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EXHIBIT 99.1
RISK FACTORS
BECAUSE OF THE CONCENTRATION OF OUR SALES TO THREE CUSTOMERS, THE LOSS OF ONE OR
MORE OF OUR TOP CUSTOMERS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR GROWTH,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our top three customers, The Home Depot, Lowe's and Wal*Mart, together
accounted for approximately 69% (32%, 20% and 18%, respectively) of our 2003
net sales and approximately 53% of our outstanding accounts receivable as of
December 31, 2003. These customers hold significant positions in the retail
lawn and garden market. The loss of, or reduction in orders from, The Home
Depot, Lowe's, Wal*Mart or any other significant customer could have a
material adverse effect on our business and our growth, financial condition
and results of operations, as could customer disputes regarding shipments,
pricing, brand use and positioning, merchandise condition or related matters.
Our inability to collect accounts receivable from any of these customers
could also have a material adverse effect on our growth, financial condition
and results of operations. Furthermore, we have not historically entered into
long-term purchase agreements or other contractual assurances as to future
sales with all of our major retail customers.
WEATHER CONDITIONS DURING OUR PEAK SELLING SEASON COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR GROWTH, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Weather conditions in North America have a significant impact on the
timing of sales in the spring selling season and our overall annual sales.
Periods of dry, hot weather can decrease insecticide sales, while periods of
cold and wet weather can slow sales of herbicides and fertilizers. In
addition, an abnormally cold spring throughout North America could adversely
affect both fertilizer and pesticide sales and therefore our growth,
financial condition and results of operations. For example, we experienced a
late winter and cool, wet spring conditions that delayed the start of the
lawn and garden season in 2003.
WE MAY BE ADVERSELY AFFECTED BY TRENDS IN THE RETAIL INDUSTRY.
With the growing trend towards retail trade consolidation, we are
increasingly dependent upon key retailers whose bargaining strength is growing.
To the extent such concentration continues to occur, our net sales and operating
income may be increasingly sensitive to a deterioration in the financial
condition of, or other adverse developments involving our relationships with,
one or more of our retail customers. Our business may also be negatively
affected by changes in the policies of our retail customers, such as limitations
on our in-store service force, inventory de-stocking, limitations on access to
shelf space, price demands and other conditions. In addition, as a result of the
desire of retailers to more closely manage inventory levels, there is a growing
trend among them to purchase our products on a "just-in-time" basis. This
requires us to shorten our lead-time for production in certain cases and more
closely anticipate demand, which could in the future require us to carry
additional inventories and increase our working capital and related financing
requirements.
WE MAY BE UNABLE TO COMPETE SUCCESSFULLY IN OUR HIGHLY COMPETITIVE INDUSTRY.
We compete against a number of large national and regional companies
and brands. Our principal national competitors include: The Scotts Company,
which markets products under the Scotts(R), Ortho(R), Roundup(R),
Miracle-Gro(R) and Hyponex(R) brand names; S.C. JohnSon & Son, Inc., which
markets products under the Raid(R) and OFF!(R) brand names; The Clorox
Company, which markets products under the Combat(R) brand name; Central
Garden & Pet Company, which markets products under the AMDRO(R) and IMAGE(R)
brand names; and Bayer A.G., which markets lawn and garden products under the
Bayer Advanced(TM) brand name. Some of our competitors are larger, have
longer operating histories and have greater financial resources, market
recognition and research and development departments than we do. We cannot
assure you that we will be able to compete successfully.
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WE HAVE SUBSTANTIAL EXISTING INDEBTEDNESS AND MAY INCUR SUBSTANTIAL ADDITIONAL
INDEBTEDNESS IN THE FUTURE, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION, OUR ABILITY TO OBTAIN FINANCING IN THE FUTURE, REACT TO CHANGES IN
OUR BUSINESS AND PREVENT US FROM FULFILLING OUR OBLIGATIONS.
