® brands are among the most widely recognized brands in the U.S. consumer lawn and garden care industry. We are also Monsanto’s exclusive agent for the marketing and distribution of consumer Roundup®* non-selective herbicide within the United States and other contractually specified countries.

      In fiscal 1995, through a stock for stock acquisition, Scotts and Miracle-Gro joined forces in what became the start of several acquisitions of other leading brands in the lawn and garden industry in North America and Europe. In the late 1990’s, we completed several acquisitions in Europe which gave us well-known brands in France, Germany and the United Kingdom. We have also rapidly expanded into the lawn care service industry with the launch of Scotts LawnService® in fiscal 1997. In fiscal 1999, we acquired the Ortho® brand and exclusive rights to market the consumer Roundup® brand, thereby adding industry-leading pesticides and herbicides to our controls portfolio.

      We believe that our market leadership in the lawn and garden category is driven by our widely-recognized brands, consumer-focused marketing, superior product performance, supply chain competency, highly knowledgeable field sales and merchandising organization, and the strength of our relationships with major retailers in our product categories.

      We maintain an Internet website at http://www.investor.scotts.com. (this uniform resource locator, or URL, is an inactive textual reference only and is not intended to incorporate our website into this Form 10-K). We file our reports with the Securities and Exchange Commission (the “SEC”) and make available, free of charge, on or through this website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

      Any of the materials we file with the SEC may also be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Information on the operation of the SEC’s Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

Competitive Strengths

     We believe we are the world’s largest marketer of branded consumer lawn and garden fertilizers, control products and value-added growing media products. We have been able to achieve our market leading position through a combination of internal growth, driven by product line extensions and award-

      In addition, we have the following significant brands in Europe: Miracle-Gro® plant fertilizers, Weedol® and Pathclear® herbicides, EverGreen® lawn fertilizers and Levington® growing media in the United Kingdom, KB® and Fertiligène® in France, Celaflor®, Nexa-Lotte® and Substral® in Germany and Austria, and ASEF®, KB® and Substral® in the Benelux countries. Scotts’ market leadership is evidenced by the brand recognition across all product categories.

Business Segments

     In fiscal 2004, we divided our business into three reporting segments:

	•	North America;
	•	Scotts LawnService®; and
	•	International.

      These segments differ from those used in the prior year due to the absorption of the Global Professional segment into the North America and International segments based on geography. This new division of reportable segments is consistent with how the segments report to and are managed by senior management of the Company. Financial information about these segments for the three years ended September 30, 2004 is presented in Note 21 to the Consolidated Financial Statements.

    North America

     In our North America segment, we manufacture and market products that provide fast, easy and effective assistance to homeowners who seek to nurture beautiful, weed- and pest-free lawns, gardens and indoor plants. These products are sold under brand names that people know and trust, and that incorporate many of the best technologies available. In addition, we manufacture and market a broad line of professional products designed to meet the specific needs of commercial nurseries, greenhouses and specialty crop growers in North America. Our products include:

     Turf Builder®. We sell a complete line of granular lawn fertilizer and combination products which include fertilizer and crabgrass control, weed control or pest control under the Scotts® Turf Builder® brand name. The Turf Builder® line of products is designed to make it easy for do-it-yourself consumers to select and properly apply the right product in the right quantity for their lawns.

     Miracle-Gro®. We sell a complete line of plant foods under the Miracle-Gro® brand name. The leading product is a water-soluble plant food that, when dissolved in water, creates a diluted nutrient solution which is poured over plants or sprayed through an applicator and rapidly absorbed by a plant’s roots and leaves. Miracle-Gro® products are specially formulated to give different kinds of plants the right kind of nutrition. While Miracle-Gro® All-Purpose Water-Soluble Plant Food is the leading product in the Miracle-Gro® line by market share, the Miracle-Gro® line includes other products such as Miracle-Gro® Rose Plant Food, Miracle-Gro® Tomato Plant Food, Miracle-Gro® Lawn Food and Miracle-Gro® Bloom Booster®. Miracle-Gro continues to develop ways to improve the convenience of its products for the consumer. The Miracle-Gro® Garden Feeder provides consumers with an easy, fast and effective way to feed all the plants in their garden. We have also introduced a high quality, slow release line of Miracle-Gro® plant foods for extended feeding convenience sold as Miracle-Gro® Shake ’N Feed®.

     Ortho®. We sell a broad line of weed control, indoor and outdoor pest control and plant disease control products under the Ortho® brand name. Ortho® products are available in aerosol, liquid ready-to-

     Growing Media. We sell a complete line of growing media products for indoor and outdoor uses under the Miracle-Gro®, Scotts®, Hyponex®, Earthgro® and Nature Scapes® brand names, as well as other labels. These products include potting mix, garden soils, topsoil, manures, sphagnum peat and decorative barks and mulches. The addition of the Miracle-Gro® brand name and fertilizer to potting mix and garden soils has turned previously low-margin commodity products into value-added category leaders.

     Roundup®. In 1998, we entered into a long-term marketing agreement with Monsanto and became Monsanto’s exclusive agent for the marketing and distribution of consumer Roundup® non-selective herbicide products in the consumer lawn and garden market within the United States and other specified countries, including Australia, Austria, Canada, France, Germany, Belgium, Holland and the United Kingdom.

     Branded Plants. We arrange for the sale of high-quality annual plants to retailers. The annuals are produced by independent growers according to a defined protocol and branded with the Miracle-Gro® trademark, in accordance with a licensing agreement. We receive a fee for each branded plant that is sold to a retailer.

     Other Consumer Products. We manufacture and market several lines of high quality lawn spreaders under the Scotts® brand name — Edge Guard® Total Performance spreaders, SpeedyGreen® rotary spreaders, AccuGreen® drop spreaders and Handy Green® II handheld spreaders. We sell a line of hose-end applicators for water-soluble plant foods such as Miracle-Gro® products, a line of pottery products, and lines of applicators under the Ortho®, Dial ’N Spray®, and Pull ’N Spray® trademarks for the application of certain insect control products. We also sell numerous varieties and blends of high quality grass seed, many of them proprietary, designed for different conditions and geographies. These consumer grass seed products are sold under the Scotts® Pure Premium®, Scotts® Turf Builder®, Scotts® and PatchMaster® brands.

     North American Professional. We sell professional products to commercial nurseries, greenhouses and specialty crop growers in North America, the Caribbean and throughout Latin America. Our professional products include a broad line of sophisticated controlled-release fertilizers, water-soluble fertilizers, pesticide products and wetting agents which are sold under brand names that include Banrot®, Miracle-Gro®, Osmocote®, Peters®, Poly-S®, Rout®, ScottKote®, Sierrablen®, Shamrock® and Sierra®.

     Canada. We are the leading marketer of branded consumer lawn and garden products in the Canadian market. We sell a full range of lawn and garden fertilizer, control products, grass seed, spreaders, and value-added growing media products under the Scotts®, Turf Builder®, Miracle Gro®, Killex®, and Roundup® brands.

    Scotts LawnService®

     In addition to our products, we provide residential lawn care, lawn aeration, tree and shrub care and external pest control services through our Scotts LawnService® business in the United States. These services consist primarily of fertilizer, weed control, pest control and disease control applications. As of September 30, 2004, Scotts LawnService® had 68 Company-operated locations serving 49 metropolitan markets and 74 independent franchises primarily operating in secondary markets.

    International

     In our International segment, we sell consumer lawn and garden products in over 25 countries outside of North America. We also sell a broad line of professional products throughout Europe, the Far East, Australia, New Zealand and Japan to commercial nurseries, greenhouses and specialty retailers.

      Our International products and brand names vary from country to country depending upon the market conditions, brand name strength and the nature of our strategic relationships in a given country. For example, in the United Kingdom, we sell Miracle-Gro® plant fertilizers, Weedol® and Pathclear® herbicides, EverGreen® lawn fertilizers and Levington® growing media. Our other international brands include KB® and

      For information concerning risks attendant to our foreign operations, please see “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Forward-Looking Statements.”

    Smith & Hawken®

     Effective October 2, 2004, Scotts acquired Smith & Hawken®, a leading brand in the fast growing outdoor living and gardening lifestyle category. Smith & Hawken® products, which include high-end outdoor furniture, pottery, garden tools, gardening containers and live goods, are sold in the United States through its 58 retail stores, as well as through catalog and Internet sales. For further details concerning the acquisition of this business, please refer to Note 5 to the Consolidated Financial Statements.

Research and Development

     We believe strongly in the benefits of research and development, and we continually invest in research and development to improve existing or develop new products, manufacturing processes and packaging and delivery systems. Our spending on research and development approximated 1.7% ($34.4 million), 1.6% ($30.4 million), and 1.5% ($26.2 million) of net sales in fiscal 2004, fiscal 2003, and fiscal 2002, respectively. Our research and development spending included $6.8 million, $6.3 million and $5.3 million in fiscal 2004, fiscal 2003, and fiscal 2002, respectively, related to environmental and regulatory expenses. We believe that our long-standing commitment to innovation has benefited us, as evidenced by a portfolio of patents worldwide that support many of our fertilizers, grass seeds and application devices. In addition to the benefits of our own research and development, we benefit from the research and development activities of our suppliers.

      Our research and development worldwide headquarters is located at the Dwight G. Scott Research Center in Marysville, Ohio. We also have research and development facilities in Levington, the United Kingdom; Chazay, France; Heerlen, the Netherlands and Sydney, Australia, as well as several research field stations located throughout the United States.

Biotechnology

     We believe that the development and commercialization of innovative products is an important key to our continued success.

      We have a long history of dedication to responsible research in search of more effective and easier to use products, that are preferred by consumers and are better for the environment. In particular, we have worked for over 75 years to create better products for the establishment and maintenance of turfgrass. Plant breeding has been a part of that research and development for the past 50 years. We remain dedicated to being the technology leader in turfgrass products. Today, that dedication results in research into products that can be enhanced, not only with traditional plant breeding, but also with proven agricultural biotechnology. This research offers the long term promise of grasses that require less maintenance, less water, and are even better for the environment.

      Before a product enhanced with biotechnology may be sold in the United States, it must be “deregulated” by appropriate governmental agencies. Deregulation involves compliance with the rules and regulations of, and cooperation with, the United States Department of Agriculture, Animal and Plant Health Inspection Service (the “USDA”), the United States Environmental Protection Agency (the “U.S. EPA”) and/or the Food and Drug Administration (the “FDA”). Therefore, any enhanced product for which we seek commercialization through submission of a petition for deregulation will be subjected to rigorous and thorough governmental regulatory review.

      More specifically, as part of the deregulation process for any product enhanced with biotechnology, we are required to present evidence to the USDA in the form of scientifically rigorous studies showing that the product poses no additional toxicological or ecological risk than products of the same species that have not been enhanced with biotechnology. We are also required to satisfy other agencies, such as the

      We submitted a petition for deregulation of a non-residential turfgrass product enhanced with biotechnology to the USDA on April 30, 2002. This turfgrass has been shown, through our research trials, to provide simple, more flexible and better weed control for golf courses in a manner that we believe is more environmentally friendly. The USDA requested additional information and data. We determined that it was more expedient to withdraw the petition and submit a revised petition that addressed the USDA’s requests than to amend the current petition. On October 3, 2002, we withdrew our petition. We prepared a revised petition that addresses the USDA’s requests and submitted it on April 14, 2003. The USDA has a variety of options in adjudicating a petition to “deregulate” a biotechnology-derived plant product. The USDA has decided to employ the formal Environmental Impact Statement (“EIS”) process to judge the acceptability of our petition for deregulation. Scotts welcomes this process as the most thorough evaluative step available to the USDA.

      There can be no assurance that our petition for deregulation of this turfgrass product enhanced with biotechnology will be approved, or that if approved and commercially introduced, it will generate any revenues or contribute to our earnings.

Trademarks, Patents and Licenses

     The Scotts®, Miracle-Gro®, Hyponex®, Smith & Hawken® and Ortho® brand names and logos, as well as a number of product trademarks, including Turf Builder®, Osmocote® and Peters®, are federally and/or internationally registered and are considered material to our business. We regularly monitor our trademark registrations, which are generally effective for ten years, so that we can renew those nearing expiration.

      As of September 30, 2004, we held 96 issued patents in the United States covering fertilizer, chemical and growing media compositions and processes; grass varieties; and applicator and sprayer devices. Many of these patents have also been issued internationally, bringing our total worldwide patent portfolio to 443. United States and International patents provide patent protection generally extending to 20 years from the date of filing, subject to the payment of applicable governmental maintenance and annuity fees. Accordingly, many of our patents will extend well into the next decade.

      In addition, we continue to file new patent applications each year. Currently, we have 141 pending patent applications worldwide. We also hold exclusive and non-exclusive patent licenses from various raw material suppliers, permitting the use and sale of additional patented fertilizers and pesticides.

      During fiscal 2004, we were granted three United States and 24 international patents. The new U.S. patents cover coated fertilizers that are specifically formulated to act as starter fertilizers for new plantings; coated fertilizers having coatings that can be triggered to begin nutrient release at specific times and growing media prepared from surfactants mixed with coir material to provide controlled nutrient release characteristics. Internationally, we continue to extend patent coverage of our core fertilizer technologies including controlled-release and water-soluble products. We also are extending protection of our developments in regard to aquaculture, growing media, applicator and sprayer technologies to additional countries within our Canadian, European and Asia/ Pacific markets. Significant accomplishments are the extension of our coir/peat international patent coverage, our “Grasshopper” applicator products within the European markets, our “Pull ’N Spray” sprayer in New Zealand and additional coverage of our Ortho applicator technology in both Canada and Japan.

      Two patents are scheduled to expire in fiscal 2005. The loss of these patents is not expected to materially affect the business. We have one patent currently being opposed by a third party in Europe. In regard to this opposed patent, the European Patent Office (EPO) earlier in calendar year 2004 rendered a favorable decision. However, the opposing party has appealed that decision. A ruling on the appeal is not expected until calendar year 2006. An unfavorable ruling by the EPO in the appeal could materially affect our indoor pest control market share in Germany.

