UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JULY 2, 2005

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

FOR THE TRANSITION PERIOD FROM _________ TO _________

THE SCOTTS MIRACLE-GRO COMPANY

(Exact Name of Registrant as Specified in Its Charter)

OHIO (State or Other Jurisdiction of Incorporation or Organization)		31-1414921 (I.R.S. Employer Identification No.)

14111 SCOTTSLAWN ROAD, MARYSVILLE, OHIO 43041
(Address of Principal Executive Offices) (Zip Code)

(937) 644-0011
(Registrant’s Telephone Number, Including Area Code)

NO CHANGE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.)

     Indicate by check mark whether 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 R No £

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

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

33,681,333		OUTSTANDING AT August 4, 2005
Common Shares, voting, no par value

 

 

THE SCOTTS MIRACLE-GRO COMPANY

INDEX

		PAGE
		NO.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited)
Condensed, Consolidated Statements of Operations — Three and nine months ended July 2, 2005 and June 26, 2004			3
Condensed, Consolidated Statements of Cash Flows — Nine months ended July 2, 2005 and June 26, 2004			4
Condensed, Consolidated Balance Sheets — July 2, 2005, June 26, 2004 and September 30, 2004			5
Notes to Condensed, Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			41
Item 4. Controls and Procedures			41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			41
Item 6. Exhibits			42
Signatures			43
Index to Exhibits			44
EX-4.1
EX-4.2
EX-31.1
EX-31.2
EX-32

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE SCOTTS MIRACLE-GRO COMPANY

CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(IN MILLIONS EXCEPT PER SHARE AMOUNTS)

		THREE MONTHS ENDED								NINE MONTHS ENDED
		JULY 2,				JUNE 26,				JULY 2,				JUNE 26,
		2005				2004				2005				2004
Net sales		$	910.8			$	769.1			$	1,942.1			$	1,674.3
Cost of sales			555.4				463.0				1,205.9				1,031.3
Restructuring and other charges			—				0.2				0.1				0.9
Gross profit			355.4				305.9				736.1				642.1
Gross commission earned from marketing agreement			31.2				30.4				53.4				45.7
Amortization of deferred marketing fee			0.8				0.8				2.5				2.5
Contribution expense under marketing agreement			6.3				6.2				18.8				18.7
Deferred contribution charge			45.7				—				45.7				—
Net (expense) commission from marketing agreement			(21.6	)			23.4				(13.6	)			24.5
Operating expenses:
Advertising			49.8				41.7				105.5				89.8
Selling, general and administrative			117.3				93.8				329.6				278.2
Selling, general and administrative — lawn service business			16.1				13.3				46.2				38.6
Stock-based compensation			2.8				3.7				7.4				8.1
Restructuring and other charges, net			(0.1	)			2.4				1.1				3.1
Amortization of intangibles			2.6				2.3				8.1				7.1
Impairment of intangible assets			—				—				22.0				—
Other income, net			(7.0	)			(2.5	)			(6.3	)			(6.3	)
Income from operations			152.3				174.6				208.9				248.0
Costs related to refinancing			—				0.3				—				44.6
Interest expense			11.6				12.7				34.8				38.1
Income before income taxes			140.7				161.6				174.1				165.3
Income taxes			52.6				61.4				65.3				62.8
Net income from continuing operations			88.1				100.2				108.8				102.5
Net income from discontinued operations			0.4				0.1				0.2				0.2
Net income		$	88.5			$	100.3			$	109.0			$	102.7
BASIC EARNINGS PER COMMON SHARE:
Weighted-average common shares outstanding during the period			33.5				32.5				33.2				32.2
Basic earnings per common share:
Net income from continuing operations			2.64				3.09				3.28				3.19
Net income from discontinued operations			0.01				—				—				—
Basic earnings per common share		$	2.65			$	3.09			$	3.28			$	3.19
DILUTED EARNINGS PER COMMON SHARE:
Weighted-average common shares outstanding during the period			34.3				33.3				34.2				33.2
Diluted earnings per common share:
Net income from continuing operations			2.57				3.01				3.19				3.09
Net income from discontinued operations			0.01				—				—				—
Diluted earnings per common share		$	2.58			$	3.01			$	3.19			$	3.09

See notes to condensed, consolidated financial statements

THE SCOTTS MIRACLE-GRO COMPANY

CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN MILLIONS)

		NINE MONTHS ENDED
		JULY 2,				JUNE 26,
		2005				2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	109.0			$	102.7
Adjustments to reconcile net income to net cash provided by operating activities:
Impairment of intangible assets			22.0				—
Write-off of deferred costs on retired debt			—				44.6
Stock-based compensation expense			7.4				8.1
Depreciation			37.5				33.8
Amortization			10.6				9.6
Deferred taxes			7.2				1.1
Changes in assets and liabilities, net of acquired businesses:
Accounts receivable			(254.3	)			(258.3	)
Inventories			(47.3	)			(59.4	)
Prepaid and other current assets			(4.4	)			(19.0	)
Accounts payable			71.2				89.0
Accrued taxes and liabilities			94.8				103.9
Restructuring reserves			6.0				(0.6	)
Other assets			(4.2	)			(1.9	)
Other liabilities			10.7				5.7
Other, net			1.0				(0.9	)
Net cash provided by operating activities			67.2				58.4
CASH FLOWS FROM INVESTING ACTIVITIES
Redemption of available for sale securities			57.2				—
Investment in property, plant and equipment, net			(19.3	)			(16.4	)
Investment in acquired businesses, net of cash acquired			(76.7	)			(5.5	)
Net cash used in investing activities			(38.8	)			(21.9	)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under revolving and bank lines of credit			454.6				636.6
Repayments under revolving and bank lines of credit			(434.5	)			(630.4	)
Proceeds from issuance of term loans			—				500.0
Repayment of term loans			(3.0	)			(427.0	)
Issuance of 6 5/8% Senior Subordinated Notes			—				200.0
Redemption of 8 5/8% Senior Subordinated Notes			—				(418.0	)
Financing fees, net			(0.5	)			(11.7	)
Payments on seller notes			(5.8	)			(9.7	)
Cash received from the exercise of stock options			23.7				19.8
Net cash provided by (used in) financing activities			34.5				(140.4	)
Effect of exchange rate changes on cash			(1.7	)			(12.9	)
Net increase (decrease) in cash			61.2				(116.8	)
Cash and cash equivalents at beginning of period			115.6				155.9
Cash and cash equivalents at end of period		$	176.8			$	39.1
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid			30.7				42.7
Income taxes (paid) refunded			(13.2	)			12.2

See notes to condensed, consolidated financial statements

THE SCOTTS MIRACLE-GRO COMPANY

CONDENSED, CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(IN MILLIONS)

