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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 20012002

OR

For the Transitiontransition period from                            to                            

Commission File No.Number: 333-76055

UNITED INDUSTRIES CORPORATION
(Exact name of registrant as specified in its charter)

8825 Page Boulevard
St. Louis, Missouri 63114
(Address of principal executive office, including zip code)
(314) 427-0780
(Registrant's telephone number, including area code)

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

        As of September 30, 2001,November 12, 2002, the Registrantregistrant had 27,721,00033,143,000 Class A voting and 27,721,00033,143,000 Class B non-voting shares of common stock outstanding and 15,00037,600 Class A non-voting shares of Class A preferred stock outstanding.

PART 1
FINANCIAL INFORMATION

Item 1. Financial Statements

UNITED INDUSTRIES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
BALANCE SHEETS

PERIOD ENDED SEPTEMBER 30, 2002

TABLE OF CONTENTS

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this report constitute "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, as amended. All statements other than statements of historical facts included in this report regarding our financial position, business strategy, budgets and plans and objectives of management for future operations are forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, our performance or achievements, or industry results, to be materially different from those contemplated or projected, forecasted, estimated or budgeted in or expressed or implied by such forward-looking statements. Such factors include, among others, the risks and other factors set forth under Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2001, as well as the following: general economic and business conditions; governmental regulations; industry trends; the loss of major customers or suppliers; cost and availability of raw materials; changes in business strategy or development plans, including acquisition or disposition of assets; availability and quality of management; and availability, terms and deployment of capital. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

UNITED INDUSTRIES CORPORATION AND 2000, AND DECEMBER 31, 2000SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

(Unaudited)thousands, except share data)

See accompanying notes to consolidated financial statementsstatements.

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UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)

See accompanying notes to consolidated financial statements.

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UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

See accompanying notes to consolidated financial statements.

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UNITED INDUSTRIES CORPORATION

STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

(Dollars in thousands)

(Unaudited)

See accompanying notes to financial statements.

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UNITED INDUSTRIES CORPORATION

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

(Dollars in thousands)

(Unaudited)

See accompanying notes to financial statements.

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UNITED INDUSTRIES CORPORATION
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)(UNAUDITED)

Note 1—Organization and Basis of presentationPresentation

        United Industries Corporation (the Company) is the leading manufacturer and marketer of value-oriented branded products for the consumer lawn and garden care and insect control markets in the United States. The Company manufactures and markets one of the broadest lines of pesticides in the industry, including herbicides and indoor and outdoor insecticides, as well as insect repellents, fertilizers and soils, under a variety of brand names. As described further in Note 12, the Company's operations are divided into three business segments: Lawn and Garden, Household and Contract.

        The accompanying unauditedconsolidated financial statements include the accounts and balances of the Company and its wholly owned subsidiaries. All material intercompany transactions have been eliminated in consolidation. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the instructionsUnited States for Form 10-Qinterim financial information and do not include allthe rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. Infootnote disclosures typically included in the opinion of management, all adjustments considered necessary for a fair presentationCompany's Annual Report on Form 10-K have been included. Operating resultscondensed or omitted for any quarter are not necessarily indicative of the results for any other quarter or for the full year. These statementsthis report. As such, this report should be read in conjunction with the financial statements and accompanying notes thereto included in the Company's Annual Report on Form 10-K of United Industries Corporation (the "Company") for the year ended December 31, 2000.2001. Certain amounts in the 2001 consolidated financial statements included herein have been reclassified to conform with the 2002 presentation.