Roundup® Marketing Agreement

     On September 30, 1998, we entered into a marketing agreement with Monsanto and became Monsanto’s exclusive agent for the marketing and distribution of consumer Roundup® products (with

      Under the marketing agreement, we and Monsanto are jointly responsible for developing global consumer and trade marketing programs for consumer Roundup®. We have assumed responsibility for sales support, merchandising, distribution and logistics for Roundup®. Monsanto continues to own the consumer Roundup® business and provides significant oversight of its brand. In addition, Monsanto continues to own and operate the agricultural Roundup® business.

      We are compensated under the marketing agreement based on the success of the consumer Roundup® business in the markets covered by the agreement. We receive a graduated commission to the extent that the earnings before interest and taxes of the consumer Roundup® business in the included markets exceed specified thresholds. Regardless of these earnings, we are required to make an annual contribution payment against the overall expenses of the Roundup® business. For fiscal 2004, and until 2018 or the earlier termination of the agreement, the minimum annual contribution payment is $25 million and may be higher if certain significant earnings targets are achieved.

      Our net commission under the marketing agreement is equal to the graduated commission amount described above, less the applicable contribution payment and amortization of the marketing rights advance payment. For fiscal 2004 and fiscal 2003, the net commission was $28.5 million and $17.6 million, respectively. For further details, see Note 3 to the Consolidated Financial Statements.

      The marketing agreement has no definite term, except as it relates to the European Union countries. With respect to the European Union countries, the initial term of the marketing agreement extends through September 30, 2005. The parties may agree to renew the agreement with respect to the European Union countries for three successive terms ending on September 30, 2008, 2015 and 2018, with a separate determination being made by the parties at least six months prior to the expiration of each such term as to whether to commence a subsequent renewal term. However, if Monsanto does not agree to any of the renewal terms with respect to the European Union countries, the commission structure will be recalculated in a manner likely to be favorable to us.

      Monsanto has the right to terminate the marketing agreement upon certain specified events of default by Scotts, including an uncured material breach, material fraud, material misconduct or egregious injury to the Roundup® brand. Monsanto also has the right to terminate the agreement upon a change of control of Monsanto or the sale of the consumer Roundup® business. In addition, Monsanto may terminate the agreement within specified regions, including North America, for specified declines in the consumer Roundup® business.

      We have rights similar to Monsanto’s to terminate the marketing agreement upon an uncured material breach, material fraud or material willful misconduct by Monsanto. In addition, we may terminate the agreement upon Monsanto’s sale of the consumer Roundup® business or in certain other circumstances, in which case we would not be able to collect the termination fee described below.

      If Monsanto terminates the marketing agreement upon a change of control of Monsanto or the sale of the consumer Roundup® business prior to September 30, 2008, we will be entitled to a termination fee in excess of $100 million. If we terminate the agreement upon an uncured material breach, material fraud or material willful misconduct by Monsanto, we will be entitled to receive a termination fee in excess of $100 million if the termination occurs prior to September 30, 2008. The termination fee declines over time from in excess of $100 million to a minimum of $16 million for terminations between September 30, 2008 and September 30, 2018.

      Monsanto has agreed to provide us with notice of any proposed sale of the consumer Roundup® business, allow us to participate in the sale process and negotiate in good faith with us with respect to a sale. In the event that we acquire the consumer Roundup® business in such a sale, we would receive credit against the purchase price in the amount of the termination fee that would otherwise have been paid to us upon termination by Monsanto of the marketing agreement upon the sale. If Monsanto decides to sell the consumer Roundup® business to another party, we must let Monsanto know whether we intend to terminate the marketing agreement and forfeit any right to a termination fee or whether we will agree to

Competition

     Each of our segments participates in markets that are highly competitive. Many of our competitors sell their products at prices lower than ours, and we compete primarily on the basis of product quality, product performance, supply chain efficiencies, value, brand strength and advertising.

      In the North American consumer do-it-yourself lawn and garden markets and pest control markets, we compete primarily against “control label” products as well as branded products. “Control label” products are those sold under a retailer-owned label or a supplier-owned label, which are sold exclusively at a specific retail chain. The control label products that we compete with include Vigoro® products sold at Home Depot, Sta-Green® products sold at Lowe’s, and KGro® products sold at Kmart. Our competitors in branded lawn and garden products and the consumer pest control markets include United Industries Corporation, Bayer AG, Central Garden & Pet Company, Garden Tech, Enforcer Products, Inc., Green Light Company and Lebanon Chemical Corp.

      With respect to growing media products, in addition to nationally distributed, branded competitive products, we face competition from regional competitors who compete primarily on the basis of price for commodity growing media business.

      In the North American professional horticulture markets, we face a broad range of competition from numerous companies ranging in size from multi-national chemical and fertilizer companies such as Dow AgroSciences Company, Uniroyal Chemical Corporation and Chisso-Asahi Fertilizer Co. Ltd., to smaller, specialized companies such as Pursell Technologies, Inc., Sun Gro-U.S. (a division of Hines Horticulture, Inc.) and Fafard, Inc. Some of these competitors have significant financial resources and research departments.

      TruGreen-ChemLawn®, a division of ServiceMaster, has the leading market share in the U.S. lawn care service market and has a substantially larger share of this market than Scotts LawnService®.

      The International professional horticulture markets in which we compete are also very competitive, particularly the markets for controlled-release and water-soluble fertilizer products. We have numerous U.S. and European competitors in these international markets, including Pursell Industries, Inc., Compo GmbH, a subsidiary of Kali & Salz, Norsk Hydro ASA, Haifa Chemicals Ltd. and Kemira Oyj. We also face competition from control label products.

      Internationally, we face strong competition in the consumer do-it-yourself lawn and garden market, particularly in Europe. Our competitors in the European Union include Bayer AG, Kali & Salz (Compo, Algoflash brands) and a variety of local companies.

Significant Customers

     Approximately 73% of our worldwide net sales in fiscal 2004 were made by our North America segment. Within the North America segment, approximately 36% of our net sales in fiscal 2004 were made to Home Depot, 18% to Wal*Mart and 13% to Lowe’s. We face strong competition for the business of these significant customers. The loss of any of these customers or a substantial decrease in the volume or profitability of our business with any of these customers could have a material adverse effect on our earnings and profits.

Strategic Initiatives

     In August 2002, we announced an initiative to reduce costs and improve the profitability of our European consumer and professional businesses. The original plan called for an investment of between $50 million and $60 million in these businesses by the end of 2005. We now expect to invest between $45 million and $50 million over this time frame by leveraging high-value, lower risk initiatives to drive significant improvement in the profitability of these businesses. Approximately 25% of the expected investment is for capital expenditures, primarily for the installation of an Enterprise Resource Planning (ERP) system in our largest European operations (France, Germany and the United Kingdom). The project

      Under the plan, profitability has improved, but the International business continues to perform below expectations. As such, we are exploring all of our options for the International business, with the goal of improving shareholder value. For further information concerning the restructuring charges incurred in fiscal years 2004, 2003 and 2002, see Note 4 to the Consolidated Financial Statements.

     We believe that our leading brands and our industry-leading media advertising make our products “traffic builders” at retail locations. In addition, we believe our leading full line of branded consumer lawn and garden products gives us an advantage in selling to retailers who value the efficiency of dealing with a limited number of suppliers. We have made significant investments in the past few years to establish business development teams at Home Depot, Wal*Mart, Lowe’s and at other national accounts to work with their buyers and supply chain management to maximize mutual sales opportunities and improve the efficient distribution of products. In addition, we serve as the lawn and garden category advisor for Wal*Mart and Kmart. We are also the largest supplier of consumer lawn and garden products to the hardware co-op channel.

     We intend to continue to execute our successful marketing strategies used to strengthen our leading market positions. In fiscal 2004, we invested approximately $105 million on advertising which we believe is better targeted to our key consumer audience and focused on Scotts’ product superiority. We believe that our approach to marketing, which balances consumer-directed advertising (e.g. prime time television spots, direct mail and Internet marketing) with retailer-oriented promotions, builds brand awareness and drives product sales growth. We have grown sales, increased market share and expanded the lawn and garden category over the past five years through successful execution of this strategy for our four principal brands — Scotts®, Miracle-Gro®, Ortho® and Roundup®. We market and distribute Roundup® products exclusively to the consumer lawn and garden market in the United States and certain other countries on behalf of Monsanto. Our strategy is to grow the overall consumer lawn and garden category and to capture substantially all of this growth.

     We believe that the power of our brands provides us with significant opportunities to expand our business into adjacent lawn and garden categories. To pursue these opportunities, at the end of fiscal 2002, we created a New Business Development Group within North America. This group has focused on extending Scotts’ brands into adjacent consumer lawn and garden categories that are currently not characterized by branded, value-added products. The group is also responsible for developing underdeveloped sales channels, such as grocery and drug stores, and improving our business with independent retailers through a combination of tailored programs and unique products or packaging. In fiscal 2003, we acquired two pottery distribution companies and are finalizing plans to introduce a value-added line of pottery products with a highly efficient distribution model, first in the southeastern United States with a major retailer, and later on a national basis. In October 2004, we acquired Smith & Hawken®, a leading brand in the fast growing outdoor living and gardening lifestyle category. The addition of the Smith & Hawken® brand and its network of retail stores, catalog and Internet sales will be the foundation for our future expansion into “outdoor living” as we look to expand into adjacent lawn and garden categories.

     The number of lawn owners who want to maintain their lawns and gardens but do not want to do it themselves represents a significant portion of the total market. We recognize that our portfolio of well-known brands provides us with a unique ability to extend our brands into the lawn and garden service business. We believe that the strength of our brands provides us with a significant competitive advantage

     Over the past several years, we have focused on building world-class manufacturing and distribution capabilities. We have successfully developed this expertise through both significant investments and incorporation of supply chain related metrics into our key business and incentive measures. We have invested, and continue to invest, in systems to allow us to better capture and analyze supply chain information. For instance, in fiscal 2001, we completed implementation of the ERP software system for our North American businesses at a cost of approximately $55 million. More recently we, as part of our Profit Improvement Plan for International, have installed the ERP software system at our major foreign locations. This level of investment and focus has allowed us to develop what we believe is a significant competitive advantage in serving our retail customers. We have significantly improved customer service rates which, coupled with more closely tying shipments to when the consumer purchases Scotts’ products from the retail shelf, has allowed our customers to improve inventory turns and reduce average inventory levels. The investments we have made in our production facilities have improved manufacturing flexibility, allowing us to improve our inventory turns and reduce our average inventory levels as well.

Seasonality and Backlog

     Our business is highly seasonal with approximately 73% of our net sales occurring in our combined second and third quarters of both fiscal 2004 and fiscal 2003.

      Consistent with prior years, we anticipate that significant orders for the upcoming spring season will start to be received late in the winter and continue through the spring season. Historically, substantially all orders are received and shipped within the same fiscal year with minimal carryover of open orders at the end of the fiscal year.

Raw Materials

     We purchase raw materials for our products from various sources that we presently consider to be adequate, and no one source is considered essential to any of our segments or to our business as a whole. We are subject to market risk from fluctuating market prices of certain raw materials, including urea and other chemicals as well as paper and plastic products. Our objectives surrounding the procurement of these materials are to ensure continuous supply and to minimize costs. We seek to achieve these objectives through negotiation of contracts with favorable terms directly with vendors. We do not enter into forward contracts or other market instruments as a means of minimizing our risk exposures on these materials but, when appropriate, we will procure a certain percentage of our needs in advance of the season to secure pre-determined prices.

Manufacturing and Distribution

     We manufacture products for our North American consumer business at our facilities in Marysville, Ohio; Ft. Madison, Iowa and Temecula, California, as well as use a number of third party contract packers in the United States and Canada. In addition, the Company manufactures growing media products in 23 regional facilities located throughout the United States. The primary distribution centers for our North American consumer business are managed by Scotts and strategically placed across the United States.

      We also manufacture horticultural products for our North America and International professional businesses at a leased fertilizer manufacturing facility in Charleston, South Carolina and a Company-owned

      We manufacture the non-growing media products for our International business at our facilities in Howden, the United Kingdom and Bourth, France, as well as use a number of third party contract packers. The primary distribution centers for our International businesses are located in the United Kingdom, France and Germany and are managed by a logistics provider.

      The growing media products for our International segment are produced at our facilities in Hatfield, the United Kingdom and Hautmont, France and at a number of third party contract packers. Growing media products are generally shipped direct without passing through either a distribution center or mixing warehouse.

Employees

     As of September 30, 2004, we employed 3,966 full-time employees in the United States and an additional 1,019 full-time employees located outside the United States. During peak sales and production periods, we utilize seasonal and temporary labor.

      None of our U.S. employees are members of a union. Approximately 110 of our full-time U.K. employees are members of the Transport and General Workers Union and have full collective bargaining rights. An undisclosed number of our full-time employees at our office in Ecully, France are members of the Confederation Francaise Democratique du Travail and Confederation Generale du Travail, participation in which is confidential under French law. In addition, a number of union and non-union full-time employees are members of works councils at three sites in Bourth, Hautmont and Ecully, France, and a number of non-union employees are members of works councils in Ingelheim, Germany. In the Waardenburg office in the Netherlands, a small number of the approximately 130 employees are members of a workers union, but we are not responsible for collective bargaining negotiations with this union. In the Netherlands, we are governed by the Works Councils Act with respect to the union. Works councils represent employees on labor, employment matters and manage social benefits.

      We believe we have good relationships with our employees, both unionized and non-unionized, in the United States and internationally.