		JULY 2,				JUNE 26,				SEPTEMBER 30,
		2005				2004				2004
ASSETS
Current assets:
Cash and cash equivalents		$	176.8			$	39.1			$	115.6
Investments			—				—				57.2
Accounts receivable, less allowances of $19.3, $35.4, and $29.0, respectively			537.7				548.8				292.4
Inventories, net			355.8				335.5				290.1
Current deferred tax asset			20.2				60.6				24.9
Prepaid and other assets			55.8				52.2				50.1
Total current assets			1,146.3				1,036.2				830.3
Property, plant and equipment, net of accumulated depreciation of $344.7, $296.5 and $301.4, respectively			326.9				323.0				328.0
Goodwill			442.2				421.3				417.9
Intangible assets, net			414.6				430.1				431.0
Other assets			44.5				41.1				40.6
Total assets		$	2,374.5			$	2,251.7			$	2,047.8
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of debt		$	18.1			$	25.3			$	22.1
Accounts payable			211.9				238.0				130.3
Accrued liabilities			319.1				273.4				261.9
Accrued taxes			68.1				80.7				19.3
Total current liabilities			617.2				617.4				433.6
Long-term debt			603.7				612.0				608.5
Other liabilities			136.8				162.2				131.1
Total liabilities			1,357.7				1,391.6				1,173.2
Commitments and contingencies (notes 3, 8 and 10)
Shareholders’ equity:
Common Shares, no par value per share, $.01 stated value per share, 33.6, 32.6, 32.8 shares issued, respectively			0.3				0.3				0.3
Deferred compensation — stock awards			(15.5	)			(16.1	)			(10.4	)
Capital in excess of stated value			480.0				434.5				443.0
Retained earnings			608.5				501.3				499.5
Accumulated other comprehensive loss			(56.5	)			(59.9	)			(57.8	)
Total shareholders’ equity			1,016.8				860.1				874.6
Total liabilities and shareholders’ equity		$	2,374.5			$	2,251.7			$	2,047.8

See notes to condensed, consolidated financial statements

NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
		NATURE OF OPERATIONS
		The Scotts Miracle-Gro Company (“Scotts Miracle-Gro”) and its subsidiaries (collectively, the “Company”) are engaged in the manufacture, marketing and sale of lawn and garden care products. The Company’s major customers include home improvement centers, mass merchandisers, large hardware chains, independent hardware stores, nurseries, garden centers, food and drug stores, commercial nurseries and greenhouses, and specialty crop growers. The Company’s products are sold primarily in North America and the European Union. We also operate and franchise the Scotts LawnService® business which provides lawn and tree and shrub fertilization, insect control and other related services in the United States. Effective October 2, 2004, the Company acquired Smith & Hawken®, a leading brand in the outdoor living and gardening lifestyle category. Smith & Hawken® products are sold in the United States through its 59 retail stores as well as through catalog and internet sales.
		Due to the nature of our lawn and garden business, the majority of our shipments to retailers have occurred in the second and third fiscal quarters. On a combined basis, net sales for the second and third quarters generally represent 70% to 75% of our annual net sales. The addition of our Smith & Hawken® acquisition has not significantly altered the percentage of net sales by quarter in fiscal 2005.
		RESTRUCTURING MERGER
		On March 18, 2005, The Scotts Company consummated the restructuring of its corporate structure into a holding company structure by merging The Scotts Company into a newly-created, wholly-owned, second-tier Ohio limited liability company subsidiary, The Scotts Company LLC, pursuant to the Agreement and Plan of Merger, dated as of December 13, 2004, by and among The Scotts Company, The Scotts Company LLC and Scotts Miracle-Gro (the “Restructuring Merger”). As a result of the Restructuring Merger, each of The Scotts Company’s common shares, without par value, issued and outstanding immediately prior to the consummation of the Restructuring Merger was automatically converted into one fully paid and nonassessable common share, without par value, of Scotts Miracle-Gro. Scotts Miracle-Gro is the public company successor to The Scotts Company. Following the consummation of the Restructuring Merger, The Scotts Company LLC is the successor to The Scotts Company and is a direct, wholly-owned subsidiary of Scotts Miracle-Gro, the new parent holding company.
		ORGANIZATION AND BASIS OF PRESENTATION
		The Company’s condensed, consolidated financial statements are unaudited; however, in the opinion of management, are presented in accordance with accounting principles generally accepted in the United States of America. The condensed, consolidated financial statements include the accounts of Scotts Miracle-Gro and all wholly-owned and majority-owned subsidiaries. All material intercompany transactions have been eliminated in consolidation. The Company’s criteria for consolidating entities is based on majority ownership (as evidenced by a majority voting interest in the entity) and an objective evaluation and determination of effective management control. Interim results reflect all normal recurring adjustments and are not necessarily indicative of results for a full year. The interim financial statements and notes are presented as specified by Regulation S-X of the Securities and Exchange Commission, and should be read in conjunction with the financial statements and accompanying notes in the Annual Report on Form 10-K for the fiscal year ended September 30, 2004 of The Scotts Company, the public company predecessor of Scotts Miracle-Gro.
		REVENUE RECOGNITION
		Revenue is recognized when title and risk of loss transfer, generally when products are received by the customer. Provisions for estimated returns and allowances are recorded at the time revenue is recognized based on historical rates and are periodically adjusted for known changes. Scotts LawnService® revenues are recognized at the time service is provided to the customer. Under the terms of the Amended and Restated Exclusive Agency and Marketing Agreement (the “Marketing Agreement”) with Monsanto Company (“Monsanto”), the Company in its role as exclusive agent performs certain functions, such as sales support, merchandising, distribution and logistics on behalf of Monsanto, and

incurs certain costs in support of the consumer Roundup® business. The actual costs incurred by the Company on behalf of Roundup® are recovered from Monsanto through the terms of the Marketing Agreement and are treated solely as a recovery of incurred costs. Revenue is not recognized in the Company’s consolidated financial statements for the recovery of these costs since the services rendered are solely in support of the agency arrangement and not a part of any principal line of business.

PROMOTIONAL ALLOWANCES

The Company promotes its branded products through cooperative advertising programs with retailers. Retailers also are offered in-store promotional allowances and rebates based on sales volumes. Certain products are promoted with direct consumer rebate programs and special purchasing incentives. Promotion costs (including allowances and rebates) incurred during the year are expensed to interim periods in relation to revenues and are recorded as a reduction of net sales. Accruals for expected payouts under these programs are included as accrued marketing and promotion in the “Accrued liabilities” line in the Condensed, Consolidated Balance Sheets.

ADVERTISING

The Company advertises its branded products through national and regional media. Advertising costs incurred during the year are expensed to interim periods in relation to revenues. All advertising costs, except for external production costs, are expensed within the fiscal year in which such costs are incurred. External production costs for advertising programs are deferred until the period in which the advertising is first aired. Scotts LawnService® promotes its service offerings primarily through direct mail campaigns. External costs associated with these campaigns that qualify as direct response advertising costs are deferred and recognized as advertising expense in proportion to revenues over a future period not beyond the end of the subsequent fiscal year. The costs deferred at July 2, 2005, June 26, 2004 and September 30, 2004 were $3.9 million, $2.2 million and $1.6 million, respectively.

STOCK-BASED COMPENSATION AWARDS

Beginning in fiscal 2003, the Company began expensing prospective grants of employee stock-based compensation awards in accordance with Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of SFAS No. 123”. Beginning in fiscal 2003, the fair value of new awards is expensed ratably over the vesting period, which has historically been three years, except for grants to members of the Board of Directors, which have historically had a shorter vesting period.