        The accompanying consolidated financial statements are unaudited. In the opinion of management, such statements include all adjustments, which consist of only normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. Interim results are not necessarily indicative of results for a full year. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Note 2—Business Combination

        On May 9, 2002, a wholly owned subsidiary of the Company completed a merger with and into Schultz Company (Schultz), a manufacturer of horticultural products and specialty items, particularly for the indoor houseplant care segment of the market, and a distributor of charcoal, potting soil and soil conditioners. Schultz products are distributed primarily to retail outlets and nurseries throughout the United States and Canada. The merger was executed in order to achieve economies of scale and synergistic efficiencies. As a result of the merger, Schultz became a wholly owned subsidiary of the Company. The total purchase price included cash payments of $38.3 million, including related acquisition costs, issuance of 600,000 shares of Class A voting common stock valued at $3.0 million and issuance of 600,000 shares of Class B non-voting common stock valued at $3.0 million. In exchange for the Company's cash and common stock consideration, the Company received all of the outstanding shares of Schultz. The Company has preliminarily allocated 50% of the purchase price to intangible assets and 50% to goodwill. The acquired intangible assets consist of trade names and other intellectual property, as well as a $1.5 million purchase accounting inventory write-up, which are not deductible for tax purposes.

        The transaction was accounted for using the purchase method of accounting and, accordingly, the results of operations of the assets acquired and liabilities assumed have been included in the

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consolidated financial statements from the date of acquisition. The purchase price was allocated to assets acquired and liabilities assumed based on fair values. The allocation of the purchase price is based, in part, on preliminary information, which is subject to adjustment upon obtaining complete valuation information. While the final purchase price allocation may differ significantly from the preliminary allocation included in this report, management believes that finalization of the allocation of the purchase price will not have a material impact on the consolidated results of operations or financial position of the Company. Allocation of the purchase price is expected to be completed by the second quarter of 2003.

        The Company's unaudited consolidated results of operations on a pro forma basis, as if the merger had occurred on January 1, 2001, include net sales of $487.0 million for the nine months ended September 30, 2002 and $333.5 million for the nine months ended September 30, 2001 and net income of $40.6 million for the nine months ended September 30, 2002 and $21.7 million for the nine months ended September 30, 2001. This unaudited pro forma financial information does not purport to be indicative of the consolidated results of operations that would have been achieved had this transaction been completed as of the assumed date or which may be obtained in the future.

        The Company's funding sources for the merger were as follows: an additional $35.0 million add-on to Term Loan B of the Company's senior credit facility (see Note 9), the issuance of 1,690,000 shares of Class A voting common stock to UIC Holdings, L.L.C. for $8.5 million and the issuance of 1,690,000 shares of Class B non-voting common stock to UIC Holdings, L.L.C. for $8.5 million. The issuance of shares to UIC Holdings, L.L.C. was a condition precedent to the amendment of the senior credit facility.

Note 3—Inventories

        Inventories are as follows:consist of the following (dollars in thousands):

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Note 3—4—Equipment and leasehold improvements, netLeasehold Improvements

        Equipment and leasehold improvements are as follows:consist of the following (dollars in thousands):

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Note 4-Other5—Goodwill and Intangible Assets

        Goodwill and intangible assets consist of the following (dollars in thousands):

        On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and broadens the criteria for recording intangible assets separately from goodwill. SFAS No. 142, among other things, eliminates the amortization of goodwill and indefinite-lived intangible assets and requires them to be tested for impairment at least annually. During the first quarter of 2002, the Company performed an impairment analysis of its goodwill and intangible assets using the discounted cash flow method. The Company did not incur any impairment charges related to this analysis. Prospectively, the Company will test goodwill and intangible assets for impairment annually, or more frequently as warranted by events or changes in circumstances.

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        As prescribed by SFAS No. 142, prior period operating results were not restated. However, a reconciliation follows which reflects net income as reported by the Company and as adjusted to reflect the impact of SFAS No. 142, as if it had been adopted as of January 1, 2001 (dollars in thousands):

        On December 17, 2001, the Company acquired the Vigoro®, Sta-Green® and Bandini® brand names, as well as licensing rights to the Best® line of fertilizer products from Pursell Industries, Inc. (Pursell) for $37.5 million. The acquired brand names and licensing rights are being amortized over 40 years.

        As described in Note 2, on May 9, 2002, a wholly owned subsidiary of the Company completed a merger with and into Schultz. The purchase price included cash payments of $38.3 million, including related acquisition costs, of which the Company has preliminarily allocated 50% to intangible assets and 50% to goodwill. The acquired intangible assets are being amortized over 25 years.

