Scotts Miracle-Gro Annual Report 2008

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FY2008 Annual Report · Scotts Miracle-Gro

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2008 Annual Report

Cultivating a strong future

The Scotts Miracle-Gro Company 14111 Scottslawn Road Marysville, Ohio 43041 937.644.0011 www.scotts.com

The Scotts Miracle-Gro Company:
Cultivating a strong future since 1868

This year, ScottsMiracle-Gro achieved a milestone few

companies have ever reached – our 140th anniversary.
What has contributed to our longevity? Our people and our
brands. Throughout our history, ScottsMiracle-Gro associates
have advanced the lawn and garden industry with their innovation,
operational excellence and world-class service. We are
dedicated to helping create a beautiful world.
As a result, our brands enjoy unparalleled trust with consumers
and continue to hold market-leading shares. The Company remains
committed to strengthening our reputation going forward.
the
We have been left an exceptional legacy, and we accept the
hing
important responsibility to cultivate a strong future in everything
e
we do. ScottsMiracle-Gro is well-positioned to be among the
me
world’s great consumer products companies for years to come.

Investor Relations & Corporate Affairs

The Scotts Miracle-Gro Company

Shareholder Information

World Headquarters

14111 Scottslawn Road

Marysville, Ohio 43041

(937) 644-0011

www.scotts.com

Annual Meeting

The annual meeting of shareholders

will be held at The Berger Learning Center,

14111 Scottslawn Road, Marysville, Ohio

43041, on Thursday, January 22, 2009,

at 8:30 a.m. (EST).

NYSE Symbol

The common shares of The Scotts Miracle-

Gro Company trade on the New York Stock

Exchange under the symbol SMG.

Transfer Agent and Registrar

National City Bank

Corporate Trust Operations

P.O. Box 92301

Cleveland, Ohio 44193-0900

Shareholder and Investor

Relations Contact

Jim King

Senior Vice President,

The Scotts Miracle-Gro Company

14111 Scottslawn Road

Marysville, Ohio 43041

(937) 644-0011

Dividends

On June 22, 2005, The Scotts Miracle-Gro

Company announced that its Board of

Directors had approved the establishment

of a quarterly cash dividend. The $0.50 per

share (adjusted for the 2-for-1 stock split dis-

tributed November 9, 2005) annual dividend

has been paid in quarterly increments since

the fourth quarter of ﬁ scal 2005. In addition,

the Company paid a special one-time cash

dividend of $8.00 per share on March 5, 2007.

The payment of future dividends, if any,

on common shares will be determined by

the Board of Directors of The Scotts

Miracle-Gro Company in light of conditions

then existing, including the Company’s

earnings, ﬁ nancial condition and capital

requirements, restrictions in ﬁ nancing agree-

ments, business conditions and other factors.

Future dividend payments are currently

restricted to $55 million annually under the

Company’s existing credit facilities.

Stock Price Performance

See chart at right for stock price

performance. The Scotts Miracle-Gro

Company common shares have been

publicly traded since January 31, 1992.

Shareholders

As of November 26, 2008, there were

approximately 29,000 shareholders,

including holders of record and

The Scotts Miracle-Gro Company’s

estimate of beneﬁ cial holders.

Publications for Shareholders

In addition to this 2008 Annual Report,

The Scotts Miracle-Gro Company informs

shareholders about the Company through

its Annual Report on Form 10-K, its

Quarterly Reports on Form 10-Q, its

Current Reports on Form 8-K and its

Notice of Annual Meeting of Shareholders

and Proxy Statement.

Copies of any of these documents

may be obtained without charge on

our Investor Relations Web site at

http://investor.scotts.com or by

writing to:

Attention: Investor Relations

14111 Scottslawn Road

Marysville, Ohio 43041

Certiﬁ cations

The Scotts Miracle-Gro Company has ﬁ led

the certiﬁ cations of its chief executive ofﬁ cer

and its chief ﬁ nancial ofﬁ cer, required by

Section 302 of the Sarbanes-Oxley Act of

2002 and Rule 13a-14(a) under the Securities

Exchange Act of 1934, as exhibits to its

Annual Report on Form 10-K for the ﬁ scal

year ended September 30, 2008.

On February 27, 2008, The Scotts Miracle-Gro

Company submitted to the New York Stock

Exchange the annual certiﬁ cation of the

chief executive ofﬁ cer required by Section

303A.12(a) of the New York Stock Exchange

Listed Company Manual.

Stock Price Range*

Fiscal year ended

September 30, 2008

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

High

Low

$46.90

$40.65

$36.76

$30.17

$33.50

$30.51

$17.79

$16.12

Fiscal year ended

September 30, 2007

High

Low

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

$54.72

$57.45

$47.30

$49.69

$44.02

$40.57

$42.28

$40.60

*Not adjusted for a one-time cash dividend

of $8.00 per share distributed March 5, 2007

Safe Harbor Statement under the Private

Securities Litigation Reform Act of 1995:

Certain of the statements contained in this

2008 Annual Report, including, but not

limited to, information regarding the

future ﬁ nancial performance and ﬁ nancial

condition of the Company, the plans and

objectives of the Company’s management,

and the Company’s assumptions regarding

such performance and plans are forward-

looking in nature. Actual results could

differ materially from the forward-looking

information in this 2008 Annual Report, due

to a variety of factors. Additional detailed

information concerning a number of the

important factors that could cause actual

results to differ materially from the forward-

looking information contained in this 2008

Annual Report is readily available in the

Company’s Annual Report on Form 10-K

for the ﬁ scal year ended September 30, 2008,

which is ﬁ led with the Securities and

Exchange Commission.

Comparison of 5-Year Cumulative Total Return*

Among The Scotts Miracle-Gro Company, The Russell 2000 Index and The S&P Household Products Index

The Scotts Miracle-Gro Company

Russell 2000

S&P Household Products Index

$200

$180

$160

$140

$120

$100

$50

9/03

9/04

9/05

9/06

9/07

9/08

* $100 invested on 9/30/03 in stock or index-including

reinvestment of dividends. Fiscal year ending September 30.

4603_CoverC3.indd 2

12/11/08 1:20:40 PM

Net sales $2.98 billion

Global Consumer ......................................75%
Global Professional..........................12%
Scotts LawnService.................8%
Smith & Hawken.............5%

The Scotts Miracle-Gro Company
(in millions, except per share data)

2008
Net sales
$ 2,981.8
Cost of sales
2,042.2
Gross proﬁ t
939.6
707.2
Operating expenses, net
Impairment and other charges 134.4
98.0
Income from operations
-
Costs related to reﬁ nancings
82.2
Interest expense
15.8
Income before taxes
Income tax expense
26.7
(10.9)
Net income (loss)

2007
$ 2,871.8
1,867.3
1,004.5
689.4
38.0
277.1
18.3
70.7
188.1
74.7
113.4

Diluted net income (loss)
per share

$ (0.17)

$ 1.69

Adjusted net income*
Adjusted diluted net income
per share*

$ 134.1

$ 158.8

2.05

$ 2.37

Adjusted EBITDA*

$ 318.4

$ 382.6

*Excludes impairment, registration and recall costs, and other non-recurring charges

Industry-leading brands worldwide

4603_NarativeC5.indd 1

12/11/08 1:22:28 PM

Dear Shareholders,

My reputation for ‘straight talk’ is well
understood in the halls of ScottsMiracle-Gro as
well as by our investors. I take seriously the process
of writing this letter each year and sharing my
thoughts on the business with our shareholders,
associates, retail partners and other stakeholders.
This year’s letter takes on increased signiﬁ cance,
given the state of the global economy and the
uncertainty of the ﬁ nancial markets.
There is no doubt that ﬁ scal 2008 was a year of
unprecedented challenges. We endured a late start
to the season, several product recalls, higher com-
modity prices and retail partners who were nervous
about the weaker consumer. While our results fell
short of our original expectations, we reset our goals
midway through the year and then achieved them.
Company-wide sales grew by 4 percent to a
record $2.98 billion, including a 24 percent
improvement in Global Professional and 2 percent
growth in Global Consumer. However, adjusted
gross margins declined by 190 basis points as urea,
diesel and other commodities hit unprecedented
highs. Although we increased prices by about $100
million for the year and realized productivity and
efﬁ ciency savings of over $40 million, this was not
enough to offset higher costs.
On an adjusted basis, we reported earnings of
$2.05 per share compared with $2.37 per share
reported a year earlier. Those results exclude
$145 million of after tax costs related to asset impair-
ment charges as well as costs associated with product
recall and registration issues. Including those items,
we reported a net loss for the year of $0.17 per share.
A strong focus on working capital throughout
the year allowed us to generate free cash ﬂ ow of

$141 million. Even with higher commodity costs
and lower-than-expected sales, inventory increased
by only $10 million.
While I would be disappointed with this
outcome in any other year, I am proud of the hard
work and dedication shown by our 6,000 associates
to achieve the results we did report. But we can do
better. We must do better.
As I write this letter, our market capitalization
of $1.7 billion is dramatically lower than a year
ago and at a level similar to 2003. Clearly, macro-
economic issues have impacted our business, and
our stock price has suffered with others during this
current downturn. But since stock prices are based
on an assumption of future results, the simple truth
is that we have to overcome the obstacles in front
of us and stay focused on opportunities to drive
growth and enhance shareholder value.

In the near-term, we know that the lawn and

garden category has historically outperformed
others during a weak economy. Consumers who are
spending less on big-ticket purchases tend to stay
close to home, and they tend to spend more time
getting their hands dirty in the backyard. We need
to strengthen our relationship with them and keep
them in the ScottsMiracle-Gro family.
We can manage this effort without sacriﬁ cing
the future. We must continue to strike a balance
that allows us to make progress against several
longer-term initiatives, even if the return on these
investments is several years away.
On the cover of this annual report, we declare
that we are ‘cultivating a strong future.’ In the
remainder of this letter, I’ll explain why I believe
our efforts will allow us to strike the appropriate

“The 6,000 associates of this Company are committed
to leveraging our history and our strengths to continue
driving growth and to enhance shareholder value.”

4603_NarativeC5.indd 2

12/11/08 1:22:36 PM

Jim Hagedorn
n
r
Chief Executive Ofﬁ cer
d
and Chairman of the Board
y
The Scotts Miracle-Gro Company

balance in cultivating near- and long-term growth.
Doing so requires us to succeed in each of the
following ways:

1. Even in a difﬁ cult economy, we must continue
to invest in further strengthening our relationship
with the consumer. This will allow us to leverage
the cornerstone of our business – our brands –
driving higher usage of our products and increased
participation in the category.

2. We must continue to invest in game-changing
innovation to drive higher sales and proﬁ ts. In
recent years, new products have been critical to our
success. We must leverage the fact that no one in
the industry can match our record of innovation.

3. We must further assist our retail partners in
driving the sales and productivity of their lawn and

garden departments. To that end, we have
realigned our industry-leading sales force in
the U.S. to be more ﬂ exible and improve their
local focus.

4. We will continue to transform our supply
chain platform in the U.S. to create a more regional
model. This effort has the potential to save
$50 million annually and reduce inventories by
more than $100 million.

5. We must further develop and leverage
the proprietary technologies in our Global
Professional business to drive proﬁ table sales
growth in ornamental horticulture, professional
turf and high-value specialty agriculture around
the world.

Let me touch on each of these in more detail.

4603_NarativeC5.indd 3

12/11/08 1:22:36 PM

Consumer insights have led to the development of innovative

solutions, such as Miracle-Gro® Moisture Control® Potting

Mix and Miracle-Gro® LiquaFeed® – products that help

gardeners easily succeed.

4603_NarativeC5.indd 4

12/11/08 1:22:45 PM

Driving our brands with consumers

Our relationship with the consumer remains the
single biggest advantage we possess, and one that
we will continue to build upon in 2009. Approxi-
mately 5 percent of sales each year is invested in
advertising, a number we strive to increase. We
also make incremental investments focused on
consumer research that helps drive innovation,
brand positioning and our messages to consumers.
Continuing to invest in both advertising and
consumer insights is critical for us to grow the
overall category and further increase our market
share. Our goal is to do this by increasing house-
hold penetration rates as well as the frequency with
which existing consumers use our products.
These investments are largely why our brands in
both the U.S. and Europe – Scotts®, Miracle-Gro®,
Ortho®, Roundup®, Evergreen®, Celaﬂ or®,
Fertiligène®, KB® and Substral® – continue to
enjoy industry-leading market share with the
opportunity for even more growth.
Our understanding of the consumer allows us
to better interpret what they love about lawn and
garden care as well as what frustrates them. For
example, several years ago our research told us that
consumers were confused about how much water
they should provide to their plants. Our response:
Miracle-Gro® Moisture Control® Potting Mix. By
taking the guesswork out of watering, we made it
easier for gardeners to succeed. In turn, they rewarded
us with increased purchases of higher margin,
value-added products. Since the introduction of
this product in 2001, sales in our growing media
business have increased nearly 85 percent.

Roundup and Roundup Design are trademarks of Monsanto Technology LLC.
The Scotts Company LLC is the exclusive sales and marketing agent for
Roundup Brand Lawn and Garden products.

In 2009, additional consumer insights will
allow us to further leverage the Moisture Control
brand. Data shows a signiﬁ cant increase in
consumer interest in edible gardening, a trend
we expect to continue. The introduction of
Miracle-Gro® Moisture Control® Garden Soil
will allow gardeners to trade up from low-value
commodity soils to help them increase yields of
healthy vegetables, fruits and herbs.

The Global Consumer business is fulﬁ lling

consumers’ desire for natural gardening.

Naturen®, a leading brand in Europe,

pr
provides a full range of natural products.

Researching consumer attitudes is a global effort
that requires us to identify trends that go beyond the
garden. Our understanding of consumer perspectives
about the environment in Europe, for example, led
to the introduction in 2008 of a complete line of
natural and organic products in every major European
market. Consumer response made the offering our
most successful launch since we began operating
in Europe a decade ago – already accounting for
8 percent of International Consumer sales.

I am equally conﬁ dent that we are using our

understanding of consumer behavior to enhance
our ability to communicate effectively with them.
A decade ago, nearly all of our consumer outreach
was via television commercials. While television is
still important, our marketing teams now rely on

4603_NarativeC5.indd 5

12/11/08 1:23:16 PM

a much broader range of tools to reinforce the
power of our brands.

In 2009, we will continue our shift away from
television to weather-triggered radio as we adopt an
increasingly more regional approach to driving our
consumer business. Since weather is unpredictable,
drive-time radio gives us the ﬂ exibility to make the call
on Monday to run media that week. This enables
us to run locally and seasonally relevant messages
when the consumer is more likely to listen and act.
In addition, the state of the economy requires

us to recognize potential vulnerabilities. As
consumers become more sensitive to price, we
will use promotions to help them stay in the
ScottsMiracle-Gro franchise. This will require
our messaging to the consumer – regardless of the
medium – to become more competitive. We will
reinforce with consumers why our products cost
more and why they are worth it.

Building on a history of innovation

Knowing what the consumer wants is one
thing – being able to provide it to them is quite
another. Throughout our history, innovation has

Roundup® Pump ‘N Go®, with its

innovative applicator, was our most

successful product launch ever,

resulting in a 10 percent increase
in Roundup® purchases.

been the foundation of our consumer business.
Looking ahead, I believe our potential to bring
truly revolutionary products to the market has
never looked stronger.
Our philosophy regarding new product devel-
opment starts with a basic formula. New products
must be simple, sustainable and signiﬁ cant. We
believe this approach can help us reach our
goal of $200 million of sales growth each year
through innovation.
Let me explain the formula.

“Simple” means that products must be easy for
the consumer to buy, easy to use and easy to store.
In addition, they should reduce the amount of time
it takes to accomplish a task and should give the
consumer more conﬁ dence and improved results.
Being “sustainable” means products must be designed
with consumer safety and environmental impacts in
mind. And “signiﬁ cant” products should have strong
margin potential, generate potential cost savings,
present a global opportunity and be, whenever
possible, proprietary to ScottsMiracle-Gro.
The introduction of Roundup® Pump ‘N Go®
in 2008, a product that sold at retail for $20, which
is a relatively high price point in lawn and garden,
was a near-perfect case study of this approach. The
innovation was not what was in the product. We
maintained the same long-standing formulation
that has made Roundup® the world’s best-selling
consumer non-selective weed control. However,
by improving the package design and application
device, we made the product even easier to use.
And consumers responded.
With sales of more than $40 million, Roundup®
Pump ‘N Go® was our best launch ever. We are now

4603_NarativeC5.indd 6

12/11/08 1:23:17 PM

ScottsMiracle-Gro’s global R&D efforts are ﬁ lling a growth pipeline

with future products, improved formulas and more convenient applicators
and packaging. Among our new offerings in ﬁ scal 2009 will be

two innovative grass seed products – EZ Seed ™ and Turf Builder ®

Water Smart™ Grass Seed. The Company’s commitment to research

and development – a clear competitive advantage – helps drive continued

growth and success.

4603_NarativeC5.indd 7

12/11/08 1:23:22 PM

Strong consumer relationships have always been key to the success

of ScottsMiracle-Gro. We continue to seek opportunities to connect

with consumers, including using in-store counselors, introducing

new products such as Moisture Control ® Garden Soil and through

advertising, www.scotts.com and our consumer toll-free hotline. Our

communication with the consumer has created a trusted bond that

has endured for well over a century.

4603_NarativeC5.indd 8

12/11/08 1:23:43 PM

poised to apply the same packaging innovations to
other products in our controls business.
Research & Development will be front-and-
center again in 2009 with the introduction of two of
the most innovative grass seed products in decades.
New Turf Builder® Water Smart™ Grass Seed is
a full line of premium grass seed products that
provide consumers high-performance seed wrapped
in a revolutionary super-absorbent coating. The
patented coating allows the seed to absorb up to
40 percent more water than ordinary seed. As a
result, the seed needs to be watered less frequently,
which enables consumers to more easily succeed in
growing a beautiful Scotts lawn.

Saving water and achieving great results are also
included in the thinking behind our new EZ Seed™
product. The seeding mix includes premium grass
seed, fertilizer and a proprietary growing material.
Our proprietary technology absorbs water like a
sponge, expanding to surround the seed in a moist
protective layer. And it continues to care for the
seed, infusing it with water and nutrients, so it
builds strong roots that survive tough conditions.
With EZ Seed™, consumers can grow grass that is
50 percent thicker than ordinary seed with half the
water. It is so efﬁ cient that the seed can germinate
in nearly any environment – including the most
difﬁ cult soil conditions.
Our longer-term opportunities are even more
encouraging. We have recently obtained global
exclusivity on a breakthrough active ingredient
for weed control. Although regulatory approval is
still needed, we are optimistic that the product could
radically change the way in which consumers control
weeds in their lawns by making it easier to eliminate

and prevent weeds. In addition, we continue to
make progress with a new naturally derived
bioherbicide that could provide a new way to
control broadleaf weeds. Our goal is to introduce
both of these breakthrough technologies in 2011.

The Scotts® brand introduces EZ Seed™

in ﬁ scal 2009, an innovation that makes

growing grass simple in nearly any

lawn environment.

Leveraging our sales force

Innovation and effective marketing campaigns
are key to building a stronger relationship with the
consumer. The relationship we maintain with our
retail partners, however, is equally critical.

In the U.S., about 70 percent of our sales are
with three primary retailers – The Home Depot,
Lowe’s and Wal-Mart. To help manage the sheer
volume of business they conduct during the peak of
the lawn and garden season, our sales team works
year-round to help them maximize their store shelf
productivity. The balance of our U.S. sales comes
from national accounts and independent lawn and
garden centers, where we maintain a dedicated
sales force, unique product offerings and programs
designed speciﬁ cally for these retailers.
Our sales force numbers nearly 2,000 during the
peak of the lawn and garden season. On weekdays,
these associates help our retail partners merchandise

4603_NarativeC5.indd 9

12/11/08 1:24:06 PM

products and manage their inventory. On the
weekends, they are transformed into an army of
in-store counselors, providing one-on-one assistance
to consumers – answering their questions and
guiding them to the Scotts®, Miracle-Gro®, Ortho®
and Roundup® products that meet their needs.

In 2009, we are rebalancing our sales force in a
cost-neutral way that allows us to spend more time
in season helping our retailers and consumers. We
will employ more merchandisers and expert product
counselors than ever before and signiﬁ cantly
increase the number of hours we spend in stores.
This change will provide a more ﬂ exible cost
structure that helps maximize the return on our
investment and allows us to better meet the needs
and seasonal considerations of local markets. We
are now better equipped to quickly deploy more
labor in those regions where business is particularly
strong and reduce spending in regions where sales
may be lower than expected due to poor weather,
economic concerns or other factors.

Our distribution process is a critical link in our supply chain and

key to driving customer service rates of more than 99 percent.

Driving out costs with supply chain

Perhaps the most signiﬁ cant long-term
opportunity to reduce costs exists within our supply
chain. Over the years, investments in infrastructure
have made ScottsMiracle-Gro one of the most
trusted partners with our retailers. We have helped
our retailers increase inventory turns, lower their
season-ending inventory and improve their overall
proﬁ tability. We believe we can further build upon
this track record while signiﬁ cantly reducing costs
and improving working capital.
By creating a regionally-focused distribution
and manufacturing footprint, we believe costs can
be reduced by at least $50 million over the next
several years. If fully realized, these efforts could
also dramatically improve free cash ﬂ ow by reducing
inventory by more than $100 million. Let me
provide an illustration to help explain our plans.
Today, the vast majority of our lawn fertilizer
in the U.S. is shipped from Marysville, Ohio to
11 warehouses located across the country. From
those warehouses, the fertilizer is then shipped
– along with controls, plant food, grass seed and
durable products – directly to home center stores.
However, these products are often shipped on
less-than-full trucks, making their distribution less
efﬁ cient than we would like.
Meanwhile, our growing media products are
shipped direct-to-store through a network of
26 manufacturing facilities throughout the U. S.
Because these shipments go shorter distances on full
trucks, they are extremely efﬁ cient.

4603_NarativeC5.indd 10

12/11/08 1:24:14 PM

Efﬁ ciently moving products from production to retailers is one of

ScottsMiracle-Gro’s competitive strengths. We continue to generate

improvements in our supply chain in order to reduce inventory, save

fuel costs and provide better service to retailers.

4603_NarativeC5.indd 11

12/11/08 1:24:17 PM

Our Global Professional business, which serves primarily professional

growers and turf managers, is emerging as an attractive growth and

proﬁ t driver. In ﬁ scal 2008, strong demand for our products led to a

reported 24 percent sales growth in this business.

4603_NarativeC5.indd 12

12/11/08 1:25:06 PM

The future model – which is being rolled out
in the southeastern U.S. in ﬁ scal 2009 – allows
fertilizer products to be shipped into growing media
facilities and, from there, co-distributed directly to
the stores with growing media products. Once the
model is deployed across the entire country, nearly
all fertilizer for home center customers would be
shipped through these growing media facilities on
full truckloads, signiﬁ cantly improving the efﬁ ciency
of distributing these products. The remaining
products – mostly controls, plant foods and grass
seed – would then be shipped in full truckloads
to home center distribution centers, rather than
directly to stores in less efﬁ cient, partial truckload
quantities. We believe this will result in signiﬁ cant
distribution savings, even as fuel prices have begun
to retreat. And, within ﬁ ve years, it is anticipated
that up to half of our third-party warehouse square
footage could be eliminated.
These efforts not only present signiﬁ cant
economic beneﬁ t to ScottsMiracle-Gro but also
to our retailer partners through more frequent
store replenishment, improved inventory turns
and reduced order lead times to maximize retail
point-of-sale opportunities. As importantly,
we believe these efforts can be accomplished
without compromising our world-class customer
service rates.

Driving growth platforms

Since our Global Consumer business represents

75 percent of total sales, it is natural that this
segment is a leading priority. However, it is
increasingly obvious that our Global Professional

business also presents an opportunity to drive
proﬁ table growth and long-term shareholder value.

Nurseries that grow

ornamental plants

are among Global

Professional’s most

critical worldwide

customers.

This business, which represents 12 percent of
total sales, is primarily focused on serving profes-
sional horticulture and professional turf managers.
Growers rely on our proprietary slow-release
Osmocote® fertilizer to help them grow healthy
plants, such as poinsettias and other ornamentals,
in a cost-effective manner. Because Osmocote®
technology can be adjusted for the speciﬁ c needs of
nearly any type of plant, it has allowed our Global
Professional business to expand throughout the
world in serving the needs of specialty agriculture.
In ﬁ scal 2008, this business reported growth
of 24 percent. While price increases and foreign
exchange rates contributed to the improvement, the
organic volume growth of nearly 10 percent gives
us continued optimism in the long-term prospects
of this business.
Today, approximately 20 percent of Global
Professional sales occur in emerging markets such
as the Asia Paciﬁ c and Latin America regions. As the
populations and economies of these regions continue
to expand, Global Professional provides signiﬁ cant
opportunity to meet the needs of the increasingly

4603_NarativeC5.indd 13

12/11/08 1:25:44 PM

larger base of professional growers. The ability
to proﬁ tably expand our Global Professional
business over the next several years appears
extremely attractive, whether through tuck-in
acquisitions or organic growth.

Pulling it all together

The collective impact of the ﬁ ve priorities
outlined in this letter is the basis of our optimism.
Our near-term challenge is to remain focused on
these opportunities while navigating the most
difﬁ cult economic climate in a generation.
Like most consumer goods companies, we
believe a wait-and-see approach is appropriate for
the upcoming year. Our performance in the ﬁ nal
months of ﬁ scal 2008 reinforced our belief that lawn and
garden will remain a critical category for our retail
partners and consumers. However, we also recognize
that consumers are increasingly concerned about
the state of the economy and, therefore, unpredict-
able. While we have provided signiﬁ cant incentives
for our management and sales teams to return the
Company to historical growth levels, we recognize
that the economic environment in ﬁ scal 2009 will be
challenging and are planning accordingly.
Economic cycles come and go, and this one,
too, will pass. Our job is to be positioned to drive
higher levels of proﬁ table growth, regardless of
the environment. We also will remain focused on
improving our return on invested capital and
driving free cash ﬂ ow – two metrics that I believe
are critical in creating value.
To achieve those results, ScottsMiracle-Gro
also must leverage two other competitive

advantages – our history and our people.
Reaching our 140th-year anniversary is a
tribute to our associates, who over the years
were never deterred by a challenge. Through many
difﬁ cult economic and business times, our
Company has consistently emerged as an even
stronger leader in the lawn and garden category.
Our team has a proven history of being good
stewards of this business, focused on our consumers,
retailers and shareholders.
No one is better positioned to drive long-term
growth in this critical industry than ScottsMiracle-
Gro. Our advantages are clear – our brands, our
innovation, our sales force, our infrastructure
and our platform for growth in emerging markets.
The 6,000 associates of this Company – by far,
our most important competitive advantage – are
committed to leveraging our history and our
strengths to continue driving growth and to
enhance shareholder value.

In next year’s letter, I am conﬁ dent I will
share with you the numerous successes we enjoyed
in ﬁ scal 2009. And, I am conﬁ dent I will once again
reinforce the ways in which we are ‘cultivating a
strong future’ and why the long-term prospects of
this Company are so compelling.

Regards,

Jim Hagedorn
Chief Executive Ofﬁ cer
and Chairman of the Board
The Scotts Miracle-Gro Company
December 2008

4603_NarativeC5.indd 14

12/11/08 1:25:48 PM

The lawn and garden category represents a vital way of life for

millions of people. By continuing to invest in our innovation portfolio,

consumer relationships and retail partnerships, ScottsMiracle-Gro is

cultivating a strong and enduring future.