During the first nine months of fiscal 2005, the Company has granted 50,500 shares of restricted stock and non-qualified stock options covering 474,800 common shares to officers and other key employees, and non-qualified stock options covering 73,500 common shares to members of the Board of Directors. The exercise price for the option awards and the stated price for the restricted stock awards were determined by the closing price of the Company’s common shares on the date of grant.

The Company changed its fair value option pricing model from the Black-Scholes model to a binomial model for all options granted on or after October 1, 2004. The fair value of options granted prior to October 1, 2004, was determined using the Black-Scholes model. The Company believes that the binomial model considers characteristics of fair value option pricing that are not available under the Black-Scholes model. Similar to the Black-Scholes model, the binomial model takes into account variables such as volatility and risk-free interest rate. However, in addition, the binomial model considers the contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the probability of termination or retirement of the option holder in computing the value of the option.

The value of all stock-based compensation grants during fiscal 2004 was $11.0 million and $11.5 million for the first nine months of fiscal 2005. The assumptions used in the fair value determinations were similar for both the fiscal 2005 and fiscal 2004 grants. In addition, the fair value of the restricted stock granted thus far in fiscal 2005 was $3.3 million.

Had compensation expense been recognized for stock-based compensation awards granted in periods prior to fiscal 2003 in accordance with the recognition provisions of SFAS No. 123, the Company would have recorded net income and net

income per common share for the three and nine months ended June 26, 2004, as follows (dollars in millions, except per share data):

		THREE MONTHS				NINE MONTHS
		ENDED				ENDED
		JUNE 26, 2004				JUNE 26, 2004
Net income		$	100.3			$	102.7
Stock-based compensation expense included in reported net income, net of tax			2.3				5.0
Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax			(2.8	)			(6.5	)
Net income as adjusted		$	99.8			$	101.2
Net income per common share, as reported:
Basic		$	3.09			$	3.19
Diluted			3.01				3.09
Net income per common share, as adjusted:
Basic			3.07				3.14
Diluted			3.00				3.05

The as adjusted amounts shown above are not necessarily representative of the impact on net income in future periods.

In December 2004, the Financial Accounting Standards Board (FASB) replaced SFAS No. 123, “Accounting for Stock-Based Compensation” with SFAS No. 123(R), “Share-Based Payment.” As the Company previously adopted the provisions of SFAS No. 123 for awards granted beginning in fiscal 2003, its accounting for share-based payments (including grants of employee stock options) is substantially in accordance with revised SFAS No. 123(R). Therefore, the adoption of revised SFAS No. 123(R), now required for fiscal 2006, is not expected to have a significant effect on the Company’s results of operations.

LONG-LIVED ASSETS

Management assesses the recoverability of property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable from its future undiscounted cash flows. If it is determined that an impairment has occurred, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds its estimated fair value.

Management also assesses the recoverability of goodwill, tradenames and other intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable from its estimated undiscounted future cash flows. In addition, goodwill and unamortizable intangible assets are reviewed for impairment at least annually during the first fiscal quarter. If it is determined that an impairment of intangible assets has occurred, an impairment charge is recognized for the amount by which the carrying value of the asset exceeds its estimated fair value. The Company performed its annual impairment analysis during the first quarter of fiscal 2005 and determined that intangibles associated with our consumer business in the United Kingdom were impaired. The reduction in the value of the business has resulted primarily from the decline in the profitability of its growing media business and unfavorable category mix trends. Although management is developing strategies to significantly improve the profitability of the U.K. business, we believe an impairment charge against the book value is appropriate. Accordingly, an impairment charge of $22 million was recorded for the first quarter of fiscal 2005. No impairment charge was recorded for the first quarter of fiscal 2004.

INCOME TAXES

The effective rate used to determine income tax expense for the first nine months of fiscal 2005 was reduced to 37.5% from a rate of 38% used for the first six months of fiscal 2005. This change in the year-to-date rate had the effect of reducing the effective rate for the three-months ended July 2, 2005 to 37.4% versus a rate of 38% for the comparable three-month period in fiscal 2004.

Certain resolutions of previous tax contingencies resulted in a one-time tax benefit in the third quarter of fiscal 2005, bringing the projected tax rate for the fiscal year-ended September 30, 2005, down to 37.5% compared to 38% in the same period prior year. These resolutions mainly related to the settlement of an audit in the U.K. and the closing of certain statutes of limitations in the U.S. The associated tax benefits were partially offset by the impact of a tax law change passed on June 30, 2005, which resulted in a valuation allowance against certain Ohio tax credit carryforwards that had previously been recognized.

The effective tax rate used for interim reporting purposes is based on management’s best estimate of factors impacting the effective tax rate for the fiscal year. Factors affecting the estimated rate include assumptions as to income by jurisdiction (domestic and foreign), the availability and utilization of tax credits, the existence of elements of income and

expense that may not be taxable or deductible, as well as other items. There can be no assurance that the effective tax rate estimated for interim financial reporting purposes will approximate that determined at fiscal year end. The estimated effective tax rate is subject to revision in later interim periods and at fiscal year end as facts and circumstances change.

EARNINGS PER COMMON SHARE

Basic earnings per common share is based on the weighted-average number of common shares outstanding each period. Diluted earnings per common share is based on the weighted-average number of common shares and dilutive potential common shares (stock options, stock appreciation rights, and restricted stock) outstanding each period. These common share equivalents equated to 0.9 million and 1.0 million common shares for the three- and nine-month periods ending July 2, 2005, and June 26, 2004, respectively. Options to purchase approximately 10,000 common shares for the three and nine month periods ended July 2, 2005, were not included in the computation of diluted earnings per share. These options were excluded from the calculation because the exercise price was greater than the average market price of the common shares in the respective periods, and therefore, were anti-dilutive.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future, actual results ultimately may differ from the estimates.

RECLASSIFICATIONS

Certain reclassifications have been made in prior periods’ financial statements to conform to fiscal 2005 classifications. The prior periods’ Condensed, Consolidated Statement of Operations reflect the reclassification of $1.6 million and $4.0 million for the three- and nine-month periods, respectively, ended June 26, 2004 of “selling, general and administrative costs – lawn service business” to “cost of sales” to conform to fiscal 2005 classifications.

2.

DETAIL OF INVENTORIES, NET

Inventories, net of provisions for slow moving and obsolete inventory of $20.9 million, $23.6 million, and $21.3 million, respectively, consisted of (in millions):

		JULY 2, 2005				JUNE 26, 2004				SEPTEMBER 30, 2004
INVENTORIES, NET
Finished goods		$	260.1			$	235.1			$	186.6
Work-in-Process			25.1				26.4				30.7
Raw materials			70.6				74.0				72.8
Total		$	355.8			$	335.5			$	290.1

The Company will be required to adopt the provisions of SFAS No. 151, “Inventory Costs,” in the first quarter of fiscal 2006. SFAS No. 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The Company has not completed its evaluation of the provisions of SFAS No. 151, and therefore, has not yet determined the effects (if any) of the adoption of this Statement on future results of operations.

3.