        On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long lived assets to be disposed of and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and resolves implementation issues related to SFAS No. 121. Adoption of SFAS No. 144 did not have a material impact on the Company's consolidated financial statements.

Note 6—Other Assets

        Other assets are as follows:consist of the following (dollars in thousands):

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Note 5-Accrued expenses7—Accrued Expenses

        Accrued expenses are as follows:consist of the following (dollars in thousands):

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Note 6-Long-term debt8—Facilities and creditOrganization Rationalization

        During the fourth quarter of 2001, the Company recorded accrued expenses of $5.6 million related to facilities and organization rationalization. In connection therewith, 85 employees were terminated and provided severance packages. All costs associated with the facilities and organization rationalization are expected to be incurred by December 31, 2002. The following table presents the balances of and amounts recorded against such accrued expenses for the nine months ended September 30, 2002 (dollars in thousands):

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Note 9—Long-term Debt

        Long-term debt is comprisedconsists of the following:following (dollars in thousands):

        The Senior Credit Facilitysenior credit facility was provided by Bank of America, N.A. (formerly known as NationsBank, N.A.), Morgan Stanley Senior Funding, Inc. and CIBC Inc. and consists of (i) a $80,000$90.0 million revolving credit facility (the "RevolvingRevolving Credit Facility")Facility); (ii) a $75,000$75.0 million term loan facility ("Term(Term Loan A")A); and (iii) a $150,000$215.0 million term loan facility ("Term(Term Loan B")B). The Revolving Credit Facility and Term Loan A maturesmature on January 20, 2005 and Term Loan B matures on January 20, 2006. The Revolving Credit Facility is subject to a clean-down period during which the aggregate amount outstanding under the Revolving Credit Facility shall not exceed $10.0 million for 30 consecutive days occurring during the period between August 1 and November 30 in each calendar year. OnAt September 30, 2001, $0 was2002, the clean-down period had been completed and no amounts were outstanding under the Revolving Credit Facility. ThereFacility, nor were nothere any compensating balance requirements forrequirements.

        In connection with the Company's merger with Schultz, the senior credit facility was amended to increase Term Loan B from $180.0 million to $215.0 million, increase the Revolving Credit Facility at September 30, 2001.from $80.0 million to $90.0 million and provide additional capital expenditure flexibility. The Company incurred $2.2 million of fees related to the amendment which were recorded as deferred financing fees and are being amortized over the remaining term of the senior credit facility. The amendment did not change the existing covenants of the senior credit facility.

        The principal amount of Term Loan A is to be repaid in twenty-three23 consecutive quarterly installments commencing JuneSeptember 30, 1999 with a final installment due January 20, 2005. The principal amount of Term Loan B is to be repaid in twenty-seven27 consecutive quarterly installments commencing JuneSeptember 30, 1999 with a final installment due January 20, 2006.

        The Senior Credit Facilitysenior credit facility agreement contains restrictive affirmative, negative and financial covenants. Affirmative and negative covenants putplace restrictions on levels of investments, indebtedness, insurance and capital expenditures. Financial covenants require the maintenance of certain financial ratios at defined levels. At September 30, 2001,2002, the Company was in compliance with all financial covenants.

While the Company does not anticipate an event of non-compliance in the immediate future, the effect of non-compliance would require the Company to request a waiver or an amendment to the senior credit facility. The result of amending the senior credit facility could result in changes to the Company's borrowing capacity or its effective interest rates. Under the covenants, interest rates on the

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Revolving Credit Facility, Term Loan A and Term Loan B rangesrange from 2502.50% to 400 basis points4.00% above LIBOR depending on certain financial ratios. Unused commitments under the Revolving Credit Facility are subject to a 50 basis point0.5% annual commitment fee. LIBOR was 2.63%1.82% at September 30, 2001.2002.

