Scotts Company (SMG)

 

The Company’s products that contain pesticides must comply with the Federal Insecticide, Fungicide, and Rodenticide Act of 1947, as amended (“FIFRA”), and be registered with the U.S. Environmental Protection Agency (“U.S. EPA”) (and similar state agencies) before they can be sold or distributed. 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 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 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. 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 resulted in the Company’s temporarily being unable to ship or sell several 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 shipping or selling the affected products until the issue could be resolved with the U.S. EPA.

 

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 such investigation and compliance review process is 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.

 

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.

 

 

The Company’s products that contain pesticides must comply
with the Federal Insecticide, Fungicide, and Rodenticide Act of
1947, as amended (“FIFRA”), and be registered with the
U.S. Environmental Protection Agency
(“U.S. EPA”) (and similar state agencies) before
they can be sold or distributed. 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 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 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. 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 resulted in the Company’s
temporarily being unable to ship or sell several 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 shipping or selling the affected products until the
issue could be resolved with the U.S. EPA.

 

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 such investigation and compliance review process
is 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.

 

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.

 

 

The Company’s products that contain pesticides must comply with the Federal Insecticide, Fungicide, and Rodenticide Act of 1947, as amended (“FIFRA”), and be registered with the U.S. Environmental Protection Agency (“U.S. EPA”) (and similar state agencies) before they can be sold or distributed. 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 registration forms to be submitted to regulators. Since that

 

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