We have a significant amount of debt. As of December 31, 2003, our
total debt, excluding capital lease obligation, was $388.5 million. In
addition, our substantial indebtedness, including any indebtedness under our
planned refinancing, could have important consequences. For example, it could:
- make it more difficult for us to satisfy our obligations under
outstanding indebtedness and otherwise;
- increase our vulnerability to general adverse economic and industry
conditions, including interest rate increases because a substantial
portion of our borrowings are and will continue to be at variable rates
of interest;
- require us to dedicate a substantial portion of cash flows from operating
activities to payments on obligations under outstanding indebtedness and
otherwise, which would reduce the cash flows available to fund working
capital, capital expenditures, advertising, research and development
efforts and other general corporate expenses;
- limit our flexibility in planning for, or reacting to, changes in our
business, the industry in which we operate and the economy at large;
- place us at a competitive disadvantage compared to our competitors that
have proportionately less debt; and
- limit our ability to borrow additional funds in the future, if needed, or
on reasonable terms.
Our ability to make payments on and to refinance any future
indebtedness and to fund planned capital expenditures and acquisitions will
depend on our ability to generate cash in the future. This, to some extent,
is subject to general economic, weather, 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 senior credit facility 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 existing
maturity dates. We cannot assure you that we would be able to refinance any
of our indebtedness on commercially reasonable terms or at all.
OUR HISTORICAL SEASONALITY AND QUARTERLY FLUCTUATIONS COULD IMPAIR OUR ABILITY
TO MAKE PAYMENTS ON OUR INDEBTEDNESS.
Our products are used primarily in the spring and summer, so our business
is highly seasonal. During 2003, approximately 72% of our net sales occurred in
the first and second quarters. Our working capital needs, and correspondingly
our borrowings, begin to peak at the beginning of the second quarter because we
generally incur expenditures for the spring selling season at a faster rate than
we generate revenues. If cash on hand is insufficient to pay our obligations as
they come due, including interest payments on our indebtedness, or our operating
expenses, at a time when we are unable to draw on our credit facility, this
seasonality could have a material adverse effect on our growth, financial
condition and results of operations. Adverse weather conditions could heighten
this risk.
Our quarterly results of operations may also fluctuate significantly as a
result of a variety of factors, including, among other things:
- weather conditions during peak gardening seasons;
- shifts in demand for lawn and garden products;
- changes in product mix, service levels and pricing by us and our
competitors;
- the effect of acquisitions, including costs of acquisitions that are not
completed; and
- economic stability of retail customers.
These seasonal and quarterly fluctuations could negatively impact our
business, our indebtedness and our ability to pay our obligations as they come
due.
THE AGREEMENTS AND INDENTURES GOVERNING OUR INDEBTEDNESS CONTAIN RESTRICTIVE
COVENANTS AND LIMITATIONS THAT COULD SIGNIFICANTLY IMPACT OUR ABILITY TO OPERATE
OUR BUSINESS AND ADVERSELY AFFECT OUR GROWTH, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Our senior credit facility and the indentures governing our senior
subordinated notes contain restrictive covenants and cross default provisions
and also require us to maintain specified financial ratios, all of which could
restrict our ability to:
- incur more debt;
- pay dividends or make other distributions;
- issue stock of subsidiaries;
- make investments;
- repurchase stock;
- create subsidiaries;
- create liens;
- enter into transactions with affiliates;
- enter into sale and leaseback transactions;
- merge or consolidate; and
- transfer and sell assets.
The ability to comply with these provisions and satisfy those
financial ratios may be affected by events beyond our control and we cannot
assure that we will satisfy those ratios. A breach of any of these financial
ratio covenants or other covenants in our senior credit facility or the
indentures governing our senior subordinated notes will result in a default
and could trigger acceleration of repayment under the applicable agreements.
We cannot be sure that our lenders or the bondholders would waive a default
or that we could pay the indebtedness in full if it were accelerated. Any
default under our senior credit facility or our indentures governing the
senior subordinated notes might adversely affect our growth, financial
condition, results of
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operations and the ability to make payments on the senior subordinated notes or
meet other obligations.