4603_NarativeC5.indd 15

12/11/08 1:25:49 PM

15
15

Leadership Team

Jim Hagedorn
Chief Executive Ofﬁ cer and
Chairman of the Board

Mark Baker
President and
Chief Operating Ofﬁ cer

Vince Brockman
Executive Vice President,
General Counsel and
Corporate Secretary

Dave Evans
Executive Vice President and
Chief Financial Ofﬁ cer

Mike Kelty, Ph.D.
Executive Vice President

Claude Lopez
Executive Vice President,
International, and
Chief Marketing Ofﬁ cer

Mike Lukemire
Executive Vice President,
Global Technologies & Operations

Barry Sanders
Executive Vice President,
North America

Denise Stump
Executive Vice President,
Global Human Resources

Board of Directors

Mark R. Baker
President and Chief Operating Ofﬁ cer
The Scotts Miracle-Gro Company
Board member since 2004

Arnold W. Donald
President and Chief Executive Ofﬁ cer (retired)
Juvenile Diabetes Research Foundation
International funding for diabetes research
Chair of Compensation & Organization Committee
Board member since 2000

Joseph P. Flannery
President, Chief Executive Ofﬁ cer
and Chairman of the Board
Uniroyal Holding, Inc.
Investment management company
Interim Chair of Governance & Nominating Committee;
Member of Compensation & Organization Committee
Board member since 1987

James Hagedorn
Chief Executive Ofﬁ cer and Chairman of the Board
The Scotts Miracle-Gro Company
Board member since 1995

Keith Baeder
Senior Vice President and General
Manager, North America Gardens

Fred Bosch
Senior Vice President,
Global Professional

Randy Coleman
Senior Vice President,
North America Finance

Andy Coogle
Senior Vice President and
Assistant General Counsel

Jeff Garascia, Ph.D.
Senior Vice President,
Global Research & Development

Michel Gasnier
Senior Vice President and
Chief Financial Ofﬁ cer, International

Jim King
Senior Vice President,
Investor Relations & Corporate Affairs

Peter Korda
Senior Vice President,
Scotts LawnService

Brian Kura
Senior Vice President,
North America Sales

Thomas N. Kelly Jr.
Former Executive Vice President,
Transition Integration
Sprint Nextel Corporation
Global communications company
Member of Audit Committee and
Innovation & Technology Committee
Board member since 2006

Carl F. Kohrt, Ph.D.
President and Chief Executive Ofﬁ cer
Battelle
International science and technology ﬁ rm
Chair of Innovation & Technology Committee;
Member of Governance & Nominating Committee
Board member since 2008

Katherine Hagedorn Littleﬁ eld
Chair
Hagedorn Partnership, L.P.
Private investment partnership
Member of Finance Committee and
Innovation & Technology Committee
Board member since 2000

Karen G. Mills
President
MMP Group
Private equity ﬁ rm, investor and advisor
Member of Audit Committee; Interim Member of
Compensation & Organization Committee
Lead Independent Director
Board member since 1994

Dan Paradiso
Senior Vice President and General
Manager, North America Lawns

Tim Portland
Senior Vice President and General
Manager, North America Controls

Korbin Riley
Senior Vice President, Global Pro Seed,
Asia Paciﬁ c & Emerging Markets

Rich Shank, Ph.D.
Senior Vice President,
Regulatory & Governmental Affairs,
and Chief Environmental Ofﬁ cer

Pete Supron
Senior Vice President,
Global Purchasing

Dave Swihart
Senior Vice President,
Global Supply Chain

Jan Valentic
Senior Vice President,
Global Marketing Services &
Growth Platforms

Nancy G. Mistretta
Member
Russell Reynolds Associates
Executive search ﬁ rm
Chair of Finance Committee
Board member since 2007

Patrick J. Norton
Executive Vice President and
Chief Financial Ofﬁ cer (retired)
The Scotts Company
Member of Finance Committee
Board member since 1998

Stephanie M. Shern
Founder
Shern Associates LLC
Retail consulting and business advisory ﬁ rm
Chair of Audit Committee
Board member since 2003

John S. Shiely
Chief Executive Ofﬁ cer
and Chairman of the Board
Briggs & Stratton Corporation
Manufacturer of outdoor power equipment
Member of Audit Committee and Finance Committee
Board member since 2007

4603_NarativeC5.indd 16

12/11/08 1:26:24 PM

THE SCOTTS MIRACLE-GRO COMPANY
2008 FINANCIAL RESULTS

TABLE OF CONTENTS

Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reconciliation of Non-GAAP Disclosure Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Financial Statements of The Scotts Miracle-Gro Company and Subsidiaries:

Annual Report of Management on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . .
Reports of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the fiscal years ended September 30, 2008, 2007

and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2008, 2007

and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets at September 30, 2008 and 2007 . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders’ Equity for the fiscal years ended September 30,

2008, 2007 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Governance Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

18
20
22
37
42

44
45

48
49

50
51
92

SELECTED FINANCIAL DATA

Five-Year Summary(1)
For the fiscal year ended September 30,
(in millions, except per share amounts)

OPERATING RESULTS(3):

Net sales
Gross profit
Income from operations
Income (loss) from continuing

operations (net of tax)

Net income (loss)
Depreciation and amortization

FINANCIAL POSITION:
Working capital
Current ratio
Property, plant and equipment, net
Total assets
Total debt to total book

capitalization(4)

Total debt
Total shareholders’ equity

CASH FLOWS:

Cash flows from operating activities
Investments in property, plant and

equipment

Investments in intellectual property
Investments in acquisitions, including

seller note payments

PER SHARE DATA:

Basic earnings (loss) per common

Diluted earnings (loss) per common

Total cash dividends paid
Dividends per share(5)(6)
Stock price at year-end(6)
Stock price range — High(6)
Stock price range — Low(6)

OTHER:

Adjusted EBITDA(7)
Interest coverage (Adjusted

EBITDA/interest expense)(7)
Weighted average common shares

outstanding

Common shares and dilutive

potential common shares used in
diluted EPS calculation

2008

2007

2006(2)

2005(2)

2004

$2,981.8
939.6
98.0

$2,871.8
1,004.5
277.1

$2,697.1
955.9
252.5

$2,369.3
860.4
200.9

$ 2,106.5
792.4
252.8

(10.9)
(10.9)
70.3

$ 366.8
1.5
344.1
2,156.3

113.4
113.4
67.5

$ 412.7
1.7
365.9
2,277.2

132.7
132.7
67.0

$ 445.8
1.9
367.6
2,217.6

100.4
100.6
67.2

$ 301.6
1.6
337.0
2,018.9

100.5
100.9
57.7

$ 396.7
1.9
328.0
2,047.8

69.6%
999.5
436.7

70.0%

1,117.8
479.3

30.8%
481.2
1,081.7

27.7%

393.5
1,026.2

41.9%

630.6
874.6

$ 200.9

$ 246.6

$ 182.4

$ 226.7

$ 214.2

56.1
4.1

2.7

54.0
—

21.4

57.0
—

122.9

40.4
—

84.6

35.1
—

20.5

(0.17)

1.74

1.97

1.51

1.56

(0.17)
32.5
0.50
23.64
46.90
16.12

1.69
543.6
8.50
42.75
57.45
40.57

1.91
33.5
0.50
44.49
50.47
37.22

1.47
8.6
0.125
43.97
43.97
30.95

1.52
—
—
32.08
34.28
27.63

$ 318.4

$ 382.6

$ 385.9

$ 291.5

$ 310.5

3.9

64.5

5.4

65.2

9.7

67.5

7.0

66.8

6.4

64.7

64.5

67.0

69.4

68.6

66.6

(1) All common share and per share information presented in the above five-year summary have been

adjusted to reflect the 2-for-1 stock split of the common shares which was distributed on
November 9, 2005 to shareholders of record on November 2, 2005.

(2) Fiscal 2006 includes Rod McLellan Company, Gutwein & Co., Inc. and certain brands and assets
acquired from Turf-Seed, Inc. and Landmark Seed Company from the dates of acquisition. Fiscal
2005 includes Smith & Hawken» from the October 2, 2004 date of acquisition. See further discus-
sion of acquisitions in “NOTE 8. ACQUISITIONS” to the Consolidated Financial Statements included
elsewhere in this Annual Report.

(3) Operating results include the following items segregated by lines affected as set forth on the Consol-
idated Statements of Operations included with the Consolidated Financial Statements included
elsewhere in this Annual Report.

For the Fiscal Year Ended September 30,
2008
2006

2005

2007

2004

Net sales includes the following relating to the

Roundup» Marketing Agreement:
Net commission income, excluding the deferred

contribution charge . . . . . . . . . . . . . . . . . . . . $ 44.3

$41.9

$39.9

$ 40.4

$28.5

Reimbursements associated with the Roundup»
Marketing Agreement . . . . . . . . . . . . . . . . . . .
Deferred contribution charge . . . . . . . . . . . . . . .

Cost of sales includes:

Costs associated with the Roundup» Marketing
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . .

Impairment, restructuring, and other charges

(income) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product registration and recall matters . . . . . . .

Selling, general and administrative includes:

Restructuring and other charges . . . . . . . . . . . .
Impairment charges. . . . . . . . . . . . . . . . . . . . . .
Product registration and recall matters . . . . . . .

Interest expense includes:

58.0
—

47.7
—

37.6
—

40.7
(45.7)

40.1
—

58.0

47.7

37.6

40.7

40.1

15.1
27.2

—
121.7
12.7

—
—

2.7
35.3
—

0.1
—

9.3
66.4
—

(0.3)
—

9.8
23.4
—

0.6
—

9.1
—
—

Costs related to refinancings . . . . . . . . . . . . . . .

—

18.3

—

1.3

45.5

(4) The total debt to total book capitalization percentage is calculated by dividing total debt by total

debt plus shareholders’ equity.

(5) The Company began paying a quarterly dividend of 12.5 cents per share in the fourth quarter of fiscal

2005.

(6) The Company paid a special one-time cash dividend of $8.00 per share on March 5, 2007. Stock

prices have not been adjusted for this special one-time cash dividend.

(7) Given our significant borrowings, we view our credit facilities as material to our ability to fund opera-
tions, particularly in light of our seasonality. Please refer to “RISK FACTORS” in this Annual Report
for a more complete discussion of the risks associated with the Company’s debt and our credit facili-
ties and related covenants. Our ability to generate cash flows sufficient to cover our debt service
costs is essential to our ability to maintain our borrowing capacity. We believe that Adjusted EBITDA
provides additional information for determining our ability to meet debt service requirements. The
presentation of Adjusted EBITDA herein is intended to be consistent with the calculation of that mea-
sure as required by our borrowing arrangements, and used to calculate a leverage ratio (maximum of
4.25 at September 30, 2008) and an interest coverage ratio (minimum of 3.25 for the year ended
September 30, 2008). The Company’s leverage ratio was 3.97 at September 30, 2008 and our inter-
est coverage ratio was 3.87 for the year ended September 30, 2008.

In accordance with the terms of our credit facilities, Adjusted EBITDA is defined as net income before
interest, taxes, depreciation and amortization, as well as certain other items such as the impact of
discontinued operations, the cumulative effect of changes in accounting, costs associated with debt
refinancings, and other non-recurring, non-cash items effecting net income. Adjusted EBITDA does
not represent and should not be considered as an alternative to net income or cash flow from opera-
tions as determined by accounting principles generally accepted in the United States, and Adjusted
EBITDA does not necessarily indicate whether cash flow will be sufficient to meet cash requirements.
Interest coverage is calculated as Adjusted EBITDA divided by interest expense excluding costs
related to refinancings.

A numeric reconciliation of net income (loss) to Adjusted EBITDA is as follows:

2008

2007

2006

2005

2004

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (10.9)
82.2
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26.7
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70.3
Deprecation and amortization . . . . . . . . . . . . . . . . . . .
136.8
Loss on impairment and other charges . . . . . . . . . . . .
Product registration and recall matters, non-cash

portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs related to refinancings . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . .

13.3
—
—

$ 113.4
70.7
74.7
67.5
38.0

—
18.3
—

$ 132.7
39.6
80.2
67.0
66.4

$100.6
41.5
57.7
67.2
23.4

$100.9
48.8
58.0
57.7
—

—
—
—

—
1.3
(0.2)

—
45.5
(0.4)

Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $318.4

$382.6

$385.9

$ 291.5

$ 310.5

RECONCILIATION OF NON-GA AP DISCLOSURE ITEMS

This table is part of The Scotts Miracle-Gro Company 2008 Annual Report (the “Annual Report”). The

Annual Report includes financial data and a letter from James Hagedorn, President, Chief Executive
Officer and Chairman of the Board, to the shareholders of The Scotts Miracle-Gro Company. Some of the
data and Mr. Hagedorn’s letter include non-GAAP financial measures, as defined in SEC Regulation G, of
adjusted gross margin, adjusted net income and adjusted diluted earnings per share which exclude
costs or gains for discrete projects or transactions. Items excluded during the five-year period ended
September 30, 2008 relate to the closure, downsizing or divestiture of certain operations that are apart
from and not indicative of the results of operations of the business, costs incurred to refinance the long-
term debt of the Company, product registration and recall charges, intangible and other asset
impairment charges, and a deferred contribution charge related to the Roundup˛ marketing agreement,
in each case net of tax. The comparable GAAP measures are reported gross margin, reported net income
and reported diluted earnings per share. Additionally, Mr. Hagedorn’s letter includes reference to free
cash flow, another non-GAAP financial measure. Free cash flow is equivalent to cash provided by
operating activities as defined by generally accepted accounting principles less capital expenditures. A
reconciliation of the GAAP to the non-GAAP measures is presented in the following tables:

The Scotts Miracle-Gro Company
Reconciliation of Non-GAAP Disclosure Items for the Twelve
Months Ended September 30, 2008, 2007, 2006, 2005, and 2004
(in millions, except per share data)

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other charges, net of tax . . . . . . . .
Debt refinancing charges, net of tax . . . . . . . . . . . . .
Impairment of intangibles and other assets, net of

tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred contribution charge, net of tax . . . . . . . . . . .
Product registration and recall matters, net of tax . . .
Adjusted net income . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted earnings (loss) per share . . . . . . . . . . . . . . . . .
Restructuring and other charges, net of tax . . . . . . . .
Debt refinancing charges, net of tax . . . . . . . . . . . . .
Impairment of intangibles and other assets, net of

tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred contribution charge, net of tax . . . . . . . . . . .
Product registration and recall matters, net of tax . . .
Adjusted diluted earnings per share . . . . . . . . . . . . . . .

Twelve Months Ended September 30,
2006
$132.7
6.1
—

2007
2008
$(10.9) $ 113.4
1.7
11.5

2005
$100.6
6.1
0.8

2004
$100.9
6.1
28.3

—
—

111.8
—
33.2

32.2
—
—
$134.1 $158.8

$(0.17) $ 1.69
0.03
0.17

—
—

1.71
—
0.51

0.48
—
—
$ 2.05 $ 2.37

43.1
—
—
$181.9

$ 1.91
0.09
—

0.62
—
—
$ 2.62

14.9
29.0
—
$ 151.4

$ 1.47
0.09
0.01

0.21
0.43
—
$ 2.21

—
—
—
$ 135.3

$ 1.52
0.09
0.42

—
—
—
$ 2.03

The Scotts Miracle-Gro Company
Reconciliation of Non-GAAP Disclosure Items for the Twelve
months ended September 30, 2008 and 2007

Twelve Months Ended September 30, 2008

Twelve Months Ended September 30, 2007

Product
Registrations/
Recalls

As Reported

Impairment Adjusted

As Reported

Costs
Related

to Refinancings Impairment Adjusted

$2,981.8
1,999.9

$(22.3)
(11.1)

— $3,004.1
2,011.0
—

$2,871.8
1,867.3

$ —
—

$ — $2,871.8
— $1,867.3

15.1

—

15.1

—

(15.1)

993.1

1,004.5

33.1%

35.0%

—

717.6

700.9

121.7

—

—
—

(136.8)
—
—

(136.8)
(25.0)

—
(10.4)

285.9
—
82.2

203.7
69.6

38.0

—
(11.5)

277.1
18.3
70.7

188.1
74.7

—

—
—

—
18.3
—

(18.3)
(6.5)

—

1,004.5

35.0%

—

700.9

38.0

—

—
—

(38.0)
—
—

(38.0)
(4.4)

—
(11.5)

315.1
—
70.7

244.4
85.6

27.2

939.6

31.5%

717.6

121.7

12.7
(10.4)

98.0
—
82.2

15.8
26.7

27.2

(38.4)

—

12.7
—

(51.1)
—
—

(51.1)
(17.9)

Net sales
Cost of sales
Cost of sales — impairment,
restructuring, and other
charges

Cost of sales — product

registrations and recall
matters

Gross profit
% of sales
Operating expenses:

Selling, general and
administrative

Impairment, restructuring
and other charges
Product registrations and

recall matters
Other income, net

Income from operations
Costs related to refinancings
Interest expense

Income before taxes
Income tax expense

Net income (loss)

$ (10.9)

$(33.2)

$ (111.8) $ 134.1

$ 113.4

$ (11.8)

$(33.6) $ 158.8

Diluted income (loss) per

Common shares and

potential common shares
used in diluted income
(loss) per share
calculation

(0.17)

$ (0.51)

$ (1.71) $

2.05

1.69

$(0.18)

$(0.50) $

2.37

64.5

65.4

67.0

Net income (loss)
Impairment of assets
Costs related to
refinancing

Stock-based compensation
Depreciation
Amortization, including

marketing fees

Changes in working capital

and other

Investment in property,
plant and equipment
Investment in intellectual

property

$ (10.9)
136.8

—
12.5
53.9

16.4

(7.8)

(56.1)

(4.1)

$ 113.4
38.0

18.3
13.3
51.4

16.1

(3.9)

(54.0)

—

Free cash flow

$ 140.7

$ 192.6

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The purpose of this discussion is to provide an understanding of the financial condition and results
of operations of The Scotts Miracle-Gro Company (“Scotts Miracle-Gro”) and its subsidiaries (collectively
the “Company”), by focusing on changes in certain key measures from year-to-year. Management’s
Discussion and Analysis (“MD&A”) is divided into the following sections:

(cid:129) Executive summary

(cid:129) Results of operations

(cid:129) Management’s outlook

(cid:129) Liquidity and capital resources

(cid:129) Critical accounting policies and estimates

Executive Summary

We are dedicated to delivering strong, consistent financial results and outstanding shareholder
returns by providing products of superior quality and value in order to enhance consumers’ outdoor
living environments. We are a leading manufacturer and marketer of consumer branded products for
lawn and garden care and professional horticulture in North America and Europe. We are Monsanto’s
exclusive agent for the marketing and distribution of consumer Roundup» non-selective herbicide
products within the United States and other contractually specified countries. We have a presence in
similar consumer branded and professional horticulture products in Australia, the Far East, Latin America
and South America. In the United States, we operate Scotts LawnService», the second largest residential
lawn care service business, and Smith & Hawken», a leading brand in the outdoor living and garden
lifestyle category. In fiscal 2008, our operations were divided into the following reportable segments:
Global Consumer, Global Professional, Scotts LawnService» and Corporate & Other. The Corporate &
Other segment consists of the Smith & Hawken» business and corporate general and administrative
expenses.

As a leading consumer branded lawn and garden company, our marketing efforts are largely focused
on building brand and product level awareness to inspire consumers and create retail demand. We have
successfully applied this consumer marketing focus for a number of years, consistently investing
approximately 5% of our annual net sales in advertising to support and promote our products and
brands. We continually explore new and innovative ways to communicate with consumers. We believe
that we receive a significant return on these marketing expenditures and anticipate a similar level of
advertising and marketing investments in the future, with the continuing objective of driving category
growth and increasing market share.

Our sales are susceptible to global weather conditions. For instance, periods of wet weather can
adversely impact sales of certain products, while increasing demand for other products. We believe that
our diversified product line provides some mitigation to this risk. We also believe that our broad
geographic diversification further reduces this risk.

Percent of Net Sales
by Quarter
2007

2006

2008

First Quarter
Second Quarter

Third Quarter
Fourth Quarter

10.4% 9.5% 9.3%
32.1% 34.6% 33.6%

39.3% 38.2% 38.9%
18.2% 17.7% 18.2%

Due to the nature of our lawn and garden business, significant portions of our products ship to our
retail customers during the second and third fiscal quarters. Our annual sales are further concentrated in
the second and third fiscal quarters by retailers who increasingly rely on our ability to deliver products
“in season” when consumers buy our products, thereby reducing their inventories.

Management focuses on a variety of key indicators and operating metrics to monitor the health and

performance of our business. These metrics include consumer purchases (point-of-sale data), market
share, net sales (including volume, pricing, product mix and foreign exchange movements), gross profit
margins, income from operations, net income and earnings per share. To the extent applicable, these

measures are evaluated with and without impairment, restructuring and other charges, which manage-
ment believes are not indicative of the ongoing earnings capabilities of our businesses. We also focus
on measures to optimize cash flow and return on invested capital, including the management of working
capital and capital expenditures.

Given the Company’s historical performance and consistent cash flows, the Company has
undertaken a number of actions over the past several years to return cash to our shareholders. We
began paying a quarterly cash dividend of 12.5 cents per share in the fourth quarter of fiscal 2005. In
fiscal 2006, the Company launched a five-year, $500 million share repurchase program pursuant to
which we repurchased 2.0 million common shares for an aggregate purchase price of $87.9 million
during fiscal 2006. In December 2006, the Company announced a recapitalization plan to return
$750 million to the Company’s shareholders. This plan expanded and accelerated the previously
announced five-year, $500 million share repurchase program (which was canceled). Pursuant to the
recapitalization plan, in February 2007, the Company repurchased 4.5 million of the Company’s common
shares for an aggregate purchase price of $245.5 million ($54.50 per share) and paid a special one-time
cash dividend of $8.00 per share ($508 million in the aggregate) in early March 2007.

In order to fund this recapitalization, the Company entered into credit facilities totaling $2.15 billion

and terminated its prior credit facility. Please refer to “NOTE 11. DEBT” to the Consolidated Financial
Statements included in this Annual Report for further information as to the credit facilities and the
repayment and termination of the Company’s prior credit facility and the Company’s 65⁄8% senior
subordinated notes.

Product Registration and Recall Matters

In April 2008, the Company learned that a former associate apparently deliberately circumvented
the Company’s policies and U.S. Environmental Protection Agency (“U.S. EPA”) regulations under the
Federal Insecticide, Fungicide, and Rodenticide Act of 1947, as amended (“FIFRA”), by failing to obtain
valid registrations for products and/or causing invalid product registration forms to be submitted to
regulators. Since that time, the Company has been cooperating with the U.S. EPA in its civil investigation
into pesticide product registration issues involving the Company and with the U.S. EPA and the
U.S. Department of Justice (the “U.S. DOJ”) in a related criminal investigation. In late April of 2008, in
connection with the U.S. EPA’s investigation, the Company was required to conduct a consumer-level
recall of certain consumer lawn and garden products and a Scotts LawnService» product. Subsequently,
the Company and the U.S. EPA agreed upon a Compliance Review Plan for conducting a comprehensive,
independent review of the Company’s product registration records. Pursuant to the Compliance Review
Plan, an independent third-party firm, Quality Associates Incorporated (“QAI”), has been reviewing all of
the Company’s U.S. pesticide product registration records, some of which are historical in nature and no
longer support sales of the Company’s products. The Company has identified approximately 132 of the
registrations under review as relating to products for which there was sales activity in the period
generally representing the Company’s 2008 fiscal year (“Active Registrations”). These Active Registrations
supported products which accounted for approximately $680 million of the Company’s net sales in the
period. The U.S. EPA investigation and QAI review process identified several issues affecting Active
Registrations which resulted in the issuance of a number of Stop Sale, Use or Removal Orders by the
U.S. EPA and caused the Company to temporarily suspend sales and shipments of affected products. In
addition, as the QAI review process or the Company’s internal review has identified a FIFRA registration
issue or a potential FIFRA registration issue (some of which appear unrelated to the former associate),
the Company has endeavored to stop selling or distributing the affected products until the issue could
be resolved with the U.S. EPA.

To date, QAI has completed a review of the registration records for substantially all of the

Company’s Active Registrations. Based on such review, and with the cooperation and prompt attention
of the U.S. EPA, the Company believes it has restored the ability to sell and distribute products
representing over 90% of the sales associated with Active Registrations; and the Company is hopeful
that it will be able to satisfactorily resolve most, if not all, of the remaining issues prior to the start of
the 2009 lawn and garden season. The QAI review process is expected to continue with a focus on
reviewing advertising and related promotional support of our registered pesticide products.

While the Company believes it has made substantial progress toward completing the FIFRA

compliance review process, the process continues and may result in future state or federal action with
respect to additional product registration issues. Until such investigation is complete, the Company

cannot fully quantify the extent of additional issues. Furthermore, the Company may be subject to civil
or criminal fines and/or penalties or private rights of action at the state and/or federal level as a result
of the product registration issues. At this time, management cannot reasonably determine the scope or
magnitude of possible liabilities that could result from known or potential additional product registration
issues, and no reserves for these claims have been established as of September 30, 2008. However, it
is possible that such fines, penalties and/or judgments could be material and have an adverse effect on
the Company’s financial condition, results of operations and cash flows.

On September 26, 2008, the Company, doing business as Scotts LawnService», was named as a

defendant in a purported class action filed in the U.S. District Court for the Eastern District of Michigan
relating to certain pesticide products. In the suit, Mark Baumkel, on behalf of himself and the purported
classes, seeks an unspecified amount of damages, plus costs and attorney fees, for alleged claims
involving breach of contract, unjust enrichment and violation of the Michigan consumer protection act.
Given the preliminary stages of the proceedings, no reserves have been booked at this time, and the
Company intends to vigorously contest the plaintiff’s assertions.

In addition, in fiscal 2008 the Company conducted a voluntary recall of most of its wild bird food

products due to a formulation issue. The wild bird food products had been treated with pest control
additives to avoid insect infestation, especially at retail stores. While the pest control additives had been
labeled for use on certain stored grains that can be processed for human and/or animal consumption,
they were not labeled for use on wild bird food products. This voluntary recall was completed prior to
the end of fiscal 2008.

As a result of these registration and recall matters, the Company has reversed sales associated with

estimated returns of affected products, recorded an impairment estimate for affected inventory and
recorded other registration and recall-related costs. The cumulative impact of these adjustments reduced
income from operations by $51.1 million for the fiscal year ended September 30, 2008. While the
Company continues to evaluate the financial impact of the registration and recall matters, the Company
currently expects total fiscal year 2008 and 2009 costs related to the recalls and known registration
issues to be limited to approximately $65 million, exclusive of potential fines, penalties and/or
judgments.

Scotts Miracle-Gro is committed to providing its customers and consumers with products of superior

quality and value to enhance their lawns, gardens and overall outdoor living environments. We believe
consumers have come to trust our brands based on the superior quality and value they deliver, and that
trust is highly valued. We are also committed to conducting business with the highest degree of ethical
standards and in adherence to the law. While we are disappointed in these recent events, we believe we
have made significant progress in addressing the issues and restoring customer and consumer
confidence in our products.

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, 2008:

Net sales
Cost of sales

Cost of sales — impairment, restructuring and other charges
Cost of sales — product registration and recall matters

Gross profit

Operating expenses:

Selling, general and administrative

SG&A — impairment, restructuring and other charges
SG&A — product registration and recall matters

Other income, net

Income from operations
Costs related to refinancings

Interest expense

Income before income taxes

Income taxes

Net income (loss)

Net Sales

2008

100.0%
67.1

2007

100.0%
65.0

2006

100.0%
64.6

0.5
0.9

31.5

24.1

4.1
0.4

(0.4)

3.3
—

2.8

0.5

0.9

—
—

35.0

24.4

1.4
—

(0.4)

9.6
0.6

2.5

6.5

2.6

—
—

35.4

23.6

2.8
—

(0.4)

9.4
—

1.5

7.9

3.0

(0.4)%

3.9%

4.9%

Consolidated net sales for fiscal 2008 increased 3.8% to $2.98 billion from $2.87 billion in fiscal
2007, while for fiscal 2007, net sales increased 6.3% to $2.87 billion from $2.70 billion in fiscal 2006.
Significantly impacting the rate of sales growth in both years were the following items:

Net sales growth
Acquisitions

Foreign exchange rates

Product recall matters — returns

Adjusted net sales growth

2008

2007

3.8%
(0.3)

(2.0)

0.8

2.3%

6.3%
(1.3)

(1.6)

—

3.4%

Excluding the impact of pricing, Global Consumer adjusted net sales declined by 2.5% for the year.

We believe this was a result of a number of factors, including the overall economic climate in the
United States, as well as unfavorable early spring weather conditions. Adjusted net sales in our Global
Professional segment grew 9.3% excluding the impact of pricing, driven by strong demand for the
proprietary technology used in that segment. Despite a reduction in customer count, Scotts LawnService»
experienced adjusted net sales growth of 1.2%, excluding the impact of pricing. Corporate & Other
adjusted net sales decreased 13.8%, primarily driven by declines across all channels of the Smith &
Hawken» business.

The adjusted net sales increase of 3.4% in fiscal 2007 was reflective of the weather related
challenges in the largest part of our business, the Global Consumer segment. Extreme cold and wet
weather in April 2007 discouraged consumer usage during this key retail selling period, and these lost
opportunities were not recovered as the weather improved later in the spring. While we saw strong
growth in the gardening category, in our Scotts LawnService» business, and our in Global Professional
segment, the adverse impact of weather on the important lawns business in North America overshad-
owed these successes.

Gross Profit

As a percentage of net sales, gross profit was 31.5% of net sales for fiscal 2008 compared to 35.0%

for fiscal 2007. The decrease in gross profit margin percentage was primarily driven by increased
commodity costs, which unfavorably impacted all operating segments. Product registration and recall
matters and impairment charges unfavorably impacted gross profit rates for fiscal 2008 by 90 basis
points and 50 basis points, respectively.