MARKETING AGREEMENT

Effective September 30, 1998, the Company entered into the Marketing Agreement with Monsanto for exclusive domestic and international marketing and agency rights to Monsanto’s consumer Roundup® herbicide products. Under the terms of the Marketing Agreement, the Company is entitled to receive an annual commission from Monsanto in consideration for the performance of its duties as agent. The annual commission is calculated as a percentage of the

actual earnings before interest and income taxes (EBIT), as defined in the Marketing Agreement, of the consumer Roundup® business. Each year’s percentage varies in accordance with the terms of the Marketing Agreement based on the achievement of two earnings thresholds and on commission rates that vary by threshold and program year.

The Marketing Agreement also requires the Company to make fixed annual payments to Monsanto as a contribution against the overall expenses of the consumer Roundup® business. The annual fixed payment is defined as $20 million. However, portions of the annual payments for the first three years of the Marketing Agreement have been deferred. No payment was required for the first year (fiscal 1999), a payment of $5 million was required for the second year and a payment of $15 million was required for the third year so that a total of $40 million of the contribution payments was deferred. Beginning in fiscal 2003, the fifth year of the Marketing Agreement, the annual payments to Monsanto increased to at least $25 million, which include per annum interest charges at 8%. The annual payments may be increased above $25 million if certain significant earnings targets are exceeded. If all of the deferred contribution amounts are paid prior to 2018, the annual contribution payments revert to $20 million. Regardless of whether the deferred contribution amounts are paid, all contribution payments cease entirely in 2018.

Prior to the end of the third quarter of 2005, the Company recognized a periodic charge associated with the annual contribution payments equal to the required payment for that period. The Company had not recognized a charge for the portions of the contribution payments that were deferred until the time those deferred amounts were due under the terms of the Marketing Agreement. Based on then available facts and circumstances, the Company considered this method of accounting for the contribution payments to be appropriate after consideration of the likely term of the Marketing Agreement, the Company’s ability to terminate the Marketing Agreement without paying the deferred amounts, and the fact that significant portion of the deferred amount is never paid, even if the Marketing Agreement is not terminated prior to 2018, unless significant earnings targets are exceeded.

The express terms of the Marketing Agreement permit the Company to terminate the Marketing Agreement only upon material breach, material fraud or material willful misconduct by Monsanto, as such terms are defined in the Marketing Agreement, or upon the sale of the consumer Roundup® business by Monsanto. In such instances, the Marketing Agreement permits the Company to avoid payment of any deferred contribution and related per annum charge. The Company’s basis for previously not recording a financial liability to Monsanto for the deferred portions of the annual contribution and per annum charge was based on our assessment and consultations with our legal counsel and the Company’s former registered public accounting firm. In addition, the Company had obtained a legal opinion from The Bayard Firm, P.A., which concluded, subject to certain qualifications, that if the matter were litigated, a Delaware court would likely conclude that the Company is entitled to terminate the Marketing Agreement at will, with appropriate prior notice, without incurring significant penalty, and avoid paying the unpaid deferred amounts. Prior to the end of the third quarter of 2005, we concluded that, should the Company elect to terminate the Marketing Agreement at any balance sheet date, it will not incur significant economic consequences as a result of such action.

The Bayard Firm was special Delaware counsel retained during fiscal 2000 solely for the limited purpose of providing a legal opinion in support of the contingent liability treatment of the Marketing Agreement previously adopted by the Company and has neither generally represented or advised the Company nor participated in the preparation or review of the Company’s financial statements or any SEC filings. The terms of such opinion specifically limit the parties who are entitled to rely on it.

During the quarter ended July 2, 2005, the Company updated its assessment of the amounts deferred and previously considered a contingent obligation under the Marketing Agreement. Based on the collective weight of several factors culminating in the third quarter of 2005, including the recent strong performance of the consumer Roundup® business, management now believes it is probable the Company will pay the previously deferred contribution amounts. Accordingly, the Company recorded a charge to recognize the liability for the deferred contribution payment of $45.7 million in the quarter ended July 2, 2005. This liability will continue to bear interest at 8% until paid. Management is assessing the timing of paying this liability; however, given the relatively high rate of interest associated with this obligation, it is likely it will be paid within the next year. As such, the full balance has been recorded as a current liability as of July 2, 2005.

The Marketing Agreement has no definite term except as it relates to the European Union countries. With respect to the European Union countries, the term of the Marketing Agreement has been extended through September 30, 2008 and

may be renewed at the option of both parties for two additional successive terms ending on September 30, 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. If Monsanto does not agree to the renewal term as with respect to the European Union countries, the commission structure will be recalculated in a manner likely to be favorable to the Company. For countries outside of the European Union, the Marketing Agreement continues indefinitely unless terminated by either party. The Marketing Agreement provides Monsanto with the right to terminate the Marketing Agreement for an event of default (as defined in the Marketing Agreement) by the Company or a change in control of Monsanto or the sale of the consumer Roundup® business. The Marketing Agreement provides the Company with the right to terminate the Marketing Agreement in certain circumstances including an event of default by Monsanto or the sale of the consumer Roundup® business. Unless Monsanto terminates the Marketing Agreement for an event of default by the Company, Monsanto is required to pay a termination fee to the Company that varies by program year. 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 Marketing 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 $100 million to a minimum of $16 million for terminations between September 30, 2008 and September 30, 2018.

In consideration for the rights granted to the Company under the Marketing Agreement for North America, the Company was required to pay a marketing fee of $33 million to Monsanto. The Company has deferred this amount on the basis that the payment will provide a future benefit through commissions that will be earned under the Marketing Agreement and is amortizing the balance over the term of the agreement.

4.

RESTRUCTURING AND OTHER CHARGES

FISCAL 2005 CHARGES

During the three months ended July 2, 2005, the Company recorded a net credit to restructuring and other charges in selling, general and administrative costs in the amount of $0.1 million. As discussed more fully in Note 8, a $7.9 million reserve against outstanding receivables due from Central Garden & Pet Company (Central Garden) was reversed. Offsetting this reversal were costs relating primarily to the Company’s announced strategic improvement plan designed to significantly improve long-term earnings though a sustainable effort to reduce general and administrative costs. Primarily in relation to the plan, the Company recognized $7.8 million of severance and related costs.

For the nine-month period ended July 2, 2005, the Company has recorded restructuring and other charges in selling, general and administrative costs in the net amount of $1.2 million. In addition to the net third quarter credit described above, the net year-to-date charges relate primarily to Smith & Hawken® integration related severance.

FISCAL 2004 CHARGES

During the three- and nine-month periods ended June 26, 2004, the Company recorded $2.6 million and $4.0 million of restructuring and other charges, respectively. Charges related to our North American distribution restructuring were classified as cost of sales in the amount of $0.9 million for the nine months ended June 26, 2004. Charges related to our International Profit Improvement Plan, the restructuring of our International management team and the restructuring of our Global Information Services group amounted to $3.1 million and are classified as selling, general and administrative costs for the nine months ended June 26, 2004.

The following is a rollforward from September 30, 2004 of the amounts accrued for restructuring and other charges, that will be settled for cash. The accrued charges are included in “Accrued liabilities” on the Condensed, Consolidated Balance Sheets.