        The Senior Credit Facilitysenior credit facility may be prepaid at any time in whole or in part without premium or penalty. During fiscal 2000,2001, the Company made principal payments of $9.2 million on Term LoansLoan A and B of $14.1$1.4 million and $12.2 million, respectively, were paid,on Term Loan B, which included optional principal prepayments of $4.1 million

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and $10.8 on Term Loan A and $0.7 million on Term Loan B, respectively.B. During the nine month periodmonths ended September 30, 2001,2002, the Company made optional principal prepayments of $4.6 million and $0.7 million on Term Loan A and $0.9 million on Term Loan B, respectively, were paid.B. The optional payments were made in order for the Company to remain two quarterly payments ahead of scheduled payments.the regular payment schedule. According to the Senior Credit Facilitysenior credit facility agreement, each prepayment on Term Loan A and Term Loan B can be applied to the next principal repayment installments. Management intends to pay a full year of principal repayment installments in 20012002 in accordance with the Senior Credit Facility agreement.terms of the senior credit facility.

        Substantially all of the properties and assets of the Company and substantially all of the properties and assets of any current or future domestic subsidiaries of the Company secure obligations under the senior credit facility.

        The carrying amount of the Company's obligation under the senior credit facility approximates fair value because the interest rates are based on floating interest rates identified by reference to market rates.

        In November 1999, the Company issued $150.0 million in aggregate principal amount of 9⁷/8% Series B senior subordinated notes (the Senior Subordinated Notes for $150 million that areNotes) due April 1, 2009.

Interest accrues at the rate of 9⁷/8% per annum, payable semi-annually on each April 1 and October 1.

        Substantially all ofThe table below presents the properties and assets of the Company and substantially all of the properties and assets of the Company'saggregate future domestic subsidiaries secure obligationsprincipal payments under the Senior Credit Facility.

    The carrying amount of the Company's obligation under the Senior Credit Facility approximate fair value because the interest rates are based on floating interest rates identified by reference to market rates.

    Aggregate maturities under the Senior Credit Facility (excluding the Revolving Credit Facility)senior credit facility and the Senior Subordinated Notes are as follows:of September 30, 2002 (dollars in thousands):

Note 7-Commitments10—Commitments

        The Company leases the majority of its operating facilities from a company owned by a significant shareholder of the Company under various operating leases expiring December 31, 2010. The Company has options to terminate the leases on a year-to-year basis by giving advance notice of at least twelve months. TheSuch notice was given relative to the Company's corporate headquarters in St. Louis as the Company prepares to move to its newly constructed corporate headquarters in December 2002. In addition, the Company leases a

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portion of its operating facilities from the same company under a sublease agreement expiring on December 31, 2005. The Company has two five-year options to renew thissuch lease beginning January 1, 2006. Management believes that the terms and expenses associated with the related partythese leases described above are similar to those that would be negotiated bywith unrelated parties at arm's length.parties.

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        The Company is obligated under other operating leases for use of warehouse space. The leases expire at various dates through December 1, 2006.31, 2012. Five of the leases provide as many as five five-year options to renew.renew for five years per renewal.

Note 11—Contingencies

        The Company isWe are involved from time to time in litigation and arbitration proceedings in the normal course of business that assert product liabilityroutine legal matters and other claims. The Company is contesting all such claims.claims incidental to our business. When it appears probable in management's judgment that the Company will incur monetary damages or other costs in connection with such claims and proceedings, and such costs can be reasonably estimated, appropriate liabilities are recorded in the consolidated financial statements and charges are made against earnings.

    Management believes We believe that the possibilityresolution of such routine matters and other incidental claims, taking into account established reserves and insurance, will not have a material adverse effectimpact on the Company'sour consolidated financial position or results of operations and cash flows from the claims and proceedings described above is remote.operations.