As a percentage of net sales, gross profit was 35.0% of net sales for fiscal 2007 compared to 35.4%

for fiscal 2006. This decline in gross profit was driven primarily by the Global Consumer segment, due
almost entirely to unfavorable product mix. Strong net sales growth in the lower margin wild bird food
and growing media businesses, coupled with a net sales decline in our higher margin lawns business,
were the drivers behind this decrease. Offsetting this decline were gross profit improvements in our
Scotts LawnService», Smith & Hawken» and the Global Professional businesses.

Selling, General and Administrative Expenses (in millions)

Advertising
Advertising as a percentage of net sales

Other SG&A

Stock-based compensation
Amortization of intangibles

2008

$142.4

4.8%

$547.1

12.5
15.6

$717.6

2007

$ 150.9

5.3%

$ 519.2

15.5
15.3

2006

$ 137.3

5.1%

$468.7

15.7
15.2

$700.9

$636.9

Advertising expenses in fiscal 2008 were $142.4 million, a decrease of $8.5 million or 5.6% from

fiscal 2007. Fiscal 2007 advertising expenses were $150.9 million, an increase of $13.6 million or 9.9%
from fiscal 2006. On a percentage of net sales basis, advertising expenses were 4.8% of net sales in
fiscal 2008, 5.3% in fiscal 2007 and 5.1% in fiscal 2006. The fiscal 2008 decrease as a percent of net
sales was principally the result of a shift from media to consumer promotions and other trade expense,
the costs of which are netted against sales rather than classified as SG&A. The fiscal 2007 increase as a
percent of net sales was due to an effort to drive consumer interest and reinvigorate the lawns category
following weak net sales performance in April 2007.

In fiscal 2008, other SG&A spending increased $27.9 million or 5.4% from fiscal 2007. The

Company’s increased investments were focused principally within the sales force, research and develop-
ment and marketing areas ($14.2 million). The increase from fiscal 2007 to fiscal 2008 was largely driven
by increased investments within the North America portion of the Global Consumer segment. The adverse
impact of foreign exchange rates on spending outside of the United States represented the majority of
the remaining increase ($11.3 million). In fiscal 2007, other SG&A spending increased $50.5 million or
10.8% from fiscal 2006. An increase in Scotts LawnService» infrastructure ($20.4 million), the adverse
effect of foreign exchange rates on spending outside the United States ($11.3 million), and a nonrecur-
ring benefit in fiscal 2006 ($10.1 million) for an insurance recovery relating to past legal costs incurred
in our defense of lawsuits regarding our use of vermiculite were the primary drivers behind the increase
from fiscal 2006 to fiscal 2007.

The majority of our stock-based awards vest over three years, with the associated expense

recognized ratably over the vesting period. The decrease in stock-based compensation expense in fiscal
2008 as compared to fiscal 2007 was primarily attributable to a change in the Board of Directors equity
compensation plan effective in February 2008, which resulted in the majority of associated expense
being recognized ratably over the Board of Directors’ service period, compared to previous years’ grants
where the associated expense was recorded entirely in the year of the grant. Additionally, the decrease
in the Company’s share price during fiscal 2008 resulted in a reduction of expense for the equity awards
that are expensed based on the Company’s share price.

Amortization expense of $15.6 million in fiscal 2008 is comparable to $15.3 million in fiscal 2007

and $15.2 million in fiscal 2006.

4603_FIN.pdf December 5, 2008 10

Impairment, Restructuring and Other Charges (in millions)

Goodwill and intangible asset impairment
Property, plant and equipment impairment

SG&A — product registration and recall matters

Restructuring — severance and related
Other

2008

$120.0
1.7

12.7

—
—

2007

$ 35.3
—

—

—
2.7

2006

$66.4
—

—

9.3
—

$ 134.4

$38.0

$ 75.7

During the third quarter of fiscal 2007, the Company changed the timing of its SFAS 142, “Goodwill

and Other Intangible Assets” annual goodwill impairment testing from the last day of our first fiscal
quarter to the first day of our fourth fiscal quarter. Moving the timing of our annual goodwill impairment
testing better aligns with the seasonal nature of our business and the timing of our annual strategic
planning process. In addition, the Company also changed the date of its annual indefinite life intangible
impairment testing to the first day of our fourth fiscal quarter. Management engages an independent
valuation firm to assist in its impairment assessment reviews.

As a result of a significant decline in the market value of the Company’s common shares during the

latter half of the third fiscal quarter ended June 28, 2008, the Company’s market value of invested
capital was approximately 60% of the comparable impairment metric used in our fourth quarter fiscal
2007 annual impairment testing. Management determined this was an indicator of possible goodwill
impairment and, therefore, interim impairment testing was performed as of June 28, 2008.

The Company’s third quarter fiscal 2008 interim impairment review resulted in a non-cash charge of

$123.3 million to reflect the decline in the fair value of certain goodwill and other assets evidenced by
the decline in the Company’s common shares. No further adjustments to the goodwill portion of this
impairment charge were required as a result of the completion of the SFAS 142 Step 2 evaluation in the
fourth quarter of fiscal 2008. However, an additional impairment charge of $13.5 million was recorded in
the fourth quarter of fiscal 2008, primarily related to leasehold improvements of Smith & Hawken». In
total, the fiscal 2008 impairment charges comprise $80.8 million for goodwill, $19.0 million related to
indefinite-lived tradenames and $37.0 million for SFAS 144 long-lived assets. Of the $37.0 million
impairment charge recorded for SFAS 144 long-lived assets, $15.1 million was recorded in cost of sales.
On a reportable segment basis, $64.5 million of the impairment was in Global Consumer, $38.4 million
was in Global Professional, with the remaining $33.9 million in Corporate & Other.

The Company recorded $12.7 million of SG&A-related product registration and recall costs during

fiscal 2008 which primarily relate to third-party compliance review, legal and consulting fees.

Our fourth quarter fiscal 2007 impairment review resulted in a non-cash goodwill and intangible asset
impairment charge of $35.3 million. Partially as a result of the disappointing 2007 lawn and garden season,
management completed a comprehensive strategic update of its business initiatives in the fourth quarter of
fiscal 2007. One outcome of this update was a decision to increase the focus of Company resources on our
core consumer lawn and garden do-it-yourself businesses. This process also involved a re-evaluation of the
strategy and cash flow projections surrounding our Smith & Hawken» business, which has consistently
performed below expectations since it was acquired in early fiscal 2005. We revised our Smith & Hawken»
strategy to reflect a scaled back retail expansion plan, with an increased focus on aggressively expanding
the wholesale aspect of this business. This resulted in a decrease in our prior cash flow projections for this
business, resulting in a $24.6 million goodwill impairment charge and a $4.6 million impairment charge for
an indefinite-lived tradename. The Company finalized the fourth quarter fiscal 2007 SFAS 142 impairment
evaluation of the Smith & Hawken» goodwill during the first quarter of fiscal 2008 and there was no change
to the related impairment charge recorded in the fourth quarter of fiscal 2007.

Our fiscal 2007 fourth quarter strategic update also encompassed other areas. We remain strongly
committed to the development of turfgrass varieties that could one day require less mowing, less water
and fewer treatments to resist insects, weeds and disease. Our efforts to develop such turfgrass varieties
include conventional breeding programs as well as research and development involving biotechnology.
Our efforts to develop turfgrass varieties involving biotechnology have yielded positive results; however,
the required regulatory approval process is taking longer than anticipated, impacting our ability to

commercialize our innovations. As a result of our fiscal 2007 fourth quarter strategic update, we
recorded a $2.2 million goodwill impairment charge related to our turfgrass biotechnology program.
Similarly, a strategic update of certain information technology initiatives in our Scotts LawnService»
segment resulted in a $3.9 million impairment charge.

Other charges in fiscal 2007 related to ongoing monitoring and remediation costs associated with our

turfgrass biotechnology program. Restructuring activities in fiscal 2006 related primarily to organizational
reductions associated with Project Excellence, initiated in the third quarter of fiscal 2005. As a result of
this program, approximately 110 associates accepted early retirement or were severed during fiscal 2006.

Other Income, net

Other income, net was $10.4 million for fiscal 2008, $11.5 million for fiscal 2007 and $9.2 million

for fiscal 2006. Royalty income was the most significant component of other income, approximating
$9.6 million, $9.9 million and $6.8 million in fiscal 2008, 2007 and 2006, respectively.

Income from Operations

Income from operations in fiscal 2008 was $98.0 million compared to $277.1 million in fiscal 2007,

a decrease of $179.1 million. Fiscal 2008 was negatively impacted by impairment charges ($136.8 million)
and product registration and recall costs ($51.1 million) that, when excluded, result in income from
operations of $285.9 million. Fiscal 2007 was negatively impacted by impairment and other charges
($38.0 million) that, when excluded, result in income from operations of $315.1 million. Excluding the
impairment and other charges and product registration and recall costs, income from operations declined
by $29.2 million in 2008, primarily driven by increased commodity costs which more than offset price
increases passed onto our customers.

Income from operations in fiscal 2007 was $277.1 million compared to $252.5 million in fiscal 2006,
an increase of $24.6 million. Both years were negatively impacted by impairment, restructuring and other
charges that, when excluded, result in a decline of $13.1 million of income from operations in fiscal 2007
as compared to fiscal 2006. The adverse effects of weather on net sales growth coupled with a 40 basis
point decline in gross profit and SG&A spending increases were the drivers behind this decline.

Interest Expense and Refinancing Activities

Interest expense in fiscal 2008 was $82.2 million compared to $70.7 million and $39.6 million in

fiscal 2007 and 2006, respectively. The increase in interest expense is primarily attributable to an
increase in borrowings resulting from the recapitalization transactions that were consummated during
the second quarter of fiscal 2007. We also recorded $18.3 million in costs in fiscal 2007 related to the
refinancing undertaken to facilitate the recapitalization transactions.

Income Taxes

The effective tax rate for fiscal 2008 was 168.6% compared to 39.7% in fiscal 2007 and 37.7% in
fiscal 2006. The increase in the effective tax rate for fiscal 2008 and fiscal 2007 was due to goodwill
impairment charges ($80.8 million, $26.8 million and $1.8 million in fiscal 2008, 2007 and 2006,
respectively), which are not fully deductible for tax purposes. The fiscal 2008 income tax expense also
includes $16.9 million of charges to fully reserve for deferred tax assets that originated as a result of
impairments of the Smith & Hawken» business in fiscal 2008 and fiscal 2007. The Company has
concluded that it is probable that we will not receive any future benefit from these deferred tax assets.

Net Income (Loss) and Earnings (Loss) per Share

The Company reported a net loss of $10.9 million or $0.17 per diluted share in fiscal 2008

compared to net income of $113.4 million or $1.69 per diluted share in fiscal 2007. The Company
recorded $136.8 million in impairment charges, as well as $51.1 million in costs related to product
registration and recall matters, in fiscal 2008. Challenging weather conditions in March 2008 negatively
impacted net sales for the largest part of our business, the Global Consumer segment. Additionally,
commodity costs increased significantly in fiscal 2008. Diluted weighted-average common shares
outstanding decreased from 67.0 million in fiscal 2007 to 64.5 million in fiscal 2008, due to the
4.5 million common shares repurchased as part of the recapitalization consummated during the second
quarter of fiscal 2007, weighted for the period outstanding, and offset by common shares issued upon
the exercise of share-based awards and the vesting of restricted stock. Furthermore, 0.9 million potential
common shares were excluded from the diluted loss per share calculation for fiscal 2008 because their

effect is anti-dilutive. The number of potential common shares declined in fiscal 2008 as a result of a
lower average market price for our common shares.

While income from operations increased $24.6 million in fiscal 2007 over fiscal 2006, net income
decreased from $132.7 million or $1.91 per diluted share in fiscal 2006 to $113.4 million or $1.69 per diluted
share in fiscal 2007. Adverse weather conditions negatively impacted net sales in the Global Consumer
segment, particularly during the important month of April. Costs related to the refinancing, increased levels
of debt and a higher weighted average interest rate resulting from the recapitalization transactions coupled
with a higher effective tax rate also contributed to the decline. Diluted weighted-average common shares
outstanding decreased from 69.4 million in fiscal 2006 to 67.0 million in fiscal 2007 due to the repurchase
of 4.5 million of our common shares, weighted for the period outstanding, as part of the recapitalization
transactions consummated in the second quarter of fiscal 2007.

Segment Results

The Company is divided into the following segments: Global Consumer, Global Professional,

Scotts LawnService» and Corporate & Other. These segments differ from those used in the prior year due
to the realignment of the North America and International segments into the Global Consumer and
Global Professional segments. The Corporate & Other segment consists of Smith & Hawken» and
corporate general and administrative expenses. The prior year amounts have been reclassified to
conform to the fiscal 2008 segments. Segment performance is evaluated based on several factors,
including income from operations before amortization, product registration and recall costs, and
impairment, restructuring and other charges, which are not generally accepted accounting principles
(“GAAP”) measures. Management uses this measure of operating profit to gauge segment performance
because we believe this measure is the most indicative of performance trends and the overall earnings
potential of each segment.

Net Sales by Segment (in millions)

Global Consumer
Global Professional
Scotts LawnService»
Corporate & Other

Segment total
Roundup» amortization
Product registrations and recall matters-returns

Consolidated

Income from Operations by Segment (in millions)

Global Consumer

Global Professional
Scotts LawnService»
Corporate & Other

Segment total

Roundup» amortization
Other amortization
Product registrations and recall matters

Impairment of assets

Restructuring and other charges

2008

$ 2,250.1
348.8

247.4

158.6

2007

$ 2,176.2
281.9

230.5

184.0

2006

$2,089.6
233.4

205.7

169.2

3,004.9

2,872.6

2,697.9

(0.8)
(22.3)

(0.8)
—

$2,981.8

$ 2,871.8

$ 2,697.1

2008

$ 344.5

33.7

11.3
(87.2)

302.3
(0.8)

(15.6)
(51.1)

(136.8)

—

2007

$379.1

31.3

11.3
(90.5)

331.2
(0.8)

(15.3)
—

(35.3)

(2.7)

2006

$392.4

27.3

15.6
(91.0)

344.3
(0.8)

(15.2)
—

(66.4)

(9.4)

Consolidated

$ 98.0

$277.1

$252.5

Global Consumer

Global Consumer segment net sales were $2.25 billion in fiscal 2008 compared to $2.18 billion in
fiscal 2007, an increase of 3.4%. Within Global Consumer, North America consumer sales increased by
2.0%. Net sales of our gardening products, which consist of plant foods and growing media, increased
by 0.7%, with growth driven by growing media products, where consumers continue to trade up for
branded, value-added solutions. Net sales of our lawn products, comprised of fertilizers, grass seed,
and durables, increased by 0.8% as the season got off to a late start, with unseasonable March weather
resulting in reduced sales of higher priced lawn fertilizer combination products. Ortho» net sales
decreased by 3.4% in fiscal 2008, while the net sales in the wild bird food category have increased by
20.0% primarily due to pricing, and net sales in Canada increased by 9.3% excluding the effect of
foreign exchange rates. International consumer sales increased by 10.8% in 2008. Excluding foreign
exchanges rates, international consumer net sales increased 2.0% driven by growth in France and
Central Europe as the result of improved marketing programs and new products. This growth offset the
decreased net sales in the United Kingdom where the economic environment is more challenging and
competition has been more aggressive.

Global Consumer segment operating income decreased by $34.6 million or 9.1% in fiscal 2008. The

decrease in operating income was driven primarily by a decrease in gross margin rates of 160 basis
points. The decrease in gross margin rates was largely the result of higher commodity costs, which more
than offset price increases. SG&A spending, including media advertising, increased 3.7% in fiscal 2008
primarily related to higher selling and R&D costs.

For fiscal 2007, Global Consumer segment net sales were $2.18 billion, an increase of $86.6 million
or 4.1% compared to fiscal 2006. In the North American consumer business, adverse weather conditions
for much of the core selling season disproportionately impacted the lawns business, resulting in a 5.6%
decline in net sales. The other core businesses were less impacted by the weather, with net sales in the
gardening category up 7.4% and Ortho» up 2.9%. Net sales in our wild bird food business improved by
13.5%. International consumer net sales increased by 5.5% excluding foreign exchange rates, driven by
growth in our two largest markets, France and the United Kingdom. The increase in net sales for the
segment did not generate the gross margin improvement needed to offset the growth in advertising and
other SG&A spending, with the result being a decline in segment operating income of $13.3 million or
3.4% compared to fiscal 2006.

Global Professional

Global Professional segment net sales increased $66.9 million or 23.7% in fiscal 2008. Excluding
the effect of exchange rates, net sales increased by 17.2%. Strong demand for our proprietary technology
drove the sales growth of 9.3% in fiscal 2008, excluding pricing actions. The segment operating income
increased by $2.4 million in fiscal 2008 as the strong growth in net sales was partially offset by
increased commodity costs and SG&A spending, primarily related to selling costs.

Global Professional segment net sales increased $48.5 million or 20.8% in fiscal 2007, driven by

the impact of foreign exchange rates as well as organic growth in the international professional
business. The segment operating income increased by $4.0 million or 14.7% in fiscal 2007 driven by a
steady gross margin on higher net sales as well as tight control over growth in SG&A spending.

Scotts LawnService»

Compared to fiscal 2007, Scotts LawnService» net sales increased 7.3% to $247.4 million in fiscal

2008. The increase for fiscal 2008 was the result of acquisition growth of 3.3%, pricing of 2.8% and
organic growth of 1.2%. Despite macroeconomic pressures that have reduced customer count, the
business has grown partially due to increased penetration on tree, shrub and insect services, a reduction
in new customer cancel rates and reduced cancels due to issues with service or results. Additionally, the
shifting of late season lawn treatments to the first quarter of fiscal 2008 positively impacted net sales.
The Scotts LawnService» segment operating income is flat compared to fiscal 2007 as the net sales and
gross margin growth were offset by an increase in SG&A spending.

Compared to fiscal 2006, segment net sales increased 12.1% to $230.5 million for fiscal 2007. This

revenue growth was primarily attributable to an increase in average customer count. Approximately 3.6%
of the revenue increase came from acquisitions completed in fiscal 2006 and fiscal 2007. Operating
income decreased from $15.6 million in fiscal 2006 to $11.3 million in fiscal 2007. The decrease in
operating income was primarily attributable to higher planned SG&A spending to support higher volume

and continued service improvements. Improved labor productivity helped to offset higher fertilizer and
fuel costs, but revenue growth was not adequate to cover the higher levels of SG&A spending due to
adverse weather conditions during the important late winter/early spring period.

Corporate & Other

Net sales for the Corporate & Other segment, which pertain primarily to Smith & Hawken»,
decreased $25.4 million or 13.8% in fiscal 2008. Net sales decreased across all channels of Smith &
Hawken». Additionally, the first half of fiscal 2007 benefited from initial start-up activity with Starbucks».
The operating loss for Corporate & Other decreased by $3.3 million in fiscal 2008 primarily due to lower
net Corporate spending.

Net sales for the Corporate & Other segment increased $14.8 million or 8.7% in fiscal 2007 due

largely to the business-to-business channel, including the initial start-up activity with Starbucks». The
operating loss for Corporate & Other decreased by $0.5 million in fiscal 2007. Spending at the Corporate
level declined more than the numbers indicate for fiscal 2007, as fiscal 2006 benefited from a
$10.1 million insurance recovery.

Management’s Outlook

Entering fiscal 2009, we expected net income and earnings per share, excluding impairment charges

and product registration and recall costs, to be in line with the results we reported in fiscal 2008. We
anticipated net sales to be flat compared to 2008, as average price increases of eight percent would be
largely offset by unfavorable foreign exchange rate movements and unit volume declines. We also
anticipated that gross margin rates would be in line with 2008 and that SG&A would likely grow at a
minimal level.

In the early weeks of fiscal 2009, however, key commodity costs continued to trend more favorably
than expected. Subsequently, several retail partners approached the Company about possibly providing
private label products for them in fiscal 2009 after a major competitor unexpectedly exited the category.
While we are hopeful that favorable commodity price trends will continue and that we will ultimately be
successful in securing additional volume from the private label opportunities, we are mindful of the
continually deteriorating outlook for consumer spending. Given the seasonality of our business (which
results in a concentration of sales in the second and third fiscal quarters), it is difficult for us to predict
what impact the current economic volatility will have on upcoming consumer lawn and garden spending.
Nevertheless, we believe that we have more opportunity than not to exceed the financial expectations
we had entering fiscal 2009.

The Company remains focused on maintaining its free cash flow and return on invested capital,
both of which the Company believes are important drivers of shareholder value. Our regular quarterly
dividend will allow us to continue to return funds to shareholders while maintaining our targeted capital
structure.

For certain information concerning our risk factors, see “RISK FACTORS.”

Liquidity and Capital Resources

Operating Activities

Cash provided by operating activities decreased from $246.6 million in fiscal 2007 to $200.9 million

in fiscal 2008. Net income (loss) plus non-cash impairment charges, non-cash costs related to
refinancing, stock-based compensation expense, depreciation and amortization declined by $41.8 million
from $250.5 million in fiscal 2007 to $208.7 million in fiscal 2008, primarily due to product registration
and recall costs of approximately $51.1 million.

Cash provided by operating activities increased from $182.4 million in fiscal 2006 to $246.6 million

in fiscal 2007. Net income plus non-cash impairment charges, non-cash costs related to refinancing,
stock-based compensation expense, depreciation and amortization declined by $31.3 million from
$281.8 million in fiscal 2006 to $250.5 million in fiscal 2007, primarily due to higher interest expense
after our February 2007 recapitalization and lower operating income in our Global Consumer segment.
Fiscal 2006 operating cash flows were unfavorably impacted by inventory and accounts receivable
increases, which did not impact fiscal 2007. Furthermore, fiscal 2006 reflects a $43.0 million usage of
cash to fund the Roundup» deferred contribution payment in October 2005.

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 to support our retailers’
spring selling season. 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 fourth quarter because of the seasonal timing of customer
applications and extra service revenues.

Investing Activities

Cash used in investing activities was $59.1 million and $72.2 million for fiscal 2008 and 2007,
respectively. Capital spending increased from $54.0 million in fiscal 2007 to $60.2 million in fiscal
2008. Capital spending in fiscal 2008 included a $4.1 million investment in intellectual property rights
to certain organically derived herbicides, repellants and insecticides. For the three years ended
September 30, 2008, the Company’s capital spending was allocated as follows: 50% for expansion and
maintenance of Global Consumer productive assets; 12% for new productive assets supporting our
Global Consumer business; 9% primarily for leasehold improvements associated with new Smith &
Hawken» retail stores; 5% for expansion and upgrades of Scotts LawnService» facilities; 16% to expand
our information technology capabilities; and 8% for other corporate assets. Acquisition activity in fiscal
2007 was restricted to our Scotts LawnService» business, approximating $18.7 million. There was no
acquisition activity in fiscal 2008.

Financing Activities

Financing activities used cash of $123.0 million and $158.8 million in fiscal 2008 and 2007,
respectively. In fiscal 2008, the cash used was primarily the result of net repayments on outstanding
debt of $99.9 million and dividends paid of $32.5 million, offset by cash of $9.2 million received from
the exercise of stock options. Fiscal 2007 included the recapitalization plan that returned $750 million to
shareholders in addition to the repurchase of all of our 65⁄8% senior subordinated notes in an aggregate
principal amount of $200 million. These actions were financed by replacing, effective February 7, 2007,
our prior revolving credit facility with senior secured $2.15 billion multicurrency credit facilities that
provide for revolving credit and term loans through February 7, 2012.

Credit Agreements

Our primary sources of liquidity are cash generated by operations and borrowings under our credit

agreements. In connection with the recapitalization transactions discussed in “NOTE 5. RECAPITALIZA-
TION” to the Consolidated Financial Statements included in this Annual Report, in February 2007, Scotts
Miracle-Gro and certain of its subsidiaries entered into the following loan facilities totaling up to
$2.15 billion in the aggregate: (a) a senior secured five-year term loan facility in the principal amount of
$560 million and (b) a senior secured five-year revolving loan facility in the aggregate principal amount
of up to $1.59 billion. Borrowings may be made in various currencies including U.S. dollars, Euros,
British pounds, Australian dollars and Canadian dollars. These $2.15 billion senior secured credit
facilities replaced the Company’s former $1.05 billion senior credit facility. In addition, we used proceeds
from these senior secured credit facilities to repurchase all of our then outstanding 65⁄8% senior
subordinated notes in an aggregate principal amount of $200 million. Under our current structure, we
may request an additional $200 million in revolving credit and/or term credit commitments, subject to
approval from our lenders. As of September 30, 2008, there was $1.19 billion of availability under our
senior secured credit facilities. “NOTE 11. DEBT” to the Consolidated Financial Statements included in
this Annual Report provides additional information pertaining to our borrowing arrangements. Although
we were in compliance with all of our debt covenants throughout fiscal 2008, please see “RISK
FACTORS” for a discussion of the potential negative impact of such issues on our compliance with
certain covenants contained in our credit agreements.

On April 11, 2007, the Company entered into a one-year Master Accounts Receivable Purchase

Agreement (the “Original MARP Agreement”). On April 9, 2008, the Company terminated the Original
MARP Agreement and entered into a new Master Accounts Receivable Purchase Agreement (the “New
MARP Agreement”) with a stated termination date of April 8, 2009, or such later date as may be
extended by mutual agreement of the Company and its lenders. The terms of the New MARP Agreement
are substantially the same as the Original MARP Agreement. The New MARP Agreement provides an
interest rate savings of 40 basis points as compared to borrowing under our senior secured credit
facilities. The New MARP Agreement provides for the sale, on a revolving basis, of accounts receivable

generated by specified account debtors, with seasonally adjusted monthly aggregate limits ranging from
$10 million to $300 million. The New MARP Agreement also provides for specified account debtor
sublimit amounts, which provide limits on the amount of receivables owed by individual account debtors
that can be sold to the banks. Borrowings under the New MARP Agreement at September 30, 2008 were
$62.1 million.

At September 30, 2008, the Company had outstanding interest rate swaps with major financial
institutions that effectively converted a portion of our variable-rate debt denominated in Euros, British
pounds and U.S. dollars to a fixed rate. The swap agreements had a total U.S. dollar equivalent notional
amount of $711.4 million at September 30, 2008. The term, expiration date and rates of these swaps are
shown in the table below.

Currency

British pound
Euro
U.S. dollar
U.S. dollar
U.S. dollar

Notional
Amount in
USD
(In millions)

$ 51.2
60.2
200.0
200.0
200.0

Term

3 years
3 years
2 years
3 years
5 years

Expiration
Date

11/17/2008
11/17/2008
3/31/2009
3/30/2010
2/14/2012

Fixed
Rate

4.76%
2.98%
4.90%
4.87%
5.20%

Our primary sources of liquidity are cash generated by operations and borrowings under our credit

facilities. As of September 30, 2008, there was $1.19 billion of availability under our credit facilities and
we were in compliance with all debt covenants. Our credit facilities contain, among other obligations, an
affirmative covenant regarding the Company’s leverage ratio, calculated as indebtedness relative to our
earnings before taxes, depreciation and amortization. Under the terms of the credit facilities, the
permissible leverage ratio is 4.25 as of September 30, 2008, which is scheduled to decrease to 3.75 on
September 30, 2009. Management continues to monitor the Company’s compliance with the leverage
ratio and other covenants contained in the credit facilities and, based upon the Company’s current
operating assumptions, the Company expects to remain in compliance with the permissible leverage
ratio throughout fiscal 2009. However, an unanticipated charge to earnings or an increase in debt could
materially affect our ability to remain in compliance with the financial covenants of our credit facilities,
potentially causing us to have to seek an amendment or waiver from our lending group. While we believe
we have good relationships with our banking group, given the adverse conditions currently present in
the global credit markets, we can provide no assurance that such a request would be likely to result in a
modified or replacement credit facility on reasonable terms, if at all.

Judicial and Administrative Proceedings

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, and
the availability and limits of our insurance coverage and have established what we believe to be
appropriate reserves. Apart from the proceedings surrounding the FIFRA compliance matters, which are
discussed separately, we do not believe that any liabilities that may result from pending judicial and
administrative proceedings are reasonably likely to have a material adverse effect on our liquidity,
financial condition or results of operations; however, there can be no assurance that future quarterly or
annual operating results will not be materially affected by final resolution of these matters.

Contractual Obligations and Off-Balance Sheet Arrangements

The following table summarizes our future cash outflows for contractual obligations as of September 30,

2008 (in millions):

Payments Due by Period

Contractual Cash Obligations

Total

Less than 1 year

1-3 years

4-5 years

$ 999.5
192.2
597.3

$ 150.0
39.0
299.8

$349.4
63.9
229.0

$496.6
44.7
68.5

More than
5 years

$ 3.5
44.6
—

Debt obligations
Operating lease obligations
Purchase obligations
Other, primarily retirement plan

obligations

47.2

12.3

7.3

7.7

19.9

Total contractual cash obligations

$1,836.2

$ 501.1

$649.6

$ 617.5

$68.0

Purchase obligations primarily represent commitments for materials used in the Company’s manu-
facturing processes, as well as commitments for warehouse services, seed and out-sourced information
services which comprise the unconditional purchase obligations disclosed in “NOTE 17. COMMITMENTS”
to the Consolidated Financial Statements included in this Annual Report.