Environmental and Regulatory Considerations

     Local, state, federal and foreign laws and regulations relating to environmental matters affect us in several ways. In the United States, all products containing pesticides must be registered with the U.S. EPA (and 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 our business, the severity of which would depend on the products involved, whether another product could be substituted and whether our competitors were similarly affected. We attempt to anticipate regulatory developments and maintain registrations of, and access to, substitute active ingredients, but there can be no assurance that we will continue to be able to avoid or minimize these risks. Fertilizer and growing media products are also subject to state and foreign labeling regulations. Our manufacturing operations are subject to waste, water and air quality permitting and other regulatory requirements of federal and state agencies.

      The Food Quality Protection Act, enacted by the U.S. Congress in August 1996, establishes a standard for food-use pesticides, which standard is the reasonable certainty that no harm will result from the cumulative effects of pesticide exposures. Under this act, the U.S. EPA is evaluating the cumulative risks from dietary and non-dietary exposures to pesticides. The pesticides in our products, certain of which may be used on crops processed into various food products, are typically manufactured by independent third parties and continue to be evaluated by the U.S. EPA as part of this exposure risk assessment. The U.S. EPA or the third party registrant may decide that a pesticide we use in our products will be limited or made unavailable to us. We cannot predict the outcome or the severity of the effect of these continuing evaluations.

      In addition, the use of certain pesticide and fertilizer products is regulated by various local, state, federal and foreign environmental and public health agencies. These regulations may include requirements that only certified or professional users apply the product or that certain products be used only on certain types of locations (such as “not for use on sod farms or golf courses”), may require users to post notices on properties to which products have been or will be applied, may require notification to individuals in the vicinity that products will be applied in the future or may ban the use of certain ingredients. We believe that we are operating in substantial compliance with, or taking action aimed at ensuring compliance with, these laws and regulations.

      State and federal authorities generally require growing media facilities to obtain permits (sometimes on an annual basis) in order to harvest peat and to discharge storm water run-off or water pumped from peat deposits. The state permits typically specify the condition in which the property must be left after the peat is fully harvested, with the residual use typically being natural wetland habitats combined with open water areas. We are generally required by these permits to limit our harvesting and to restore the property consistent with the intended residual use. In some locations, these facilities have been required to create water retention ponds to control the sediment content of discharged water.

      Regulations and environmental concerns also exist surrounding peat extraction in the United Kingdom and the European Union. In August 2000, English Nature, the nature conservation advisory body to the United Kingdom government, notified us that three of our peat harvesting sites in the United Kingdom were under consideration as possible “Special Areas of Conservation” under European Union law. In April 2002, working in conjunction with Friends of the Earth (United Kingdom), we reached agreement with English Nature to transfer our interests in the properties and for the immediate cessation of all but a limited amount of peat extraction on one of the three sites. As a result of this agreement, we have withdrawn our objection to the proposed European designations as Special Areas of Conservation and will undertake restoration work on the sites, for which we will receive additional consideration from English Nature. We believe that we have sufficient raw material supplies available to replace the peat extracted from such sites.

Regulatory Actions

     In June 1997, the Ohio Environmental Protection Agency (the “Ohio EPA”) initiated an enforcement action against us with respect to alleged surface water violations and inadequate treatment capabilities at our Marysville, Ohio facility and seeking corrective action under the federal Resource Conservation and Recovery Act. The action relates to several discontinued on-site disposal areas which date back to the early operations of the Marysville facility that we had already been assessing and, in some cases, remediating, on a voluntary basis. On December 3, 2001, an agreed judicial Consent Order was submitted to the Union County Common Pleas Court and was entered by the court on January 25, 2002.

      Now that the Consent Order has been entered, we have paid a $275,000 fine and must satisfactorily remediate the Marysville site. We have continued our remediation activities with the knowledge and oversight of the Ohio EPA. We completed an updated evaluation of our expected liability related to this matter based on the fine paid and remediation actions that we have taken and expect to take in the future. As a result, we accrued an additional $3.0 million in the third quarter of fiscal 2002 to increase our reserve based on the latest estimates.

      In addition to the dispute with the Ohio EPA, we are negotiating with the Philadelphia District of the U.S. Army Corps of Engineers regarding the terms of site remediation and the resolution of the Corps’ civil penalty demand in connection with our prior peat harvesting operations at our Lafayette, New Jersey facility. We are also addressing remediation concerns raised by the Environment Agency of the United Kingdom with respect to emissions to air and groundwater at our Bramford (Suffolk), the United Kingdom facility. We have reserved for our estimates of probable costs to be incurred in connection with each of these matters.

      At September 30, 2004, $6.0 million was accrued for the environmental and regulatory matters described herein, the majority of which is for site remediation. Most of the costs accrued as of September 30, 2004 are expected to be paid through fiscal 2007; however, payments could be made for a period thereafter.

      We believe that the amounts accrued as of September 30, 2004 are adequate to cover our known environmental exposures based on current facts and estimates of likely outcome. However, the adequacy of these accruals is based on several significant assumptions, including the following:

	•	that we have identified all of the significant sites that must be remediated;
	•	that there are no significant conditions of potential contamination that are unknown to us; and
	•	that with respect to the agreed judicial Consent Order in Ohio, the potentially contaminated soil can be remediated in place rather than having to be removed and only specific stream segments will require remediation as opposed to the entire stream.

      If there is a significant change in the facts and circumstances surrounding these assumptions, it could have a material impact on the ultimate outcome of these matters and our results of operations, financial position and cash flows.

      During fiscal 2004, 2003, and 2002 we expensed approximately $3.3 million, $1.5 million, and $5.4 million for environmental matters. There were no material capital expenditures in fiscal 2004, 2003 or 2002 related to environmental or regulatory matters.

Financial Information About Geographic Areas

     For certain information concerning our international revenues and long-lived assets, see “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and Note 21 to the Consolidated Financial Statements.

ITEM 2. PROPERTIES

     We lease land from the Union County Community Improvement Corporation in Marysville, Ohio for our headquarters and for our research and development facilities. We own property in Marysville, Ohio for our manufacturing and distribution facilities. Combined, these facilities are situated on approximately 875 acres of land.

      The North America segment owns three additional research facilities located in Apopka, Florida, Gervais, Oregon, and Valley Center, California. We own a production facility, which encompasses 27 acres, in Fort Madison, Iowa and lease a spreader and other durable components manufacturing facility in Temecula, California. We also lease a controlled-release fertilizer manufacturing facility in Charleston, South Carolina. We operate 23 growing media facilities in 17 states — 17 of which are owned by us and six of which are leased. Most of our growing media facilities include production lines, warehouses, offices and field processing areas. We lease one compost facility, located at a bagging facility in Lebanon, Connecticut. We also lease sales offices in Atlanta, Georgia; Troy, Michigan; Mooresville, North Carolina; Rolling Meadows, Illinois; and Bentonville, Arkansas. We also lease a facility in Mississauga, Ontario that serves as the headquarters for our Canadian subsidiary.

      Scotts LawnService® conducts its Company-owned operations from approximately 68 leased facilities, primarily office/warehouse units in industrial/office parks, across the United States serving 49 metropolitan markets.

      Smith & Hawken® operates 58 retail stores, all leased facilities primarily in shopping centers across the United States. It leases its main headquarters in Novato, California.

      The International segment leases its U.K. office, located in Godalming (Surrey); its French headquarters and local operations office, located in Ecully; a German office, located in Ingelheim; an Austrian office, located in Salzburg; an Australian office, located in Baulkan Hills (New South Wales); and a Canadian office located in Toronto. We own manufacturing facilities in Howden and Hatfield (East Yorkshire) in the United Kingdom. We also own a blending and bagging facility for growing media in Hautmont, France; and a plant in Bourth, France, that we use for formulating, blending and packaging control products for the consumer market. We lease a research and development facility in Chazay, France. Our site in Heerlen, the Netherlands is both a distribution center and a manufacturing site for coated fertilizers for the consumer and professional markets. We own the land and the building for the manufacturing facility, but lease the distribution center building. We own research and development facilities in Levington and Bramford in the United Kingdom. We lease a sales office in Sint Niklaas, Belgium.

      We lease warehouse space throughout the United States and continental Europe as needed.

      We believe that our facilities are adequate to serve their intended purposes at this time and that our property leasing arrangements are satisfactory.

ITEM 3. LEGAL PROCEEDINGS

     As noted in the discussion in “ITEM 1. BUSINESS — Environmental and Regulatory Considerations” and “ITEM 1. BUSINESS — Regulatory Actions,” we are involved in several pending environmental matters. We believe that our assessment of contingencies is reasonable and that related reserves, in the aggregate, are adequate; however, there can be no assurance that the final resolution of these matters will not have a material adverse affect on our results of operations, financial position and cash flows.

      Pending material legal proceedings are as follows:

AgrEvo Environmental Health, Inc.

     On June 3, 1999, AgrEvo Environmental Health, Inc. (“AgrEvo”) (which subsequently changed its name to Aventis Environmental Health Science USA LP) filed a complaint in the U.S. District Court for the Southern District of New York (the “New York Action”), against The Scotts Company, a subsidiary of The Scotts Company and Monsanto seeking damages and injunctive relief for alleged antitrust violations and breach of contract by The Scotts Company and its subsidiary and antitrust violations and tortious interference with contract by Monsanto. The Scotts Company purchased a consumer herbicide business from AgrEvo in May 1998. AgrEvo claims in the suit that The Scotts Company’s subsequent agreement to become Monsanto’s exclusive sales and marketing agent for Monsanto’s consumer Roundup® business violated the federal antitrust laws. AgrEvo contends that Monsanto attempted to or did monopolize the market for non-selective herbicides and conspired with The Scotts Company to eliminate the herbicide The Scotts Company previously purchased from AgrEvo, which competed with Monsanto’s Roundup®. AgrEvo also contends that The Scotts Company’s execution of various agreements with Monsanto, including the Roundup® marketing agreement, as well as The Scotts Company’s subsequent actions, violated agreements between AgrEvo and The Scotts Company.

      AgrEvo is requesting damages as well as affirmative injunctive relief, and seeking to have the court invalidate the Roundup® marketing agreement as violative of the federal antitrust laws. Under the indemnification provisions of the Roundup® marketing agreement, Monsanto and The Scotts Company each have requested that the other indemnify against any losses arising from this lawsuit.

      On January 10, 2003, The Scotts Company filed a supplemental counterclaim against AgrEvo for breach of contract. The Scotts Company alleges that AgrEvo owes The Scotts Company for amounts that The Scotts Company overpaid to AgrEvo. The Scotts Company’s counterclaim is now part of the underlying litigation. A trial date has been set for February 22, 2005.

      The Scotts Company believes that AgrEvo’s claims in these matters are without merit and is vigorously defending against them. If the above actions are determined adversely to The Scotts Company, the result could have a material adverse effect on The Scotts Company’s results of operations, financial position and cash flows. Any potential exposure that The Scotts Company may face cannot be reasonably estimated. Therefore, no accrual has been established related to these matters.

Central Garden & Pet Company

    The Scotts Company v. Central Garden, Southern District of Ohio

     On June 30, 2000, The Scotts Company filed suit against Central Garden & Pet Company (“Central Garden”) in the U.S. District Court for the Southern District of Ohio (the “Ohio Action”) to recover approximately $24 million in accounts receivable and additional damages for other breaches of duty.

      Central Garden filed counterclaims including allegations that The Scotts Company and Central Garden had entered into an oral agreement in April 1998 whereby The Scotts Company would allegedly share with Central Garden the benefits and liabilities of any future business integration between The Scotts Company and Monsanto. The court dismissed a number of Central Garden’s counterclaims as well as The Scotts Company’s claims that Central Garden breached other duties owed to The Scotts Company. On April 22, 2002, a jury returned a verdict in favor of The Scotts Company of $22.5 million and for Central Garden on

    Central Garden v. The Scotts Company & Pharmacia, Northern District of California

     On July 7, 2000, Central Garden filed suit against The Scotts Company and Pharmacia in the U.S. District Court for the Northern District of California (San Francisco Division) alleging various claims, including breach of contract and violations of federal antitrust laws, and seeking an unspecified amount of damages and injunctive relief. On April 15, 2002, The Scotts Company and Central Garden each filed summary judgment motions in this action. On June 26, 2002, the court granted summary judgment in favor of The Scotts Company and dismissed all of Central Garden’s then remaining claims. That judgment has been affirmed by the United States Court of Appeals.

      Although The Scotts Company has prevailed consistently and extensively in the litigation with Central Garden, some of the decisions in The Scotts Company’s favor are subject to appeal and possible further proceedings. If, upon appeal or otherwise, the above actions are determined adversely to The Scotts Company, the result could have a material adverse affect on The Scotts Company’s results of operations, financial position and cash flows. The Scotts Company believes that it will continue to prevail in the Central Garden matters and that any potential exposure that The Scotts Company may face cannot be reasonably estimated. Therefore, no accrual has been established related to the claims brought against The Scotts Company by Central Garden, except for amounts ordered paid to Central Garden in the Ohio Action. The Scotts Company believes it has adequate reserves recorded for the amounts it may ultimately be required to pay.

U.S. Horticultural Supply, Inc. (F/ K/ A E.C. Geiger, Inc.)

     On February 7, 2003, U.S. Horticultural Supply (“Geiger”) filed suit against The Scotts Company in the U.S. District Court for the Eastern District of Pennsylvania. Geiger alleged claims of breach of contract, promissory estoppel, and a violation of federal antitrust laws, and seeks an unspecified amount of damages. Geiger’s promissory estoppel claims have been dismissed. The parties have commenced discovery on the antitrust and breach of contract claims. No trial date has been set.

      On February 2, 2004, Geiger filed for bankruptcy protection pursuant to Chapter 11 of the United States Bankruptcy Code. Geiger has filed an adversary proceeding as part of the bankruptcy alleging that The Scotts Company interfered with an agreement between Geiger and the purchaser of its operating assets and seeks damages in an unspecified amount.