Note 8—Contingencies12—Segment Information

        During the third quarter of 2002, the Company began reporting its operating results using three reportable segments: Lawn and Garden, Household and Contract. Segments were established primarily by product type which represents the basis upon which management reviews and assesses the Company's financial performance. The Lawn and Garden segment primarily consists of dry, granular slow-release lawn fertilizers, lawn fertilizer combination and lawn control products, herbicides and selective herbicides, water-soluble and controlled-release garden and indoor plant foods, plant care products, potting soils and other growing media products, and outdoor pesticide products. Products are marketed to mass merchandisers, home improvement centers, hardware chains, nurseries and gardens centers. This segment includes, among others, the Company's Spectracide®, Spectracide Terminate®, Peters®, Garden Safe®, Schultz®, Expert Gardener®, Vigoro® and Sta-Green® brands.

        The Household segment represents household insecticides and insect repellants that allow consumers to achieve and maintain a pest-free household and repel insects. The Household segment includes, among others, the Company's Hot Shot® and Cutter® brands, as well as a number of private label products.

        The Company is involvedContract segment represents the Company's non-core products and includes various compounds and chemicals such as charcoal, cleaning solutions and automotive products.

        The table which follows presents certain financial segment information in litigationaccordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and arbitration proceedingsRelated Information." The accounting policies of the reportable segments are the same as those described in the normal coursesummary of business that assert product liability and other claims. The Company is contesting all such claims. When it appears probablesignificant policies in management's judgment that the Company will incur monetary damages or other costs in connection with such claims and proceedings, and such costs can be reasonably estimated, appropriate liabilities are recorded inNote 1 to the financial statements and charges are made against earnings.

    Management believes the possibility of a material adverse effect on the Company's consolidated financial position, results of operations and cash flows from the claims and proceedings described above is remote.

Note 9—Dursban Related Expenses

    During 2000 the US Environmental Protection Agency and manufacturers of chlorpyrifos (the active ingredient in Dursban pesticidal products) entered into a voluntary agreement that provides for withdrawal of virtually all residential uses of Dursban. Formulation of new Dursban products intended for residential use were required to cease by December 1, 2000. Formulators can no longer sell such products to retailers as of February 1, 2001 and retailers will no longer be able to sell Dursban products after December 31, 2001. A charge of $8,000 was recorded in September 2000 for costs associated with this agreement. The Company believes that the accrual is adequate as of September 30, 2001.

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    Details of this charge and the accrual balances remaining are as follows:

Note 10—Shipping and handling costs

    Shipping and handling costs are included in the selling, generalCompany's Annual Report on Form 10-K for the year ended December 31, 2001, as applicable. The segment financial information presented

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includes comparative periods prepared on a basis consistent with the current year presentation (dollars in thousands).

        Operating income represents earnings before net interest expense and administrative expenses line item onincome tax expense. Operating income is the measure of profitability used by management to assess the Company's Statementsfinancial performance. Operating margin represents operating income as a percentage of Operations.net sales.

        The amount included is $2,902 and $2,593majority of the Company's sales are made to customers in the United States. The Company's international sales comprise less than 10% of total net sales in the aggregate. In addition, no single product comprises more than 10% of the Company's net sales. The Company's three largest customers were responsible for 83.0% of net sales for the three months ended September 30, 2002, 75.5% for the three months ended September 30, 2001, 81.7% for the nine months ended September 30, 2002 and 2000, respectively. The amount included is $10,80874.8% for the nine months ended September 30, 2001.

        As the Company's assets support production across all segments, they are managed on an entity-wide basis at the corporate level and $10,345are not recorded or analyzed by segment. Substantially all of the Company's assets are located in the United States.

Note 13—Shipping and Handling Costs

        Shipping and handling costs of $3.6 million for the three months ended September 30, 2002, $2.9 million for the three months ended September 30, 2001, $12.2 million for the nine months ended September 30, 2002 and $10.8 million for the nine months ended September 30, 2001 are included in selling, general and 2000, respectively.administrative expenses in the accompanying consolidated statements of operations. These costs represent internal freight movements and distribution costs. Additional shipping and

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handling costs, representing out-bound freight, are included in cost of goods sold in the accompanying consolidated statements of operations.