VOLATILITY IN INTEREST RATES AND IN THE PRICES OF SOME OF THE RAW MATERIALS WE
USE COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR GROWTH, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
In the normal course of business, we are exposed to fluctuations in
interest rates and raw materials prices. We have established policies and
procedures that govern the management of these exposures through the use of
derivative hedging instruments, including swap agreements. Our objective in
managing our exposure to such fluctuations is to decrease the volatility of
earnings and cash flows associated with changes in interest rates and certain
raw materials prices. To achieve this objective, we periodically enter into swap
agreements with values that change in the opposite direction of anticipated cash
flows. Derivative instruments related to forecasted transactions are considered
to hedge future cash flows, and the effective portion of any gains or losses is
included in accumulated other comprehensive income until earnings are affected
by the variability of cash flows. Any remaining gain or loss is recognized
currently in earnings.
During the first half of each year, the price of granular urea, a
critical raw material component used in the production of fertilizer, tends to
increase significantly in correlation with natural gas prices. The costs of
granular urea have generally, but not always, declined during the second half of
the year. As of December 31, 2003, we had not hedged any purchases of urea but
we had several purchase agreements to effectively fix a 29% of our 2004 urea
purchases. While we expect these instruments and agreements to manage our
exposure to price fluctuations, we cannot assure that they will be effective in
fully mitigating our exposure to these risks, nor can we assure that we will be
successful in passing on pricing increases to our customers. In addition, our
inability to effectively manage our exposure could cause our costs to be greater
than the costs incurred by our competitors, which may have a material adverse
effect on our growth, financial condition and results of operations.
THE GROWTH OF OUR BUSINESS MAY MAKE IT MORE DIFFICULT TO MANAGE.
Rapid growth may strain our ability to manage our business, strain our
operational and financial resources and negatively impact our accounting
controls. We have invested substantial time, money and resources in implementing
an enterprise resource planning, or ERP, system. If the implementation of the
ERP system is not successful or does not result in the benefits and efficiencies
we anticipate, it could have a material adverse effect on our growth, financial
condition and results of operations. In addition, our continued growth will
require an increase in personnel, particularly in our sales
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force. There can be no assurance that we will be able to continue to attract,
train, develop and retain the personnel necessary to pursue our growth strategy.
THE LOSS OF KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR GROWTH,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
If we were to lose the services of Robert L. Caulk, Daniel J.
Johnston, Kent J. Davies, or Robert S. Rubin or if one or more additional
members of our management were to depart and subsequently compete with us, it
could have a material adverse effect on our business. The loss of key
personnel could have a material adverse effect on us. In addition, our future
performance depends on our ability to attract and retain skilled employees.
We cannot assure you that we will be able to retain our existing personnel or
attract additional qualified employees in the future.
THE INTERESTS OF OUR BONDHOLDERS MAY CONFLICT WITH THE CONTROLLING SHAREHOLDERS
OF OUR COMMON STOCK.
Thomas H. Lee Equity Fund IV, L.P. and its affiliates beneficially own
approximately, through UIC Holdings, L.L.C., 84% of our fully diluted common
stock, and accordingly, they have the power to elect a majority of our
directors, appoint new management and approve any action requiring the approval
of the holders of our common stock, including adopting amendments to our charter
and approving mergers or sales of substantially all of our assets. Our directors
elected by Thomas H. Lee Equity Fund IV, L.P. and its affiliates will have the
authority to make decisions affecting our capital structure, including the
issuance of additional capital stock, the implementation of stock purchase
programs and the declaration of dividends. Certain decisions concerning our
operations or financial structure may present conflicts of interest between the
holders of our equity and our bondholders. For example, equity investors may
have an interest in pursuing acquisitions, divestitures, financings or other
transactions that, in their judgment could enhance their equity interest, even
though such transactions might involve risk to our bondholders.
OUR ACQUISITION STRATEGY INVOLVES A NUMBER OF RISKS.
We have completed a number of acquisitions and strategic transactions
since 1999 and intend to grow through the acquisition of additional
companies. We are regularly engaged in acquisition discussions with a number
of other sellers and anticipate that one or more potential acquisition
opportunities, in addition to the Nu-Gro acquisition described in more detail
under the heading "Recent Acquisitions and Dispositions" in "Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and including those that could be material, may arise in the
near future. If and when appropriate acquisition opportunities arise, we
intend to pursue them actively. Further, acquisitions involve a number of
special risks, including:
- failure of the acquired business to achieve expected results;
- diversion of management's attention;
- failure to retain key personnel or customers of the acquired business;
- additional financing that, if available, could increase leverage;
- successor liability, including with respect to environmental matters;
- the high cost and expenses of completing acquisitions and risks
associated with unanticipated events or liabilities; and
- failure to successfully integrate our acquired businesses into our
internal control structure.