Other includes actuarially determined retiree benefit payments and pension funding to comply with

local funding requirements. Pension funding requirements beyond fiscal 2009 are not currently determin-
able. The above table excludes interest payments and insurance accruals as the Company is unable to
estimate the timing of the payment for these items.

The Company has no off-balance sheet financing arrangements.

In our opinion, cash flows from operations and capital resources will be sufficient to meet debt
service and working capital needs during fiscal 2009, 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.

Regulatory 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. Apart from the proceed-
ings surrounding the FIFRA compliance matters, which are discussed separately, 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 these 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, results of operations and cash flows. However, there can be no assurance that the
resolution of these matters will not materially affect our future quarterly or annual results of operations,
financial condition and cash flows.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations is based upon the
Company’s consolidated financial statements, which have been prepared in accordance with U.S. GAAP.
Certain accounting policies are particularly significant, including those related to revenue recognition,
goodwill and intangibles, certain employee benefits, and income taxes. We believe these accounting
policies, and others set forth in “NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” to the
Consolidated Financial Statements included in this Annual Report, should be reviewed as they are
integral to understanding our results of operations and financial position. Our critical accounting policies
are reviewed periodically with the Audit Committee of the Board of Directors of Scotts Miracle-Gro.

The preparation of financial statements requires management to use judgment and make estimates
that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of
contingent assets and liabilities. On an ongoing 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. Although actual results historically have not deviated significantly from those determined
using our estimates, our results of operations or financial position could differ, perhaps materially, from
these estimates under different assumptions or conditions.

Revenue Recognition and Promotional Allowances

Most of our revenue is derived from the sale of inventory, and we recognize revenue when title and

risk of loss transfer, generally when products are received by the customer. Provisions for payment
discounts, product returns and allowances are recorded as a reduction of sales at the time revenue is
recognized based on historical trends and adjusted periodically as circumstances warrant. Similarly,
reserves for uncollectible receivables due from customers are established based on management’s
judgment as to the ultimate collectibility of these balances. We offer sales incentives through various
programs, consisting principally of volume rebates, cooperative advertising, consumer coupons and
other trade programs. The cost of these programs is recorded as a reduction of sales. The recognition of
revenues, receivables and trade programs requires the use of estimates. While we believe these
estimates to be reasonable based on the then current facts and circumstances, there can be no
assurance that actual amounts realized will not differ materially from estimated amounts recorded.

Long-lived Assets, including Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment is
provided on the straight-line method and is based on the estimated useful economic lives of the assets.
Intangible assets with finite lives, and therefore subject to amortization, include technology (e.g.,
patents), customer relationships and certain tradenames. These intangible assets are being amortized on
the straight-line method over periods typically ranging from 10 to 25 years. The Company reviews long-
lived assets whenever circumstances change such that the indicated recorded value of an asset may not
be recoverable.

Goodwill and Indefinite-lived Intangible Assets

We have significant investments in intangible assets and goodwill. Whenever changing conditions

warrant, we review the assets that may be affected for recoverability. At least annually, we review
goodwill and indefinite-lived intangible assets for impairment. As discussed in the Results of Operations
section of this MD&A, during the third quarter of fiscal 2007, the Company changed the timing of its
annual goodwill impairment testing from the last day of our first fiscal quarter to the first day of our
fourth fiscal quarter. The review for impairment of intangibles and goodwill is primarily based on our
estimates of discounted future cash flows, which are based upon budgets and longer-range strategic
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. An
asset’s value is deemed impaired if the discounted cash flows or earnings projections generated do not
substantiate the carrying value of the asset. The estimation of such amounts requires management to
exercise judgment with respect to revenue and expense growth rates, changes in working capital and
selection of an appropriate discount rate, as applicable. The use of different assumptions would increase
or decrease discounted future operating cash flows or earnings projections and could, therefore, change
impairment determinations.

Fair values related to our annual impairment review of indefinite-lived tradenames and goodwill
were determined using discounted cash flow models involving several assumptions. Changes in our
assumptions could materially impact our fair value estimates. Assumptions critical to our fair value
estimates were: (i) present value factors used in determining the fair value of the reporting units and
tradenames; (ii) royalty rates used in our tradename valuations; (iii) projected average revenue growth
rates used in the reporting unit and tradename models; and (iv) projected long-term growth rates used
in the derivation of terminal year values. These and other assumptions are impacted by economic
conditions and expectations of management and will change in the future based on period specific facts
and circumstances.

Inventories

Inventories are stated at the lower of cost or market, the majority of which are based on the first-in,

first-out method of accounting. 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.

Contingencies

As described more fully in “NOTE 18. CONTINGENCIES” to the Consolidated Financial Statements
included in this Annual Report, 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 their resolution. 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 currently be brought against us are known by us at this
time.

Income Taxes

Our annual effective tax rate is established based on our pre-tax income (loss), statutory tax rates
and the tax impacts of items treated differently for tax purposes than for financial reporting purposes.
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 consolidated statement of operations reflect the change in the period such determi-
nation 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. We use an
estimate of our 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.

Associate Benefits

We sponsor various post-employment benefit plans. These include pension plans, both defined

contribution plans and defined benefit plans, and other post-employment benefit (“OPEB”) plans,
consisting primarily of health care for retirees. For accounting purposes, the defined benefit pension and
OPEB plans are dependent on a variety of assumptions to estimate the projected and accumulated
benefit obligations determined by actuarial valuations. These assumptions include the following:
discount rate; expected salary increases; certain employee-related factors, such as turnover, retirement
age and mortality; expected return on plan assets; and health care cost trend rates. These and other
assumptions affect the annual expense recognized for these plans.

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.

Changes in the discount rate and investment returns can have a significant effect on the funded

status of our pension plans and shareholders’ equity. We cannot predict these discount rates or
investment returns with certainty and, therefore, cannot determine whether adjustments to our share-
holders’ equity for minimum pension liability in subsequent years will be significant. Subsequent to
September 30, 2008, investment markets have continued to decline. This has put further downward
pressure on the investments of the Company’s pension plans. Management continues to monitor this
situation and the potential impact on our future pension plan funding requirements and related
expenses. However, we cannot predict future investment returns, and therefore cannot determine

whether future pension plan funding requirements could materially and adversely affect our financial
condition, results of operations and cash flows.

Accruals for Self-Insurance

We maintain insurance for certain risks, including workers’ compensation, general liability and
vehicle liability, and are self-insured for employee-related health care benefits. We establish reserves for
losses based on our claims experience and industry actuarial estimates of the ultimate loss amount
inherent in the claims, including losses for claims incurred but not reported. Our estimate of self-insured
liabilities is subject to change as new events or circumstances develop which might materially impact
the ultimate cost to settle these losses.

Other Significant Accounting Policies

Other significant accounting policies, primarily those with lower levels of uncertainty than those
discussed above, are also critical to understanding the consolidated financial statements. The Notes to
the Consolidated Financial Statements included in this Annual Report contain additional information
related to our accounting policies, including recent accounting pronouncements, and should be read in
conjunction with this discussion.

RISK FACTORS

Cautionary Statement on 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 fiscal 2008
Form 10-K, in this Annual Report 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 fiscal 2008 Form 10-K, in this Annual Report
and in other contexts represent challenging goals for our Company, the achievement of which 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. Updates to our risk factors as
a result of our 2008 product recalls and the related governmental investigation are included below.

FIFRA Compliance, the Corresponding Governmental Investigation and Related Matters

Our products that contain pesticides must comply with FIFRA and be registered with the U.S. EPA
(and similar state agencies) before they can be sold or distributed. In April 2008, we became aware that
a former associate apparently deliberately circumvented Company policies and U.S. EPA regulations
under FIFRA by failing to obtain valid registrations for products and/or causing invalid product registra-
tion forms to be submitted to regulators. Since that time, we have been cooperating with the U.S. EPA in
its civil investigation into pesticide product registration issues involving the Company and with the
U.S. EPA and the U.S. DOJ in a related criminal investigation.

In connection with the registration investigation and FIFRA compliance review process, we have
recorded, and in the future may record, charges and costs, based on our most recent estimates, of
retailer inventory returns, consumer returns and replacement costs, costs to rework existing products,
inventory write-downs, associated legal and professional fees and costs associated with administration
of the registration investigation and compliance review process. Because these current and expected
future charges are based on estimates, they may increase as a result of numerous factors, many of
which are beyond our control, including the amount of products that may be returned by consumers and
retailers, the number and type of legal or regulatory proceedings relating to the registration investigation

and FIFRA compliance review process and regulatory or judicial orders or decrees that may require us to
take certain actions in connection with the registration investigation and FIFRA compliance review
process or to pay civil or criminal fines and/or penalties at the state and/or federal level.

There can be no assurance that the ultimate outcome of the investigation will not result in further

action against us, whether administrative, civil or criminal, by the U.S. EPA, U.S. DOJ, state regulatory
agencies or private litigants, and any such action, in addition to the costs we have incurred and would
continue to incur in connection therewith, could materially and adversely affect our financial condition,
results of operations and cash flows. In particular, a significant fine, penalty or judgment assessed
against us could result in a charge to earnings or an increase in debt which materially affects our ability
to remain in compliance with the financial covenants of our credit facilities, potentially causing us to
have to seek an amendment or waiver from our lending group. While we believe we have good
relationships with our banking group, given the adverse conditions currently present in the global credit
markets, we can provide no assurance that such a request would be likely to result in a modified or
replacement credit facility on reasonable terms, if at all.

Product recalls, our inability to ship, sell or transport affected products and the on-going
governmental investigation may harm our reputation and acceptance of our products by our retail
customers and consumers, which may materially and adversely affect our business operations, decrease
sales and increase costs. Moreover, the FIFRA compliance issues we have disclosed throughout fiscal
2008, together with the corresponding governmental investigation by the U.S. EPA and U.S. DOJ, have
resulted in coverage critical of us in the press and media. While we believe that these compliance issues
are primarily the result of the misguided actions of a former associate who misled us, some of the
issues identified appear unrelated to the former associate. And although we believe we have acted
promptly, responsibly and in the public interest, these compliance issues may nevertheless harm our
reputation and the acceptance of our products by consumers and our retailer customers. Our retailer
customers may be less willing to purchase our products or to provide marketing support for those
products, such as shelf space, promotions and advertising, or may impose additional requirements that
could materially and adversely affect our business operations, decrease sales and increase costs.

On September 26, 2008, the Company, doing business as Scotts LawnService», was named as a

Commodity Cost Pressures

Our ability to manage our cost structure can be adversely affected by movements in commodity and

other raw material prices, such as those experienced in both fiscal 2008 and 2007. Market conditions
may limit the Company’s ability to raise selling prices to offset increases in our input and distribution
costs. The uniqueness of our technologies can limit our ability to locate or utilize alternative inputs for
certain products. For certain inputs, new sources of supply may have to be qualified under regulatory
standards, which can require additional investment and delay bringing a product to market.

Competition

Each of our segments participates in markets that are highly competitive. Many of our competitors
sell their products at prices lower than ours. The most price sensitive segment of our category may be
more likely to trade down to lower price point products in a more challenging economic environment. We
compete primarily on the basis of product innovation, product quality, product performance, value,
brand strength, supply chain competency, field sales support 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, results of operations and cash flows.

The Regulatory Environment

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 comply with FIFRA and be
registered with the U.S. EPA (and similar state agencies) before they can be sold or distributed. The

inability to obtain or maintain such compliance, or the cancellation of any 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. In the EU, the European Parliament is considering the adoption of certain regulations, the effect of
which would substantially restrict or eliminate our ability to market and sell certain of our pesticide
products. If these regulations were to be adopted in their current form in the EU, the resulting impact on
our consumer and professional European controls businesses could be materially adversely impacted. In
addition, there are provincially-driven regulations pending across Canada that, depending on the timing
and scope of final issuance, could substantially restrict or eliminate our ability to market and sell certain
of our consumer pesticide products there.

Under the Food Quality Protection Act, enacted by the U.S. Congress in 1996, food-use pesticides

are evaluated to determine whether there is 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. For example, 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, which was also
used in our lawn and garden products. We cannot predict the outcome or the severity of the effect of
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 require-
ments 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 provide assurance 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 adversely affect future quarterly or annual operating
results.

Perceptions that the products we produce and market are not safe could adversely affect us and

contribute to the risk we will be subjected to legal action. We manufacture and market a number of
complex chemical products, such as fertilizers, certain growing media, herbicides and pesticides. 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 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 on our business.

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.

The adequacy of our current non-FIFRA compliance related environmental reserves and future

provisions is based on our operating in substantial compliance with applicable environmental and public
health laws and regulations and several significant assumptions:

(cid:129) that we have identified all of the significant sites that must be remediated;

(cid:129) that there are no significant conditions of potential contamination that are unknown to us; and

(cid:129) that with respect to the agreed judicial consent order in Ohio relating to the remediation of the
Marysville site, 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 adverse impact on future environmental capital expenditures
and other environmental expenses and our results of operations, financial position and cash flows.

Manufacturing

We use a combination of internal and outsourced facilities to manufacture our products. We are
subject to the inherent risks in such activities, including product quality, safety, licensing requirements
and other regulatory issues, environmental events, loss or impairment of key manufacturing sites,
disruptions in logistics, labor disputes and industrial accidents. Furthermore, we are subject to natural
disasters and other factors over which the Company has no control.

Customer Concentration

Global Consumer net sales represented approximately 75% of our worldwide net sales in fiscal
2008. Our top three North American retail customers together accounted for 64% of our Global Consumer
segment fiscal 2008 net sales and 34% of our outstanding accounts receivable as of September 30,
2008. Home Depot, Lowe’s and Walmart represented approximately 28%, 18% and 18%, respectively, of
our fiscal 2008 Global Consumer net sales. The loss of, or reduction in orders from, Home Depot,
Lowe’s, Walmart 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 on our financial condition and results of operations.

We do not have long-term sales agreements with, 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 deterioration in the financial
condition of, or other adverse developments involving our relationship with, one or more of our customers.

Weather and Seasonality

Weather conditions in North America and Europe can have a significant impact on the timing of

sales in the spring selling season and overall annual sales. An abnormally wet and/or cold spring
throughout North America or Europe could adversely affect both fertilizer and pesticide sales and,
therefore, our financial results. Because our products are used primarily in the spring and summer, our
business is highly seasonal. For the past three fiscal years, 70% to 75% of our annual net sales have
occurred in the second and third fiscal quarters combined. Our working capital needs and borrowings
typically peak during the initial weeks of our third fiscal quarter because we are incurring expenditures
in preparation for the spring selling season, while the majority of our revenue collections occur later in
our third fiscal quarter. If cash on hand is insufficient to pay our obligations as they come due, including
interest payments or operating expenses, at a time when we are unable to draw on our credit facilities,
this seasonality could have a material adverse effect on our ability to conduct our business. Adverse
weather conditions could heighten this risk.

Debt

We have a significant amount of debt that could adversely affect our financial health and prevent us

from fulfilling our obligations. Our substantial indebtedness could have important consequences. For
example, it could:

(cid:129) make it more difficult for us to satisfy our obligations under outstanding indebtedness;

(cid:129) increase our vulnerability to general adverse economic and industry conditions;

(cid:129) 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;

(cid:129) limit our flexibility in planning for, or reacting to, changes in our business and the industry in

which we operate;

(cid:129) place us at a competitive disadvantage compared to our competitors that have less debt;

(cid:129) limit our ability to borrow additional funds; and

(cid:129) 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 and to refinance our indebtedness, to fund planned capital expendi-

tures and acquisitions and to pay dividends 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 credit facilities 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 be sure that we would be able to
refinance any of our indebtedness on commercially reasonable terms or at all.

Our credit facilities 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 be assured we will satisfy those ratios. A breach of any of these
financial ratio covenants or other covenants could result in a default. Upon the occurrence of an event of
default, the lenders could elect to declare the applicable outstanding indebtedness due immediately
and payable and terminate all commitments to extend further credit. We cannot be sure that our lenders
would waive a default or that we could pay the indebtedness in full if it were accelerated.

Foreign Operations and Currency Exposures

We currently operate manufacturing, sales and service facilities outside of the United States,
particularly in Canada, France, the United Kingdom, Germany and the Netherlands. In fiscal 2008,
international net sales, including Canada, accounted for approximately 24% of our total net sales.
Accordingly, we are subject to risks associated with operating in foreign countries, including:

(cid:129) fluctuations in currency exchange rates;

(cid:129) limitations on the remittance of dividends and other payments by foreign subsidiaries;

(cid:129) additional costs of compliance with local regulations; and

(cid:129) 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 and
Canadian operations could adversely affect our operations and financial results in the future.

Acquisitions

We make strategic acquisitions from time to time, including the June 2006 acquisition of certain
assets of Landmark Seed Company, the May 2006 acquisition of certain assets of Turf-Seed, Inc., the
November 2005 acquisition of Gutwein (Morning Song»), the October 2005 acquisition of Rod McLellan
Company and the October 2004 acquisition of Smith & Hawken». Acquisitions have inherent risks, such
as obtaining necessary regulatory approvals, retaining key personnel, integration of the acquired
business and achievement of planned synergies and projections. We have approximately $745 million of
goodwill and intangible assets as of September 30, 2008. Uncertainty regarding the future performance
of the acquired businesses could also result in future impairment charges related to the associated
goodwill and intangible assets, such as the impairment charges recorded in fiscal 2006, 2007 and 2008.

Significant Agreement

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 Marketing 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 substantial 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 unit volume sales to consumers in that region decline: (1) over a cumulative three-fiscal-year period; or
(2) by more than 5% for each of two consecutive years.

Equity Ownership Concentration

Hagedorn Partnership, L.P. beneficially owned approximately 31% of our outstanding common shares

as of November 21, 2008, and has sufficient voting power to significantly influence the election of
directors and the approval of other actions requiring the approval of our shareholders.

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. Financial derivative and other
instruments are used to manage these risks. These instruments are not used for speculative purposes.

Interest Rate Risk

The Company had variable rate debt instruments outstanding at September 30, 2008 and 2007 that

are impacted by changes in interest rates. As a means of managing our interest rate risk on these debt
instruments, the Company enters into interest rate swap agreements to effectively convert certain
variable-rate debt obligations to fixed rates.

At September 30, 2008 and September 30, 2007, the Company had outstanding interest rate swaps
with major financial institutions that effectively convert a portion of our variable-rate debt to a fixed rate.
The swap agreements had a total U.S. dollar equivalent notional amount of $711.4 million and
$720.0 million, respectively. Under the terms of these swaps, we paid average fixed rates of 2.98% on
Euro denominated swaps, 4.76% on British pound (“GBP”) denominated swaps and 4.99% on U.S. Dollar
denominated swaps.

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, 2008 and 2007. 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, 2008 and 2007. A
change in our variable interest rate of 1% would have a $2.7 million impact on interest expense
assuming the $267.6 million of our variable-rate debt that had not been hedged via an interest rate
swap at September 30, 2008 was outstanding for the entire fiscal year. The information is presented in
U.S. dollars (in millions):

2008

Long-term debt:

2009

Expected Maturity Date
2010
2011

2012

After

Total

Variable rate debt . . . . . . . . . . . . . $146.7
Average rate . . . . . . . . . . . . . . . . .

6.2%

$154.1

$193.2

$485.0

$ — $979.0

6.2%

6.2% 6.2%

6.2%

Interest rate derivatives:

Interest rate swaps based on
U.S. Dollar, Euro and GBP
LIBOR . . . . . . . . . . . . . . . . . . . . $ (0.9)

$ (4.6)

$ — $ (9.5)

$ — $ (15.0)

Average rate . . . . . . . . . . . . . . . . .

4.79% 4.87%

—

5.20%

—

4.71%

Fair
Value

$979.0
—

$ (15.0)
—

2007

Long-term debt:

2008

Expected Maturity Date
2011
2010

2009

After

Total

Fair
Value

Variable rate debt . . . . . . . . . . $82.6
Average rate . . . . . . . . . . . . . .

6.5%

$84.0

$154.0

$193.2

$578.4

$1,092.2

6.5%

$1,092.2
—

Interest rate derivatives:

Interest rate swaps based on
U.S. Dollar, Euro and GBP
LIBOR . . . . . . . . . . . . . . . . . $ 1.9

$ (0.9)

$ (1.4)

$ — $ (3.7)

Average rate . . . . . . . . . . . . . .

3.87% 4.90% 4.87%

—

5.20%

(4.1)
4.71%

(4.1)
—

Excluded from the information provided above are $20.5 million and $25.6 million at September 30,

2008 and 2007, respectively, of miscellaneous debt instruments.

Other Market Risks

Our market risk associated with foreign currency rates is not considered to be material. Through fiscal

2008, we had only minor amounts of transactions that were denominated in currencies other than the
currency of the country of origin. We use foreign currency swap contracts to manage the exchange rate risk
associated with intercompany loans with foreign subsidiaries that are denominated in U.S. dollars. At
September 30, 2008, the notational amount of outstanding contracts was $86.4 million with a fair value
of ($0.4) million. At September 30, 2007, the notional amount of outstanding contracts was $101.5 million
with a fair value of ($1.3) million.

We are subject to market risk from fluctuating prices of certain raw materials, including urea, resins,

fuel, grass seed and wild bird food components. 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. In addition, in 2007 we
entered into arrangements to partially mitigate the effect of fluctuating direct and indirect fuel costs on
our Global Consumer and Scotts LawnService» businesses and hedged a portion of our urea needs for
fiscal 2008. We had outstanding a strip of collars for approximately 0.5 million gallons of fuel at
September 30, 2007. There were no outstanding derivatives for fuel at September 30, 2008. We also had
hedging arrangements for 48,500 and 45,000 aggregate tons of urea at September 30, 2008 and 2007,
respectively. The fair value of the 48,500 aggregate tons at September 30, 2008 was ($8.5) million, while
the fair value of the 45,000 aggregate tons at September 30, 2007 was $1.0 million.

ANNUAL REPORT OF MANAGEMENT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial

reporting to provide reasonable assurance regarding the reliability of our financial reporting and the
preparation of financial statements for external purposes in accordance with accounting principles
generally accepted in the United States of America. Internal control over financial reporting includes
those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of The Scotts Miracle-Gro
Company and our consolidated subsidiaries; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, and that receipts and expenditures of The
Scotts Miracle-Gro Company and our consolidated subsidiaries are being made only in accordance with
authorizations of management and directors of The Scotts Miracle-Gro Company and our consolidated
subsidiaries, as appropriate; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the assets of The Scotts Miracle-Gro
Company and our consolidated subsidiaries that could have a material effect on the consolidated
financial statements.

Management, with the participation of our principal executive officer and principal financial officer,
assessed the effectiveness of our internal control over financial reporting as of September 30, 2008, the
end of our fiscal year. Management based its assessment on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commis-
sion. Management’s assessment included evaluation of such elements as the design and operating
effectiveness of key financial reporting controls, process documentation, accounting policies and our
overall control environment. This assessment is supported by testing and monitoring performed under
the direction of management.

Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. Accordingly, even an effective system of
internal control over financial reporting will provide only reasonable assurance with respect to financial
statement preparation.

Based on our assessment, management has concluded that our internal control over financial
reporting was effective as of September 30, 2008, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external reporting
purposes in accordance with accounting principles generally accepted in the United States of America.
We reviewed the results of management’s assessment with the Audit Committee of the Board of
Directors of The Scotts Miracle-Gro Company.

Our independent registered public accounting firm, Deloitte & Touche LLP, independently audited

our internal control over financial reporting and has issued their report which appears herein.

James Hagedorn
Chief Executive Officer
and Chairman of the Board
Dated: November 25, 2008

David C. Evans
Executive Vice President
and Chief Financial Officer
Dated: November 25, 2008

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
The Scotts Miracle-Gro Company
Marysville, Ohio

We have audited the accompanying consolidated balance sheets of The Scotts Miracle-Gro Company

and Subsidiaries (the “Company”) as of September 30, 2008 and 2007, and the related consolidated
statements of operations, shareholders’ equity, and cash flows for each of the three years in the period
ended September 30, 2008. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our
audits.

We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of September 30, 2008 and 2007, and the results of its operations
and its cash flows for each of the three years in the period ended September 30, 2008, in conformity
with accounting principles generally accepted in the United States of America.

As discussed in Note 10 to the financial statements, on September 30, 2007, the Company adopted
Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Company’s internal control over financial reporting as of September 30, 2008,
based on the criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated November 25, 2008
expressed an unqualified opinion on the Company’s internal control over financial reporting.

Columbus, Ohio
November 25, 2008

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
The Scotts Miracle-Gro Company
Marysville, Ohio

We have audited the internal control over financial reporting of The Scotts Miracle-Gro Company and

Subsidiaries (the “Company”) as of September 30, 2008, based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Annual Report of Management on Internal Control Over Financial Report-
ing. Our responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the

supervision of, the company’s principal executive and principal financial officers, or persons performing
similar functions, and effected by the company’s board of directors, management, and other personnel to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future periods are subject to the risk
that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of September 30, 2008, based on the criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and for the year ended
September 30, 2008 of the Company and our report dated November 25, 2008 expressed an unqualified
opinion on those financial statements and included an explanatory paragraph relating to the Company’s
adoption of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans on September 30, 2007.

Columbus, Ohio
November 25, 2008

The Scotts Miracle-Gro Company
Consolidated Statements of Operations
for the fiscal years ended September 30, 2008, 2007 and 2006
(in millions, except per share data)

Net sales
Cost of sales
Cost of sales — impairment, restructuring and other charges
Cost of sales — product registration and recall matters

Gross profit
Operating expenses:

Selling, general and administrative
Impairment, restructuring and other charges
Product registration and recall matters
Other income, net

Income from operations
Costs related to refinancing
Interest expense

Income before income taxes

Income taxes

Net income (loss)

Basic earnings (loss) per common share

Diluted earnings (loss) per common share

See Notes to Consolidated Financial Statements.

2008

2007

2006

$2,981.8
1,999.9
15.1
27.2

$2,871.8
1,867.3
—
—

$2,697.1
1,741.1
0.1
—

939.6

1,004.5

955.9

717.6
121.7
12.7
(10.4)

98.0
—
82.2

15.8
26.7

700.9
38.0
—
(11.5)

277.1
18.3
70.7

188.1
74.7

636.9
75.7
—
(9.2)

252.5
—
39.6

212.9
80.2

$ (10.9)

$ 113.4

$ 132.7

(0.17)

1.74

1.69

1.97

1.91

The Scotts Miracle-Gro Company
Consolidated Statements of Cash Flows
for the fiscal years ended September 30, 2008, 2007 and 2006
(in millions)

Net cash provided by operating activities

200.9

246.6

OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by

operating activities:
Impairment and other charges
Costs related to refinancing
Stock-based compensation expense
Depreciation
Amortization
Deferred taxes
Loss (gain) on sale of property, plant and equipment
Changes in assets and liabilities, net of acquired businesses:

Accounts receivable
Inventories
Prepaid and other current assets
Accounts payable
Accrued taxes and liabilities
Restructuring reserves
Other non-current items
Other, net

INVESTING ACTIVITIES

Proceeds from sale of property, plant and equipment
Investments in property, plant and equipment
Investments in intellectual property
Investments in acquired businesses, net of cash acquired

Net cash used in investing activities

FINANCING ACTIVITIES

Borrowings under revolving and bank lines of credit and term loans
Repayments under revolving and bank lines of credit and term loans
Repayment of 65⁄8% senior subordinated notes
Financing and issuance fees
Dividends paid
Payments on sellers notes
Purchase of common shares
Excess tax benefits from share-based payment arrangements
Cash received from exercise of stock options
Net cash used in financing activities

Effect of exchange rate changes

Net increase (decrease) in cash
Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of interest capitalized
Income taxes paid

See Notes to Consolidated Financial Statements.