										SEPTEMBER				CASH								JULY 2,
DESCRIPTION		TYPE				CLASSIFICATION				30, 2004				PAYMENT				ACCRUAL				2005
		($MILLIONS)
Severance		Cash				SG&A				$	4.7			$	(3.4	)		$	6.7			$	8.0
Facility		Cash				COGS					—				—				0.1				0.1
Other related costs		Cash				SG&A					0.6				(0.3	)			1.5				1.8
Total cash										$	5.3			$	(3.7	)		$	8.3			$	9.9
Primarily reversal of reserve against
Central Garden and Pet receivable		Non-cash				SG&A													(7.1	)
Net charge to expense																		$	1.2

5.

LONG-TERM DEBT

Long-term debt consists of the following (in millions):

		JULY 2, 2005				JUNE 26, 2004				SEPTEMBER 30, 2004
Term loans		$	396.0			$	399.5			$	399.0
6 5/8% Notes			200.0				200.0				200.0
Notes due to sellers			8.7				14.6				13.2
Foreign bank borrowings and term loans			10.1				14.7				10.8
Other			7.0				8.5				7.6
			621.8				637.3				630.6
Less current portions			18.1				25.3				22.1
		$	603.7			$	612.0			$	608.5

Future principal payments on our short and long-term debt are as follows (in millions):

Less than one year		$	18.1
One to three years			46.3
Four to five years			411.0
After five years			146.4
		$	621.8

In October 2003, the Company refinanced substantially all of its then outstanding debt. As a result of this early extinguishment of debt, the Company recognized refinancing related costs of $44.3 million in the first quarter of fiscal 2004. On June 24, 2004, the Company repaid $100 million of the $499 million term loans then outstanding. As a result of the early repayment, the amortization of approximately $0.3 million of deferred financing costs was accelerated.

REFINANCING SUBSEQUENT TO JULY 2, 2005

On July 21, 2005, the Company entered into a Revolving Credit Agreement (the “New Credit Agreement”) for the purpose of (a) repaying in full the loans under the Second Amended and Restated Credit Agreement, dated as of October 22, 2003 (the “Prior Credit Agreement”), and (b) provide funds for working capital and other general corporate purposes of the Company and its subsidiaries.

The New Credit Agreement consists of an aggregate $1 billion multi-currency revolving credit commitment, expiring July 21, 2010. Borrowings may be made in United States Dollars, euros and optional currencies including, but not limited to, British Pounds Sterling, Australian Dollars and Canadian Dollars. The New Credit Agreement provides that up to $65 million of the $1 billion aggregate commitments may be used for letters of credit. In addition, the Company may, at any time prior to July 21, 2010, request additional revolving credit commitments from the Lenders up to an aggregate amount, when combined with the initial commitments, not to exceed $1.15 billion. There is no guarantee such additional loans will be made at the time of the request as prevailing market conditions may be significantly different than the present time.

The New Credit Agreement has several borrowing options, including interest rates that are based on (i) a LIBOR Rate plus a margin based on a Leverage Ratio (as defined) or (ii) the greater of the prime rate or the Federal Funds Effective Rate (as defined) plus ¹/2 of 1% plus a margin based on a Leverage Ratio. Facility fees are also based on the Leverage Ratio of the Company and its subsidiaries on a consolidated basis and, as of July 21, 2005, will accrue at 0.25% of the committed amounts per annum.

Swing line loans may also be available under the New Credit Agreement provided that (i) the aggregate principal amount of swing line loans outstanding at any time may not exceed $100 million and (ii) the sum of outstanding letters of credit, swing line loans and other loans made under the New Credit Agreement may not exceed $1 billion (or $1.15 billion if additional revolving credit commitments have been obtained).

The terms of the New Credit Agreement provide for customary representations and warranties and affirmative covenants. The New Credit Agreement also contains customary negative covenants providing limitations, subject to negotiated carve-outs, on liens, contingent obligations, fundamental changes, acquisitions, investments, loans and advances, indebtedness, restrictions on subsidiary distributions, transactions with affiliates and officers, sales of assets, sale and leaseback transactions, changing the Company’s fiscal year end, modification of specified debt instruments, negative pledge clauses, entering into new lines of business, restricted payments and redemption of specified indebtedness. The New Credit Agreement also requires the maintenance of a Leverage Ratio and Minimum Interest Coverage (both as defined).

The terms of the New Credit Agreement include customary events of default such as payment defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency, the occurrence of a defined change in control or the failure to observe the negative covenants and other covenants related to the operation and conduct of the business of the Company and its subsidiaries. Upon an event of default, the Lenders may, among other things, terminate their commitments under the New Credit Agreement and declare any of the then outstanding loans due and payable immediately.

Borrowings under the New Credit Agreement are guaranteed by the Company and substantially all of its domestic subsidiaries. Borrowings under the New Credit Agreement are also collateralized by a pledge by The Scotts Miracle-Gro Company and its domestic subsidiaries of the capital stock of substantially all of such domestic subsidiaries and a majority of the capital stock of certain foreign subsidiaries that are first-tier subsidiaries of such domestic subsidiaries. The security interest in the Company’s and its domestic subsidiaries’ personal, real and intellectual property assets, which had existed under the Prior Credit Agreement, was not required under the New Credit Agreement and has been terminated (except as to certain subsidiary capital stock as described above). The Company and its subsidiaries also pledged a majority of the capital stock in foreign subsidiaries that borrow under the New Credit Agreement and a majority of the capital stock of substantially all of the first-tier subsidiaries of such foreign subsidiary borrowers.

Revolving credit borrowings under the New Credit Agreement in the aggregate amount of $195.7 million were combined with cash on hand in the amount of $200.3 million to repay in full the outstanding Tranche A Term Loans ($248 million) and Tranche B Term Loans ($148 million) under the Prior Credit Agreement (which was then terminated). Certain fees in connection with entering into the New Credit Agreement were also paid from cash on hand. There were no revolving loans outstanding under the Prior Credit Agreement. In addition, letters of credit in the aggregate amount of $15.6 million were assigned to the New Credit Agreement. Total fees of approximately $3.2 million will be capitalized and amortized on the straight-line method over the five year term of the New Credit Agreement.

A loss on the refinancing in the amount of $1.2 million, representing the write-off of deferred financing costs incurred related to the Term Loans that were repaid, will be recognized in the Company’s fourth fiscal quarter. In addition, interest rate swap agreements in the notional amount of $125 million, that effectively converted a portion of the variable rate Term Loans to a fixed rate, were unwound with a resultant gain of $2.9 million that will be amortized against future interest expense under the New Credit Agreement.

6.

COMPREHENSIVE INCOME

The components of other comprehensive income and total comprehensive income for the three- and nine-month periods ended July 2, 2005 and June 26, 2004, are as follows (in millions):

		THREE MONTHS ENDED								NINE MONTHS ENDED
		JULY 2, 2005				JUNE 26, 2004				JULY 2, 2005				JUNE 26, 2004
Net income		$	88.5			$	100.3			$	109.0			$	102.7
Other comprehensive income (expense):
Change in valuation of derivative instruments			(0.9	)			3.4				1.3				2.2
Foreign currency translation adjustments			(1.2	)			0.2				—				(1.3	)
Comprehensive income (loss)		$	86.4			$	103.9			$	110.3			$	103.6

7.