Note 11—14—Derivatives and Hedging Activities

        The Company is exposed to market risks relating to changes in interest rates.rates and raw materials prices. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. The Companyperiodically enters into financial instrumentsderivative or hedging agreements to manage and reduce the impact of changes in interest rates.

    Effective April 1, 2001,rates or raw materials price fluctuations. The Company does not enter into derivatives or other hedging arrangements for trading or speculative purposes. As of September 30, 2002, the Company entered into two interest rate swaps that have fixed the interest rate as of April 30, 2001 for $75.0 million variable rate debt under the Senior Credit Facility. The interest rate swaps are for $50.0 and $25.0 million of the Senior Credit Facility and will terminate on April 30, 2002. The fixed LIBOR interest rates are 4.74% and 4.66% for the $50.0 and $25.0 million interest rate swaps respectively. The Company's objective is to manage the cash flow risks associated with its variable rate debt anddid not to trade such instruments for profitutilize any derivative or loss. The Company's interest rate hedges are classified as cash flow hedges. For a cash flow hedge, the unrealized portion is deferred in accumulated other comprehensive income on the balance sheet until the transaction is realized, at which time any deferred hedging gains or losses are recorded in earnings. The fair value of the interest rate swaps is reported as a liability and as a component of comprehensive income in Stockholders' deficit at September 30, 2001. The September 30, 2001 fair value is $0.7 million.instruments.

Note 12—15—Comprehensive Income

        Comprehensive income differs from net income due to thea one-year interest rate hedging arrangement which expired on April 1, 2002 that was accounted for as a cash flow hedge. Comprehensive income (loss) was $0.4 million for the three andmonths ended September 30, 2002, $(0.1 million) for the three months ended September 30, 2001, $37.0 million for the nine months ended September 30, 2002 and $19.5 million for the nine months ended September 30, 2001.

Note 16—Bayer Strategic Partnership

        On June 14, 2002, the Company and Bayer Corporation and Bayer Advanced, L.L.C. (together referred to herein as Bayer) consummated a strategic partnership. The strategic partnership allows the Company to gain access to certain Bayer active ingredient technologies through a Supply Agreement and to perform certain merchandising services for Bayer through an In-Store Service Agreement. In connection with the strategic partnership, Bayer acquired a minority ownership interest, approximately 9.3% of the issued and outstanding shares of the Company's common stock, under the terms of an Exchange Agreement in exchange for promissory notes due to Bayer from Pursell (see Note 19) and the execution of the Supply and In-Store Service Agreements.

        Under the terms of the Exchange Agreement, the Company has the right to repurchase the shares issued to Bayer upon termination of the In-Store Service Agreement. Termination of the In-Store Service Agreement can occur with or without cause. If the Company elects to terminate the In-Store Service Agreement without cause, it must give Bayer sixty days notice of its intention to terminate. If the Company exercises its repurchase option, it will repurchase its shares based on a price as provided for in the In-Store Service Agreement. It is generally believed that the repurchase price per share would represent the fair market value of the shares at the time such repurchase option is exercised.

        In exchange for the promissory notes received from Bayer and the execution of the Supply and In-Store Service Agreements, the Company issued to Bayer 3,072,000 shares of Class A voting common stock valued at $15.4 million and 3,072,000 shares of Class B non-voting common stock valued at $15.4 million. The Company reserved for the entire face value of the promissory notes due to Bayer from Pursell as the Company did not believe they were collectible and an independent third party valuation did not ascribe any value to them.

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        In addition, based on the independent third party valuation, the Company has assigned a fair value of $30.7 million to the common stock issued to Bayer as follows (dollars in thousands):

        Under the requirements of the agreements, Bayer will make payments to the Company which total $5.0 million annually for the next seven years, the present value of which equals the value assigned to the common stock subscription receivable, which is reflected in the equity section in the Company's accompanying consolidated balance sheet at September 30, 2002. The common stock subscription receivable will be repaid in 28 quarterly installments of $1.25 million, one of which was received at closing on June 17, 2002. The difference between the value ascribed to the common stock subscription receivable and the installment payments will be reflected as interest income in the Company's consolidated statements of operations over the next seven years.