2008

2007

2006

(10.9)

$ 113.4

$ 132.7

136.8
—
12.5
53.9
16.4
(16.5)
1.0

(15.7)
(17.9)
(2.6)
9.4
31.7
(1.4)
14.4
(10.2)

38.0
18.3
13.3
51.4
16.1
6.3
(0.4)

(4.2)
13.2
(6.9)
(3.5)
(2.0)
(5.0)
6.8
(8.2)

1.1
(56.1)
(4.1)
—

(59.1)

942.1
(1,042.0)
—
—
(32.5)
(2.7)
—
2.9
9.2
(123.0)

0.5
(54.0)
—
(18.7)

(72.2)

2,519.2
(1,710.5)
(209.6)
(13.0)
(543.6)
(2.7)
(246.8)
19.0
29.2
(158.8)

(2.0)

16.8
67.9

84.7

4.2

19.8
48.1

67.9

66.4
—
15.7
51.0
16.0
(0.4)
(0.5)

(37.6)
(60.6)
(3.6)
34.3
(33.4)
(9.2)
2.0
9.6

182.4

1.3
(57.0)
—
(118.4)

(174.1)

746.9
(691.7)
—
—
(33.5)
(4.5)
(87.9)
6.2
17.6
(46.9)

6.5

(32.1)
80.2

$ 48.1

(82.0)
(36.8)

(75.9)
(65.2)

(38.2)
(60.3)

The Scotts Miracle-Gro Company
Consolidated Balance Sheets
September 30, 2008 and 2007
(in millions except per share data)

Current assets:

Cash and cash equivalents
Accounts receivable, less allowances of $10.6 in 2008 and

ASSETS

$11.4 in 2007

Accounts receivable pledged
Inventories, net
Prepaid and other assets

Total current assets

Property, plant and equipment, net
Goodwill
Intangible assets, net
Other assets

Total assets

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Current portion of debt
Accounts payable
Accrued liabilities
Accrued taxes

Total current liabilities

Long-term debt
Other liabilities

Total liabilities

Commitments and contingencies (Notes 2, 16, 17 and 18)
Shareholders’ equity:

Common shares and capital in excess of $.01 stated value

per share; shares issued and outstanding of 65.2 in 2008
and 64.1 in 2007

Retained earnings
Treasury shares, at cost; 3.4 shares in 2008 and 4.0 shares

in 2007

Accumulated other comprehensive loss

Total shareholders’ equity

2008

2007

84.7

67.9

259.8
146.6
415.9
137.9

1,044.9
344.1
377.7
367.2
22.4

248.3
149.5
405.9
127.7

999.3
365.9
462.9
418.8
30.3

$2,156.3

$2,277.2

$ 150.0
207.6
314.2
6.3

678.1
849.5
192.0

1,719.6

472.4
216.7

(185.3)
(67.1)

436.7

86.4
202.5
286.8
10.9

586.6
1,031.4
179.9

1,797.9

480.3
260.5

(219.5)
(42.0)

479.3

Total liabilities and shareholders’ equity

$2,156.3

$2,277.2

See Notes to Consolidated Financial Statements.

The Scotts Miracle-Gro Company
Consolidated Statements of Shareholders’ Equity
for the fiscal years ended September 30, 2008, 2007 and 2006
(in millions)

Common Stock

Shares Amount

Capital in
Excess of
Stated Value

Deferred
Compensation

Treasury Stock

Retained
Earnings Shares Amount

Accumulated
Other
Comprehensive
Income/(loss)

67.8

0.3

503.2

(12.2)

12.2

Balance, September 30, 2005
Net income
Foreign currency translation
FAS 123(R) reclassification
Minimum pension liability, net of tax

Comprehensive income

Stock-based compensation expense
Cash dividends paid ($0.50 per share)
Treasury stock purchases
Treasury stock issuances
Issuance of common shares

Balance, September 30, 2006

Net income
Foreign currency translation
Unrecognized loss on derivatives, net of

tax

Minimum pension liability, net of tax

Comprehensive income

Adjustment to initially apply SFAS 158,

net of tax

Stock-based compensation expense

(non-cash)

Cash dividends paid ($8.50 per share)
Treasury stock purchases
Treasury stock issuances

0.3

68.1

0.3

Balance, September 30, 2007

68.1

0.3

Net loss
Foreign currency translation
Unrecognized loss on derivatives, net of

tax

Pension and other postretirement

liabilities, net of tax
Comprehensive loss

Adjustment to initially apply FIN 48
Stock-based compensation expense

(non-cash)

Cash dividends paid ($0.50 per share)
Treasury stock issuances

15.7

(21.4)
23.5

508.8

13.3

(42.1)

480.0

12.5

(20.4)

591.5
132.7

(33.5)

—

(56.6)

(1.5)

6.5

2.0
(0.5)

(87.9)
21.4

—

690.7

1.5

(66.5)

(51.6)

4.9

(2.4)
20.4

(13.3)

(42.0)

8.5

(13.5)

(20.1)

113.4

(543.6)

260.5

(10.9)

(0.4)

(32.5)

—

4.5
(2.0)

4.0

(246.8)
93.8

(219.5)

(0.6)

34.2

Total

1,026.2
132.7
(1.5)
—
6.5
137.7
15.7
(33.5)
(87.9)
—
23.5

1,081.7

113.4
4.9

(2.4)
20.4

136.3

(13.3)

13.3
(543.6)
(246.8)
51.7

479.3

(10.9)
8.5

(13.5)

(20.1)
(36.0)
(0.4)

12.5
(32.5)
13.8

Balance, September 30, 2008

68.1

$0.3

$ 472.1

$ —

$ 216.7

3.4

$ (185.3)

$ (67.1)

$ 436.7

See Notes to Consolidated Financial Statements.

The Scotts Miracle-Gro Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 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 manufacturing, marketing and sale of lawn and garden care products.
The Company’s major customers include home centers, mass merchandisers, warehouse clubs, 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. The Company also operates the Scotts LawnService»
business, which provides lawn, tree and shrub fertilization, insect control and other related services in
the United States and Smith & Hawken», a leading brand in the outdoor living and gardening lifestyle
category, with sales primarily through its own retail stores, Internet and catalog channels.

Due to the nature of the lawn and garden business, the majority of sales to customers occur in the

Company’s second and third fiscal quarters. On a combined basis, net sales for the second and third
fiscal quarters generally represent 70% to 75% of annual net sales.

Organization and Basis of Presentation

The Company’s consolidated financial statements are presented in accordance with accounting

principles generally accepted in the United States. The consolidated financial statements include the
accounts of Scotts Miracle-Gro and all wholly-owned and majority-owned subsidiaries. All intercompany
transactions and accounts are 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.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. 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.

Revenue Recognition

Revenue is recognized when title and risk of loss transfer, which generally occurs when products or

services 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 in return levels. Shipping and handling costs are included in cost of sales.

Under the terms of the Amended and Restated Exclusive Agency and Marketing Agreement (the
“Marketing Agreement”) between the Company and Monsanto, the Company, in its role as exclusive
agent, performs certain functions, such as sales support, merchandising, distribution and logistics, 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. The reimbursement of costs for which the Company is considered the primary obligor is
included in net sales.

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 in the “Accrued liabilities” line in the Consolidated Balance
Sheets.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Advertising

Advertising costs incurred during the year by our Global Consumer segment 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 period not beyond the end of the
subsequent calendar year. Costs that do not qualify as direct response advertising costs are expensed
within the fiscal year incurred on a monthly basis in proportion to net sales. The costs deferred at
September 30, 2008 and 2007 were $4.5 million and $5.7 million, respectively.

Smith & Hawken» promotes its products primarily through catalogs. Costs related to the production,

printing and distribution of catalogs are expensed over the expected sales life of the related catalog;
four weeks for consumer catalogs and 52 weeks for trade catalogs. Other advertising costs, such as
Internet, radio and print, are expensed as incurred. The costs deferred at September 30, 2008 and 2007
were $0.6 million and $0.5 million, respectively.

Advertising expenses were $142.4 million in fiscal 2008, $150.9 million in fiscal 2007 and

$137.3 million in fiscal 2006.

Research and Development

All costs associated with research and development are charged to expense as incurred. Expenses

for fiscal 2008, 2007 and 2006 were $44.7 million, $38.8 million and $35.1 million including product
registration costs of $9.8 million, $9.3 million and $8.2 million, respectively.

Environmental Costs

The Company recognizes environmental liabilities when conditions requiring remediation are proba-

ble and the amounts can be reasonably estimated. Expenditures which extend the life of the related
property or mitigate or prevent future environmental contamination are capitalized. Environmental
liabilities are not discounted or reduced for possible recoveries from insurance carriers.

Stock-Based Compensation Awards

The fair value of awards is expensed ratably over the vesting period, generally three years. The

Company uses a binomial model to determine the fair value of its option grants.

Earnings per Common Share

Basic earnings per common share is computed based on the weighted-average number of common

shares outstanding each period. Diluted earnings per common share is computed based on the
weighted-average number of common shares and dilutive potential common shares (stock options,
restricted stock, performance shares and stock appreciation rights) outstanding each period.

Cash and Cash Equivalents

The Company considers all highly liquid financial instruments with original maturities of three
months or less to be cash equivalents. The Company maintains cash deposits in banks which from time
to time exceed the amount of deposit insurance available. Management periodically assesses the
financial condition of the institutions and believes that any potential credit loss is minimal.

Accounts Receivable and Allowances

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Allowances

reflect our best estimate of amounts in our existing accounts receivable that may not be collected due
to customer claims, the return of goods, or customer inability or unwillingness to pay. We determine the
allowance based on customer risk assessment and historical experience. We review our allowances
monthly. Past due balances over 90 days and in excess of a specified amount are reviewed individually
for collectibility. All other balances are reviewed on a pooled basis by type of receivable. Account

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

balances are charged off against the allowance when we feel it is probable the receivable will not be
recovered. We do not have any off-balance-sheet credit exposure related to our customers.

Inventories

Inventories are stated at the lower of cost or market, principally determined by the FIFO method.
Certain growing media inventories are accounted for by the LIFO method. Approximately 6% of inventories
were valued at the lower of LIFO cost or market at September 30, 2008 and 2007. Inventories include the
cost of raw materials, labor, manufacturing overhead and freight and in-bound handling costs incurred to
pre-position goods in the Company’s warehouse network. The Company makes provisions for obsolete or
slow-moving inventories as necessary to properly reflect inventory at the lower of cost or market value.
Reserves for excess and obsolete inventories were $26.2 million and $15.6 million at September 30, 2008
and 2007, respectively.

Goodwill and Indefinite-lived Intangible Assets

In accordance with Statement of Financial Accounting Standards (“SFAS”) 142, “Goodwill and Other
Intangible Assets,” (“SFAS 142”), goodwill and intangible assets determined to have indefinite lives are
not subject to amortization. Goodwill and indefinite-lived intangible assets are reviewed for impairment
by applying a fair-value based test on an annual basis or more frequently if circumstances indicate a
potential impairment. If it is determined that an impairment has occurred, an impairment loss is
recognized for the amount by which the carrying amount of the asset exceeds its estimated fair value
and classified as “Impairment, restructuring and other charges” in the Consolidated Statements of
Operations.

During the third quarter of fiscal 2007, the Company changed the timing of its annual goodwill
impairment testing from the last day of the first fiscal quarter to the first day of the fourth fiscal quarter.
As such, the annual impairment test was performed as of December 30, 2006 and was performed again
as of July 1, 2007. This accounting is preferable in the circumstances as moving the timing of our annual
goodwill impairment testing better aligns with the seasonal nature of the business and the timing of the
annual strategic planning process. The Company believes that this change in accounting principle will
not delay, accelerate or avoid an impairment charge. In addition, the Company also changed the date of
its annual indefinite life intangible impairment testing to the first day of the fourth fiscal quarter for the
current year. The Company determined that the change in accounting principle related to the annual
testing date does not result in adjustments to the financial statements applied retrospectively.

Long-lived Assets

Property, plant and equipment are stated at cost. Interest capitalized on capital projects amounted

to $0.3 million, $0.4 million and $0.5 million during fiscal 2008, 2007 and 2006, respectively.
Expenditures for maintenance and repairs are charged to expense as incurred. When properties are
retired or otherwise disposed of, the cost of the asset and the related accumulated depreciation are
removed from the accounts with the resulting gain or loss being reflected in income from operations.

Depreciation of property, plant and equipment is provided on the straight-line method and is based

on the estimated useful economic lives of the assets as follows:

Land improvements
Buildings

Machinery and equipment
Furniture and fixtures

Software

10 — 25 years
10 — 40 years

3 — 15 years
6 — 10 years

3 — 8 years

Intangible assets with finite lives, and therefore subject to amortization, include technology (e.g.,
patents), customer accounts and certain tradenames. These intangible assets are being amortized on the
straight-line method over periods typically ranging from 10 to 25 years. The Company’s fixed assets and
intangible assets subject to amortization are required to be tested for recoverability under SFAS 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” whenever events or changes in
circumstances indicate that carrying amounts may not be recoverable.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Internal Use Software

The Company accounts for the costs of internal use software in accordance with Statement of Position
98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Accordingly,
costs are expensed or capitalized depending on whether they are incurred in the preliminary project stage,
application development stage or the post-implementation/operation stage. As of September 30, 2008
and 2007, the Company had $21.9 million and $31.1 million, respectively, in unamortized capitalized
internal use computer software costs. Amortization of these costs was $7.2 million, $12.1 million and
$10.7 million during fiscal 2008, 2007 and 2006, respectively.

Accruals for Self-Insured Losses

The Company maintains insurance for certain risks, including workers’ compensation, general
liability and vehicle liability, and is self-insured for employee related health care benefits. The Company
accrues for the expected costs associated with these risks by considering historical claims experience,
demographic factors, severity factors and other relevant information. Costs are recognized in the period
the claim is incurred, and the financial statement accruals include an actuarially determined estimate of
claims incurred but not yet reported.

Translation of Foreign Currencies

For all foreign operations, the functional currency is the local currency. Assets and liabilities of

these operations are translated at the exchange rate in effect at each year-end. Income and expense
accounts are translated at the average rate of exchange prevailing during the year. Translation gains and
losses arising from the use of differing exchange rates from period to period are included in other
comprehensive income, a component of shareholders’ equity. Foreign currency transaction gains and
losses are included in the determination of net income (loss).

Derivative Instruments

In the normal course of business, the Company is exposed to fluctuations in interest rates, the
value of foreign currencies and the cost of commodities. A variety of financial instruments, including
forward and swap contracts, are used to manage these exposures. The Company’s objective in managing
these exposures is to better control these elements of cost and mitigate the earnings and cash flow
volatility associated with changes in the applicable rates and prices.

The Company has established policies and procedures that encompass risk-management philosophy

and objectives, guidelines for derivative-instrument usage, counterparty credit approval, and the
monitoring and reporting of derivative activity. The Company does not enter into derivative instruments
for the purpose of speculation.

Variable Interest Entities

Financial Accounting Standards Board (“FASB”) Interpretation 46(R), “Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51” (“FIN 46(R)”), provides a framework for identifying
variable interest entities (“VIE’s”) and determining when a company should include the assets, liabilities,
noncontrolling interests and results of operations of a VIE in its consolidated financial statements. In
general, a VIE is a corporation, partnership, limited liability company, trust or any other legal structure
used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out
its principal activities without additional subordinated financial support, (2) has a group of equity
owners that are unable to make significant decisions about its activities or (3) has a group of equity
owners that do not have the obligation to absorb losses or the right to receive returns generated by its
operations.

FIN 46(R) requires a VIE to be consolidated if a party with an ownership, contractual or other
financial interest in the VIE (a variable interest holder) is obligated to absorb a majority of the risk of
loss from the VIE’s activities, is entitled to receive a majority of the VIE’s residual returns (if no party
absorbs a majority of the VIE’s losses), or both. A variable interest holder that consolidates the VIE is
called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record
all of the VIE’s assets, liabilities and noncontrolling interests at fair value and subsequently account for
the VIE as if it were consolidated based on majority voting interest. FIN 46(R) also requires disclosures

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

about VIEs that the variable interest holder is not required to consolidate but in which it has a
significant variable interest.

The Company’s Scotts LawnService» business sells new franchise territories, primarily in small to

mid-size markets, under arrangements where a portion of the franchise fee is paid in cash with the
balance due under a promissory note. The Company believes that it may be the primary beneficiary for
certain of its franchisees initially, but ceases to be the primary beneficiary as the franchisees develop
their businesses and the promissory notes are repaid. At September 30, 2008 and 2007, the Company
had approximately $1.8 million and $2.3 million in notes receivable from such franchisees, respectively.
The effect of consolidating the entities where the Company may be the primary beneficiary for a limited
period of time is not material to either the Consolidated Statements of Operations or the Consolidated
Balance Sheets.

New Accounting Pronouncements

Statement of Financial Accounting Standards No. 157 — Fair Value Measurements

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157
defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair
value measurements. The provisions of SFAS 157 are effective for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued FASB Staff Position 157-1, “Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under Statement 13,” which
removes leasing transactions accounted for under Statement 13 and related guidance from the scope of
SFAS 157. In February 2008, the FASB issued FASB Staff Position 157-2, “Effective Date of FASB
Statement No. 157” (“FSP SFAS 157-2”), which delays the effective date of SFAS 157 for all nonrecurring
fair value measurements of nonfinancial assets and nonfinancial liabilities until fiscal years beginning
after November 15, 2008. FSP SFAS 157-2 states that a measurement is recurring if it happens at least
annually and defines nonfinancial assets and nonfinancial liabilities as all assets and liabilities other
than those meeting the definition of a financial asset or financial liability in SFAS 159. The Company is
required to adopt SFAS 157 as of October 1, 2008, the beginning of fiscal 2009. The Company is
completing its evaluation of SFAS 157 and does not expect its adoption in the first quarter of fiscal 2009
to have a material impact on its financial position or results of operations.

Statement of Financial Accounting Standards No. 159 — The Fair Value Option for Financial Assets
and Financial Liabilities

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and
Financial Liabilities-Including an amendment of FASB Statement No. 115” (“SFAS 159”), which allows an
entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain
financial assets and liabilities on a contract-by-contract basis. Subsequent changes in fair value of these
financial assets and liabilities would be recognized in earnings when they occur. SFAS 159 further
establishes certain additional disclosure requirements. SFAS 159 is effective for the Company’s financial
statements for the fiscal year beginning October 1, 2008. No entity is permitted to apply SFAS 159
retrospectively to fiscal years preceding the effective date unless the entity chooses early adoption. The
Company will adopt SFAS 159 as of October 1, 2008, the beginning of fiscal 2009.

Statement of Financial Accounting Standards No. 141(R) — Business Combinations

In December 2007, the FASB issued SFAS 141(R), “Business Combinations” (“SFAS 141(R)”), which
replaces SFAS 141. The objective of SFAS 141(R) is to improve the relevance, representational faithfulness
and comparability of the information that a reporting entity provides in its financial reports about a
business combination and its effects. SFAS 141(R) establishes principles and requirements for how the
acquirer recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree; recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase; and determines what
information to disclose to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141(R) applies to all transactions or other events in which an
entity (the acquirer) obtains control of one or more businesses (the acquiree), including those sometimes
referred to as “true mergers” or “mergers of equals” and combinations achieved without the transfer of

4603_FIN.pdf December 5, 2008 39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

consideration. SFAS 141(R) is effective for the Company’s financial statements for the fiscal year
beginning October 1, 2009.

Statement of Financial Accounting Standards No. 160 — Noncontrolling Interests in Consolidated
Financial Statements

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51” (“SFAS 160”). The objective of SFAS 160 is to improve the
relevance, comparability and transparency of the financial information that a reporting entity provides in
its consolidated financial statements. SFAS 160 amends ARB No. 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 also changes the way the consolidated financial statements are presented,
establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary
that do not result in deconsolidation, requires that a parent recognize a gain or loss in net income when
a subsidiary is deconsolidated and expands disclosures in the consolidated financial statements that
clearly identify and distinguish between the parent’s ownership interest and the interest of the
noncontrolling owners of a subsidiary. The provisions of SFAS 160 are to be applied prospectively as of
the beginning of the fiscal year in which SFAS 160 is adopted, except for the presentation and disclosure
requirements, which are to be applied retrospectively for all periods presented. SFAS 160 is effective for
the Company’s financial statements for the fiscal year beginning October 1, 2009. The Company is in the
process of evaluating the impact that the adoption of SFAS 160 may have on its financial statements.

Statement of Financial Accounting Standards No. 161 — Disclosures about Derivative Instruments
and Hedging Activities

In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging

Activities — an amendment of FASB Statement No. 133” (“SFAS 161”). The objective of SFAS 161 is to
enhance the current disclosure framework in SFAS 133 and improve the transparency of financial
reporting for derivative instruments and hedging activities. SFAS 161 requires entities to provide
enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under SFAS 133 and its related interpretations
and (c) how derivative instruments and related hedged items affect an entity’s financial position,
financial performance and cash flows. SFAS 161 is effective for the Company’s financial statements for
the fiscal year beginning October 1, 2010. The Company is in the process of evaluating the impact that
the adoption of SFAS 161 may have on its financial statement disclosures.

FASB Staff Position 142-3 — Determination of the Useful Life of Intangible Assets

In April 2008, the FASB issued FASB Staff Position 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP No. FAS 142-3”), which amends the list of factors an entity should consider in
developing renewal or extension assumptions used in determining the useful life of recognized intangi-
ble assets under SFAS No. 142, “Goodwill and Other Intangible Assets.” The new guidance applies to
(1) intangible assets that are acquired individually or with a group of other assets and (2) intangible
assets acquired in both business combinations and asset acquisitions. Under FSP No. FAS 142-3, entities
estimating the useful life of a recognized intangible asset must consider their historical experience in
renewing or extending similar arrangements or, in the absence of historical experience, must consider
assumptions that market participants would use about renewal or extension. FSP No. FAS 142-3 will
require certain additional disclosures beginning October 1, 2009 and prospective application to useful
life estimates prospectively for intangible assets acquired after September 30, 2009. The Company is in
the process of evaluating the impact that the adoption of FSP No. FAS 142-3 may have on its financial
statements and related disclosures.

NOTE 2. PRODUCT REGISTRATION AND RECALL MATTERS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. Department of Justice (the “U.S. DOJ”) in a related criminal investigation. In late April of 2008, in
connection with the U.S. EPA’s investigation, the Company was required to conduct a consumer-level
recall of certain consumer lawn and garden products and a Scotts LawnService» product. Subsequently,
the Company and the U.S. EPA agreed upon a Compliance Review Plan for conducting a comprehensive,
independent review of the Company’s product registration records. Pursuant to the Compliance Review
Plan, an independent third party firm, Quality Associates Incorporated (“QAI”), has been reviewing all of
the Company’s U.S. pesticide product registration records, some of which are historical in nature and no
longer support sales of the Company’s products. The Company has identified approximately 132 of the
registrations under review as relating to products for which there was sales activity in the period
generally representing the Company’s 2008 fiscal year (“Active Registrations”). These Active Registrations
supported products which accounted for approximately $680 million of the Company’s net sales in the
period. The U.S. EPA investigation and QAI review process identified several issues affecting Active
Registrations which resulted in the issuance of a number of Stop Sale, Use or Removal Orders by the
U.S. EPA and caused the Company to temporarily suspend sales and shipments of affected products. In
addition, as the QAI review process or the Company’s internal review has identified a FIFRA registration
issue or a potential FIFRA registration issue (some of which appear unrelated to the former associate),
the Company has endeavored to stop selling or distributing the affected products until the issue could
be resolved with the U.S. EPA.

To date, QAI has completed a review of the registration records for substantially all of the

On September 26, 2008, the Company, doing business as Scotts LawnService», was named as a

In addition, in fiscal 2008 the Company conducted a voluntary recall of most of its wild bird food

While the Company continues to evaluate the financial impact of the registration and recall matters,

the Company currently expects total fiscal year 2008 and 2009 costs related to the recalls and known
registration issues to be limited to approximately $65 million, exclusive of potential fines, penalties
and/or judgments. While the Company believes it has made substantial progress toward completing the
FIFRA compliance review process, the process continues and may result in future state or federal action
with respect to additional product registration issues. Until such investigation is complete, the Company
cannot fully quantify the extent of additional issues. Furthermore, the Company may be subject to civil
or criminal fines and/or penalties or private rights of action at the state and/or federal level as a result
of the product registration issues. At this time, management cannot reasonably determine the scope or
magnitude of possible liabilities that could result from known or potential additional product registration
issues, and no reserves for these claims have been established as of September 30, 2008. However, it
is possible that such fines, penalties and/or judgments could be material and have an adverse effect on
the Company’s financial condition, results of operations and cash flows.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the fiscal year ended September 30, 2008, the Company reversed sales associated with

estimated returns of the recalled products, recorded an impairment estimate for affected inventory, and
incurred other registration and recall-related costs. The following tables summarize the impact of the
product registration and recall matters on the results of operations and accrued liabilities and inventory
reserves for fiscal 2008:

Net sales — product recalls
Cost of sales — product recalls

Cost of sales — inventory impairment and other

Gross Profit

SG&A

Income from operations

Income tax benefit

Net loss

Year Ended
September 30,
2008

$(22.3)
(11.1)

27.2

(38.4)
12.7

(51.1)
(17.9)

$(33.2)

Sales returns — product recalls

Cost of sales returns — product recalls

Inventory impairment
Other incremental costs of sales

Other general and administrative costs

Reserves
Established
During the
Second Quarter of
Fiscal 2008
$ 19.0

Additional
Costs and
Changes in
Estimate
$ 3.3

Reserves
Used
$(22.1)

Reserves at
September 30,
2008
$ 0.2

(12.0)

14.1
8.5

1.2

0.9

(0.8)
5.4

11.5

11.0

(7.4)
(10.7)

(8.4)

(0.1)

5.9
3.2

4.3

Accrued liabilities and inventory reserves

$ 30.8

$20.3

$(37.6)

$13.5

NOTE 3. IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES

The Company recorded net restructuring and other charges of $1.0 million, $1.1 million and

$9.4 million in fiscal 2008, 2007 and 2006, respectively. Other charges in fiscal 2008 and 2007 related
to the Company’s turfgrass biotechnology program. Substantially all costs in fiscal 2006 were for
severance and related costs.

Property, plant and equipment charges of $15.8 million in fiscal 2008 related primarily to

Smith & Hawken». Goodwill and intangible asset impairment charges of $120.0 million, $35.3 million
and $66.4 million were recorded in fiscal 2008, 2007 and 2006, respectively. The nature of the
impairment charges are discussed further in “NOTE 4. GOODWILL AND INTANGIBLE ASSETS, NET.”

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table details impairment, restructuring and other charges and rolls forward the cash

portion of the restructuring and other charges accrued in fiscal 2008, 2007 and 2006 (in millions):

Restructuring and other charges

Property, plant and equipment impairment
Goodwill and intangible asset impairments

Total impairment, restructuring and other charges

Amounts reserved for restructuring and other charges at beginning of year

Restructuring and other expense

Receipts, payments and other

2008

2007

2006

$ 1.0

$ 2.7

$ 9.4

15.8
120.0

—
35.3

—
66.4

$136.8

$38.0

$ 75.8

$ 2.5
1.0

$ 6.4
2.7

$ 15.6
9.4

(2.4)

(6.6)

(18.6)

Amounts reserved for restructuring and other charges at end of year

1.1

$ 2.5

$ 6.4

NOTE 4. GOODWILL AND INTANGIBLE ASSETS, NET

In accordance with SFAS 142, goodwill and indefinite-lived intangible assets are not subject to
amortization. Goodwill and indefinite-lived intangible assets are reviewed for impairment by applying a
fair-value based test on an annual basis or more frequently if circumstances indicate impairment may
have occurred. The Company assesses goodwill for impairment by comparing the carrying value of its
reporting units to their respective fair values and reviewing the Company’s market value of invested
capital. Management engages an independent valuation firm to assist in its impairment assessment
reviews. The Company determines the fair value of its reporting units primarily utilizing discounted cash
flows and incorporates assumptions it believes marketplace participants would utilize. The Company
also uses comparative market multiples and other factors to corroborate the discounted cash flow
results used. The value of all indefinite-lived tradenames was determined using a royalty savings
methodology similar to that employed when the associated businesses were acquired but using updated
estimates of sales, cash flow and profitability.

As discussed in “NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” during the third
quarter of fiscal 2007, the Company changed the timing of its annual goodwill impairment testing from
the last day of the first fiscal quarter to the first day of the fourth fiscal quarter. As such, annual
impairment testing for fiscal 2008 was scheduled to be performed as of June 29, 2008. Annual
impairment testing for fiscal 2007 was performed as of December 30, 2006 and again as of July 1, 2007.

Fiscal 2008

As a result of a significant decline in the market value of the Company’s common shares during the

latter half of the third fiscal quarter ended June 28, 2008, the Company’s market value of invested
capital was approximately 60% of the comparable impairment metric used in the fourth quarter fiscal
2007 annual impairment testing. Management determined this was an indicator of possible goodwill
impairment and, therefore, interim impairment testing was performed as of June 28, 2008.