RETIREMENT AND RETIREE MEDICAL PLANS COST INFORMATION

The following summarizes the net periodic benefit cost for the various plans sponsored by the Company (in millions):

		THREE MONTHS ENDED								NINE MONTHS ENDED
		JULY 2, 2005				JUNE 26, 2004				JULY 2, 2005				JUNE 26, 2004
Curtailed defined benefit plan		$	0.6			$	0.8			$	1.9			$	2.4
International benefit plans			1.3				1.8				3.8				5.5
Retiree medical plan			0.8				0.6				2.3				1.8

8.

CONTINGENCIES

Management continually evaluates the Company’s contingencies, including various lawsuits and claims which arise in the normal course of business, environmental matters, product and general liabilities, worker’s compensation, property losses and other fiduciary liabilities for which the Company is self-insured or retains a high exposure limit. Insurance reserves are established within an actuarially determined range. In the opinion of management, its assessment of contingencies is reasonable and related reserves, in the aggregate, are adequate; however, there can be no assurance that future quarterly or annual operating results will not be materially affected by final resolution of these matters. The following provides an update to certain matters discussed in Note 16 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2004. Reference should be made to the Form 10-K for a complete description of the following matters.

ENVIRONMENTAL MATTERS

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 seeking corrective action under the federal Resource Conservation and Recovery Act. The action related to discharges from on-site waste water treatment and several discontinued on-site disposal areas. The waste water discharges were re-directed to the City of Marysville system in 1998. The on-site disposal areas date back to the early operations of the Marysville facility and are areas that we had already been assessing and, in some cases, restoring, on a voluntary basis. Pursuant to a Consent Order entered by the Union County Common Pleas Court in 2002, the Company is actively engaged in restoring the site such that we eliminate exposure to waste materials historically disposed of at the Marysville site.

At July 2, 2005, the Company has $4.3 million accrued for environmental site remediation and regulatory matters. Most of these accrued costs are expected to be paid in fiscal 2005 and 2006; however, payments could be made for a period thereafter. During the first nine months of fiscal 2005, we have expensed approximately $2.6 million related to environmental matters, compared with approximately $3.3 million in environmental expenditures for all of fiscal 2004.

We believe that the amounts accrued as of the end of the current fiscal quarter are adequate to cover our known environmental exposures based on current facts and estimates of likely outcomes. However, the adequacy of these accruals is based on several significant assumptions:

	–		that we have identified all of the significant sites that must be restored;
	–		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, that historical wastes can be left in place rather than having to be removed and only specific stream segments will require remediation/restoration 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.

LEGAL PROCEEDINGS

AgrEvo Environmental Health, Inc. v. The Scotts Company

Trial was held in this matter from May 23, 2005 to June 13, 2005. The jury rejected all of AgrEvo’s antitrust claims and all but one of AgrEvo’s contract claims, a minor claim for non-payment of invoices of approximately $194,000. Scotts’ counterclaim, seeking approximately $690,000 in damages from AgrEvo, was tried to the judge without a jury, and a decision on that claim is pending. Once the counterclaim is decided, the court will issue a final judgment.

Although The Scotts Company has prevailed in the litigation with AgrEvo, the verdicts in The Scotts Company’s favor are subject to appeal and possible further proceedings. If, upon appeal or otherwise, the above actions ultimately 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 AgrEvo 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 AgrEvo.

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

In regards to this matter and related litigation against Central Garden & Pet Company (“Central Garden”), on April 12, 2005, the Sixth Circuit modified in part and affirmed the trial court’s judgment providing for a net award of approximately $15 million to the Company. On July 15, 2005, the Company received approximately $15 million in satisfaction of the judgment against Central Garden. The Company has recognized the satisfaction of this judgment in its financial results for the period ended July 2, 2005, as follows:

Reversal of reserve against outstanding receivables due from Central Garden. The reserve was initially established through a charge to restructuring and other charges within selling, general and administrative expenses; therefore, the reversal of the reserve has been classified in a like manner. (See Note 4)		$	7.9
Portion of judgment classified with other income, net.			4.1
Total amount included in income from operations			12.0
Portion of judgment applied to unreserved accounts receivable due from Central Garden.			3.0
Total judgment		$	15.0

9.

ACQUISITIONS

Effective October 2, 2004, the Company acquired all outstanding shares of Smith & Hawken®, a leading brand in the outdoor living and gardening lifestyle category, for a total cost of $74.9 million. Of the total purchase price, $73.6 million was paid in cash (including $13.1 million paid to retire debt at acquisition), while other purchase obligations of $1.3 million were assumed. Preliminary purchase accounting allocations have been recorded, including the allocation of

		the purchase price to assets acquired and liabilities assumed, based on their estimated fair values at the date of acquisition. The Company expects to finalize purchase accounting allocations during the fourth quarter.
		On a pro forma basis, net sales for the three and nine months ended June 26, 2004, would have been $821.8 million and $1,790.6 million respectively (an increase of $52.7 million and $116.3 million, respectively) had the acquisition of Smith & Hawken® occurred as of October 1, 2003. The pro forma reported net income would have been increased by approximately $4.2 million and $0.5 million, or 12 cents and one cent per common share, for the three- and nine-month periods ended June 26, 2004. respectively.
		For the first nine months of fiscal 2005, the Company’s Scotts Lawn Service® segment acquired two individual lawn service entities for a total cost of approximately $3.0 million.
10.		OPERATING LEASE FACILITY
		During fiscal 2005, the Company has taken delivery on approximately 200 vehicles for Scotts LawnService® operations. These vehicles are being leased in an operating lease transaction under the terms of a master lease facility. The master lease agreement provides that the Company pays certain taxes, insurance, and maintenance on the vehicles. The vehicles are leased for four years from delivery, with a three-year renewal option and an option to purchase. The Company has a maximum contingent obligation that will approximate $6 million in the aggregate for all vehicles under this master lease facility based on the provisions of a residual value guarantee.
11.		SEGMENT INFORMATION
		For fiscal 2005, the Company is divided into the following segments — North America, Scotts LawnService®, International, and Other/Corporate. The North America segment primarily consists of the Lawns, Gardens, Ortho®, Canada and North American Professional business groups, as well as the North America portion of the Roundup® commission. The North America segment manufactures, markets and sells dry, granular slow-release lawn fertilizers, combination lawn fertilizer and control products, grass seed, spreaders, water-soluble, liquid and continuous-release garden and indoor plant foods, plant care products, potting, garden and lawn soils, mulches and other growing media products, pesticide products and a full line of horticulture products. Products are marketed to mass merchandisers, home improvement centers, large hardware chains, warehouse clubs, distributors, nurseries, garden centers and specialty crop growers in the United States, Canada, Latin America, South America, Australia, and Asia-Pacific.
		The Scotts LawnService® segment provides lawn fertilization, disease and insect control and other related services such as core aeration, tree and shrub fertilization and exterior barrier pest control service primarily to residential consumers through company-owned branches and franchises. The International segment provides products similar to those described above for the North America segment to consumers primarily in Europe. The Other/Corporate segment consists of the recently acquired Smith & Hawken® business and corporate general and administrative expenses.
		The following table presents segment financial information in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”. Pursuant to that Statement, the presentation of the segment financial information is consistent with the basis used by management (i.e., certain costs not allocated to business segments for internal management reporting purposes are not allocated for purposes of this presentation). As a result of fiscal 2005 segment definitions, reclassifications were made to properly allocate $26.3 million of goodwill from International to North America and to properly allocate $81.8 million of assets from North America to the Scotts LawnService®, International, and Other/Corporate segments.