These risks could have a material adverse effect on our business, results
of operations, financial condition and cash flows.
We expect to face competition for acquisition candidates, which may limit
the number of opportunities and may lead to higher acquisition prices. We cannot
assure you that we will be able to identify, acquire, or profitably manage
additional businesses or to successfully integrate any acquired businesses into
our existing business without substantial costs, delays or other operations or
financial difficulties. In addition, we could also incur additional indebtedness
or pay consideration in excess of fair value for future acquisitions, which
could have a material adverse effect on our growth, financial condition, results
of operations and cash flows.
BANKRUPTCY OF A MAJOR CUSTOMER, SUPPLIER OR PARTY WITH WHOM WE HAVE A STRATEGIC
RELATIONSHIP COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR GROWTH, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Bankruptcy or a significant deterioration in the financial condition of
one of our major customers, suppliers or parties whom we have strategic
relationships with could have a material adverse effect on our sales,
profitability, collections of receivables and cash flows. We continually monitor
and evaluate the credit status of our customers and parties with whom we have
strategic relationships and attempt to adjust terms as appropriate and
permissible. Despite these efforts, a bankruptcy filing by a key customer,
supplier or a party with whom we have strategic relationships could have a
material adverse effect on our growth, financial condition and results of
operations, collections of receivables and cash flows.
PUBLIC PERCEPTIONS THAT THE PRODUCTS WE PRODUCE AND MARKET ARE NOT SAFE COULD
ADVERSELY AFFECT US.
We manufacture and market a number of complex chemical products bearing
our brands, such as fertilizers, growing media, herbicides and pesticides. On
occasion, customers and some current or former employees have alleged
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that some products failed to perform up to expectations or have caused damage or
injury to individuals or property. Public perception that our products are not
safe, whether justified or not, could impair our reputation, damage our brand
names and have a material adverse effect on our growth, financial condition and
results of operations.
COMPLIANCE WITH ENVIRONMENTAL AND OTHER PUBLIC HEALTH REGULATIONS COULD INCREASE
OUR COSTS OF DOING BUSINESS AND EXPOSE US TO ADDITIONAL REQUIREMENTS WHICH WE
MAY BE UNABLE TO COMPLY WITH.
Local, state, federal and foreign laws and regulations relating to
environmental, health and safety matters affect us in several ways. In the
United States, all products containing pesticides must be registered with the
United States Environmental Protection Agency (EPA) and, in many cases, similar
state agencies before they can be manufactured or sold. The inability to obtain
or the cancellation of any registration could have an adverse effect on our
business. The severity of the effect would depend on which products were
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 chemicals.
We may not always be able to avoid or minimize these risks.
The Food Quality Protection Act establishes a standard for food-use
pesticides, which is that a reasonable certainty of no harm will result from the
cumulative effect of pesticide exposures. Under the Act, the EPA is evaluating
the cumulative effects from dietary and non-dietary exposures to pesticides. The
pesticides in our products continue to be evaluated by the EPA as part of this
exposure. It is possible that the EPA or a third party active ingredient
registrant may decide that a pesticide we use in our products will be limited or
made unavailable to us. For example, in 2000, Dow AgroSciences L.L.C., an active
ingredient registrant, voluntarily agreed to a withdrawal of virtually all
residential uses of chlorpyrifos, an active ingredient we used in our lawn and
garden products under the name Dursban(TM) until January 2001. This had a
material adverse effect on our operations resulting in a charge of $8.0 million
in 2001. We cannot predict the outcome or the severity of the effect of the
EPA's continuing evaluations of active ingredients used in our products.