The Company’s third quarter fiscal 2008 interim impairment review resulted in a non-cash charge of

$123.3 million to reflect the decline in the fair value of certain goodwill and other assets as evidenced
by the decline in the Company’s common shares. No further adjustments to the goodwill portion of this
impairment charge were required as a result of the completion of the SFAS 142 Step 2 evaluation in the
fourth quarter of fiscal 2008. However, an additional impairment charge of $13.5 million was recorded in
the fourth quarter of fiscal 2008, primarily related to leasehold improvements of Smith & Hawken». In
total, the fiscal 2008 impairment charges comprise $80.8 million for goodwill, $19.0 million related to
indefinite-lived tradenames and $37.0 million for SFAS 144 long-lived assets. Of the $37.0 million
impairment charge recorded for SFAS 144 long-lived assets, $15.1 million was recorded in cost of sales.
On a reportable segment basis, $64.5 million of the impairment was in Global Consumer, $38.4 million
was in Global Professional, with the remaining $33.9 million in Corporate & Other.

Given the timing of the interim impairment testing at the end of the third quarter of fiscal 2008,

management performed an evaluation and determined that additional goodwill and indefinite-lived

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

intangibles as of the annual impairment testing date at the beginning of the fourth fiscal quarter was
not required in fiscal 2008.

Fiscal 2007

The Company’s fourth quarter fiscal 2007 impairment review resulted in a non-cash goodwill and
intangible asset impairment charge of $35.3 million. Partially as a result of the disappointing 2007 lawn
and garden season, management performed a comprehensive strategic update of the Company’s
business initiatives in the fourth quarter of fiscal 2007. One outcome of this update was a decision to
increase the focus of resources on the Company’s core consumer lawn and garden do-it-yourself
businesses. This process also involved a re-evaluation of the strategy and cash flow projections
surrounding the Company’s Smith & Hawken» business, which has consistently performed below
expectations since it was acquired in early fiscal 2005. Management revised its Smith & Hawken»
strategy to reflect a scaled back retail expansion plan, with an increased focus on aggressively
expanding the wholesale aspect of this business. This resulted in a decrease in the prior cash flow
projections for this business, resulting in a $24.6 million goodwill impairment charge and a $4.6 million
impairment charge for an indefinite-lived tradename. The Company finalized the fourth quarter fiscal
2007 SFAS 142 impairment evaluation of the Smith & Hawken» goodwill during the first quarter of fiscal
2008 and there was no change to the related impairment charge recorded in the fourth quarter of
fiscal 2007.

Management’s fiscal 2007 fourth quarter strategic update also encompassed other areas. The
Company remains committed to the development of turfgrass varieties that could one day require less
mowing, less water and fewer treatments to resist insects, weeds and disease. The Company’s efforts to
develop such turfgrass varieties include conventional breeding programs as well as research and
development involving biotechnology. Efforts to develop turfgrass varieties involving biotechnology have
yielded positive results; however, the required regulatory approval process is taking longer than
anticipated, impacting the Company’s ability to commercialize such innovations. As a result of
management’s fiscal 2007 fourth quarter strategic update, the Company recorded a $2.2 million goodwill
impairment charge related to its turfgrass biotechnology program. Similarly, a strategic update of certain
information technology initiatives in the Company’s Scotts LawnService» segment resulted in a
$3.9 million impairment charge.

Fiscal 2006

The Company’s fiscal 2006 annual impairment analysis resulted in an impairment charge of
$1.0 million associated with a tradename no longer in use in the European portion of the Global
Consumer reporting segment. Subsequent to the fiscal 2006 first quarter impairment analysis, the
European portion of the Global Consumer reporting segment and Smith & Hawken» each experienced
significant off-plan performance. Management believes the off-plan performance of the European
consumer business was driven largely by category declines in the European consumer markets. The
off-plan performance of these two businesses was an indication that, more-likely-than-not, the fair
values of the related reporting units and indefinite-lived intangibles had declined below their carrying
amount. Accordingly, an interim impairment test was performed for the goodwill and indefinite-lived
tradenames of these reporting units during the fourth quarter of fiscal 2006. As a result of the interim
impairment test, the Company recorded a $65.4 million non-cash impairment charge, $62.3 million of
which was associated with indefinite-lived tradenames in the European portion of the Global Consumer
reporting segment. The balance of the fiscal 2006 fourth quarter impairment charge was in the Global
Consumer segment and consisted of $1.3 million for a Canadian tradename being phased out and
$1.8 million related to goodwill of a pottery business being exited. The interim impairment testing of the
Smith & Hawken» goodwill and indefinite-lived tradename did not indicate impairment.

120.4

298.4

418.8
462.9
$ 881.7

Total

$ 458.1
19.2

(26.8)

12.4

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents goodwill and intangible assets as of September 30, 2008 and 2007

(dollars in millions).

September 30, 2008

September 30, 2007

Weighted
Average
Life

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

16
13
17
13

$ 49.9
83.5
11.3
101.2

Amortizable intangible assets:

Technology
Customer accounts
Tradenames
Other

Total amortizable intangible assets, net

Unamortizable intangible assets:

Tradenames

Total intangible assets, net
Goodwill
Total goodwill and intangible assets, net

88.6

278.6

367.2
377.7
$744.9

$ (39.1) $ 10.8 $ 56.7
89.0
11.3
30.0 117.7

(38.0)
(9.0)
(71.2)

45.5
2.3

$ (37.1) $ 19.6
59.4
5.7
35.7

(29.6)
(5.6)
(82.0)

The changes to the net carrying value of goodwill by segment for the fiscal years ended

September 30, 2008 and 2007 are as follows (in millions):

Global
Consumer

Global
Professional

Scotts
LawnService»

Corporate
& Other

Balance as of September 30, 2006
Increases due to acquisitions

Impairment

Other, primarily cumulative translation

$267.0
4.3

(2.2)

7.9

$ 57.9
—

—

4.5

$108.6
14.9

—

$ 24.6
—

(24.6)

—

Balance as of September 30, 2007

$277.0

$ 62.4

$ 123.5

$ —

$462.9

Increases due to acquisitions
Impairment

Other, primarily cumulative translation

—
(61.0)

(0.9)

—
(19.8)

(3.8)

0.3
—

—

—
—

—

0.3
(80.8)

(4.7)

Balance as of September 30, 2008

$ 215.1

$ 38.8

$123.8

$ —

$ 377.7

The total amortization expense for the years ended September 30, 2008, 2007 and 2006 was
$16.4 million, $16.1 million and $16.0 million, respectively. Amortization expense is estimated to be as
follows for the years ending September 30 (in millions):

2009
2010
2011
2012
2013

$13.1
11.2
9.3
8.6
8.3

NOTE 5. RECAPITALIZATION

On December 12, 2006, the Company announced a recapitalization plan to return $750 million to
the Company’s shareholders. This plan expanded and accelerated the previously announced five-year,
$500 million share repurchase program (which was canceled) under which the Company repurchased
$87.9 million of its common shares during fiscal 2006. Pursuant to the recapitalization plan, on
February 14, 2007, the Company completed a modified “Dutch auction” tender offer, resulting in the
repurchase of 4.5 million of the Company’s common shares for an aggregate purchase price of
$245.5 million ($54.50 per share). On February 16, 2007, the Company’s Board of Directors declared a
special one-time cash dividend of $8.00 per share ($508 million in the aggregate), which was paid on
March 5, 2007, to shareholders of record on February 26, 2007.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In order to fund these transactions, the Company entered into new credit facilities aggregating
$2.15 billion and terminated its prior credit facility. As part of this debt restructuring, the Company also
conducted a cash tender offer for any and all of its outstanding 65⁄8% senior subordinated notes in an
aggregate principal amount of $200 million. Please refer to “NOTE 11. DEBT” for further information as to
the new credit facilities and the repayment and termination of the prior credit facility and the 65⁄8% senior
subordinated notes.

The payment of the special one-time cash dividend required the Company to adjust the number of

common shares subject to stock options and stock appreciation rights outstanding under the Company’s
share-based awards programs, as well as the price at which the awards may be exercised. Please refer
to “NOTE 12. SHAREHOLDERS’ EQUITY” for further information.

The Company’s interest expense will be significantly higher for periods subsequent to the recapital-
ization transactions as a result of the borrowings incurred to fund the cash returned to shareholders. The
following pro forma financial information has been compiled as if the Company had completed the
recapitalization transactions as of October 1, 2005 for fiscal 2006 and as of October 1, 2006 for fiscal
2007. Borrowing rates in effect as of March 30, 2007 were used to compute pro forma interest expense.
As the recapitalization involved a share repurchase, pro forma diluted common shares are also provided.

Pro Forma Financial
Information
(Unaudited)
Year Ended
September 30,

2006
2007
(In millions, except
per share data)

$ 188.1
70.7

18.3

(94.3)

182.8

72.5

$ 110.3

$ 1.74

$ 1.68

$ 70.7
21.8

1.5

0.3

$ 212.9
39.6

—

(100.8)

151.7

57.3

$ 94.4

$ 1.50

$ 1.45

$ 39.6
53.0

7.4

0.8

$ 94.3

$ 100.8

39.7%

37.8%

Income before income taxes, as reported
Add back reported interest expense

Add back costs related to refinancing

Deduct pro forma interest expense

Pro forma income before income taxes

Pro forma income taxes

Pro forma net income

Pro forma basic net income per common share

Pro forma diluted net income per common share

Reported interest expense
Incremental interest on recapitalization borrowings

New credit facilities interest rate differential

Incremental amortization of new credit facilities fees

Pro forma interest expense

Pro forma effective tax rates

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Weighted-average common shares outstanding during the period

Incremental full period impact of repurchased common shares

Pro forma basic common shares

Weighted-average common shares outstanding during the period plus dilutive

potential common shares

Incremental full period impact of repurchased common shares
Impact on dilutive potential common shares

Pro forma diluted common shares

NOTE 6. DETAIL OF CERTAIN FINANCIAL STATEMENT ACCOUNTS

INVENTORIES, NET:
Finished goods
Work-in-progress
Raw materials

PROPERTY, PLANT AND EQUIPMENT, NET:

Land and improvements
Buildings
Machinery and equipment
Furniture and fixtures
Software
Construction in progress

Less: accumulated depreciation

ACCRUED LIABILITIES:

Payroll and other compensation accruals
Advertising and promotional accruals
Other

OTHER NON-CURRENT LIABILITIES:

Accrued pension and postretirement liabilities
Deferred tax liability
Other

Pro Forma Shares
Year Ended
September 30,

2007

2006

(In millions)

65.2

(1.8)

63.4

67.0

(1.8)
0.3

65.5

67.5

(4.5)

63.0

69.4

(4.5)
0.3

65.2

September 30,

2008

2007

(In millions)

$ 277.3
29.9
108.7

$ 415.9

$ 61.0
165.1
432.0
36.2
92.0
18.4

804.7
(460.6)

$ 344.1

$ 50.3
144.1
119.8

$ 314.2

$ 108.4
42.6
41.0

$ 192.0

$ 289.9
28.3
87.7

$ 405.9

$ 58.9
162.8
417.4
39.2
88.6
17.8

784.7
(418.8)

$ 365.9

$ 44.0
138.8
104.0

$ 286.8

$ 79.8
67.9
32.2

$ 179.9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2008

September 30,
2007
(In millions)

2006

ACCUMULATED OTHER COMPREHENSIVE LOSS:

Unrecognized gain (loss) on derivatives, net of tax of $8.9, $0.4 and $(0.9) $ (14.1)

$ (0.6)

$ 1.8

Minimum pension liability, net of tax of $0, $0 and $19.5

Pension liability under SFAS 158, net of tax of $29.2, $15.9 and $0
Foreign currency translation adjustment

—

(47.1)
(5.9)

—

(27.0)
(14.4)

(34.1)

—
(19.3)

$(67.1)

$(42.0)

$(51.6)

NOTE 7. MARKETING AGREEMENT

The Company is Monsanto’s exclusive agent for the domestic and international marketing and

distribution of consumer Roundup» herbicide products. Under the terms of the Marketing Agreement
with Monsanto, the Company is entitled to receive an annual commission from Monsanto in consider-
ation for the performance of the Company’s duties as agent. The annual gross commission under the
Marketing Agreement is calculated as a percentage of the actual earnings before interest and income
taxes (EBIT) of the consumer Roundup» business, as defined in the Marketing Agreement. 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 annual payments to Monsanto as a contribu-
tion against the overall expenses of the consumer Roundup» business. The annual contribution payment
is defined in the Marketing Agreement as $20 million.

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 $32 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. Based on management’s current
assessment of the likely term of the Marketing Agreement, the useful life over which the marketing fee is
being amortized is 20 years.

Under the terms of the Marketing Agreement, the Company performs certain functions, primarily

manufacturing conversion, selling and marketing support, on behalf of Monsanto in the conduct of the
consumer Roundup» business. The actual costs incurred for these activities are charged to and
reimbursed by Monsanto, for which the Company recognizes no gross profit or net income. The Company
records costs incurred under the Marketing Agreement for which the Company is the primary obligor on a
gross basis, recognizing such costs in “Cost of sales” and the reimbursement of these costs in “Net
sales,” with no effect on gross profit or net income. The related net sales and cost of sales were
$58.0 million, $47.7 million and $37.6 million for fiscal 2008, 2007 and 2006, respectively.

The elements of the net commission earned under the Marketing Agreement and included in “Net

sales” for each of the three years in the period ended September 30, 2008 were as follows:

Gross commission

Contribution expenses

Amortization of marketing fee

Net commission income

Reimbursements associated with marketing agreement

2008

2007

2006

$ 65.1

$ 62.7

$ 60.7

(20.0)

(0.8)

44.3

58.0

41.9

47.7

39.9

37.6

Total net sales associated with marketing agreement

$102.3

$ 89.6

$ 77.5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Marketing Agreement has no definite term except as it relates to the European Union countries

(the “EU term”). The EU term had previously been extended through September 30, 2008 and, on
March 28, 2008, the parties agreed to further extend the EU term through September 30, 2011, with up
to two additional automatic renewal periods of two years each, subject to non-renewal only upon the
occurrence of certain performance defaults.

The Marketing Agreement provides Monsanto with the right to terminate the Marketing Agreement
upon an event of default (as defined in the Marketing Agreement) by the Company, 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 due to an event of default by the Company, Monsanto is required to
pay a termination fee to the Company that varies by program year. The termination fee is calculated as a
percentage of the value of the Roundup» business exceeding a certain threshold, but in no event will
the termination fee be less than $16 million. If Monsanto were to terminate the Marketing Agreement
due to an event of default by the Company, however, the Company would not be entitled to any
termination fee, and it would lose all, or a substantial 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 a
termination fee if unit volume sales to consumers in that region decline: (1) over a cumulative three-
fiscal-year period; or (2) by more than 5% for each of two consecutive years.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8. ACQUISITIONS

The Company continues to view strategic acquisitions as a means to enhance our strong core

businesses. The following recaps key acquisitions made during fiscal 2006:

Date of Acquisition

June 2006

May 2006

November 2005

Consideration

Cash of $6.2 million
with an additional
$1.0 million deferred to
future periods.

Cash of $10.0 million
plus assumed liabilities
of $4.5 million.
Contingent
consideration based on
future performance of
the business due in
2012 that may
approximate $15 million
which would be
recorded as additional
purchase price.

$78.3 million in cash
plus assumed liabilities
of $4.7 million.

Assets Acquired
Certain brands and
assets of Landmark
Seed Company, a
producer and distributor
of quality professional
seed and turfgrasses.

Certain brands and
assets of Turf-Seed, Inc.,
a leading producer of
quality commercial
turfgrasses, including
49% equity interest in
Turf-Seed Europe, which
distributes Turf-Seed’s
grass varieties
throughout the
European Union and
other countries in the
region.
All the outstanding
shares of Gutwein &
Co., Inc. (“Gutwein”), a
branded producer and
marketer in the
North American wild
bird food category.

October 2005

$20.5 million in cash
plus assumed liabilities
of $6.8 million.

All the outstanding
shares of Rod McLellan
Company (“RMC”), a
branded producer and
marketer of soil and
landscape products in
the western
United States.

Reasons for the Acquisition
Enhanced the
Company’s position in
the global turfgrass
seed industry and
complemented the
acquisition from
Turf-Seed, Inc.
Integration of
Turf-Seed’s extensive
professional seed sales
and distribution network
with the Company’s
existing presence and
industry leading brands
in the consumer seed
market strengthened the
Company’s overall
global position in the
seed category.

Gutwein’s Morning
Song» branded
products are sold at
leading mass retailers,
grocery, pet and general
merchandise stores.
This acquisition gave
the Company its entry
into the North American
wild bird food category,
a large, fragmented
category with
opportunity for branding
and innovation.
RMC complemented our
existing line of growing
media products and has
been integrated into
that business.

Due to the timing of these acquisitions in fiscal 2006, pro forma results would not be materially

different from actual results for the year ended September 30, 2006.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Scotts LawnService»

During fiscal 2006 and fiscal 2007, the Company’s Scotts LawnService» segment acquired 16
individual lawn service entities for a total cost of approximately $26.9 million. The following table
summarizes the details of these transactions by fiscal year (dollar amounts in millions):

Number of individual acquisitions

Total cost
Portion of cost paid in cash

Notes issued and liabilities assumed
Goodwill

Other intangible assets

Working capital and property, plant and equipment

NOTE 9. RETIREMENT PLANS

Fiscal Year

2007

2006

$22.5
18.7

3.8
14.9

6.3

1.3

$4.4
3.4

1.0
3.5

0.7

0.2

The Company sponsors a defined contribution profit sharing and 401(k) plans for substantially all

U.S. associates. The Company provides a base contribution equal to 2% of compensation up to 50% of
the Social Security taxable wage base plus 4% of remaining compensation. Associates also may make
pretax contributions from compensation that are matched by the Company at 100% of the associates’
initial 3% contribution and 50% of their remaining contribution up to 5%. The Company recorded charges
of $11.4 million, $10.7 million and $10.3 million under the plan in fiscal 2008, 2007 and 2006,
respectively.

The Company sponsors two defined benefit plans for certain U.S. associates. Benefits under these
plans have been frozen and closed to new associates since 1997. The benefits under the primary plan
are based on years of service and the associates’ average final compensation or stated amounts. The
Company’s funding policy, consistent with statutory requirements and tax considerations, is based on
actuarial computations using the Projected Unit Credit method. The second frozen plan is a non-qualified
supplemental pension plan. This plan provides for incremental pension payments so that total pension
payments equal amounts that would have been payable from the Company’s pension plan if it were not
for limitations imposed by the income tax regulations.

The Company sponsors defined benefit pension plans associated with its international businesses

in the United Kingdom, the Netherlands, Germany and France. These plans generally cover all associates
of the respective businesses, with retirement benefits primarily based on years of service and compen-
sation levels. During fiscal 2004, the U.K. plans were closed to new participants, but existing
participants continue to accrue benefits. All newly hired associates of the U.K. business now participate
in a defined contribution plan.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present information about benefit obligations, plan assets, annual expense,
assumptions and other information about the Company’s defined benefit pension plans (in millions). The
defined benefit plans are valued using a September 30 measurement date.

Change in projected benefit obligation
Benefit obligation at beginning of year

Service cost
Interest cost

Plan participants’ contributions
Plan amendments

Curtailment/settlement gain

Actuarial loss (gain)
Benefits paid

Other
Special termination benefits

Foreign currency translation

Curtailed Defined
Benefit Plans

International
Benefit Plans

2008

2007

2008

2007

$ 90.8

$ 93.4

$ 179.5

$178.7

—
5.4

—
—

—

0.5
(6.5)

—
—

—

—
5.3

—
—

—

(1.5)
(6.4)

—
—

—

2.8
10.0

0.9
—

—

10.2
(6.6)

(0.6)
0.1

(19.6)

3.9
9.2

0.9
(0.8)

(0.6)

(23.8)
(6.0)

0.2
0.5

17.3

Projected benefit obligation at end of year

$ 90.2

$ 90.8

$ 176.7

$179.5

Accumulated benefit obligation at end of year

$ 90.2

$ 90.8

$ 152.4

$158.6

Change in plan assets
Fair value of plan assets at beginning of year
Actual return on plan assets

Employer contribution

Plan participants’ contributions
Benefits paid

Foreign currency translation
Other

$ 77.9
(10.3)

$ 70.9
9.3

$ 142.7
(11.5)

$ 116.1
10.4

4.8

—
(6.5)

—
—

4.1

—
(6.4)

—
—

9.1

0.9
(6.6)

(15.0)
(0.7)

9.6

0.9
(6.0)

11.9
(0.2)

Fair value of plan assets at end of year

$ 65.9

$ 77.9

$ 118.9

$142.7

Underfunded status at end of year

$(24.3)

$(12.9)

$ (57.8)

$(36.8)

Information for pension plans with an accumulated benefit

obligation in excess of plan assets

Projected benefit obligation

Accumulated benefit obligation
Fair value of plan assets

Amounts recognized in the Consolidated Balance Sheets consist

of:

Current liabilities

Noncurrent liabilities

Total amount accrued

$ 90.2

$ 90.8

$ 157.0

$ 28.1

90.2
65.9

90.8
77.9

135.9
102.0

26.5
7.0

$ (0.2)

$ (1.0)

(24.1)

(12.7)

(56.8)

(35.8)

$(24.3)

$(12.9)

$ (57.8)

$(36.8)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Amounts recognized in accumulated other comprehensive loss

consist of:
Actuarial loss

Prior service cost

Net amount recognized

Curtailed Defined
Benefit Plans

International
Benefit Plans

2008

2007

2008

2007

$ 37.7

$ 22.0

$ 46.3

$ 21.7

—

(1.1)

$ 37.7

$ 22.0

$ 45.2

$ 20.6

Amounts in accumulated other comprehensive loss expected to
be recognized as components of net periodic benefit cost in
fiscal 2009 are as follows:

Actuarial loss

Prior service cost

$ 3.0

$ 1.3

$ 2.4

$ 0.6

—

(0.1)

Amount to be amortized into net periodic benefit cost

$ 3.0

$ 1.3

$ 2.3

$ 0.5

Weighted average assumptions used in development of

projected benefit obligation

Discount rate

Rate of compensation increase

Curtailed Defined
Benefit Plans

International
Benefit Plans

2008

2007

2008

2007

6.46%

6.11% 6.06%

5.67%

n/a

4.1%

3.5%

Curtailed Defined
Benefit Plan
2007

2006

2008

International
Benefit Plans
2007

2006

2008

Components of net periodic benefit cost
Service cost

Interest cost
Expected return on plan assets

Net amortization

Net periodic benefit cost

Curtailment/settlement loss (gain)

$ — $ — $ — $ 2.8

$ 3.9

$ 4.2

5.4
(6.2)

1.3

0.5

—

5.3
(5.6)

2.1

1.8

—

5.2
(5.5)

2.2

1.9

—

10.0
(9.3)

0.4

3.9

0.1

9.2
(8.2)

2.1

7.0

0.6

7.7
(7.0)

2.0

6.9

(1.1)

Total benefit cost

$ 0.5

$ 1.8

$ 1.9

$ 4.0

$ 7.6

$ 5.8

Weighted average assumptions used in

development of net periodic benefit cost

Discount rate
Expected return on plan assets

Rate of compensation increase

6.11% 5.93% 5.63% 5.67% 4.86% 4.68%
6.9%
8.0% 8.0% 8.0%

6.6%

5.8%

n/a

3.5%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other Information

Plan asset allocations:

Target for September 30, 2009:

Equity securities

Debt securities

September 30, 2008:

Equity securities

Debt securities
Other

September 30, 2007:
Equity securities

Debt securities

Other

Expected contributions in fiscal 2009:

Company
Employee

Expected future benefit payments:

2009
2010

2011
2012

2013

2014-2018

Investment Strategy

Curtailed Defined
Benefit Plans

International
Benefit
Plans

60%

40%

56%

43%
1%

61%

38%

1.5
—

6.6
6.6

6.7
6.8

6.8

35.2

49%

51%

48%

52%
0%

50%

49%

8.4
0.9

5.4
5.6

6.1
6.4

7.0

42.1

Target allocation percentages among various asset classes are maintained based on an individual
investment policy established for each of the various pension plans. Asset allocations are designed to
achieve long-term objectives of return, while mitigating against downside risk and considering expected
cash requirements necessary to fund benefit payments. Subsequent to September 30, 2008, investment
markets have continued to decline. This has put further downward pressure on the investments of the
Company’s pension plans. Management continues to monitor this situation and the potential impact on
our future pension plan funding requirements and related expenses. However, we cannot predict future
investment returns, and therefore cannot determine whether future pension plan funding requirements
could materially and adversely affect our financial condition, results of operations and cash flows.

Basis for Long-Term Rate of Return on Asset Assumptions

The Company’s expected long-term rate of return on asset assumptions is derived from studies
conducted by third parties. The studies include a review of anticipated future long-term performance of
individual asset classes and consideration of the appropriate asset allocation strategy given the
anticipated requirements of the plan to determine the average rate of earnings expected. While the
studies give appropriate consideration to recent fund performance and historical returns, the assump-
tions primarily represent expectations about future rates of return over the long term.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. ASSOCIATE MEDICAL BENEFITS

The Company provides comprehensive major medical benefits to certain of its retired associates
and their dependents. Substantially all of the Company’s domestic associates who were hired before
January 1, 1998 become eligible for these benefits if they retire at age 55 or older with more than ten
years of service. The plan requires certain minimum contributions from retired associates and includes
provisions to limit the overall cost increases the Company is required to cover. The Company funds its
portion of retiree medical benefits on a pay-as-you-go basis.

The following table sets forth the information about the retiree medical plan for domestic associates

(in millions). The retiree medical plan is valued using a September 30 measurement date.

Change in Accumulated Plan Benefit Obligation (APBO)
Benefit obligation at beginning of year

Service cost

Interest cost
Plan participants’ contributions

Actuarial gain
Benefits paid (net of federal subsidy of $0.3 and $0.3)

Benefit obligation at end of year

Change in plan assets
Fair value of plan assets at beginning of year

Employer contribution

Plan participants’ contributions
Gross benefits paid

Fair value of plan assets at end of year

Funded status at end of year

Amounts recognized in the Consolidated Balance Sheets consist of:
Current liabilities
Noncurrent liabilities

Total amount accrued

Amounts recognized in accumulated other comprehensive loss consist of:
Actuarial (gain) loss

The estimated actuarial gain that will be amortized from accumulated other

comprehensive income into net periodic benefit cost over the next fiscal year is
$0.2 million.

2008

2007

$ 30.4

$ 33.2

0.5

1.8
0.9

(4.5)
(2.9)

0.6

1.8
0.9

(3.4)
(2.7)

$ 26.2

$ 30.4

$ — $ —

2.3

0.9
(3.2)

—

2.1

0.9
(3.0)

—

$(26.2)

$(30.4)

$ (2.4)
(23.8)

$ (2.5)
(27.9)

$(26.2)

$(30.4)

$ (4.2)

$ 0.3

Discount rate used in development of APBO

Components of net periodic benefit cost
Service cost

Interest cost
Amortization of actuarial loss

Total postretirement benefit cost

7.54% 6.22%

2008

2007

2006

$ 0.5

$ 0.6

$ 0.7

1.8
—

1.9
0.1

$ 2.3

$ 2.4

$ 2.7

Discount rate used in development of net periodic benefit cost

6.22% 5.86% 5.51%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act (the

“Act”) became law. The Act provides for a federal subsidy to sponsors of retiree health care benefit
plans that provide a prescription drug benefit that is at least actuarially equivalent to the benefit
established by the Act. On May 19, 2004, the FASB issued Staff Position No. 106-2, “Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act
of 2003” (the “FSP”). The FSP provides guidance on accounting for the effects of the Act, which the
Company adopted at the beginning of its fourth quarter of fiscal 2004. The APBO at September 30,
2008, has been reduced by a deferred actuarial gain in the amount of $5.5 million to reflect the effect of
the subsidy related to benefits attributed to past service. The amortization of the actuarial gain and
reduction of service and interest costs served to reduce net periodic post retirement benefit cost for
fiscal years 2008, 2007 and 2006 by $0.5 million, $0.7 million and $0.9 million, respectively.

For measurement as of September 30, 2008, management has assumed that health care costs will

increase at an annual rate of 7.0% in fiscal 2009, decreasing 0.50% per year to an ultimate trend of
5.00% in 2013. A 1% increase in health cost trend rate assumptions would increase the APBO as of
September 30, 2008 and 2007 by $0.9 million and $0.0 million, respectively. A 1% decrease in health
cost trend rate assumptions would decrease the APBO as of September 30, 2008 and 2007 by
$0.6 million and $0.1 million, respectively. A 1% increase or decrease in the same rate would not have a
material effect on service or interest costs.