		NORTH				SCOTTS								OTHER/
		AMERICA				LAWNSERVICE®				INTERNATIONAL				CORPORATE				ADJUSTMENTS				TOTAL
						(IN MILLIONS, EXCEPT OPERATING PERCENTAGES)
Net sales:
YTD2005		$	1,353.2			$	102.3			$	362.3			$	124.3			$	—			$	1,942.1
YTD2004			1,250.7				84.8				338.8				—				—				1,674.3
Q3 2005			656.7				59.8				136.0				58.3				—				910.8
Q3 2004			588.0				50.0				131.1				—				—				769.1
Operating income (loss):
YTD2005		$	317.3			$	(3.5	)		$	45.3			$	(117.6	)		$	(32.6	)		$	208.9
YTD2004			279.0				(6.3	)			42.1				(57.2	)			(9.6	)			248.0
Q3 2005			180.9				17.0				20.7				(62.8	)			(3.5	)			152.3
Q3 2004			164.9				13.1				19.7				(19.9	)			(3.2	)			174.6
Operating margin:
YTD 2005			23.4	%			(3.4	)%			12.5	%			nm	%			nm	%			12.4	%
YTD 2004			22.3				(7.4	)			12.4				—				nm				15.4
Q3 2005			27.5				28.4				15.2				nm				nm				17.1
Q3 2004			28.0				26.1				15.0				—				nm				23.1
Goodwill:
Q3 2005		$	201.5			$	103.7			$	112.7			$	24.3			$	—			$	442.2
Q3 2004			207.6				97.5				116.2				—				—				421.3
YE 2004			201.4				100.3				116.2				—				—				417.9
Total assets:
Q3 2005		$	1,474.9			$	148.8			$	537.2			$	213.6			$	—			$	2,374.5
Q3 2004			1,367.3				133.9				580.3				170.0				—				2,251.7
YE 2004			1,268.3				134.5				509.8				135.2				—				2,047.8

		Operating income (loss) represents earnings before amortization of intangible assets, interest and taxes, since this is the measure of profitability used by management. Accordingly, the Other/Corporate operating loss for the three- and nine-month periods ended July 2, 2005 and June 26, 2004 includes amortization of certain intangible assets, unallocated corporate general and administrative expenses, restructuring charges and certain “other” income (expense) items not allocated to the reportable segments. For the three- and nine-month periods, the Other/Corporate includes a charge of $45.7 million resulting from recording a liability for the outstanding balance of the deferred contribution amount payable to Monsanto under the Roundup® agreement.
		The following table displays the components of the “adjustment” column reported in the segment table (in millions).

		ADJUSTMENTS
						AMORTIZATION OF				IMPAIRMENT OF
						DEFERRED				INTANGIBLE
		AMORTIZATION				MARKETING FEE				ASSETS				TOTAL
YTD 2005		$	8.1			$	2.5			$	22.0			$	32.6
YTD 2004			7.1				2.5				—				9.6
Q3 2005			2.7				0.8				—				3.5
Q3 2004			2.4				0.8				—				3.2

		Total assets for the Company’s reportable segments include the intangible assets for the acquired businesses within those segments. Corporate assets primarily include deferred financing and debt issuance costs, corporate intangible assets and deferred tax assets.
12.		DISCONTINUED OPERATIONS
		On September 30, 2004, the Company consummated the sale of the intangibles comprising its U.S. professional growing media business. The results of operations of the component are being reported as discontinued operations in the accompanying Condensed, Consolidated Statements of Operations. The detail comprising the discontinued operations for the three- and nine-month periods ended June 26, 2004, is as follows (in millions):

		THREE MONTHS				NINE MONTHS
		ENDED				ENDED
		JUNE 26, 2004				JUNE 26, 2004
Net sales		$	4.6			$	14.8
Cost of sales			4.2				13.8
Gross profit			0.4				1.0
Selling, general and administrative			0.3				0.7
Income from discontinued operations before income taxes			0.1				0.3
Income taxes			—				0.1
Net income from discontinued operations		$	0.1			$	0.2

During the three and nine month periods ended July 2, 2005, additional net income of $0.4 million and $0.2 million, respectively, was recorded for discontinued operations relating to facility shutdown costs.

13.		FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTORS

		The 6 5/8% Senior Subordinated Notes are general obligations of Scotts Miracle-Gro and are guaranteed by all of the existing wholly-owned, domestic subsidiaries and all future wholly-owned, significant (as defined in Regulation S-X of the Securities and Exchange Commission) domestic subsidiaries of Scotts Miracle-Gro. These subsidiary guarantors jointly and severally guarantee Scotts Miracle-Gro’s obligations under the Notes. The guarantees represent full and unconditional general obligations of each subsidiary that are subordinated in right of payment to all existing and future senior debt of that subsidiary but are senior in right of payment to any future junior subordinated debt of that subsidiary.
		The following unaudited information presents condensed, consolidating Statements of Operations for the three- and nine-month periods ended July 2, 2005 and June 26, 2004, Statements of Cash Flows for the nine-month periods ended July 2, 2005 and June 26, 2004 and Balance Sheets as of July 2, 2005, June 26, 2004 and September 30, 2004.

THE SCOTTS MIRACLE-GRO COMPANY

CONDENSED, CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 2, 2005 (IN MILLIONS)
(UNAUDITED)

						SUBSIDIARY				NON-
		PARENT				GUARANTORS				GUARANTORS				ELIMINATIONS				CONSOLIDATED
Net sales		$	404.9			$	337.6			$	168.3			$	—			$	910.8
Cost of sales			276.1				173.1				106.2				—				555.4
Restructuring and other charges			—				—				—				—				—
Gross profit			128.8				164.5				62.1				—				355.4
Gross commission earned from marketing agreement			29.4				—				1.8				—				31.2
Amortization of deferred marketing fee			0.8				—				—				—				0.8
Contribution expense under marketing agreement			6.3				—				—				—				6.3
Deferred contribution charge			45.7				—				—				—				45.7
Net (expense) commission from marketing agreement			(23.4	)			—				1.8				—				(21.6	)
Operating expenses:
Advertising			32.0				8.7				9.1				—				49.8
Selling, general and administrative			79.3				28.7				28.2				—				136.2
Restructuring and other charges, net			(0.6	)			—				0.5				—				(0.1	)
Amortization of intangibles			0.1				1.3				1.2				—				2.6
Equity income in subsidiaries			(83.9	)			—				—				83.9				—
Intracompany allocations			(15.2	)			6.6				8.6				—				—
Other income, net			(4.7	)			(1.6	)			(0.7	)			—				(7.0	)
Income from operations			98.4				120.8				17.0				(83.9	)			152.3
Interest expense (income)			9.0				(0.1	)			2.7				—				11.6
Income before income taxes			89.4				120.9				14.3				(83.9	)			140.7
Income taxes			1.3				45.9				5.4				—				52.6
Net income from continuing operations			88.1				75.0				8.9				(83.9	)			88.1
Net income from discontinued operations			0.4				—				—				—				0.4
Net income		$	88.5			$	75.0			$	8.9			$	(83.9	)		$	88.5