      On November 5, 2004, Geiger filed another suit against The Scotts Company in the U.S. District Court for the Eastern District of Pennsylvania. This complaint alleges that Scotts conspired with another distributor, Griffin Greenhouse Supplies, Inc., to restrain trade in the horticultural products market, in violation of Sections 1 and 57 of the Sherman Antitrust Act.

      The Scotts Company believes that all of Geiger’s claims are without merit and intends to vigorously defend against them. If any of the above actions are determined adversely to The Scotts Company, the result could have a material adverse effect on The Scotts Company’s results of operations, financial position and cash flows. Any potential exposure that The Scotts Company may face cannot be reasonably estimated. Therefore, no accrual has been established related to this matter.

The Scotts Company v. Aventis S.A. and Starlink Logistics, Inc.

     On August 9, 2002, The Scotts Company filed suit against Aventis S.A. and its wholly-owned subsidiary Starlink Logistics, Inc. in the U.S. District Court for the Southern District of Ohio. In the complaint, The Scotts Company alleges it is entitled to injunctive and monetary relief arising from Aventis’ and Starlink’s interference with The Scotts Company’s contractual right to purchase a company called TechPac, L.L.C. from one of Aventis’ former subsidiaries, Aventis CropScience. The complaint alleges that

      In this suit, The Scotts Company seeks to ensure that it is able to exercise its right to receive a bona fide offer to acquire TechPac, and The Scotts Company seeks to recover compensatory and punitive damages in an amount as yet undetermined for Aventis’ and Starlink’s interference with The Scotts Company’s right to receive such an offer. On October 4, 2002, Starlink filed a motion to dismiss the complaint on jurisdictional grounds. On December 17, 2002, Aventis filed a similar motion. On April 23, 2004, the court dismissed the action without prejudice.

      The Scotts Company appealed the dismissal to the United States Court of Appeals for the Sixth Circuit, where the appeal remains pending. In addition, The Scotts Company and certain subsidiaries filed an action against Aventis, Starlink and others, in the Court of Common Pleas of Union County, Ohio. The defendants removed that action to the United States District Court for the Southern District of Ohio, where it is currently pending as Civil Action No. 04-CV-352.

Other

     The Scotts Company has been named a defendant in a number of cases alleging injuries that the lawsuits claim resulted from exposure to asbestos-containing products, apparently based on The Scotts Company’s historic use of vermiculite in certain of its products. The complaints in these cases are not specific about the plaintiffs’ contacts with The Scotts Company or its products. The Scotts Company in each case is one of numerous defendants and none of the claims seeks damages from The Scotts Company alone. The Scotts Company believes that the claims against it are without merit and is vigorously defending them. It is not currently possible to reasonably estimate a probable loss, if any, associated with the cases and, accordingly, no accrual or reserves have been recorded in The Scotts Company’s consolidated financial statements. There can be no assurance that these cases, whether as a result of adverse outcomes or as a result of significant defense costs, will not have a material adverse effect on The Scotts Company, its financial condition or its results of operations.

      The Scotts Company is reviewing agreements and policies that may provide insurance coverage or indemnity as to these claims and is pursuing coverage under some of these agreements, although there can be no assurance of the results of these efforts.

      We are involved in other lawsuits and claims which arise in the normal course of our business. In our opinion, these claims individually and in the aggregate are not expected to result in a material adverse effect on our results of operations, financial position or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     There were no matters submitted to a vote of the security holders of The Scotts Company during the fourth quarter of fiscal 2004.

SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT

     The executive officers of The Scotts Company, their positions and, as of November 24, 2004, their ages and years with The Scotts Company (and its predecessors) (referred to in this Supplemental Item as “Scotts”) are set forth below.

      Executive officers serve at the discretion of the Board of Directors pursuant to employment agreements or other arrangements.

      The business experience of each of the individuals listed above during at least the past five years is as follows:

      Mr. Hagedorn was named Chairman of the Board in January 2003. He was named President and Chief Executive Officer of Scotts in May 2001. He served as President and Chief Operating Officer of Scotts from April 2000 to May 2001. From December 1998 to April 2000, he served as President, Scotts North America. Mr. Hagedorn also serves as a director of Scotts. Mr. Hagedorn is the son of Horace Hagedorn, Director Emeritus of Scotts, and is the brother of Katherine Hagedorn Littlefield, a director of Scotts.

      Dr. Kelty was named Vice Chairman and Executive Vice President of Scotts in May 2001. He served as Group Executive Vice President, Technology and Operations, of Scotts, from February 2000 to May 2001. He was previously Executive Vice President, Technology and Operations, of Scotts, from February 1999 to February 2000.

      Mr. Bernstock was named Executive Vice President and President, North America of Scotts in June 2003. Mr. Bernstock served as Senior Vice President & General Manager — Air Fresheners, Food Products & Branded Commercial Markets of Dial Corporation (“Dial”), a manufacturer and marketer of soap products, laundry detergents, air fresheners and canned meats, from October 2002 to May 2003. From January 2002 to September 2002, he served as Special Advisor to the Chairman and Chief Executive Officer of Verticalnet, Inc., a provider of collaborative supply chain solutions software, and as a consultant to Dial. From January 2001 to January 2002, Mr. Bernstock served as Acting Chairman, President and Chief Executive Officer of Atlas Commerce, Inc. (“Atlas”), a provider of collaborative supply chain solutions software, prior to the acquisition of Atlas by Verticalnet, Inc., in January 2002. From March 1998 to January 2001, he served as President, Chief Executive Officer and a Director of Vlasic Foods International Inc. (“Vlasic”), a producer, marketer and distributor of branded convenience food products. On January 29, 2001, Vlasic and its United States operating subsidiaries filed voluntary petitions for reorganization relief pursuant to Chapter 11 of the United States Bankruptcy Code. Mr. Bernstock serves as a director of Verticalnet, Inc.

      Mr. Nagel was named Executive Vice President of Scotts in February 2003 and Chief Financial Officer of Scotts in January 2003. From August 2001 to January 2003, he served as Senior Vice President, North America and Corporate Finance of Scotts. From September 1998 to August 2001, Mr. Nagel served as Vice President and Corporate Controller of Scotts.

      Mr. Aronowitz was named Executive Vice President, General Counsel and Secretary of Scotts in October 2001. He was previously Senior Vice President, Assistant General Counsel and Assistant Secretary

      Ms. Stump was named Executive Vice President, Global Human Resources, of Scotts in February 2003. She was named Senior Vice President, Global Human Resources of Scotts in October 2002. From July 2001 until October 2002, Ms. Stump served as Vice President, Human Resources North America, of Scotts. From September 2000 until July 2001, Ms. Stump served as Vice President, Human Resources Technology and Operations, of Scotts. From April 1998 to September 2000, Ms. Stump served as Director, Human Resources, for the Ross Products Division of Abbott Laboratories, a manufacturer and marketer of pediatric and adult nutritional products.

PART II

     The common shares of The Scotts Company trade on the New York Stock Exchange under the symbol “SMG”.

      We have not paid dividends on the common shares in the past. Given our rapidly improving financial condition and levels of cash generated by the business, we are currently evaluating alternatives for the use of cash generated in the future including the potential payment of dividends and share repurchases. The payment of future dividends and share repurchases, if any, on common shares will be determined by the Board of Directors of The Scotts Company in light of conditions then existing, including our earnings, financial condition and capital requirements, restrictions in financing agreements, business conditions and other factors.

      As of November 1, 2004, there were approximately 12,700 shareholders including holders of record and our estimate of beneficial holders.

ITEM 6. SELECTED FINANCIAL DATA

Five Year Summary

NOTE:	Prior year presentations have been changed to conform to fiscal 2004 presentation; these changes did not impact net income.

(1)	Includes Substral® brand acquired from Henkel KGaA from January 2001.

(2)	Income from operations for fiscal 2004, 2003, 2002 and 2001 includes $9.7, $17.1, $8.1 and $75.7 of restructuring and other charges, respectively. Gross profit for fiscal 2004, 2003, 2002 and 2001 includes $0.6, $9.1, $1.7 and $7.3 of restructuring and other charges, respectively.

(3)	Includes costs related to refinancings of $45.5 million.

(4)	Basic and diluted earnings per share would have been as follows if the accounting change for intangible assets adopted in the fiscal year beginning October 1, 2001, had been adopted as of October 1, 1999:

(5)

EBITDA is defined as income from operations, plus depreciation and amortization. We believe that EBITDA provides additional information for determining our ability to meet debt service requirements. EBITDA does not represent and should not be considered as an alternative to net income or cash flow from operations as determined by accounting principles generally accepted in the United States of America, and EBITDA does not necessarily indicate whether cash flow will be sufficient to meet cash requirements. EBITDA margin is calculated as EBITDA divided into net sales. Our measure of EBITDA, which may not be similar to other similarly titled captions used by other companies, excludes $24.9 million of cash expenses related to the refinancings of the Company’s credit facility and redemption of the Company’s 8 5/8% subordinated notes in fiscal 2004. These expenses have been excluded since they are deemed to be financing related costs that are typically excluded from the presentation of EBITDA and the definitions used by our lenders to evaluate the Company’s compliance with its debt agreements. A numeric reconciliation of EBITDA to income from operations is as follows:

Executive Summary

      Scotts is the leading manufacturer and marketer of consumer branded products for lawn and garden care and professional horticulture in the United States and Europe. We also have a presence in Canada, Australia, the Far East, Latin America and South America. Also, in the United States, we operate the second largest residential lawn service business, Scotts LawnService®. In fiscal 2004, our operations were divided into three business segments: North America, Scotts LawnService®, and International. The North America segment includes the Lawns, Gardening Products, Ortho®, North America Professional and Canadian business groups. We are also Monsanto’s exclusive agent for the marketing and distribution of consumer Roundup® non-selective herbicide within the United States and other contractually specified countries.

      In fiscal 2004, we continued the rapid expansion of our Scotts LawnService® business. Through acquisitions and internal growth, revenues increased from approximately $42 million in fiscal 2001 to over $135 million in fiscal 2004. We invested approximately $4 million of capital in lawn care acquisitions in fiscal 2004 and expect to continue to make selective acquisitions in fiscal 2005 and beyond. In addition, we invested approximately $5.2 million to buyout the minority owners in the Scotts LawnService® business.

      As a leading consumer branded lawn and garden company, we focus our consumer marketing efforts, including advertising and consumer research, on creating consumer demand to pull products through the retail distribution channels. In the past three years, we have spent approximately 5% of our net sales annually on media advertising to support and promote our products and brands. We have applied this consumer marketing focus for the past several years, and we believe that Scotts receives a significant

      Our sales are susceptible to global weather conditions. For instance, periods of wet weather like we experienced in the spring of 2003 in the United States could adversely impact sales of certain products, while increasing demand for other products. We believe that our past acquisitions have somewhat diversified both our product line risk and geographic risk to weather conditions.

      Historically, the majority of our shipments to retailers have occurred in the second and third fiscal quarters. However, over the past few years, retailers have reduced their pre-season inventories by relying on Scotts to deliver products “in season” when consumers seek to buy our products. This change in retailer purchasing patterns and the increasing importance of Scotts LawnService® revenues has caused a sales shift from our second fiscal quarter to the third and fourth fiscal quarters. Net sales by quarter were 8.9%, 35.5%, 37.7%, and 17.9%, respectively, of fiscal 2004 net sales. Concurrent with this sales shift, and because of the expansion of Scotts LawnService®, the Company has experienced a shift in profitability from the second to third and fourth fiscal quarters, with the third fiscal quarter now more profitable than the second fiscal quarter. The Company’s fourth fiscal quarter, historically a loss making quarter, improved in fiscal 2004.

      Beginning in fiscal 2003, the Company began expensing prospective grants of employee stock-based compensation awards in accordance with Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of SFAS No. 123”. The fair value of future awards is being expensed ratably over the vesting period, which has historically been three years, except for grants to directors, which have a six-month vesting period. The related compensation expense recorded in fiscal 2004 and 2003 was $7.8 million and $4.8 million, respectively.

      In fiscal 2002, we adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” This standard eliminates the requirement to amortize indefinite-lived assets and goodwill. It also requires an initial impairment test on all indefinite-lived assets as of the date of adoption of this standard and impairment tests done at least annually thereafter. We completed our initial impairment analysis in the second quarter of fiscal 2002, taking into account additional guidance provided by EITF 02-07, “Unit of Measure for Testing Impairment of Indefinite-Lived Intangible Assets.” As a result, a pre-tax impairment charge related to the value of tradenames in our German, French and United Kingdom consumer businesses of $29.8 million was recorded as of October 1, 2001. After income taxes, the net charge was $18.5 million which was recorded as a cumulative effect of a change in accounting principle. There was no goodwill impairment as of the date of adoption. Upon completing the annual impairment analysis in the first quarter of fiscal 2004, it was determined that a charge for impairment was not required.

      In fiscal 2002, we announced the International Profit Improvement Plan (the “Plan”) to improve the operations and profitability of our European-based consumer and professional businesses. By the end of 2005, we anticipate spending between $45 million and $50 million in the aggregate on various projects related to this plan, approximately 25% of which will be capital expenditures. Approximately 75% of the total spending relates to the reorganization and rationalization of our European supply chain, increased sales force productivity, and a shift to pan-European category management of our product portfolio. As part of this initiative, restructuring and other charges will be incurred at various times.

      Under the Plan, profitability has improved, but the International business continues to perform below expectations. As such, we are exploring all options for our International business, with the goal of improving shareholder value. For further information concerning the restructuring charges incurred in fiscal years 2004, 2003 and 2002, see Note 4 to the Consolidated Financial Statements.

Critical Accounting Policies and Estimates

     The following discussion and analysis of the consolidated results of operations and financial position should be read in conjunction with our Consolidated Financial Statements included under “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.”

      Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to customer programs and incentives, product returns, bad debts, inventories, intangible assets, income taxes, restructuring, environmental matters, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The estimates that we believe are most critical to our reporting of results of operations and financial position are as follows:

	•	We have significant investments in property and equipment, intangible assets and goodwill. Whenever changing conditions warrant, we review the realizability of the assets that may be affected. At least annually, we review indefinite-lived intangible assets for impairment. The review for impairment of long-lived assets, intangibles and goodwill takes into account estimates of future cash flows. Our estimates of future cash flows are based upon budgets and longer-range plans. These budgets and plans are used for internal purposes and are also the basis for communication with outside parties about future business trends. While we believe the assumptions we use to estimate future cash flows are reasonable, there can be no assurance that the expected future cash flows will be realized. As a result, impairment charges that possibly should have been recognized in earlier periods may not be recognized until later periods if actual results deviate unfavorably from earlier estimates.
	•	We continually assess the adequacy of our reserves for uncollectible accounts due from customers. However, future changes in our customers’ operating performance and cash flows or in general economic conditions could have an impact on their ability to fully pay these amounts which could have a material impact on our operating results.
	•	Reserves for product returns are based upon historical data and current program terms and conditions with our customers. Changes in economic conditions, regulatory actions or defective products could result in actual returns being materially different than the amounts provided for in our interim or annual results of operations.
	•	Reserves for excess and obsolete inventory are based on a variety of factors, including product changes and improvements, changes in active ingredient availability and regulatory acceptance, new product introductions and estimated future demand. The adequacy of our reserves could be materially affected by changes in the demand for our products or regulatory actions.
	•	As described more fully in the Notes to the Consolidated Financial Statements, we are involved in significant environmental and legal matters which have a high degree of uncertainty associated with them. We continually assess the likely outcomes of these matters and the adequacy of amounts, if any, provided for these matters. There can be no assurance that the ultimate outcomes will not differ materially from our assessment of them. There can also be no assurance that all matters that may be brought against us or that we may bring against other parties are known to us at any point in time.
	•	We accrue for the estimated costs of customer volume rebates, cooperative advertising, consumer coupons and other trade programs as the related sales occur during the year. These accruals involve the use of estimates as to the total expected program costs and the expected sales levels. Historical results are also used to evaluate the accuracy and adequacy of amounts provided at interim dates and year end. There can be no assurance that actual amounts paid for these trade programs will not differ from estimated amounts accrued.

	•	We record income tax liabilities utilizing known obligations and estimates of potential obligations. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carryforwards. Valuation allowances are used to reduce deferred tax assets to the balance that is more likely than not to be realized. We must make estimates and judgments on future taxable income, considering feasible tax planning strategies and taking into account existing facts and circumstances, to determine the proper valuation allowance. When we determine that deferred tax assets could be realized in greater or lesser amounts than recorded, the asset balance and income statement reflects the change in the period such determination is made. Due to changes in facts and circumstances and the estimates and judgments that are involved in determining the proper valuation allowance, differences between actual future events and prior estimates and judgments could result in adjustments to this valuation allowance. The Company uses an estimate of its annual effective tax rate at each interim period based on the facts and circumstances available at that time, while the actual effective tax rate is calculated at year-end.
	•	As described more fully in the Notes to the Consolidated Financial Statements, we have not accrued the deferred contribution under the Roundup® marketing agreement with Monsanto or the per annum charges thereon. We consider this method of accounting for the contribution payments to be appropriate after consideration of the likely term of the agreement, our ability to terminate the agreement without paying the deferred amounts, and the fact that a significant portion of the deferred amount is never paid, even if the agreement is not terminated prior to 2018, unless significant earnings targets are exceeded. At September 30, 2004, contribution payments and related per annum charges of approximately $47.6 million had been deferred under the agreement.
	•	The Notes to the Consolidated Financial Statements provide information about our retirement plans including information regarding costs and assumptions for employee retirement benefits. The measurement of our pension obligations and costs is dependent on a variety of assumptions used in the actuarial valuations. These assumptions include estimates of the present value of projected future pension payments to all plan participants, taking into consideration the likelihood of potential future events such as salary increases and demographic experience. The assumptions used in developing the required estimates include the following key factors:

	•	Discount rates
	•	Salary growth
	•	Retirement and termination rates
	•	Expected return on plan assets
	•	Mortality rates

	Assumptions are reviewed annually for appropriateness and updated as necessary. We base the discount rate assumption on investment yields available at year-end on corporate long-term bonds rated AA or the equivalent. The salary growth assumption reflects our long-term actual experience, the near-term outlook and assumed inflation. The expected return on plan assets assumption reflects asset allocation, investment strategy and the views of investment managers regarding the market. Retirement and mortality rates are based primarily on actual and expected plan experience. The effects of actual results differing from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense in such future periods.
	Changes in the discount rate and investment returns can have a significant effect on the funded status of our pension plans and shareholders’ equity. As stated above, we base the discount rate assumption on investment yields available at year-end on corporate long-term bonds rated AA or the equivalent. We cannot predict these bond yields or investment returns and, therefore, cannot reasonably estimate whether adjustments to our shareholders’ equity for minimum pension liability in subsequent years will be significant.

	•	The Notes to Consolidated Financial Statements provide information about medical benefits provided to our retired associates and their dependents including information regarding costs and assumptions for other postretirement benefits. The measurement of our obligations, costs and liabilities associated with other postretirement benefits (i.e., retiree health care) requires that we make use of estimates of the present value of the projected future payments to all participants,

		taking into consideration the likelihood of potential future events such as health care cost increases, and demographic experience, which may have an effect on the amount and timing of future payments.

	The assumptions used in developing the required estimates include the following key factors:

	•	Health care cost trends
	•	Discount rates
	•	Retirement rates
	•	Inflation
	•	Mortality rates
	•	Turnover
	•	Participation rates

Our health care cost trend assumptions are developed based on historical cost data, the near-term outlook, efficiencies and other cost-mitigation actions (including further employee cost sharing, administrative improvements and other efficiencies) and an assessment of likely long-term trends. We base the discount rate assumption on investment yields available at year-end on corporate long-term bonds rated AA. Our inflation assumption is based on an evaluation of external market indicators. Retirement and mortality rates are based primarily on actual plan experience. The effects of actual results differing from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense in such future periods.

Results of Operations

     The following table sets forth the components of income and expense as a percentage of net sales for the three years ended September 30, 2004:

      The following table sets forth net sales by reportable segment for the three years ended September 30, 2004 (in millions):

Fiscal 2004 Compared to Fiscal 2003

     Net sales for fiscal 2004 increased 8.0% to $2,037.9 million from $1,887.7 million in fiscal 2003.

      North America segment net sales were $1,483.2 million in fiscal 2004, an increase of $94.3 million, or 6.8%, from net sales for fiscal 2003 of $1,388.9 million. Within the North America segment, Lawns net sales in fiscal 2004 increased 4.6% due to continued strong sales of value-added combination products, such as Turf Builder® Fertilizer with Halts® Crab Grass Preventer, Turf Builder® with Plus 2® Weed Control and Bonus S®, offset by spreader and grass seed sales which were especially flat year-over-year. Gardening Products sales, which include growing media and garden fertilizers, increased 3.1% with higher sales of value-added Miracle-Gro® potting mix and garden soils partially offset by lower sales of commodity growing media products. Net sales of Ortho® products increased a robust 16.1% in fiscal 2004, driven largely by the successful launches of Bug B Gon® Max^TM, Ortho® Season-Long^TM Grass and Weed Killer and a new range of opening price point weed and insect control products under the Ortho® Basic Solutions label at a major retailer.

      Scotts LawnService® net sales increased 22.5% from $110.4 million in fiscal 2003 to $135.2 million in fiscal 2004. The growth in net sales has been largely fueled by increased customer retention, higher new customer sales during the peak spring selling season, and the full year impact of fiscal 2003 acquisitions.

      Net sales for the International segment were $419.5 million in fiscal 2004, an increase of $31.1 million, or 8.0%, compared to fiscal 2003. Excluding the effects of currency fluctuations and the impact of discontinuing the sale of certain low margin professional products, net sales were essentially unchanged in fiscal 2004 versus prior year. Sales increases in the United Kingdom and the International professional business were offset by lower sales in Central Europe and the Benelux countries, due largely to unusually cold and wet spring weather conditions, and in Asia Pacific, primarily due to continuing drought conditions in Australia which decreased fertilizer demand.

      Selling price changes were not material to net sales in fiscal 2004 or fiscal 2003.

      Gross profit increased $80.8 million in fiscal 2004 compared to fiscal 2003. As a percentage of net sales, gross profit was 37.8% of net sales in fiscal 2004 compared to 36.5% in fiscal 2003. Gross margins were higher in all three business segments. Favorable product mix, coupled with warehousing and material handling efficiency gains, more than offset the impact of higher fuel costs and inflationary pressure on key raw material inputs such as urea. Lastly, restructuring and other expenses, included in cost of sales, primarily related to International supply chain initiatives, decreased from $9.1 million in fiscal 2003 to $0.6 million in fiscal 2004, increasing gross profit as a percentage of net sales by approximately 50 basis points.

      The net commission earned from the Roundup® marketing agreement in fiscal 2004 was $28.5 million compared to $17.6 million in fiscal 2003. This strong growth in the commission as compared to the prior year is primarily due to strong underlying growth in Roundup® sales and improved product mix, partially offset by a $1.4 million increase in the contribution payment due to Monsanto, which increased from $25.0 million in fiscal 2003 to $26.4 million in fiscal 2004.

      Advertising expenses in fiscal 2004 were $105.0 million, an increase of $7.3 million from fiscal 2003. Excluding the effects of currency fluctuations, advertising expenditures increased $4.6 million or 4.7% for the year, roughly in line with the growth in sales. The increase was primarily due to television media support for the Ortho® line, the launch of a new television advertising campaign for Evergreen® lawn fertilizer in the United Kingdom and increased media support in Canada.

      Selling, general and administrative (“SG&A”) expenses in fiscal 2004 were $442.3 million compared to $379.4 million in fiscal 2003. Excluding the expensing of stock-based compensation, infrastructure investments in Scotts LawnService® and restructuring and other charges, the Company’s SG&A expenses increased $48.2 million, or 15.0%, compared to 2003. This increase was primarily due to investments in marketing research and in-store merchandising to support growth in the home center channel, increased sales and management incentives, higher legal expenses and foreign currency fluctuations. SG&A expenses for Scotts LawnService® increased approximately 23% from $46.2 million in fiscal 2003 to $56.8 million in fiscal 2004, primarily due to higher field labor expenses to support growth in customer counts and service infrastructure investments. Compensation expense related to the expensing of employee stock-based compensation awards was $7.8 million and $4.8 million, respectively, in fiscal 2004 and fiscal 2003. SG&A restructuring and other expenses increased from $8.0 million in fiscal 2003 to $9.1 million in 2004, primarily due to charges related to outsourcing of the Company’s data center and application software functions.

      Income from operations in fiscal 2004 was $252.8 million, compared to $231.6 million in fiscal 2003. This increase in income from operations reflects higher net sales and gross profit margins and significantly higher net commission earned from the Roundup® marketing agreement, partially offset by investments in media advertising and higher SG&A expenses as described above.

      For segment reporting purposes, earnings before interest, taxes and amortization is used as the measure for operating income. On that basis, operating income in the North America segment increased from $282.8 million in fiscal 2003 to $308.9 million in fiscal 2004, on an increase in net sales from $1,388.9 million in fiscal 2003 to $1,483.2 million in fiscal 2004. Higher sales volume (primarily in the Ortho® and Lawns businesses), favorable product mix, largely due to new product introductions within the Ortho® line, a continued shift to value-added Growing Media sales, increased penetration of value added lawn combination products and warehousing and distribution efficiencies more than offset higher urea and freight costs and increased advertising and SG&A expenses.

      Scotts LawnService® operating income increased from $6.2 million in fiscal 2003 to $9.8 million in fiscal 2004 due to significant improved gross profit margins, largely due to higher customer counts (as discussed above) and field productivity gains and supply chain savings realized during the year.

      International operating income was $27.3 million in fiscal 2004, compared to $23.9 million in fiscal 2003. This increase in fiscal 2004 operating earnings was largely attributable to favorable foreign currency fluctuations and a reduction in restructuring expenses, as the majority of the initiatives to reorganize and rationalize the European Supply Chain were completed during 2003.

      Interest expense decreased from $69.2 million in fiscal 2003 to $48.8 million in fiscal 2004. Costs related to the refinancings of the Company’s credit facility and redemption of the Company’s 8 5/8% Senior Subordinated Notes in fiscal 2004 totaled $45.5 million. The decrease in interest expense is due to a reduction of $107.0 million in average borrowings coupled with a reduction in the Company’s weighted average interest rate (from 7.42% in fiscal 2003 to 5.92% in fiscal 2004) resulting from more favorable terms under the New Credit Agreement discussed below under “Liquidity and Capital Resources,” and a favorable interest rate environment.

      Income tax expense for fiscal 2004 was $58.0 million, compared to $59.2 million in fiscal 2003. The effective tax rate for fiscal 2004 was 36.6% as compared to 36.4% in fiscal 2003. In fiscal 2004, the Company’s effective income tax rate benefited from an adjustment to federal deferred income taxes after a detailed review of prior tax exposures. In fiscal 2003, the Company’s effective tax rate benefited from an adjustment of state deferred income taxes resulting from a detailed review of state effective tax rates, and increased utilization of foreign tax credits.

      The Company reported net income from continuing operations of $100.5 million in fiscal 2004, compared to $103.2 million in fiscal 2003. Income from discontinued operations pertains to the disposal of the Company’s professional growing media business at the end of fiscal 2004. Reported net income, including income from discontinued operations, decreased from $103.8 million or $3.23 per share in fiscal 2003 to $100.9 million or $3.03 per share in fiscal 2004.

      Average diluted shares outstanding increased from 32.1 million in fiscal 2003 to 33.3 million in fiscal 2004, due to option exercises and the impact on common stock equivalents of a higher average share price.