Estimated Future Benefit Payments

The following benefit payments under the plan are expected to be paid by the Company and the

retirees for the fiscal years indicated (in millions):

2009

2010
2011

2012
2013

2014-2018

Gross
Benefit
Payments

$ 3.6

Retiree
Contributions

Medicare
Part D
Subsidy

Net
Company
Payments

$ (0.9)

$(0.3)

$ 2.4

3.8
4.0

4.2
4.5

27.0

(1.0)
(1.2)

(1.4)
(1.6)

(11.7)

(0.4)
(0.4)

(0.4)
(0.5)

(3.0)

2.4
2.4

12.3

The Company also provides comprehensive major medical benefits to its associates. The Company

is self-insured for certain health benefits up to $0.3 million per occurrence per individual. The cost of
such benefits is recognized as expense in the period the claim is incurred. This cost was $24.1 million,
$21.4 million and $21.8 million in fiscal 2008, 2007 and 2006, respectively.

The following table reflects the effects of the adoption of SFAS 158 on the Company’s Consolidated

Balance Sheet for pension and other post-employment benefits as of September 30, 2007.

Prepaid and other assets

Accrued liabilities
Other liabilities

Total liabilities

Accumulated other comprehensive (loss)

Prior to
Adopting
SFAS 158

Effect of
Adopting
SFAS 158
(In millions)

As Reported
under
SFAS 158

$ 136.8

$ (9.1)

$ 127.7

283.1
179.4

1,793.7

3.7
0.5

4.2

(28.7)

(13.3)

286.8
179.9

1,797.9

(42.0)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. DEBT

Credit Facilities:

Revolving loans
Term loans

Master Accounts Receivable Purchase Agreement
Notes due to sellers
Foreign bank borrowings and term loans
Other

Less current portions

September 30,
2007

2008

(In millions)

$375.8
540.4
62.1
12.8
0.7
7.7

999.5
150.0

$ 469.2
558.6
64.4
15.1
—
10.5

1,117.8
86.4

$849.5

$1,031.4

The Company’s debt matures as follows for each of the next five fiscal years and thereafter (in

millions):

2009
2010
2011
2012
2013
Thereafter

$ 150.0
155.8
193.6
496.1
0.5
3.5

$999.5

In connection with the recapitalization transactions discussed in “NOTE 5. RECAPITALIZATION,” in

February 2007, the Company entered into the following loan facilities totaling up to $2.15 billion in the
aggregate: (a) a senior secured five-year term loan in the principal amount of $560 million and (b) a
senior secured five-year revolving loan facility in the aggregate principal amount of up to $1.59 billion.
Under the terms of the loan facilities, the Company may request an additional $200 million in revolving
credit and/or term credit commitments, subject to approval from the lenders. Borrowings may be made
in various currencies including U.S. dollars, Euros, British pounds, Australian dollars and Canadian
dollars.

The terms of these senior secured credit facilities provide for customary representations and

warranties and affirmative covenants. The senior secured credit facilities also contain customary negative
covenants setting forth 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; modifications of certain debt instruments;
negative pledge clauses; entering into new lines of business; and restricted payments (including
restricting dividend payments to $55 million annually based on the current Leverage Ratio (as defined)
of the Company). The senior secured credit facilities are secured by collateral that includes the capital
stock of specified subsidiaries of Scotts Miracle-Gro, substantially all domestic accounts receivable
(exclusive of any “sold” receivables), inventory and equipment. The senior secured credit facilities also
require the maintenance of a specified Leverage Ratio and Interest Coverage Ratio (both as defined), and
are guaranteed by substantially all of Scotts Miracle-Gro’s domestic subsidiaries.

The senior secured credit facilities have 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 (as defined). Commitment fees are paid quarterly and are calculated as an amount equal
to the product of a rate based on a Leverage Ratio (as defined) and the average daily unused portion of

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

both the revolving and term credit facilities. Amounts outstanding under the senior secured credit
facilities at September 30, 2008 were at interest rates based on LIBOR applicable to the borrowed
currencies plus 125 basis points. The weighted average interest rates on average debt under the credit
facilities were 6.2% and 6.5% at September 30, 2008 and 2007, respectively. As of September 30, 2008,
there was $1.19 billion of availability under the senior secured credit facilities. Under the senior secured
credit facilities, the Company has the ability to issue letter of credit commitments up to $65.0 million. At
September 30, 2008, the Company had letters of credit in the amount of $28.4 million outstanding.

On January 10, 2007, the Company also launched a cash tender offer for any and all of its

outstanding 65⁄8% senior subordinated notes due 2013 in an aggregate principal amount of $200 million.
Substantially all of the 65⁄8% senior subordinated notes were repurchased under the terms of the tender
offer on February 14, 2007. The remaining senior subordinated notes not tendered were subsequently
called and repurchased on March 26, 2007. Proceeds from the senior secured credit facilities were used
to fund the repurchase of the 65⁄8% senior subordinated notes, at an aggregate cost of $209.6 million
including an early redemption premium.

At September 30, 2008, the Company had outstanding interest rate swaps with major financial
institutions that effectively converted a portion of variable-rate debt denominated in the Euros, British
pounds and U.S. dollars to a fixed rate. The swap agreements had a total U.S. dollar equivalent notional
amount of $711.4 million at September 30, 2008. The term, expiration date and rates of these swaps are
as follows:

Currency

British pound
Euro
U.S. dollar
U.S. dollar
U.S. dollar

Notional
Amount in USD

Term

Expiration Date

Fixed Rate

(In millions)

$ 51.2
60.2
200.0
200.0
200.0

3 years
3 years
2 years
3 years
5 years

11/17/2008
11/17/2008
3/31/2009
3/30/2010
2/14/2012

4.76%
2.98%
4.90%
4.87%
5.20%

The Company recorded a charge of $18.3 million (including approximately $8.0 million of non-cash

charges associated with the write-off of deferred financing costs) during fiscal 2007 relating to the
refinancing of the $1.05 billion senior credit facility and the repurchase of the 65⁄8% senior subordinated
notes.

Master Accounts Receivable Purchase Agreement

On April 11, 2007, the Company entered into a one-year Master Accounts Receivable Purchase

Agreement (the “Original MARP Agreement”). On April 9, 2008, the Company terminated the Original
MARP Agreement and entered into a new Master Accounts Receivable Purchase Agreement (the “New
MARP Agreement”) with a termination date of April 8, 2009, or such later date as may be extended by
mutual agreement of the Company and its lenders. The terms of the New MARP Agreement are
substantially the same as the Original MARP Agreement. The New MARP Agreement provides for the
discounted sale, on a revolving basis, of accounts receivable generated by specified account debtors,
with seasonally adjusted monthly aggregate limits ranging from $10 million to $300 million. The New
MARP Agreement also provides for specified account debtor sublimit amounts, which provide limits on
the amount of receivables owed by individual account debtors that can be sold to the banks.

The New MARP Agreement provides that although the specified receivables are sold, the purchaser

has the right to require the Company to repurchase uncollected receivables if certain events occur,
including the breach of certain covenants, warranties or representations made by the Company with
respect to such receivables. However, the purchaser does not have the right to require the Company to
repurchase any uncollected receivables if nonpayment is due to the account debtor’s financial inability
to pay. Under certain specified conditions, the Company has the right to repurchase receivables which
have been sold pursuant to the New MARP Agreement. The purchase price paid by the purchaser reflects
a discount on the adjusted amount (primarily reflecting historical dilution and potential trade credits) of
the receivables purchased, which effectively is equal to the 7-day LIBOR rate plus a margin of .85% per
annum. The Company continues to be responsible for the servicing and administration of the receivables
purchased.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company accounts for the sale of receivables under the New MARP Agreement as short-term

debt and continues to carry the receivables on its consolidated balance sheet, in accordance with
SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,”
primarily as a result of the Company’s right to repurchase receivables sold. The caption “Accounts
receivable pledged” on the accompanying Consolidated Balance Sheets in the amounts of $146.6 million
and $149.5 million as of September 30, 2008 and 2007, respectively, represents the pool of receivables
that have been designated as “sold” and serve as collateral for short-term debt in the amount of
$62.1 million and $64.4 million as of those dates, respectively.

The Company was in compliance with the terms of all borrowing agreements at September 30,
2008. Management continues to monitor the Company’s compliance with the leverage ratio and other
covenants contained in the credit facilities and, based upon the Company’s current operating assump-
tions, the Company expects to remain in compliance with the permissible leverage ratio throughout
fiscal 2009. However, an unanticipated charge to earnings or an increase in debt could materially affect
our ability to remain in compliance with the financial covenants of our credit facilities, potentially
causing us to have to seek an amendment or waiver from our lending group. While the Company
believes it has good relationships with its banking group, given the adverse conditions currently present
in the global credit markets, the Company can provide no assurance that such a request would be likely
to result in a modified or replacement credit facility on reasonable terms, if at all.

NOTE 12. SHAREHOLDERS’ EQUITY

Preferred shares, no par value:

Authorized
Issued

Common shares, no par value, $.01 stated value per share

Authorized
Issued

2008

2007

(In millions)

0.2 shares
0.0 shares

100.0 shares
68.1 shares

In fiscal 1995, The Scotts Company merged with Stern’s Miracle-Gro Products, Inc. (“Miracle-Gro”).

At September 30, 2008, the former shareholders of Miracle-Gro, including Hagedorn Partnership L.P.,
owned approximately 32% of Scotts Miracle-Gro’s outstanding common shares and, thus, have the
ability to significantly influence the election of directors and approval of other actions requiring the
approval of Scotts Miracle-Gro’s shareholders.

Under the terms of the merger agreement with Miracle-Gro, the former shareholders of Miracle-Gro
may not collectively acquire, directly or indirectly, beneficial ownership of Voting Stock (as that term is
defined in the Miracle-Gro merger agreement) representing more than 49% of the total voting power of
the outstanding Voting Stock, except pursuant to a tender offer for 100% of that total voting power,
which tender offer is made at a price per share which is not less than the market price per share on the
last trading day before the announcement of the tender offer and is conditioned upon the receipt of at
least 50% of the Voting Stock beneficially owned by shareholders of Scotts Miracle-Gro other than the
former shareholders of Miracle-Gro and their affiliates and associates.

Scotts Miracle-Gro reacquired no common shares in fiscal 2008 and 4.5 million common shares

during fiscal 2007, to be held in treasury. Common shares held in treasury totaling 0.6 million and
2.0 million were reissued in support of share-based compensation awards and employee purchases
under the employee stock purchase plan during fiscal 2008 and fiscal 2007, respectively.
See “NOTE 5. RECAPITALIZATION” for a discussion of the Company’s fiscal 2007 recapitalization
transactions.

Share-Based Awards

Scotts Miracle-Gro grants share-based awards annually to officers and other key employees of the
Company and non-employee directors of Scotts Miracle-Gro. The Company’s share-based awards typically
consist of stock options and restricted stock, although performance share awards have been made.
Stock appreciation rights (“SARs”) also have been granted, though not in recent years. SARs result in

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

less dilution than stock options as the SAR holder receives a net share settlement upon exercise. All of
these share-based awards have been made under plans approved by the shareholders. Generally,
employee share-based awards provide for three-year cliff vesting. Vesting for non-employee director
awards varies based on the length of service and age of each director at the time of the award. Share-
based awards are forfeited if a holder terminates employment or service with the Company prior to the
vesting date. The Company estimates that 10% of its share-based awards will be forfeited based on an
analysis of historical trends. This assumption is re-evaluated on an annual basis by grant and adjusted
as appropriate. Stock options and SAR awards have exercise prices equal to the market price of the
underlying common shares on the date of grant with a term of 10 years. If available, the Company will
typically use treasury shares, or if not available, newly issued common shares, in satisfaction of its
share-based awards.

A maximum of 18 million common shares are available for issuance under share-based award plans.

At September 30, 2008, approximately 2.5 million common shares were not subject to outstanding
awards and were available to underlie the grant of new share-based awards. Subsequent to
September 30, 2008, awards covering 1.1 million common shares were granted to key employees with
an estimated fair value of $14.3 million on the date of grant.

The following is a recap of the share-based awards granted over the periods indicated:

Key employees

Options

Options and SARs due to recapitalization

Restricted stock
Performance shares

Board of Directors

Deferred stock units

Options

Options due to recapitalization

Total share-based awards

Year Ended September 30,
2007

2006

2008

889,700

—

154,900
40,000

30,271

—

821,200

872,147

193,550
—

—

127,000

202,649

835,640

—

184,595
30,000

—

126,000

—

1,114,871

2,216,546

1,176,235

Aggregate fair value at grant dates (in millions), excluding

additional options and SARs issued due to the
recapitalization

18.7

22.3

20.9

As discussed in “NOTE 5. RECAPITALIZATION,” the Company consummated a series of transactions
as part of a recapitalization plan in the quarter ended March 31, 2007. The payment of a special dividend
is a recapitalization or adjustment event under the Company’s share-based award programs. As such, it
was necessary to adjust the number of common shares subject to stock options and SARs outstanding
at the time of the dividend, as well as the price at which such awards may be exercised. The
adjustments to the outstanding awards resulted in an increase in the number of common shares subject
to outstanding stock options and SAR awards in an aggregate amount of 1.1 million common shares. The
methodology used to adjust the awards was consistent with Internal Revenue Code (“IRC”) Section 409A
and the then proposed regulations promulgated thereunder and IRC Section 424 and the regulations
promulgated thereunder, compliance with which was necessary to avoid adverse tax consequences for
the holder of an award. Such methodology also resulted in a fair value for the adjusted awards post-
dividend equal to that of the unadjusted awards pre-dividend, with the result that there was no
additional compensation expense in accordance with the accounting for modifications to awards under
SFAS 123(R).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Total share-based compensation and the deferred tax benefit recognized were as follows for the

periods indicated (in millions):

Share-based compensation

Tax benefit recognized

Stock Options/SARs

Year Ended September 30,
2008
2006
2007

$12.5

$15.5

$15.7

4.8

6.2

5.9

Aggregate stock option and SARs activity consisted of the following for the year ended

September 30, 2008 (options/SARs in millions):

Beginning balance
Granted
Exercised
Forfeited

Ending balance

Exercisable

No. of
Options/SARs
5.8
0.9
(0.6)
(0.3)

5.8

3.6

WTD.
Avg.
Exercise
Price
$26.63
$38.63
$ 17.24
$ 37.32

$29.01

$ 23.41

The following summarizes certain information pertaining to stock option and SAR awards outstand-

ing and exercisable at September 30, 2008 (options/SARs in millions):

Range of
Exercise Price

$11.14 – $14.95
$15.03 – $19.82

$20.12 – $28.97

$29.01 – $31.62
$33.25 – $37.48

$37.89 – $39.95
$40.53 – $46.70

Awards Outstanding
WTD. Avg.
Remaining
Life

WTD. Avg.
Exercise
Price

No. of
Options/
SARs

Awards Exercisable

No. of
Options/
SARS

Exercise Price

WTD. Avg.
Remaining
Life

0.4
0.8

1.5

0.6
0.6

1.6
0.3

5.8

1.41
2.57

4.91

6.20
7.14

8.57
7.90

5.87

$ 13.69
16.79

23.63

29.08
35.71

38.63
43.31

$ 29.01

0.4
0.8

1.5

0.6
—

—
0.3

3.6

$ 13.69
16.79

23.63

29.03
—

—
43.26

$ 23.41

The intrinsic value of the stock option and SAR awards outstanding and exercisable at

September 30, were as follows (in millions):

Outstanding
Exercisable

The grant date fair value of stock option awards are estimated using a binomial model and the
assumptions in the following table. Expected market price volatility is based on implied volatilities from
traded options on Scotts Miracle-Gro’s common shares and historical volatility specific to the common
shares. Historical data, including demographic factors impacting historical exercise behavior, is used to
estimate option exercise and employee termination within the valuation model. The risk-free rate for
periods within the contractual life (normally ten years) of the option is based on the U.S. Treasury yield
curve in effect at the time of grant. The expected life of stock options is based on historical experience

1.41
2.57

4.91

6.17
—

—
7.85

4.43

2008

$9.7
9.7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

and expectations for grants outstanding. The weighted average assumptions for awards granted are as
follows for the periods indicated:

Expected market price volatility

Risk-free interest rates
Expected dividend yield

Expected life of stock options in years
Estimated weighted-average fair value per stock option

Restricted Stock

Restricted stock award activity was as follows:

Awards outstanding at September 30, 2007
Granted
Vested
Forfeited

Awards outstanding at September 30, 2008

Year Ended September 30,
2008
2006
2007

30.2% 26.3% 23.0%

4.0%
1.3%

4.8%
1.1%

4.4%
1.2%

6.19
$12.34

5.83
$11.42

6.19
$12.04

WTD. Avg.
Grant Date
Fair Value
per Share
$ 43.74
39.99
34.91
43.23

No. of
Shares
277,080
187,000
(29,215)
(53,300)

381,565

$42.65

As of September 30, 2008, total unrecognized compensation cost related to non-vested share-based

awards amounted to $17.0 million. This cost is expected to be recognized over a weighted-average
period of 1.9 years. Unearned compensation cost is amortized by grant on the straight-line method over
the vesting period, with the amortization expense classified as a component of “Selling, general and
administrative” expense within the Consolidated Statements of Operations.

The total intrinsic value of stock options exercised was $11.4 million, $65.5 million and $23.2 million

during fiscal 2008, 2007 and 2006, respectively. The total fair value of restricted stock vested was
$1.1 million, $5.5 million and $0.4 million during fiscal 2008, 2007 and 2006, respectively.

Cash received from the exercise of stock options for fiscal 2008 was $9.2 million. The tax benefit

realized from the tax deductions associated with the exercise of share-based awards and the vesting of
restricted stock totaled $4.4 million for fiscal 2008.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13. EARNINGS (LOSS) PER COMMON SHARE

The following table (in millions, except per share data) presents information necessary to calculate

basic and diluted earnings per common share. Basic earnings (loss) per common share are computed by
dividing net income (loss) by the weighted average number of common shares outstanding. Diluted
earnings (loss) per common share are computed by dividing net income (loss) by the weighted average
number of common shares outstanding plus all potentially dilutive securities. Stock options with
exercise prices greater than the average market price of the underlying common shares are excluded
from the computation of diluted net income (loss) per share because they are out-of-the-money. The
number of common shares covered by out-of-the-money stock options was 4.0 million, 0.17 million and
0.15 million common shares for the years ended September 30, 2008, 2007 and 2006, respectively.
Because of the net loss in fiscal 2008, 0.9 million potential common shares were not included in the
calculation of diluted loss per share because to do so would have been anti-dilutive.

Net income (loss)

BASIC EARNINGS (LOSS) PER COMMON SHARE:

Weighted-average common shares outstanding

during the period

Net income (loss)

DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Weighted-average common shares outstanding

during the period

Potential common shares

Weighted-average number of common shares
outstanding and dilutive potential common
shares

Net income (loss)

NOTE 14. INCOME TAXES

2008

$(10.9)

64.5

$(0.17)

64.5

—

64.5

$(0.17)

Year Ended September 30,
2007

$113.4

65.2

$ 1.74

65.2

1.8

67.0

$ 1.69

2006

$132.7

67.5

$ 1.97

67.5

1.9

69.4

$ 1.91

The provision (benefit) for income taxes consisted of the following (in millions):

Year Ended
September 30,
2007

2008

2006

Current:

Federal
State
Foreign

Total Current

Deferred:
Federal
State
Foreign

Total Deferred

Provision for income taxes

$ 27.9
2.8
12.5

$ 54.5
5.4
8.5

$68.3
6.0
6.3

43.2

68.4

80.6

(13.6)
(1.9)
(1.0)

(16.5)

6.5
(0.6)
0.4

6.3

(0.5)
1.6
(1.5)

(0.4)

$ 26.7

$ 74.7

$80.2

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The domestic and foreign components of income before taxes were as follows (in millions):

Domestic
Foreign

Income before taxes

Year Ended September 30,
2008
2006
2007

$ 75.0
(59.2)

$175.3
12.8

$253.6
(40.7)

$ 15.8

$188.1

$212.9

A reconciliation of the federal corporate income tax rate and the effective tax rate on income before

income taxes from continuing operations is summarized below (in millions):

Statutory income tax rate

Effect of foreign operations
State taxes, net of federal benefit

Change in state NOL and credit carryforwards

Research & Development tax credit
Change in valuation allowances

Effect of goodwill impairment and other permanent differences
Other

Year Ended September 30,
2008
2006
2007
35.0% 35.0% 35.0%

(4.5)
0.6

(1.3)

(4.7)
106.9

42.3
(5.7)

(0.5)
1.6

(0.2)

(0.5)
1.0

4.8
(1.5)

(0.5)
2.3

0.1

0.0
0.4

Effective income tax rate

168.6% 39.7%

37.7%

Deferred income taxes arise from temporary differences between financial reporting and tax
reporting bases of assets and liabilities, and operating loss and tax credit carryforwards for tax
purposes. The components of the deferred income tax assets and liabilities as of September 30, 2008
and 2007 were as follows (in millions):

DEFERRED TAX ASSETS

Inventories

Accrued liabilities
Postretirement benefits

Accounts receivable
Federal NOL carryovers

State NOL carryovers

Foreign NOL carryovers
Other

Gross deferred tax assets
Valuation allowance

Total deferred tax assets

DEFERRED TAX LIABILITIES

Property, plant and equipment

Intangible assets
Other

Total deferred tax liabilities

Net deferred tax asset

September 30,
2008
2007

$ 18.5

$ 12.0

64.0
40.0

8.4
—

4.6

45.9
12.7

194.1
(65.8)

56.0
26.5

3.4
0.1

5.4

38.6
19.1

161.1
(41.0)

128.3

120.1

(34.3)

(52.9)
(5.6)

(38.4)

(72.5)
(7.5)

(92.8)

(118.4)

$ 35.5

1.7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The net current and non-current components of deferred income taxes recognized in the Consoli-

dated Balance Sheets were (in millions):

Net current deferred tax asset (classified with prepaid and other assets)

Net non-current deferred tax liability (classified with other liabilities)

Net deferred tax asset

September 30,
2007
2008
$ 69.6
$ 78.1

(42.6)

(67.9)

$ 35.5

$ 1.7

Tax benefits relating to state net operating loss carryforwards were $4.6 million and $5.4 million at

September 30, 2008 and 2007, respectively. State net operating loss carryforward periods range from
5 to 20 years. Any losses not utilized within a specific state’s carryforward period will expire. State net
operating loss carryforwards include $1.4 million of tax benefits relating to Smith & Hawken». As these
losses may only be used against income of Smith & Hawken», and cannot be used to offset income of
the consolidated group, a full valuation allowance has been recorded against this tax asset. Tax benefits
associated with state tax credits will expire if not utilized and amounted to $0.3 million and $0.1 million
at September 30, 2008 and 2007, respectively.

Fiscal 2008 income tax expense and valuation allowances also include $16.9 million recorded to

fully reserve deferred tax assets that originated from impairment charges recorded for the Smith &
Hawken» business in fiscal 2007 and fiscal 2008. The Company has concluded it is probable that it will
not receive any future tax benefit from these deferred tax assets.

In accordance with APB 23, deferred taxes have not been provided on unremitted earnings

approximating $105.8 million of certain foreign subsidiaries and foreign corporate joint ventures as such
earnings have been permanently reinvested. The Company has also elected to treat certain foreign
entities as disregarded entities for U.S. tax purposes, which results in their net income or loss being
recognized currently in the Company’s U.S. tax return. As such, the tax benefit of net operating losses
available for foreign statutory tax purposes has already been recognized for U.S. purposes. Accordingly,
a full valuation allowance is required on the tax benefit of these net operating losses on global
consolidation. The statutory tax benefit of these net operating loss carryovers amounted to $45.9 million
and $38.6 million for the fiscal years ended September 30, 2008 and 2007, respectively. A full valuation
allowance has been placed on these assets for worldwide tax purposes.

The Company adopted the provisions of FASB Interpretation 48, “Accounting for Uncertainty in
Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”), as of October 1, 2007, the
beginning of its 2008 fiscal year. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in the financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.”
This standard provides that a tax benefit from an uncertain tax position may be recognized when it is
more likely than not that the position will be sustained upon examination, including resolutions of any
related appeals or litigation processes, based on the technical merits of the position. The amount
recognized is measured as the largest amount of tax benefit that is greater than 50% likely of being
realized upon settlement. The cumulative effect of adoption of this interpretation was a $0.4 million
decrease to retained earnings.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company had $7.2 million and $10.0 million of gross unrecognized tax benefits related to

uncertain tax positions at September 30, 2008 and October 1, 2007, respectively. Included in the
September 30, 2008 and October 1, 2007 balances were $6.5 million and $9.5 million, respectively, of
unrecognized tax benefits that, if recognized, would have an impact on the effective tax rate. A
reconciliation of these unrecognized tax benefits from October 1, 2007 to September 30, 2008 is as
follows (in millions):

Balance at October 1, 2007
Additions for tax positions of the current year
Additions for tax positions of prior years
Reductions for tax positions of the current year
Reductions for tax positions of prior years
Settlements with tax authorities
Expiration of the statute of limitations
Balance at September 30, 2008

$10.0
2.2
0.6
(0.1)
(1.8)
(1.8)
(1.9)
$ 7.2

The Company continues to recognize accrued interest and penalties related to unrecognized tax

benefits as a component of the provision for income taxes. As of September 30, 2008 and October 1,
2007, the Company had $1.2 million and $1.4 million, respectively, accrued for the payment of interest
that, if recognized, would impact the effective tax rate. As of September 30, 2008 and October 1, 2007,
the Company had $0.6 million and $0.8 million, respectively, accrued for the payment of penalties that,
if recognized, would impact the effective tax rate. For the year ended September 30, 2008, the Company
recognized $0.1 million of tax interest and tax penalties in its statement of operations.

Scotts Miracle-Gro or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction

and various state, local and foreign jurisdictions. With few exceptions, the Company is no longer subject
to examinations by these tax authorities for fiscal year 2004 and prior. The Company is currently under
examination by certain foreign and U.S. state and local tax authorities. In regard to the foreign audits,
the tax periods under investigation are limited to fiscal years 2005 through 2007. In the Company’s third
quarter of fiscal 2008, the Canada Revenue Agency completed an examination of income tax returns for
fiscal years 2002 and 2003 resulting in no material modifications or adjustments to unrecognized tax
benefits. In regards to the U.S. state and local audits, the tax periods under investigation are limited to
fiscal years 2002 through 2006. In addition to the aforementioned audits, certain other tax deficiency
issues and refund claims for previous years remain unresolved.

The Company currently anticipates that few of its open and active audits will be resolved in the next

12 months. The Company is unable to make a reasonably reliable estimate as to when or if cash
settlements with taxing authorities may occur. Although audit outcomes and the timing of audit
payments are subject to significant uncertainty, the Company does not anticipate that the resolution of
these tax matters or any events related thereto will result in a material change to its consolidated
financial position or results of operations.

Management judgment is required in determining tax provisions and evaluating tax positions.

Management believes its tax positions and related provisions reflected in the consolidated financial
statements are fully supportable and appropriate. The Company established reserves for additional
income taxes that may become due if the tax positions are challenged and not sustained. The
Company’s tax provision includes the impact of recording reserves and changes thereto. The reserves for
additional income taxes are based on management’s best estimate of the ultimate resolution of the tax
matter. Based on currently available information, the Company believes that the ultimate outcome of any
challenges to its tax positions will not have a material adverse effect on its financial position, results of
operations or cash flows. The Company’s tax provision includes the impact of recording reserves and
adjusting existing reserves.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15. FINANCIAL INSTRUMENTS

A description of the Company’s financial instruments and the methods and assumptions used to

estimate their fair values is as follows:

Long-Term Debt

The interest rate currently available to the Company fluctuates with the applicable LIBOR rate, prime

rate or Federal Funds Effective Rate, and thus the carrying value is a reasonable estimate of fair value.

Accounts Receivable Pledged

The interest rate on the short-term debt associated with accounts receivable pledged under the New

MARP agreement fluctuates with the one-week LIBOR rate, and thus the carrying value is a reasonable
estimate of fair value.

Derivatives and Hedging

The Company is exposed to market risks, such as changes in interest rates, currency exchange rates

and commodity prices. To manage the volatility related to these exposures, the Company enters into
various financial transactions, which are accounted for under SFAS 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended and interpreted. The utilization of these financial
transactions is governed by policies covering acceptable counterpart exposure, instrument types and
other hedging practices. The Company does not hold or issue derivative financial instruments for
speculative trading purposes.

The Company formally designates and documents qualifying instruments as hedges of underlying
exposures at inception. The Company formally assesses, both at inception and at least quarterly on an
ongoing basis, whether the financial instruments used in hedging transactions are effective at offsetting
changes in either the fair value or cash flows of the related underlying exposure. Fluctuations in the
value of these instruments generally are offset by changes in the fair value or cash flows of the
underlying exposures being hedged. This offset is driven by the high degree of effectiveness between the
exposure being hedged and the hedging instrument. Any ineffective portion of a change in the fair value
of a qualifying instrument is immediately recognized in earnings. There were no amounts excluded from
the assessment of effectiveness for derivatives designated as either fair value or cash flow hedges for
the fiscal years ended September 30, 2008 and 2007.