THE SCOTTS MIRACLE-GRO COMPANY

CONDENSED, CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JULY 2, 2005 (IN MILLIONS)
(UNAUDITED)

						SUBSIDIARY				NON-
		PARENT				GUARANTORS				GUARANTORS				ELIMINATIONS				CONSOLIDATED
Net sales		$	888.0			$	619.3			$	434.8			$	—			$	1,942.1
Cost of sales			574.5				358.1				273.3				—				1,205.9
Restructuring and other charges			—				—				0.1				—				0.1
Gross profit			313.5				261.2				161.4				—				736.1
Gross commission earned from marketing agreement			47.9				—				5.5				—				53.4
Amortization of deferred marketing fee			2.5				—				—				—				2.5
Contribution expense under marketing agreement			18.8				—				—				—				18.8
Deferred contribution charge			45.7				—				—				—				45.7
Net (expense) commission from marketing agreement			(19.1	)			—				5.5				—				(13.6	)
Operating expenses:
Advertising			64.7				18.4				22.4				—				105.5
Selling, general and administrative			222.2				79.0				82.0				—				383.2
Restructuring and other charges, net			0.6				—				0.5				—				1.1
Amortization of intangibles			0.4				4.0				3.7				—				8.1
Equity income in subsidiaries			(102.5	)			—				—				102.5				—
Intracompany allocations			(29.0	)			8.0				21.0				—				—
Impairment of intangible assets			—				—				22.0				—				22.0
Other expense (income), net			(4.9	)			(3.6	)			2.2				—				(6.3	)
Income from operations			142.9				155.4				13.1				(102.5	)			208.9
Interest expense (income)			31.5				(4.9	)			8.2				—				34.8
Income before income taxes			111.4				160.3				4.9				(102.5	)			174.1
Income taxes			2.5				60.9				1.9				—				65.3
Net income from continuing operations			108.9				99.4				3.0				(102.5	)			108.8
Net income from discontinued operations			0.1				—				0.1				—				0.2
Net income		$	109.0			$	99.4			$	3.1			$	(102.5	)		$	109.0

THE SCOTTS MIRACLE-GRO COMPANY

CONDENSED, CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED JULY 2, 2005 (IN MILLIONS)
(UNAUDITED)

						SUBSIDIARY				NON-
		PARENT				GUARANTORS				GUARANTORS				ELIMINATIONS				CONSOLIDATED
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income		$	109.0			$	99.4			$	3.1			$	(102.5	)		$	109.0
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Impairment of intangible assets			—				—				22.0				—				22.0
Stock-based compensation expense			7.4				—				—				—				7.4
Depreciation			26.5				5.3				5.7				—				37.5
Amortization			2.7				4.4				3.5				—				10.6
Deferred taxes			5.8				2.3				(0.9	)			—				7.2
Equity income in subsidiaries			(102.5	)			—				—				102.5				—
Net change in certain components of working capital			(17.8	)			(48.7	)			(67.5	)			—				(134.0	)
Net changes in other assets and liabilities and other adjustments			1.6				4.4				1.5				—				7.5
Net cash provided by (used in) operating activities			32.7				67.1				(32.6	)			—				67.2
CASH FLOWS FROM INVESTING ACTIVITIES
Redemption of available for sale securities			57.2				—				—				—				57.2
Investment in property, plant and equipment, net			(13.8	)			(3.0	)			(2.5	)			—				(19.3	)
Investment in acquired businesses, net of cash acquired			—				(76.7	)			—				—				(76.7	)
Net cash provided by (used in) investing activities			43.4				(79.7	)			(2.5	)			—				(38.8	)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under revolving and bank lines of credit			44.2				—				410.4				—				454.6
Repayments under revolving and bank lines of credit			(45.3	)			—				(389.2	)			—				(434.5	)
Repayment of term loans			(3.0	)			—				—				—				(3.0	)
Financing fees, net			(0.4	)			—				(0.1	)			—				(0.5	)
Payments on seller notes			(0.7	)			(5.1	)			—				—				(5.8	)
Cash received from the exercise of stock options			23.7				—				—				—				23.7
Intracompany financing			(46.6	)			19.9				26.7				—				—
Net cash provided by (used in) financing activities			(28.1	)			14.8				47.8				—				34.5
Effect of exchange rate changes on cash			—				—				(1.7	)			—				(1.7	)
Net increase in cash			48.0				2.2				11.0				—				61.2
Cash and cash equivalents, beginning of period			82.4				1.3				31.9				—				115.6
Cash and cash equivalents, end of period		$	130.4			$	3.5			$	42.9			$	—			$	176.8

THE SCOTTS MIRACLE-GRO COMPANY

CONDENSED, CONSOLIDATING BALANCE SHEET
AS OF JULY 2, 2005 (IN MILLIONS)
(UNAUDITED)

						SUBSIDIARY				NON-
		PARENT				GUARANTORS				GUARANTORS				ELIMINATIONS				CONSOLIDATED
ASSETS
Current assets:
Cash and cash equivalents		$	130.4			$	3.5			$	42.9			$	—			$	176.8
Accounts receivable, net			166.2				209.2				162.3				—				537.7
Inventories, net			184.8				75.1				95.9				—				355.8
Current deferred tax asset			17.3				1.3				1.6				—				20.2
Prepaid and other assets			27.1				8.9				19.8				—				55.8
Total current assets			525.8				298.0				322.5				—				1,146.3
Property, plant and equipment, net			178.8				107.2				40.9				—				326.9
Goodwill			18.8				298.5				124.9				—				442.2
Intangible assets, net			5.2				293.4				116.0				—				414.6
Other assets			44.4				—				0.1				—				44.5
Investment in affiliates			1,344.6				—				—				(1,344.6	)			—
Intracompany assets			—				428.7				—				(428.7	)			—
Total assets		$	2,117.6			$	1,425.8			$	604.4			$	(1,773.3	)		$	2,374.5
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of debt		$	5.0			$	3.0			$	10.1			$	—			$	18.1
Accounts payable			97.4				52.2				62.3				—				211.9
Accrued liabilities			172.1				50.1				96.9				—				319.1
Accrued taxes			62.9				2.5				2.7				—				68.1
Total current liabilities			337.4				107.8				172.0				—				617.2
Long-term debt			600.3				3.3				0.1				—				603.7
Other liabilities			114.7				(2.3	)			24.4				—				136.8
Intracompany liabilities			48.4				—				380.3				(428.7	)			—
Total liabilities			1,100.8				108.8				576.8				(428.7	)			1,357.7
Shareholders’ equity			1,016.8				1,317.0				27.6				(1,344.6	)			1,016.8
Total liabilities and shareholders’ equity		$	2,117.6			$	1,425.8			$	604.4			$	(1,773.3	)		$	2,374.5