In addition to the regulations already described, local, state, federal
and foreign agencies regulate the disposal, handling and storage of hazardous
substances and hazardous waste, air and water discharges from our facilities and
the remediation of contamination. If we do not fully comply with environmental
regulations, or if a release of hazardous substances occurs at or from one of
our facilities, we may be subject to penalties and/or held liable for the costs
of remedying the condition.
We do not anticipate incurring material capital expenditures for
environmental control facilities during 2004 or 2005. We currently estimate that
the costs associated with compliance with environmental, health and safety
regulations could total approximately $0.2 million annually for the next several
years. The adequacy of our anticipated future expenditures is based on our
operating in substantial compliance with applicable environmental and public
health laws and regulations and the assumption that there are not significant
conditions of potential contamination that are unknown to us. If there is a
significant change in the facts and circumstances surrounding this assumption,
or if we are found not to be in substantial compliance with applicable
environmental public health laws and regulations, it could have a material
adverse effect on future environmental capital expenditures and other
environmental expenses and our growth, financial condition, results of
operations and cash flows.
WE MAY BE EXPOSED TO SIGNIFICANT PRODUCT LIABILITY CLAIMS WHICH OUR INSURANCE
MAY NOT COVER AND WHICH COULD HARM OUR REPUTATION.
Although we have product liability insurance coverage in the aggregate
amount of $2.0 million per occurrence, subject to a $500,000 per occurrence
self-insured retention, and an umbrella policy for occurrences exceeding $2.0
million in the amount of $15.0 million, we cannot assure you that this insurance
will provide coverage for any claim against us or will be sufficient to cover
all possible liabilities. Moreover, any adverse publicity arising from claims
made against us, even if the claims were not successful, could adversely affect
the reputation and sales of our products.
IF WE ARE UNABLE TO USE AND PROTECT OUR TRADEMARKS OR PRODUCT FORMULATIONS, WE
MAY BE EXPOSED TO MODIFICATION AND LICENSING COSTS.
Our ability to successfully compete in our markets depends significantly
on our ability to use and protect our trademarks. There can be no assurance that
our trademarks will be enforceable or adequately protect us from others using
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similar marks. Therefore, we may not be able to maintain our proprietary
position. In addition to trademarks, we also rely on a combination of
patents, trade secrets, nondisclosure agreements and other contractual
provisions and technical measures to protect our intellectual property
rights. There can be no assurance that we will be able to maintain our
proprietary position or that third parties will not circumvent any
proprietary protection we have. Although we believe that our products do not
violate the patents, trademarks, trade dress or other proprietary rights of
third parties, it is possible that competitors or others could claim this. If
our products are found to infringe on the rights of competitors or others, we
could be required to modify such products, pay for a license for the
manufacture and sale of such products, which license may not be available on
reasonable terms, or stop selling such products.
TERRORIST ATTACKS, SUCH AS THE ATTACKS THAT OCCURRED IN NEW YORK AND WASHINGTON,
D.C. ON SEPTEMBER 11, 2001, AND OTHER ACTS OF VIOLENCE OR WAR MAY AFFECT THE
MARKETS IN WHICH WE OPERATE, OUR OPERATIONS, PROFITABILITY AND CASH FLOWS.
Terrorist attacks or other acts of violence or war may negatively affect
our operations. There can be no assurance that there will not be further
terrorist attacks against the United States or U.S. businesses. These attacks
may directly impact our physical facilities or those of our suppliers or
customers. Furthermore, these attacks may make travel and the transportation of
our supplies and products more difficult and more expensive and ultimately may
have a material adverse effect on our growth, financial condition and operating
results.
Also as a result of terrorism and other hostilities, the United States
has entered into, and may enter into additional, armed conflicts which could
have a further impact on our sales, our supply chain, and our ability to deliver
products to our customers. Political and economic instability in some regions of
the world may also negatively impact our business. The consequences of any of
these armed conflicts are unpredictable, and we may not be able to foresee
events that could have an adverse effect on our business. More generally, any of
these events could cause consumer confidence and spending to decrease or result
in increased volatility in the United States and worldwide financial markets and
economy. They also could result in economic recession in the United States or
abroad. Any of these occurrences could have a material adverse effect on our
growth, financial condition, operating results and cash flows and may result in
the volatility of the market price for our securities and on the future price of
our securities.