Foreign Currency Swap Agreements

The Company uses foreign currency swap contracts to manage the exchange rate risk associated
with intercompany loans with foreign subsidiaries that are denominated in U.S. dollars. At September 30,
2008, the notional amount of outstanding contracts was $86.4 million, with a fair value of $(0.4) million.
The unrealized loss on the contracts approximates the unrealized gain on the intercompany loans
recognized by the Company’s foreign subsidiaries.

Interest Rate Swap Agreements

At September 30, 2008 and 2007, the Company had outstanding interest rate swaps with major
financial institutions that effectively convert a portion of the Company’s variable-rate debt to a fixed rate.
The swap agreements had a total U.S. dollar equivalent notional amount of $711.4 million and
$720.0 million at September 30, 2008 and 2007, respectively. Please refer to “NOTE 11. DEBT” for the
terms, expiration dates and rates of the swaps outstanding at September 30, 2008. The change in
notional amounts for the Euro and British pounds denominated swaps is due to foreign exchange
movement. During fiscal 2008, 2007 and 2006, $4.5 million of pretax derivative losses, and $3.3 million
and $0.8 million of pretax derivative gains, respectively, from such hedges were recorded in interest
expense. During the next 12 months, $4.3 million of the September 30, 2008 other comprehensive
income balance will be reclassified to earnings consistent with the timing of the underlying hedged
transactions.

The Company enters into interest rate swap agreements as a means to hedge its variable interest

rate exposure on debt instruments. Since the interest rate swaps have been designated as hedging
instruments, their fair values are reflected in the Company’s Consolidated Balance Sheets. Net amounts
to be received or paid under the swap agreements are reflected as adjustments to interest expense.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unrealized gains or losses resulting from adjusting these swaps to fair value are recorded as elements
of accumulated other comprehensive income or loss within the Consolidated Balance Sheets. The fair
value of the swap agreements was determined based on the present value of the estimated future net
cash flows using implied rates in the applicable yield curve as of the valuation date.

Commodity Hedges

Throughout the fiscal year, the Company uses diesel fuel derivatives to partially mitigate the effect

of fluctuating fuel costs on operating results. The Company has no outstanding fuel derivatives at
September 30, 2008. Fuel derivatives used by the Company do not qualify for hedge accounting
treatment under SFAS 133 and are marked-to-market, with unrealized gains and losses on open contracts
and realized gains or losses on settled contracts recorded as an element of cost of sales. Amounts
included in cost of sales relating to these fuel derivatives for the years ended September 30, 2008 and
2007 were not significant.

The Company also has hedging arrangements designed to fix the price of a portion of its urea needs
through April 30, 2009. The contracts are designated as hedges of the Company’s exposure to future cash
flows associated with the cost of urea. The objective of the hedge is to eliminate the variability of cash
flows attributable to the risk of change. Unrealized gains or losses in the fair value of these contracts are
recorded to the accumulated other comprehensive loss component of shareholders’ equity. Gains or losses
upon realization remain as a component of accumulated other comprehensive loss until the related
inventory is sold. Upon sale of the underlying inventory, the gain or loss is reclassified to cost of sales.
During fiscal 2008, 2007 and 2006, $3.3 million, $2.6 million and $0.0 million of pretax derivative gains,
respectively, from such hedges were recorded in cost of sales. The fair value of the 48,500 aggregate tons
hedged at September 30, 2008 was ($8.5) million. During the next 12 months, ($8.5) million of the
September 30, 2008 other comprehensive income balance will be reclassified to earnings consistent with
the timing of the underlying hedged transactions.

Estimated Fair Values

The estimated fair values of the Company’s financial instruments are as follows for the fiscal years

ended September 30 (in millions):

Revolving loans

Foreign bank borrowings and term loans

Term loans
Master Accounts Receivable Purchase Agreement

Unrealized (loss) on foreign currency swap agreements
Unrealized (loss) on interest rate swap agreements

Unrealized gain (loss) on commodity hedging instruments

2008

2007

Carrying
Amount
$375.8

0.7

540.4
62.1

(0.4)
(15.0)

(8.5)

Fair
Value
$375.8

0.7

540.4
62.1

(0.4)
(15.0)

(8.5)

Carrying
Amount
$469.2

—

558.6
64.4

(1.3)
(4.1)

1.0

Fair
Value
$469.2

—

558.6
64.4

(1.3)
(4.1)

1.0

Certain miscellaneous instruments included in the Company’s total debt balances for which fair
value determinations are not ascertainable have been excluded from the fair value table above. The
excluded items at September 30, 2008 and 2007 (in millions) are as follows:

Notes due to sellers
Other

NOTE 16. OPERATING LEASES

2008

$12.8
7.7

2007

$ 15.1
10.5

The Company leases certain property and equipment from third parties under various non-

cancelable operating lease agreements. Certain lease agreements contain renewal and purchase options.
The lease agreements generally provide that the Company pay taxes, insurance and maintenance

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

expenses related to the leased assets. Future minimum lease payments for non-cancelable operating
leases at September 30, 2008, are as follows (in millions):

2009
2010
2011
2012
2013
Thereafter
Total future minimum lease payments

$ 39.0
33.5
30.4
24.5
20.2
44.6
$192.2

The Company also leases certain vehicles (primarily cars and light trucks) under agreements that are

cancelable after the first year, but typically continue on a month-to-month basis until canceled by the
Company. The vehicle leases and certain other non-cancelable operating leases contain residual value
guarantees that create a contingent obligation on the part of the Company to compensate the lessor if
the leased asset cannot be sold for an amount in excess of a specified minimum value at the conclusion
of the lease term. If all such vehicle leases had been canceled as of September 30, 2008, the
Company’s residual value guarantee would have approximated $7.8 million. Other residual value
guarantee amounts that apply at the conclusion of the non-cancelable lease term are as follows:

Scotts LawnService» vehicles
Corporate aircraft

Amount of
Guarantee
$19.5 million

Lease
Termination Date
2012

15.7 million

2010 and 2012

Rent expense for fiscal 2008, 2007 and 2006 totaled $68.1 million, $74.9 million and $63.3 million,

respectively.

NOTE 17. COMMITMENTS

The Company has the following unconditional purchase obligations due during each of the next five

fiscal years that have not been recognized on the Consolidated Balance Sheet at September 30, 2008
(in millions):

2009
2010
2011
2012
2013
Thereafter

$299.8
150.9
78.1
36.9
31.6
—
$ 597.3

Purchase obligations primarily represent commitments for materials used in the Company’s manu-

facturing processes, as well as commitments for warehouse services, grass seed and out-sourced
information services.

NOTE 18. CONTINGENCIES

Management continually evaluates the Company’s contingencies, including various lawsuits and
claims which arise in the normal course of business, product and general liabilities, worker’s compensa-
tion, property losses and other fiduciary liabilities for which the Company is self-insured or retains a
high exposure limit. Self-insurance reserves are established based on actuarial loss estimates for
specific individual claims plus actuarial estimated amounts for incurred but not reported claims and
adverse development factors for existing claims. Legal costs incurred in connection with the resolution
of claims, lawsuits and other contingencies generally are expensed as incurred. 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

be materially affected by final resolution of these matters. The following are the more significant of the
Company’s identified contingencies.

FIFRA Compliance and the Corresponding Governmental Investigation

The Company’s products that contain pesticides are subject to the Federal Insecticide, Fungicide,
and Rodenticide Act of 1947, as amended (“FIFRA”). In April 2008, the Company became aware that a
former associate apparently deliberately circumvented the Company’s policies and U.S. EPA regulations
under FIFRA by failing to obtain valid registrations for products and/or causing invalid product registra-
tion forms to be submitted to regulators. Since that time, the Company has been cooperating with the
U.S. EPA in its civil investigation into product registration issues involving the Company and with the
U.S. EPA and the U.S. DOJ in a related criminal investigation. In late April of 2008, in connection with
the U.S. EPA’s investigation, the Company was required to conduct a consumer-level recall of certain
consumer lawn and garden products and a Scotts LawnService» product. Subsequently, the Company
and the U.S. EPA agreed upon a Compliance Review Plan for conducting a comprehensive, independent
review of the Company’s product registration records. Pursuant to the Compliance Review Plan, an
independent third-party firm, Quality Associates Incorporated (“QAI”), has been reviewing all of the
Company’s U.S. pesticide product registration records, some of which are historical in nature and no
longer support sales of the Company’s products. The U.S. EPA investigation and QAI review process have
resulted in the issuance of a number of Stop Sale, Use or Removal Orders by the U.S. EPA that caused
the Company to temporarily suspend sales and shipments of affected products. In addition, as the QAI
review process or the Company’s internal review has indicated a FIFRA registration issue or a potential
FIFRA registration issue (some of which appear unrelated to the former associate), the Company has
endeavored to stop selling or distributing the affected products until the issue could be resolved with
the U.S. EPA.

On September 26, 2008, the Company, doing business as Scotts LawnService», was named as a

The U.S. EPA investigation or the compliance review process may result in future state or federal

action or private rights of action with respect to additional product registration issues. Until the
investigation and compliance review process are complete, the Company cannot fully quantify the extent
of additional issues. While the Company continues to evaluate the financial impact of the registration
and recall matters, the Company currently expects total fiscal year 2008 and 2009 costs related to the
recalls and known registration issues to be limited to approximately $65 million, exclusive of potential
fines, penalties and/or judgments, of which approximately $51.1 million was incurred during fiscal 2008.
No reserves have been established with respect to any potential fines, penalties and/or judgments at
the state and/or federal level related to the product registration issues, as the scope and magnitude of
such amounts are not currently estimable. However, it is possible that such fines, penalties and/or
judgments could be material and have an adverse effect on the Company’s financial condition, results of
operations and cash flows.

Other Regulatory Matters

In 1997, the Ohio Environmental Protection Agency (the “Ohio EPA”) initiated an enforcement action

against the Company with respect to alleged surface water violations and inadequate treatment
capabilities at the Marysville, Ohio facility seeking corrective action under the federal Resource Conser-
vation and Recovery Act. The action related to discharges from on-site waste water treatment and several
discontinued on-site disposal areas. Pursuant to a Consent Order entered by the Union County Common
Pleas Court in 2002, the Company is actively engaged in restoring the site to eliminate exposure to
waste materials from the discontinued on-site disposal areas.

At September 30, 2008, $3.8 million was accrued for these non-FIFRA compliance-related environ-
mental matters. The amounts accrued are believed to be adequate to cover such known environmental
exposures based on current facts and estimates of likely outcomes. However, if facts and circumstances

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

change significantly, they could result in a material adverse effect on the Company’s results of
operations, financial condition or cash flows.

During fiscal 2008, 2007 and 2006, we expensed approximately $1.4 million, $1.5 million and

$2.4 million, respectively, for these non-FIFRA compliance-related environmental matters.

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

On November 5, 2004, U.S. Horticultural Supply, Inc. (“Geiger”) filed suit against the Company in
the U.S. District Court for the Eastern District of Pennsylvania. The complaint alleges that the Company
conspired with another distributor, Griffin Greenhouse Supplies, Inc., to restrain trade in the horticultural
products market, in violation of Section 1 of the Sherman Antitrust Act. On June 2, 2006, the Court
denied the Company’s motion to dismiss the complaint. Fact discovery and expert discovery are closed.
Geiger’s damages expert quantifies Geiger’s alleged damages at approximately $3.3 million, which could
be trebled under antitrust laws. Geiger also seeks recovery of attorneys’ fees and costs. The Company
has moved for summary judgment requesting dismissal of Geiger’s claims.

The Company continues to vigorously defend against Geiger’s claims. The Company believes that

Geiger’s claims are without merit. While no accrual has been established related to this matter, the
Company cannot predict the ultimate outcome with certainty. The Company had previously sued and
obtained a judgment against Geiger on April 25, 2005, based on Geiger’s default on obligations to the
Company. The Company is proceeding to collect that judgment.

Other

The Company has been named as a defendant in a number of cases alleging injuries that the

lawsuits claim resulted from exposure to asbestos-containing products, apparently based on the
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 Company or its products. The Company in each case is
one of numerous defendants and none of the claims seek damages from the Company alone. The
Company believes that the claims against it are without merit and is vigorously defending against 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 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 Company’s financial
condition, results of operations or cash flows.

The 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 and policies,
although there can be no assurance of the results of these efforts.

On April 27, 2007, the Company received a proposed Order On Consent from the New York State
Department of Environmental Conservation (the “Proposed Order”) alleging that, during the calendar year
2003, the Company and James Hagedorn, individually and as Chairman of the Board and Chief Executive
Officer of the Company, unlawfully donated to a Port Washington, New York youth sports organization
forty bags of Scotts» LawnPro Annual Program Step 3 Insect Control Plus Fertilizer which, while federally
registered, was allegedly not registered in the state of New York. The Proposed Order requests penalties
totaling $695,000. The Company has made its position clear to the New York State Department of
Environmental Conservation and is awaiting a response.

The Company is involved in other lawsuits and claims which arise in the normal course of business.
These claims individually and in the aggregate are not expected to result in a material adverse effect on
the Company’s results of operations, financial condition or cash flows.

NOTE 19. CONCENTRATIONS OF CREDIT RISK

Financial instruments which potentially subject the Company to concentration of credit risk consist

principally of trade accounts receivable. The Company sells its consumer products to a wide variety of
retailers, including mass merchandisers, home centers, independent hardware stores, nurseries, garden
outlets, warehouse clubs, food and drug stores and local and regional chains. Professional products are
sold to commercial nurseries, greenhouses, landscape services and growers of specialty agriculture
crops. Concentrations of accounts receivable at September 30, net of accounts receivable pledged under
the terms of the New MARP Agreement whereby the purchaser has assumed the risk associated with the

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

debtor’s financial inability to pay ($146.6 million and $149.5 million for 2008 and 2007, respectively),
were as follows:

Due from customers geographically located in North America

Applicable to the consumer business
Applicable to Scotts LawnService», the professional businesses (primarily

distributors), Smith & Hawken» and Morning Song»

Top 3 customers within consumer business as a percent of total consumer accounts

receivable

2008

2007

53%

61%

52%

54%

39%

46%

The remainder of the Company’s accounts receivable at September 30, 2008 and 2007, were
generated from customers located outside of North America, primarily retailers, distributors, nurseries
and growers in Europe. No concentrations of customers or individual customers within this group
account for more than 10% of the Company’s accounts receivable at either balance sheet date.

The Company’s three largest customers are reported within the Global Consumer segment, and are

the only customers that individually represent more than 10% of reported consolidated net sales for
each of the last three fiscal years. These three customers accounted for the following percentages of
consolidated net sales for the fiscal years ended September 30:

2008

2007
2006

Largest
Customer

2nd Largest
Customer

3rd Largest
Customer

21.0%

20.2%
21.5%

13.5%

10.9%
11.2%

13.4%

10.2%
10.5%

NOTE 20. OTHER (INCOME) EXPENSE

Other (income) expense consisted of the following for the fiscal years ended September 30 (in

millions):

Royalty income

Gain from peat transaction
Franchise fees

Foreign currency (gains) losses
Other, net

Total

NOTE 21. SEGMENT INFORMATION

2008

2007

2006

$ (9.6)

$ (9.9)

$(6.8)

(1.2)
(0.2)

0.9
(0.3)

(1.0)
(0.2)

(0.2)
(0.2)

(0.9)
(0.2)

(0.7)
(0.6)

$(10.4)

$(11.5)

$(9.2)

For fiscal 2008, the Company divided its business into the following segments — Global Consumer,

Global Professional, Scotts LawnService», and Corporate & Other. These segments differ from those used
in the prior year due to the realignment of the North America and International segments into the Global
Consumer and Global Professional segments. The prior year amounts have been reclassified to conform
with the fiscal 2008 segments. This division of reportable segments is consistent with how the segments
report to and are managed by senior management of the Company.

The Global Consumer segment consists of the North American Consumer and International Consumer

business groups. The business groups comprising this segment manufacture, market and sell 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 and pesticide
products. Products are marketed to mass merchandisers, home centers, large hardware chains,
warehouse clubs, distributors, garden centers and grocers in the United States, Canada and Europe.

The Global Professional segment is focused on a full line of horticultural products including
controlled-release and water-soluble fertilizers and plant protection products, grass seed products,
spreaders and customer application services. Products are sold to commercial nurseries and

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

greenhouses and specialty crop growers, primarily in North America and Europe. Our consumer
businesses in Australia and Latin America are also part of the Global Professional segment.

The Scotts LawnService» segment provides lawn fertilization, disease and insect control and other

related services such as core aeration and tree and shrub fertilization primarily to residential consumers
through company-owned branches and franchises in the United States. In our larger branches, an
exterior barrier pest control service is also offered.

The Corporate & Other segment consists of the Smith & Hawken» business and corporate general

and administrative expenses.

The following table presents segment financial information in accordance with SFAS 131, “Disclo-
sures about Segments of an Enterprise and Related Information.” Pursuant to SFAS 131, 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).

Net sales:

Global Consumer
Global Professional
Scotts LawnService»
Corporate & Other

Segment total

Roundup» amortization
Product registration and recall matters — returns

Operating income (loss):

Global Consumer
Global Professional
Scotts LawnService»
Corporate & Other

Segment total
Roundup» amortization
Amortization
Product registration and recall matters
Impairment of assets
Restructuring and other charges

Depreciation & amortization:

Global Consumer
Global Professional
Scotts LawnService»
Corporate & Other

Capital expenditures:
Global Consumer
Global Professional
Scotts LawnService»
Corporate & Other

Total assets:

Global Consumer
Global Professional
Scotts LawnService»
Corporate & Other

2008

2007

2006

$ 2,250.1
348.8
247.4
158.6

3,004.9
(0.8)
(22.3)

$ 2,176.2
281.9
230.5
184.0

2,872.6
(0.8)
—

$2,089.6
233.4
205.7
169.2

2,697.9
(0.8)
—

$2,981.8

$ 2,871.8

$ 2,697.1

$ 344.5
33.7
11.3
(87.2)

$ 379.1
31.3
11.3
(90.5)

$ 392.4
27.3
15.6
(91.0)

302.3
(0.8)
(15.6)
(51.1)
(136.8)
—

331.2
(0.8)
(15.3)
—
(35.3)
(2.7)

344.3
(0.8)
(15.2)
—
(66.4)
(9.4)

98.0

$ 277.1

$ 252.5

42.2
3.3
5.2
19.6

70.3

50.2
1.0
1.8
7.2

39.1
3.6
4.1
20.7

67.5

37.8
1.2
3.8
11.2

54.0

41.0
2.8
3.8
19.4

67.0

35.2
1.0
3.0
17.8

57.0

60.2

$ 1,483.8
289.9
186.5
196.1

$ 1,551.9
308.0
189.2
228.1

$ 2,156.3

$2,277.2

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Segment 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
Corporate & Other operating loss includes unallocated corporate general and administrative expenses
and certain other income/expense not allocated to the business segments.

Total assets reported for the Company’s operating segments include the intangible assets for the

acquired businesses within those segments. Corporate & Other assets primarily include deferred
financing and debt issuance costs and corporate intangible assets, as well as deferred tax assets and
Smith & Hawken» assets.

The following table presents net sales and property, plant and equipment by geographic area for

fiscal years 2008, 2007 and 2006:

Net sales:

North America
International

Property, plant and equipment, net:

North America
International

2008

2007

2006

$2,435.7
546.1

$2,402.0
469.8

$2,288.6
408.5

$2,981.8

$ 2,871.8

$ 2,697.1

$ 297.3
46.8

$ 313.9
52.0

$ 324.1
43.5

$ 344.1

$ 365.9

$ 367.6

NOTE 22. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)

The following is a summary of the unaudited quarterly results of operations for fiscal 2008 and

fiscal 2007 (in millions, except per share data).

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Full Year

FISCAL 2008
Net sales
Gross profit
Net income (loss)
Basic earnings (loss) per common share
Common shares used in basic EPS calculation
Diluted earnings (loss) per common share
Common shares and dilutive potential common

shares used in diluted EPS calculation

FISCAL 2007
Net sales
Gross profit
Net income (loss)
Basic earnings (loss) per common share
Common shares used in basic EPS calculation
Diluted earnings (loss) per common share
Common shares and dilutive potential common

shares used in diluted EPS calculation

$308.7
71.3
(56.8)
$ (0.89)
64.2
$ (0.89)

$958.0
322.8
58.0
$ 0.90
64.4
$ 0.88

$1,170.9
423.8
22.6
0.35
64.6
0.35

$544.2
121.7
(34.7)
$ (0.54)
64.7
$ (0.54)

$2,981.8
939.6
(10.9)
(0.17)
64.5
(0.17)

64.2

65.6

65.3

64.7

64.5

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Full Year

$271.2
55.3
(59.4)
$(0.88)
67.2
$(0.88)

$993.3
368.4
83.4
$ 1.26
66.1
$ 1.23

$1,098.4
422.7
129.7
2.04
63.6
1.98

$508.9
158.1
(40.3)
$ (0.63)
63.9
$ (0.63)

$2,871.8
1,004.5
113.4
1.74
65.2
1.69

67.2

67.8

65.4

63.9

67.0

Common share equivalents, such as stock awards, are excluded from the diluted loss per share

calculation in periods where there is a net loss because their effect is anti-dilutive.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company’s business is highly seasonal, with 70% to 75% of net sales occurring in the second

and third fiscal quarters combined.

Unusual items during fiscal 2008 consisted of impairment and product registration and recall
charges. These items are reflected in the quarterly financial information as follows: second quarter
product registration and recall charges of $30.8 million, third quarter product registration and recall
charges of $10.2 million and impairment of intangible assets and goodwill of $123.3 million and fourth
quarter product registration and recall charges of $10.1 million and impairment of intangible assets and
goodwill of $13.5 million.

Unusual items during fiscal 2007 consisted of impairment, restructuring and other charges and

charges incurred to execute the Company’s recapitalization plan. These items are reflected in the
quarterly financial information as follows: second quarter refinancing expense due to the recapitalization
plan of $18.3 million, fourth quarter impairment of intangible assets and goodwill of $35.3 million and
restructuring and other charges of $2.7 million.

GOVERNANCE DOCUMENTS

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 members of the Registrant’s Board of Directors and associates (employees) of the
Registrant and its subsidiaries, including, without limitation, the Registrant’s principal executive officer,
principal financial officer and principal accounting officer. The Registrant intends to disclose the
following events, if they occur, on its Internet website located at http://investor.scotts.com within four
business days following their occurrence: (A) the date and nature of any amendment to a provision of
Scotts Miracle-Gro’s 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 perform-
ing 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 elements of the code of ethics definition 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, the
Compensation and Organization Committee charter, the Finance Committee charter and the Innovation &
Technology Committee charter are posted under the “governance” link on the Registrant’s Internet
website located at http://investor.scotts.com. Interested persons may also obtain copies of each of
these documents without charge by writing to The Scotts Miracle-Gro Company, Attention: Corporate
Secretary, 14111 Scottslawn Road, Marysville, Ohio 43041.

The Scotts Miracle-Gro Company:

Cultivating a strong future since 1868

This year, ScottsMiracle-Gro achieved a milestone few

companies have ever reached – our 140th anniversary.

What has contributed to our longevity? Our people and our

brands. Throughout our history, ScottsMiracle-Gro associates

have advanced the lawn and garden industry with their innovation,

operational excellence and world-class service. We are

dedicated to helping create a beautiful world.

As a result, our brands enjoy unparalleled trust with consumers

and continue to hold market-leading shares. The Company remains

committed to strengthening our reputation going forward.

We have been left an exceptional legacy, and we accept the

the

important responsibility to cultivate a strong future in everything

hing

we do. ScottsMiracle-Gro is well-positioned to be among the

world’s great consumer products companies for years to come.

Shareholder Information

World Headquarters
14111 Scottslawn Road
Marysville, Ohio 43041
(937) 644-0011

www.scotts.com

Annual Meeting
The annual meeting of shareholders
will be held at The Berger Learning Center,
14111 Scottslawn Road, Marysville, Ohio
43041, on Thursday, January 22, 2009,
at 8:30 a.m. (EST).

NYSE Symbol
The common shares of The Scotts Miracle-
Gro Company trade on the New York Stock
Exchange under the symbol SMG.

Transfer Agent and Registrar
National City Bank
Corporate Trust Operations
P.O. Box 92301
Cleveland, Ohio 44193-0900

Shareholder and Investor
Relations Contact
Jim King
Senior Vice President,
Investor Relations & Corporate Affairs

The Scotts Miracle-Gro Company
14111 Scottslawn Road
Marysville, Ohio 43041
(937) 644-0011

Dividends
On June 22, 2005, The Scotts Miracle-Gro
Company announced that its Board of
Directors had approved the establishment
of a quarterly cash dividend. The $0.50 per
share (adjusted for the 2-for-1 stock split dis-
tributed November 9, 2005) annual dividend
has been paid in quarterly increments since
the fourth quarter of ﬁ scal 2005. In addition,
the Company paid a special one-time cash
dividend of $8.00 per share on March 5, 2007.

The payment of future dividends, if any,
on common shares will be determined by
the Board of Directors of The Scotts
Miracle-Gro Company in light of conditions
then existing, including the Company’s
earnings, ﬁ nancial condition and capital
requirements, restrictions in ﬁ nancing agree-
ments, business conditions and other factors.
Future dividend payments are currently
restricted to $55 million annually under the
Company’s existing credit facilities.

Stock Price Performance
See chart at right for stock price
performance. The Scotts Miracle-Gro
Company common shares have been
publicly traded since January 31, 1992.

Shareholders
As of November 26, 2008, there were
approximately 29,000 shareholders,
including holders of record and
The Scotts Miracle-Gro Company’s
estimate of beneﬁ cial holders.

Publications for Shareholders
In addition to this 2008 Annual Report,
The Scotts Miracle-Gro Company informs
shareholders about the Company through
its Annual Report on Form 10-K, its
Quarterly Reports on Form 10-Q, its
Current Reports on Form 8-K and its
Notice of Annual Meeting of Shareholders
and Proxy Statement.

Copies of any of these documents
may be obtained without charge on
our Investor Relations Web site at
http://investor.scotts.com or by
writing to:

The Scotts Miracle-Gro Company
Attention: Investor Relations
14111 Scottslawn Road
Marysville, Ohio 43041

Certiﬁ cations
The Scotts Miracle-Gro Company has ﬁ led
the certiﬁ cations of its chief executive ofﬁ cer
and its chief ﬁ nancial ofﬁ cer, required by
Section 302 of the Sarbanes-Oxley Act of
2002 and Rule 13a-14(a) under the Securities
Exchange Act of 1934, as exhibits to its
Annual Report on Form 10-K for the ﬁ scal
year ended September 30, 2008.

On February 27, 2008, The Scotts Miracle-Gro
Company submitted to the New York Stock
Exchange the annual certiﬁ cation of the
chief executive ofﬁ cer required by Section
303A.12(a) of the New York Stock Exchange
Listed Company Manual.

Stock Price Range*
Fiscal year ended
September 30, 2008

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

High

Low

$46.90
$40.65
$36.76
$30.17

$33.50
$30.51
$17.79
$16.12

Fiscal year ended
September 30, 2007

High

Low

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

$54.72
$57.45
$47.30
$49.69

$44.02
$40.57
$42.28
$40.60

*Not adjusted for a one-time cash dividend
of $8.00 per share distributed March 5, 2007

Safe Harbor Statement under the Private
Securities Litigation Reform Act of 1995:
Certain of the statements contained in this
2008 Annual Report, including, but not
limited to, information regarding the
future ﬁ nancial performance and ﬁ nancial
condition of the Company, the plans and
objectives of the Company’s management,
and the Company’s assumptions regarding
such performance and plans are forward-
looking in nature. Actual results could
differ materially from the forward-looking
information in this 2008 Annual Report, due
to a variety of factors. Additional detailed
information concerning a number of the
important factors that could cause actual
results to differ materially from the forward-
looking information contained in this 2008
Annual Report is readily available in the
Company’s Annual Report on Form 10-K
for the ﬁ scal year ended September 30, 2008,
which is ﬁ led with the Securities and
Exchange Commission.

Comparison of 5-Year Cumulative Total Return*
Among The Scotts Miracle-Gro Company, The Russell 2000 Index and The S&P Household Products Index

The Scotts Miracle-Gro Company

Russell 2000

S&P Household Products Index

$200

$180

$160

$140

$120

$100

$50

9/03

9/04

9/05

9/06

9/07

9/08

* $100 invested on 9/30/03 in stock or index-including
reinvestment of dividends. Fiscal year ending September 30.

4603_CoverC3.indd 2

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2008 Annual Report

Cultivating a strong future

Cultivati

The Scotts Miracle-Gro Company 14111 Scottslawn Road Marysville, Ohio 43041 937.644.0011 www.scotts.com

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