Fiscal 2003 Compared to Fiscal 2002

     Net sales for fiscal 2003 increased 9.5% to $1,887.7 million from $1,723.7 million in fiscal 2002.

      North America segment net sales were $1,388.9 million in fiscal 2003, an increase of $77.0 million, or 5.9%, from net sales for fiscal 2002 of $1,311.9 million. Within the North America segment, Lawns net sales in fiscal 2003 increased a robust 11.2% due to strong acceptance of the new Miracle-Gro® lawn fertilizer line at Wal*Mart and continued strong sales of Turf Builder® lawn fertilizer, control products and grass seed. Gardening Products sales, which include growing media and garden fertilizers, were essentially flat year-over-year with higher sales of value-added Miracle-Gro® potting mix and garden soils mainly offset by lower sales of commodity growing media products. Ortho® branded products net sales increased 2.1% in fiscal 2003, driven largely by strong sales of selective and non-selective weed control products and continued growth of the Ortho® Home Defense® indoor and perimeter pest control product line, partially offset by lower outdoor insect control sales.

      Scotts LawnService® net sales increased 46.0% from $75.6 million in fiscal 2002 to $110.4 million in fiscal 2003. The growth in net sales has been largely fueled by geographic expansion and acquisitions. Spending on acquisitions, including seller-financing, reached $30.6 million in fiscal 2003 versus $54.8 million in fiscal 2002. Fiscal 2002 was affected by a major acquisition late in the year, representing nearly one-half of fiscal 2002 acquisition spending and favorably impacting fiscal 2003 net sales.

      Net sales for the International segment were $388.4 million in fiscal 2003, an increase of $52.2 million, or 15.5%, compared to fiscal 2002. Sales increased in all major countries except Germany which experienced lower sales due to increased regulatory restrictions. Excluding the effects of currency fluctuations and non-recurring sales from previous supply agreements, net sales decreased approximately $2.0 million, or 0.6%, in fiscal 2003.

      Selling price changes were not material to net sales in fiscal 2003 or fiscal 2002.

      Gross profit increased $55.7 million in fiscal 2003 compared to fiscal 2002. As a percentage of net sales, gross profit was 36.5% of net sales in fiscal 2003 compared to 36.7% in fiscal 2002. Favorable impacts were realized from certain supply chain initiatives and higher volume. These benefits were offset by unfavorable warehousing and material handling costs and product mix, particularly in our Lawns business, which was also impacted by higher urea costs. Lastly, restructuring and other expenses, included in cost of sales, primarily related to International supply chain initiatives, increased from $1.7 million in fiscal 2002 to $9.1 million in fiscal 2003, reducing gross profit as a percentage of net sales by 40 basis points.

      The net commission earned from the Roundup® marketing agreement in fiscal 2003 was $17.6 million compared to $16.2 million in fiscal 2002. The increase from the prior year is primarily due to strong underlying growth in Roundup® sales, which drove the gross commission higher, partially offset by a $5.0 million increase in the contribution payment due to Monsanto, which increased from $20.0 million in fiscal 2002 to $25.0 million in fiscal 2003.

      Advertising expenses in fiscal 2003 were $97.7 million, an increase of $15.5 million from fiscal 2002. The increase in advertising expenses is primarily due to the re-launch of television media support for the Ortho® line and media support for new product launches such as Miracle-Gro® Shake N’ Feed®. Foreign currency fluctuations also increased reported advertising expenses by $2.7 million.

      Selling, general and administrative (“SG&A”) expenses in fiscal 2003 were $379.4 million compared to $335.1 million for fiscal 2002. Excluding the expensing of stock-based compensation, infrastructure investment in the Scotts LawnService® and restructuring and other charges, the Company’s SG&A expenses increased $22.5 million, or 7.6%, compared to 2002. This increase is primarily due to investments to support our expansion into adjacent categories and channels, investments to expand the functionality and capability of our business development offices at our largest retailers, and foreign exchange fluctuations. SG&A expenses for Scotts LawnService® increased 50% from $30.8 million in fiscal 2002 to $46.2 million in fiscal 2003, primarily due to growth in the branch service network, supporting our plan to rapidly

      Amortization of intangibles increased from $5.7 million in fiscal 2002 to $8.6 million in fiscal 2003, primarily due to foreign currency fluctuations and higher expenses related to the amortization of certain intangibles, primarily related to customer lists acquired by Scotts LawnService®.

      Other income, net was $10.8 million in fiscal 2003, compared to $12.0 million in fiscal 2002. The Company realized a net reduction of approximately $4 million from an agreement to cease peat extraction in the United Kingdom. Increased Scotts LawnService® franchise fees and royalty income recorded in fiscal 2003 partially off-set the reduction related to peat extraction.

      Income from operations in fiscal 2003 was $231.6 million, compared to $238.4 million in fiscal 2002. This decrease in income from operations reflects higher net sales and gross profit, offset by greater investments in media advertising and higher SG&A expenses, higher restructuring spending in Europe (to support our International Profit Improvement Plan) and the adoption of an accounting change to expense stock-based compensation awards.

      For segment reporting purposes, earnings before interest, taxes and amortization is used as the measure for operating income. On that basis, operating income in the North America segment increased from $277.2 million in fiscal 2002 to $282.8 million in fiscal 2003, on an increase in net sales from $1,311.9 million in fiscal 2002 to $1,388.9 million in fiscal 2003. Higher sales volume (primarily in the Lawns business) and favorable volume-related manufacturing cost absorption were largely offset by a decrease in gross profit margin as a percentage of net sales (due to product mix and increased urea and warehousing costs), and higher media and SG&A expenses.

      Scotts LawnService® operating income decreased from $8.8 million in fiscal 2002 to $6.2 million in fiscal 2003 due to planned infrastructure investments and higher field labor and truck costs, largely the result of poor spring weather that delayed the start of the spring treatment season. These higher costs more than offset increased margin resulting from higher net sales, which were driven by geographic expansion and acquisitions.

      International operating income was $23.9 million in fiscal 2003, compared to $25.3 million in fiscal 2002. The decrease in fiscal 2003 operating income is largely due to planned restructuring expenses, as outlined in the Company’s International Profit Improvement Plan, and a non-recurring peat transaction gain recognized in fiscal 2002. Foreign currency fluctuations also favorably impacted operating income.

      Interest expense decreased from $76.3 million in fiscal 2002 to $69.2 million in fiscal 2003. The decrease in interest expense was primarily due to debt repayments and strong operating cash flow, which resulted in lower average borrowing levels as compared to the prior year, and lower interest rates on our credit revolver and variable rate term loans. The weighted average cost of debt was 7.42% in fiscal 2003 compared to 8.30% in fiscal 2002.

      Income tax expense for fiscal 2003 was $59.2 million, compared to $61.6 million in fiscal 2002. This decrease in income tax expense as compared to the prior year primarily was the result of a reduction in the Company’s effective tax rate from 38.0% in 2002 to 36.4% in 2003, due to an adjustment of state deferred income taxes resulting from a detailed review of state effective tax rates, and increased utilization of foreign tax credits in fiscal 2003.

      The Company reported net income from continuing operations of $103.2 million for fiscal 2003, compared to $100.5 million in fiscal 2002. Results of operations for both fiscal 2003 and 2002 were adjusted to display the results of the Company’s professional growing media business as discontinued operations due to the disposal of that business at the end of fiscal 2004. A charge of $29.8 million ($18.5 million, net of tax) for the impairment of trade names in our German, French and United Kingdom businesses was taken in fiscal 2002 as a result of the adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”. Net income for fiscal 2002 was $82.5 million, or $2.61 per diluted share, compared to net income of $103.8 million, or $3.23 per diluted share, in fiscal 2003.

      Average diluted shares outstanding increased from 31.7 million in fiscal 2002 to 32.1 million in fiscal 2003, due to option and warrant exercises and the impact on common stock equivalents of a higher average share price in fiscal 2003 compared to fiscal 2002.

Liquidity and Capital Resources

     Net cash provided from operating activities was $214.2 million for fiscal 2004, compared to $216.1 million for fiscal 2003. This strong cash flow performance was fueled by increased profitability (excluding the non-cash costs related to the refinancing of our credit facility and redemption of our 8 5/8% Senior Subordinated Notes) and higher payroll and miscellaneous accrued liabilities. Despite a strong 8% growth in top line sales, accounts receivable and inventory levels increased only modestly over the prior year. Net cash provided from operating activities in fiscal 2003 benefited from a reduction in taxes paid due to a change in the tax treatment of costs related to trade programs from a cash to accrual basis. This one-time cash flow benefit did not repeat itself in fiscal 2004. Net cash provided from operating activities reached record levels in fiscal 2002 due largely to a one-time reduction in inventories and other cash flow initiatives.

      The seasonal nature of our operations generally requires cash to fund significant increases in working capital (primarily inventory) during the first half of the year. Receivables and payables also build substantially in the second quarter of the year in line with the timing of sales as the spring selling season begins. These balances liquidate during the June through September period as the lawn and garden season unwinds. Unlike our core retail business, Scotts LawnService® typically has its highest receivables balances in the September quarter because of the seasonal timing of customer applications and extra services revenues, which are strongest in the fourth fiscal quarter of the year.

      Net cash used in investing activities was $112.8 million in fiscal 2004 compared to $108.9 million in fiscal 2003. While reported net cash used in investing activities was essentially unchanged versus prior year, cash requirements actually decreased by $53.3 million in fiscal 2004, excluding the impact of investments in adjustable rate notes (“Notes”) which were made in lieu of investing excess cash in overnight funds. These Notes, which the Company believes are essentially equivalent to cash, have been accounted for as “available for sale securities” in accordance with Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The Notes, which were redeemed and converted into cash on October 1, 2004, permitted the Company to put the Notes back to a remarketing agent at any time at 100% of par value and were secured by an irrevocable, direct pay letter of credit. Proceeds from the Notes were used to partially fund the acquisition of Smith and Hawken®.

      Reduced capital expenditures were responsible for $16.7 million of the decrease in cash requirements between the periods, as fewer significant capital projects were undertaken in fiscal 2004. We anticipate capital expenditures to be somewhat higher in fiscal 2005, likely in the range of $50 million, consistent with historical trends and approved spending levels. In fiscal 2003, major capital investments were made in the information systems area (principally supply chain related) and the Company completed a significant capacity expansion project at its Charleston, South Carolina professional fertilizer plant to support the consolidation of production from another manufacturing facility that was subsequently closed. Principal payments due on seller notes issued in conjunction with prior Scotts LawnService® acquisitions were $12.3 million in fiscal 2004 compared to $36.7 million in fiscal 2003. This reduction in payments on seller notes was directly attributable to fewer acquisitions being completed during the second half of fiscal 2003 and throughout fiscal 2004.

      Financing activities used cash of $133.0 million in fiscal 2004, compared to a cash usage of $59.0 million the prior year. During the first quarter of fiscal 2004, we restructured our borrowing arrangements through the refinancing of our former Credit Agreement and the redemption of our 8 5/8% Senior Subordinated Notes, which were replaced by the issuance of our 6 5/8% Senior Subordinated Notes. On October 22, 2003, the Company consummated a series of transactions which included the repayment of the term loans outstanding under the former Credit Agreement, the termination of the Credit Agreement, the execution of the Second Amended and Restated Credit Agreement (“New Credit Agreement”), and the borrowing of $500 million in the form of term loans under the New Credit Agreement. On June 24, 2004, the Company repaid $100 million of the $499 million term loans then outstanding under the New Credit Agreement. On August 13, 2004, the Company refinanced its existing term loan facility with a new term loan facility (“New Term Loans”) consisting of a $250 million Tranche A

      Our primary sources of liquidity are cash generated by operations and borrowings under our New Credit Agreement. The New Credit Agreement consists of a $700 million multi-currency revolving credit commitment and a term loan facility that was initially $500 million subsequently reduced as a result of a voluntary $100 million prepayment on June 24, 2004. Note 9 to the Consolidated Financial Statements provides additional information pertaining to the refinancing of our former Credit Agreement, the establishment of our New Credit Agreement (including a description of financial covenants and cross-default provisions) the redemption of our 8 5/8% Senior Subordinated Notes, the issuance of our 6 5/8% Senior Subordinated Notes and New Term Loans. At September 30, 2004, we were in compliance with our debt covenants.

      Total cash and cash equivalents were $115.6 million at September 30, 2004, a decrease of $40.3 million from September 30, 2003. We elected not to use cash on hand at September 30, 2004 and September 30, 2003 to pay down indebtedness since voluntary repayments permanently reduce the total borrowing commitments under the terms of the credit facility. Under the terms of the former Credit Agreement, a mandatory excess cash flow prepayment of $24.4 million was made in early fiscal 2003 based on fiscal 2002’s results of operations and cash flow. While this mandatory excess cash flow prepayment requirement was also in effect during fiscal 2004, we were not required to fund this payment since the Company’s leverage ratios were well below levels triggering a mandatory prepayment.

      Our year-end cash effectively serves to reduce our average indebtedness by reducing seasonal borrowings made under our revolving credit facility to fund seasonal working capital needs. We have not paid dividends on our common shares in the past. However, given our rapidly improving financial condition and levels of cash generated by the business, we are currently evaluating various capital structure strategies and the use of capital for cash generated in the future. These uses may include continued debt repayment, funding of selective acquisitions to support future growth, payment of dividends and share repurchases. On October 2, 2004, Scotts acquired all outstanding shares of Smith & Hawken® for a total cost of $74.9 million including prepayment of existing debt obligations.

      The payment of future dividends and share repurchases, if any, will be determined by our Board of Directors in light of conditions then existing, including our earnings, financial condition, capital requirements, restrictions in financing agreements, business conditions and other factors. We did not repurchase any treasury shares in fiscal 2004 or 2003.

      The funded status of our pension plans improved $11.5 million in fiscal 2004 due to $15.8 million in employer contributions and better than anticipated investment returns on the plans assets, which together more than offset higher benefit obligations, required benefit payments and the impact of foreign currency translation on our International plans. The unfunded status of our curtailed defined benefit plans in the United States decreased from a deficit of $29.5 million at September 30, 2003 to a deficit of $22.5 million at September 30, 2004. Our International plans’ deficit was reduced from $55.4 million in fiscal 2003 to $50.9 million in fiscal 2004. Employer contributions to the plans in fiscal 2005 are not expected to increase versus 2004.

      The Company’s off-balance sheet financing arrangements are in the form of operating leases that are disclosed in the Notes to the Consolidated Financial Statements. As of September 30, 2004, we had $13.2 million of outstanding guarantees, primarily related to deferred purchase obligations on Scotts LawnService® acquisitions. During the second quarter of fiscal 2004, we took final delivery on a used aircraft under the terms of a synthetic operating lease agreement as disclosed in Note 14 to the Consolidated Financial Statements.

      We are party to various pending judicial and administrative proceedings arising in the ordinary course of business. These include, among others, proceedings based on accidents or product liability claims and alleged violations of environmental laws. We have reviewed our pending environmental and legal proceedings, including the probable outcomes, reasonably anticipated costs and expenses, reviewed the availability and limits of our insurance coverage and have established what we believe to be appropriate

      The following table summarizes our future cash outflows for contractual obligations as of September 30, 2004 (in millions):

      In our opinion, cash flows from operations and capital resources will be sufficient to meet debt service and working capital needs during fiscal 2004, and thereafter for the foreseeable future. However, we cannot ensure that our business will generate sufficient cash flow from operations or that future borrowings will be available under our credit facilities in amounts sufficient to pay indebtedness or fund other liquidity needs. Actual results of operations will depend on numerous factors, many of which are beyond our control.

Environmental Matters

     We are subject to local, state, federal and foreign environmental protection laws and regulations with respect to our business operations and believe we are operating in substantial compliance with, or taking actions aimed at ensuring compliance with, such laws and regulations. We are involved in several legal actions with various governmental agencies related to environmental matters. While it is difficult to quantify the potential financial impact of actions involving environmental matters, particularly remediation costs at waste disposal sites and future capital expenditures for environmental control equipment, in the opinion of management, the ultimate liability arising from such environmental matters, taking into account established reserves, should not have a material adverse effect on our financial position. However, there can be no assurance that the resolution of these matters will not materially affect future quarterly or annual results of operations, financial condition or cash flows of the Company. Additional information on environmental matters affecting us is provided in “ITEM 1. BUSINESS — Environmental and Regulatory Considerations,” “ITEM 1. BUSINESS — Regulatory Actions” and “ITEM 3. LEGAL PROCEEDINGS.”

Management’s Outlook

     We are very pleased with the Company’s performance in fiscal 2004. Despite upward pressure on commodity raw material costs, execution issues and poor spring weather conditions in Europe, the Company delivered record net sales and income from operations for the year. Our sales results were driven by strong point of sales growth in our North America business, particularly lawn fertilizer and control products and continued rapid expansion of our Scotts LawnService® business.

      We set challenging growth targets for fiscal 2004, including aggressive sales growth and share gains within the North American consumer lawn and garden categories. We also undertook a significant Enterprise Resource Planning (“ERP”) project in our major European countries with installations in the United Kingdom and France, which followed installations in Germany and Austria the year before. We also continued to strive to improve customer service levels throughout the core consumer retail business and in Scotts LawnService®. We were successful at strengthening our relationships with key accounts by continuing to improve in-season execution and moving to “just in time” replenishment of store inventory levels. As a result, order fill levels reached all time highs in our North American business. Similarly, we made significant strides to improve customer service throughout Scotts LawnService® by restructuring field incentives to focus more on customer retention and by spending more time and money training technicians pre and in-season on customer service. Our consumer businesses in the United Kingdom and France

      Our strong results in fiscal 2004 set the stage for another successful year in 2005. We are committed to improving the results of our International business and have aggressively addressed the supply chain challenges we faced in fiscal 2004. Our focus is to improve gross profit margins in each business segment by continuing to improve product mix and strengthening our Global Supply Chain organization while aggressively seeking cost reduction initiatives throughout the purchasing, logistics and manufacturing areas. We will continue to invest aggressively in media advertising, marketing research and in-store merchandising programs to drive category growth and margin expansion. Our strategy is also to continue to develop new distribution channels and to leverage our strong brands to enter profitable adjacent product categories. We will also further expand our research and development activities and expect to introduce several new value-added products that will provide new features and benefits to consumers while improving both retailer and Company margins.

      We believe fiscal 2005 will be another year of profitable growth, with continued focus on improving return on invested capital and strong cash flow generation a priority.

Forward-Looking Statements

     We have made and will make “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 in our 2004 Annual Report, in this Annual Report on Form 10-K and in other contexts relating to future growth and profitability targets and strategies designed to increase total shareholder value. Forward-looking statements also include, but are not limited to, information regarding our future economic and financial condition, the plans and objectives of our management and our assumptions regarding our performance and these plans and objectives.

      The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the forward-looking statements. We desire to take advantage of the “safe harbor” provisions of that Act.

      Some forward-looking statements that we make in our 2004 Annual Report, in this Annual Report on Form 10-K and in other contexts represent challenging goals for our company, and the achievement of these goals is subject to a variety of risks and assumptions and numerous factors beyond our control. Important factors that could cause actual results to differ materially from the forward-looking statements we make are described below. All forward-looking statements attributable to us or persons working on our behalf are expressly qualified in their entirety by the following cautionary statements.

	•	OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR OBLIGATIONS.

	We have a significant amount of debt. Our substantial indebtedness could have important consequences. For example, it could:

	•	make it more difficult for us to satisfy our obligations under outstanding indebtedness and otherwise;
	•	increase our vulnerability to general adverse economic and industry conditions;
	•	require us to dedicate a substantial portion of cash flows from operating activities to payments on our indebtedness, which would reduce the cash flows available to fund working capital, capital expenditures, advertising, research and development efforts and other general corporate requirements;
	•	limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
	•	place us at a competitive disadvantage compared to our competitors that have less debt;
	•	limit our ability to borrow additional funds; and

	•	expose us to risks inherent in interest rate fluctuations because some of our borrowings are at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates.

	Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures and acquisitions will depend on our ability to generate cash in the future. This, to some extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
	We cannot provide assurance that our business will generate sufficient cash flow from operating activities or that future borrowings will be available to us under our New Credit Agreement in amounts sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness, on or before maturity. We cannot assure you that we would be able to refinance any of our indebtedness on commercially reasonable terms or at all.

	•	RESTRICTIVE COVENANTS MAY ADVERSELY AFFECT US.

The New Credit Agreement and the indenture governing our 6 5/8% Senior Subordinated Notes (the “New Indenture”) contain restrictive covenants and cross default provisions that require us to maintain specified financial ratios. Our ability to satisfy those financial ratios can be affected by events beyond our control, and we cannot assure you that we will satisfy those ratios. A breach of any of these financial ratio covenants or other covenants in the New Credit Agreement or the New Indenture could result in a default under the New Credit Agreement and/or the New Indenture. Upon the occurrence of an event of default under the New Credit Agreement and/or the New Indenture, the lenders and/or noteholders could elect to declare the applicable outstanding indebtedness to be immediately due and payable and, in the case of our lenders under the New Credit Agreement, terminate all commitments to extend further credit. We cannot be sure that our lenders or the noteholders would waive a default or that we could pay the indebtedness in full if it were accelerated.

	•	ADVERSE WEATHER CONDITIONS COULD ADVERSELY IMPACT FINANCIAL RESULTS.

	Weather conditions in North America and Europe have a significant impact on the timing of sales in the spring selling season and overall annual sales. An abnormally cold spring throughout North America and/or Europe could adversely affect both fertilizer and pesticide sales and, therefore, our financial results.

	•	OUR HISTORICAL SEASONALITY COULD IMPAIR OUR ABILITY TO PAY OBLIGATIONS AS THEY COME DUE IN ADDITION TO OUR OPERATING EXPENSES.

Because our products are used primarily in the spring and summer, our business is highly seasonal. For the past two fiscal years, more than 70% of our net sales have occurred in the second and third fiscal quarters combined. Our working capital needs and our borrowings peak near the middle of our second fiscal quarter because we are generating fewer revenues while incurring expenditures in preparation for the spring selling season. If cash on hand is insufficient to pay our obligations as they come due, including interest payments on our indebtedness, or our operating expenses, at a time when we are unable to draw on our credit facility, this seasonality could have a material adverse effect on our ability to conduct our business. Adverse weather conditions could heighten this risk.

	•	PERCEPTIONS THAT THE PRODUCTS WE PRODUCE AND MARKET ARE NOT SAFE COULD ADVERSELY AFFECT US.

We manufacture and market a number of complex chemical products, such as fertilizers, growing media, herbicides and pesticides, bearing one of our brand names. On occasion, allegations are made that some of our products have failed to perform up to expectations or have caused damage or injury to individuals or property. Based on reports of contamination at a third party supplier’s vermiculite mine, the public may perceive that some of our products manufactured in the past using vermiculite are or may also be contaminated. Public perception that our products are not safe, whether justified or not, could impair our reputation, involve us in litigation, damage our brand names and have a material adverse affect our business.

	•	THE NATURE OF CERTAIN OF OUR PRODUCTS AND OUR BUSINESS SUCCESS CONTRIBUTE TO THE RISK THAT THE COMPANY WILL BE SUBJECTED TO LAWSUITS.

	The nature of certain of our products and our business success contribute to the risk that the Company will be subjected to lawsuits. The following are among the factors that contribute to this litigation risk:

	•	We manufacture and market a number of complex chemical products bearing our brand names, including fertilizers, growing media, herbicides and pesticides. There is a portion of the population that perceives all chemical products as potentially hazardous. This perception, regardless of its merits, enhances the risk that the Company will be subjected to product liability claims that allege harm from exposure to our products. Product liability claims are brought against the Company from time to time.
	•	A third party vendor supplied contaminated vermiculite ore to the Company. Although our use of vermiculite ore from the contaminated source ended over twenty years ago, our former relationship with this supplier enhances the risk that the Company will be subjected to personal injury and product liability claims relating to the use of vermiculite in some of our products.
	•	We are a significant competitor in many of the markets in which we compete. Our success in our markets enhances the risk that the Company will be targeted by plaintiffs’ lawyers, consumer groups, competitors and others asserting antitrust claims. Antitrust claims are brought against the Company from time to time. The Company believes that the antitrust claims of which it is aware are without merit.

	Please see “ITEM 3. LEGAL PROCEEDINGS” and Note 16 to the Consolidated Financial Statements.

	•	BECAUSE OF THE CONCENTRATION OF OUR SALES TO A SMALL NUMBER OF RETAIL CUSTOMERS, THE LOSS OF ONE OR MORE OF, OR SIGNIFICANT DECLINE IN ORDERS FROM, OUR TOP CUSTOMERS COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS.

	North America net sales represent approximately 73% of our worldwide net sales in fiscal 2004. Our top three North American retail customers together accounted for 67% of our North America fiscal 2004 net sales and 60% of our outstanding accounts receivable as of September 30, 2004. Home Depot, Wal*Mart and Lowe’s represented approximately 36%, 18% and 13%, respectively, of our fiscal 2004 North America net sales. The loss of, or reduction in orders from, Home Depot, Wal*Mart, Lowe’s or any other significant customer could have a material adverse effect on our business and our financial results, as could customer disputes regarding shipments, fees, merchandise condition or related matters. Our inability to collect accounts receivable from any of these customers could also have a material adverse affect.
	We do not have long-term sales agreements or other contractual assurances as to future sales to any of our major retail customers. In addition, continued consolidation in the retail industry has resulted in an increasingly concentrated retail base. To the extent such concentration continues to occur, our net sales and income from operations may be increasingly sensitive to a deterioration in the financial condition of, or other adverse developments involving our relationship with, one or more customers.

	•	THE HIGHLY COMPETITIVE NATURE OF THE COMPANY’S MARKETS COULD ADVERSELY AFFECT THE ABILITY OF THE COMPANY TO GROW OR MAINTAIN REVENUES.

Each of our segments participates in markets that are highly competitive. Many of our competitors sell their products at prices lower than ours, and we compete primarily on the basis of product quality, product performance, value, brand strength, supply chain competency and advertising. Some of our competitors have significant financial resources. The strong competition that we face in all of our markets may prevent us from achieving our revenue goals, which may have a material adverse affect on our financial condition and results of operations.

	•	IF MONSANTO WERE TO TERMINATE THE MARKETING AGREEMENT FOR CONSUMER ROUNDUP® PRODUCTS WITHOUT BEING REQUIRED TO PAY ANY TERMINATION FEE, WE WOULD LOSE A SUBSTANTIAL SOURCE OF FUTURE EARNINGS.

	If we were to commit a serious default under the marketing agreement with Monsanto for consumer Roundup® products, Monsanto may have the right to terminate the agreement. If Monsanto were to

terminate the marketing agreement for cause, we would not be entitled to any termination fee, and we would lose all, or a significant portion, of the significant source of earnings and overhead expense absorption the marketing agreement provides. Monsanto may also be able to terminate the marketing agreement within a given region, including North America, without paying us a termination fee if sales to consumers in that region decline:

	•	over a cumulative three fiscal year period; or
	•	by more than 5% for each of two consecutive fiscal years.

	•	HAGEDORN PARTNERSHIP, L.P. BENEFICIALLY OWNS APPROXIMATELY 33% OF OUR OUTSTANDING COMMON SHARES.

	Hagedorn Partnership, L.P. beneficially owned approximately 33% of our outstanding common shares as of November 1, 2004, and has sufficient voting power to significantly influence the election of directors and the approval of other actions requiring the approval of our shareholders.

	•	COMPLIANCE WITH ENVIRONMENTAL AND OTHER PUBLIC HEALTH REGULATIONS COULD INCREASE OUR COST OF DOING BUSINESS.

	Local, state, federal and foreign laws and regulations relating to environmental matters affect us in several ways. In the United States, all products containing pesticides must be registered with the U.S. EPA (and 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 our business, the severity of which would depend on the products involved, whether another product could be substituted and whether our competitors were similarly affected. We attempt to anticipate regulatory developments and maintain registrations of, and access to, substitute active ingredients, but there can be no assurance that we will continue to be able to avoid or minimize these risks.
	The Food Quality Protection Act, enacted by the U.S. Congress in August 1996, establishes a standard for food-use pesticides, which standard is the reasonable certainty that no harm will result from the cumulative effect of pesticide exposures. Under this act, the U.S. EPA is evaluating the cumulative risks from dietary and non-dietary exposures to pesticides. The pesticides in our products, certain of which may be used on crops processed into various food products, are typically manufactured by independent third parties and continue to be evaluated by the U.S. EPA as part of this exposure risk assessment. The U.S. EPA or the third party registrant may decide that a pesticide we use in our products will be limited or made unavailable to us. For example, in June 2000, DowAgroSciences, an active ingredient registrant, voluntarily agreed to a gradual phase-out of residential uses of chlorpyrifos, an active ingredient used in our lawn and garden products. In December 2000, the U.S. EPA reached agreement with various parties, including manufacturers of the active ingredient diazinon, regarding a phased withdrawal from retailers by December 2004 of residential uses of products containing diazinon, also used in our lawn and garden products. We cannot predict the outcome or the severity of the effect of their continuing evaluations.
	In addition, the use of certain pesticide and fertilizer products is regulated by various local, state, federal and foreign environmental and public health agencies. These regulations may include requirements that only certified or professional users apply the product or that certain products be used only on certain types of locations, may require users to post notices on properties to which products have been or will be applied, may require notification to individuals in the vicinity that products will be applied in the future or may ban the use of certain ingredients. Even if we are able to comply with all such regulations and obtain all necessary registrations, we cannot assure you that our products, particularly pesticide products, will not cause injury to the environment or to people under all circumstances. The costs of compliance, remediation or products liability have adversely affected operating results in the past and could materially affect future quarterly or annual operating results.
	The harvesting of peat for our growing media business has come under increasing regulatory and environmental scrutiny. In the United States, state regulations frequently require us to limit our harvesting and to restore the property to an agreed-upon condition. In some locations, we have been required to create water retention ponds to control the sediment content of discharged water. In the United Kingdom, our peat extraction efforts are also the subject of legislation.
	In addition to the regulations already described, local, state, federal and foreign agencies regulate the disposal, handling and storage of waste, air and water discharges from our facilities. In June

	1997, the Ohio EPA initiated an enforcement action against us with respect to alleged surface water violations and inadequate treatment capabilities at our Marysville, Ohio facility and is seeking corrective action under the federal Resource Conservation and Recovery Act. We have met with the Ohio EPA and the Ohio Attorney General’s office to negotiate an amicable resolution of these issues. On December 3, 2001, an agreed judicial Consent Order was submitted to the Union County Common Pleas Court and was entered by the court on January 25, 2002.
	During fiscal 2004, 2003, and 2002 we expensed approximately $3.3 million, $1.5 million, and $5.4 million for environmental matters.
	The adequacy of these estimated future expenditures is based on our operating in substantial compliance with applicable environmental and public health laws and regulations and several significant assumptions:

	•	that we have identified all of the significant sites that must be remediated;
	•	that there are no significant conditions of potential contamination that are unknown to us; and
	•	that with respect to the agreed judicial Consent Order in Ohio, the potentially contaminated soil can be remediated in place rather than having to be removed and only specific stream segments will require remediation as opposed to the entire stream.

	If there is a significant change in the facts and circumstances surrounding these assumptions or if we are found not to be in substantial compliance with applicable environmental and public health laws and regulations, it could have a material impact on future environmental capital expenditures and other environmental expenses and our results of operations, financial position and cash flows.

	•	OUR SIGNIFICANT INTERNATIONAL OPERATIONS MAKE US SUSCEPTIBLE TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES AND TO THE COSTS OF INTERNATIONAL REGULATION.

	We currently operate manufacturing, sales and service facilities outside of North America, particularly in the United Kingdom, Germany, France and the Netherlands. In fiscal 2004, international sales accounted for approximately 20% of our total sales. Accordingly, we are subject to risks associated with operations in foreign countries, including:

	•	fluctuations in currency exchange rates;
	•	limitations on the conversion of foreign currencies into U.S. dollars;
	•	limitations on the remittance of dividends and other payments by foreign subsidiaries;
	•	additional costs of compliance with local regulations; and
	•	historically, in certain countries, higher rates of inflation than in the United States.

	In addition, our operations outside the United States are subject to the risk of new and different legal and regulatory requirements in local jurisdictions, potential difficulties in staffing and managing local operations and potentially adverse tax consequences. The costs related to our international operations could adversely affect our operations and financial results in the future.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     As part of our ongoing business, we are exposed to certain market risks, including fluctuations in interest rates, foreign currency exchange rates and commodity prices. We use derivative financial and other instruments, where appropriate, to manage these risks. We do not enter into transactions designed to mitigate our market risks for trading or speculative purposes.

Interest Rate Risk

     We have various debt instruments outstanding at September 30, 2004 and 2003 that are impacted by changes in interest rates. As a means of managing our interest rate risk on these debt instruments, we enter into interest rate swap agreements to effectively convert certain variable rate debt obligations to fixed rates.

      At September 30, 2004 and 2003, we had outstanding nine and five interest rate swaps, respectively, with major financial institutions that effectively convert a portion of our variable-rate debt to a fixed rate. The swaps have notional amounts between $10 million and $50 million ($175 million and $75 million in total, respectively at September 30, 2004 and 2003) with three to seven year terms commencing in October 2001. Under the terms of these swaps, the Company pays rates ranging from 2.76% to 3.76% and receives three-month LIBOR.

      The following table summarizes information about our derivative financial instruments and debt instruments that are sensitive to changes in interest rates as of September 30, 2004 and 2003. For debt instruments, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates. For interest rate swaps, the table presents expected cash flows based on notional amounts and weighted-average interest rates by contractual maturity dates. Weighted-average variable rates are based on implied forward rates in the yield curve at September 30, 2004 and 2003. A change in our variable interest rate of 1% would have a $2.2 million impact on interest expense for the $224 million of our variable rate debt that has not been hedged via an interest rate swap at September 30, 2004. The information is presented in U.S. dollars (in millions):

Other Market Risks

     Our market risk associated with foreign currency rates is not considered to be material. Through fiscal 2004, we had only minor amounts of transactions that were denominated in currencies other than the currency of the country of origin. We are subject to market risk from fluctuating market prices of certain raw materials, including urea and other chemicals and paper and plastic products. Our objectives surrounding the procurement of these materials are to ensure continuous supply and to minimize costs. We seek to achieve these objectives through negotiation of contracts with favorable terms directly with vendors. We do not enter into forward contracts or other market instruments as a means of achieving our objectives or minimizing our risk exposures on these materials.

     The financial statements and other information required by this Item are contained in the consolidated financial statements, notes thereto and schedules listed in the “Index to Consolidated Financial Statements and Financial Statement Schedule” on page 47 herein.

     None.

     With the participation of the principal executive officer and principal financial officer of The Scotts Company (the “Registrant”), the Registrant’s management has evaluated the effectiveness of the Registrant’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, the Registrant’s principal executive officer and principal financial officer have concluded that:

	•	information required to be disclosed by the Registrant in this Annual Report on Form 10-K and the other reports that the Registrant files or submits under the Exchange Act would be accumulated and communicated to the Registrant’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure;
	•	information required to be disclosed by the Registrant in this Annual Report on Form 10-K and the other reports that the Registrant files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and
	•	the Registrant’s disclosure controls and procedures are effective as of the end of the period covered by this Annual Report on Form 10-K to ensure that material information relating to the Registrant and its consolidated subsidiaries is made known to them, particularly during the period in which the Registrant’s periodic reports, including this Annual Report on Form 10-K, are being prepared.

      In addition, there were no changes in the Registrant’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Registrant’s fiscal quarter ended September 30, 2004, that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

     None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     In accordance with General Instruction G(3) of Form 10-K, the information regarding directors required by Item 401 of SEC Regulation S-K is incorporated herein by reference from the material which will be included under the caption “PROPOSAL NUMBER 1 — ELECTION OF DIRECTORS” in the Registrant’s definitive Proxy Statement for the 2005 Annual Meeting of Shareholders to be held on January 27, 2005 to be filed with the SEC pursuant to a Registration Statement on Form S-4 pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934 (the “Proxy Statement”). The information regarding executive officers of the Registrant required by Item 401 of SEC Regulation S-K is included in “SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.” The information required by Item 405 of SEC Regulation S-K is incorporated herein by reference from the material which will be included under the caption “BENEFICIAL OWNERSHIP OF SECURITIES OF SCOTTS — Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant’s Proxy Statement.

      Information concerning the Registrant’s Audit Committee and the determination by the Registrant’s Board of Directors that at least one member of the Audit Committee qualifies as an “audit committee financial expert” is incorporated herein by reference from the information which will be included under the caption “PROPOSAL NUMBER 1 — ELECTION OF DIRECTORS — Committees and Meetings of the Board — Audit Committee” in the Registrant’s Proxy Statement. Information concerning the nomination process for director candidates is incorporated herein by reference from the information which will be included under the captions “PROPOSAL NUMBER 1 — ELECTION OF DIRECTORS — Committees and Meetings of the Board — Governance and Nominating Committee” and “PROPOSAL NUMBER 1 — ELECTION OF DIRECTORS — Nomination of Directors.”

      The Board of Directors of the Registrant has adopted charters for each of the Audit Committee, the Governance and Nominating Committee, the Compensation and Organization Committee and the Innovation & Technology Committee.

      In accordance with the requirements of Section 303A.10 of the New York Stock Exchange’s Listed Company Manual, the Board of Directors of the Registrant has adopted a Code of Business Conduct and Ethics covering the Registrant’s Board members and associates, including, without limitation, the Registrant’s principal executive officer, principal financial officer and principal accounting officer. The Registrant intends to disclose the following on its Internet website located at http://www.investor.scotts.com within four business days following their occurrence: (A) the date and nature of any amendment to a provision of its Code of Business Conduct and Ethics that (i) applies to the Registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, (ii) relates to any element of the code of ethics definition enumerated in Item 406(b) of SEC Regulation S-K, and (iii) is not a technical, administrative or other non-substantive amendment; and (B) a description (including the nature of the waiver, the name of the person to whom the waiver was granted and the date of the waiver) of any waiver, including an implicit waiver, from a provision of the Code of Business Conduct and Ethics to the Registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions that relates to one or more of the items set forth in Item 406(b) of SEC Regulation S-K.

      The text of the Code of Business Conduct and Ethics, the Registrant’s Corporate Governance Guidelines, the Audit Committee charter, the Governance and Nominating Committee charter and the Compensation and Organization Committee charter are posted on the Registrant’s Internet website located at http://www.investor.scotts.com. Interested persons may also obtain copies of each of these documents without charge by writing to The Scotts Company, Attention: Corporate Secretary, 14111 Scottslawn Road, Marysville, Ohio 43041. In addition, a copy of the Code of Business Conduct and Ethics is incorporated by reference in Exhibit 14 to this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

     In accordance with General Instruction G(3) of Form 10-K, the information contained under the captions “EXECUTIVE COMPENSATION — Summary of Cash and Other Compensation, — Option/ SAR Grants in 2004 Fiscal Year, — Option Exercises in 2004 Fiscal Year and 2004 Fiscal Year-End Option/ SAR Values, — Executive Retirement Plan, — Pension Plans, and — Employment Agreements and Termination of Employment and Change-in-Control Arrangements” and “PROPOSAL NUMBER 1 — ELECTION OF DIRECTORS — Compensation of Directors” in the Registrant’s Proxy Statement is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     In accordance with General Instruction G(3) of Form 10-K, the information contained under the captions “BENEFICIAL OWNERSHIP OF SECURITIES OF SCOTTS” and “EXECUTIVE COMPENSATION — Equity Compensation Plan Information” in the Registrant’s Proxy Statement is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     In accordance with General Instruction G(3) of Form 10-K, the information contained under the captions “BENEFICIAL OWNERSHIP OF SECURITIES OF SCOTTS”, “PROPOSAL NUMBER 1 — ELECTION OF DIRECTORS” and “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” in the Registrant’s Proxy Statement is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

     In accordance with General Instruction G(3) of Form 10-K, the information contained under the captions “AUDIT COMMITTEE MATTERS — Fees of the Independent Registered Public Accounting Firm and — THE SCOTTS COMPANY THE AUDIT COMMITTEE POLICIES AND PROCEDURES REGARDING APPROVAL OF SERVICES PROVIDED BY THE INDEPENDENT AUDITOR” in the Registrant’s Proxy Statement is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

     (a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT

      1 and 2. Financial Statements and Financial Statement Schedule:

	The response to this portion of Item 15 is submitted as a separate section of this Annual Report on Form 10-K. Reference is made to the “Index to Consolidated Financial Statements and Financial Statement Schedule” on page 47 herein.

      3.     Exhibits:

	Exhibits filed with this Annual Report on Form 10-K are attached hereto or incorporated herein by reference. For a list of such exhibits, see “Index to Exhibits” beginning at page 100. The following table provides certain information concerning executive compensation plans and arrangements required to be filed as exhibits to this Annual Report on Form 10-K.

EXECUTIVE COMPENSATORY PLANS AND ARRANGEMENTS