        Bayer has the right to put the shares received back to the Company under the terms of the Exchange Agreement. Bayer can terminate the Exchange Agreement within the first 36 months if the Company fails to meet certain performance guidelines as established in the Exchange Agreement. In conjunction with the termination, Bayer can put the shares received back to the Company within 30 days of the termination of the Exchange Agreement at a price as provided for in the Exchange Agreement. It is generally believed that the put price per share would represent the fair market value of the shares at the time such put option is exercised.

        The value of the Supply Agreement and the liability associated with the In-Store Service Agreement will be amortized over the period in which economic benefits under the Supply Agreement are utilized and the obligations under the In-Store Service Agreement are fulfilled. The Company is amortizing the asset associated with the Supply Agreement to cost of goods sold and currently anticipates the benefit will be recognized over a three to five-year period. The Company is amortizing the obligation associated with the In-Store Service Agreement to revenues over the seven-year life of the agreement (see Note 19). The independent third party valuation obtained by the Company also indicated that value should be ascribed to a repurchase option owned by the Company under the agreements. The effect of the repurchase option is reflected as a reduction to equity in the accompanying consolidated balance sheet at September 30, 2002. This amount will be recorded as a component of additional paid-in capital upon the exercise of the option or its expiration.

Note 17—Related Party Transactions

        On September 28, 2001, the Company entered into a loan agreement with Robert L. Caulk, the President, Chief Executive Officer and Chairman of the Board of Directors of the Company, for $400,000 which matures on September 28, 2006 (the 2001 Loan). On March 8, 2002, the Company entered into a loan agreement with Mr. Caulk for $51,685 which matures on March 8, 2007 (the 2002

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Loan). The purpose for both loans was ($143)to allow Mr. Caulk to purchase shares of the Company's common and $19,517 respectively.preferred stock. The loans bear interest at LIBOR which is adjusted on the respective anniversary date of each loan. The interest rate in effect as of September 30, 2002 was 1.81%. Interest on both loans is payable annually, based on outstanding accrued amounts on December 31 of each year. Principal payments on both loans are based on 25% of the gross amount of each annual bonus awarded to Mr. Caulk and are immediately payable, except that principal payments on the 2002 Loan are immediately payable only if all amounts due under the 2001 Loan are fully paid. Any unpaid principal and interest on both loans is due upon maturity. The outstanding principal balance for the 2001 Loan was $352,000 as of September 30, 2002 and $400,000 as of December 31, 2001. The outstanding principal balance of the 2002 Loan was $51,685 as of September 30, 2002.

10Note 18—Recently Issued Accounting Pronouncements

        In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred rather than when a company commits to such an activity and also establishes fair value as the objective for initial measurement of the liability. SFAS No. 146 will be adopted by the Company for exit or disposal activities that are initiated after December 31, 2002. Adoption will not have a material impact on the consolidated financial statements of the Company.

Note 19—Subsequent Events

        On October 3, 2002, the Company signed an asset purchase agreement to acquire certain assets from Pursell, which renamed itself U.S. Fertilizer subsequent to the agreement, for a cash purchase price of $12.1 million and forgiveness of the Pursell promissory notes (see Note 16), subject to final purchase price adjustments. The assets acquired included certain inventory and equipment at two of Pursell's facilities and real estate at one of the two facilities. The facilities acquired from Pursell, located in Orrville, Ohio and Sylacauga, Alabama, previously fulfilled, and are expected to continue to fulfill, over half of the Company's fertilizer manufacturing requirements.

        Also on October 3, 2002, the Company signed a tolling agreement with Pursell whereby Pursell will supply the Company with the remainder of its fertilizer needs. The tolling agreement requires the Company to be responsible for certain raw materials, capital expenditures and other related costs for Pursell to manufacture and supply the Company with fertilizer products. The agreement does not require a minimum volume purchase of Pursell's manufacturing services but does provide for a fixed monthly payment of $0.7 million through the term of the tolling agreement which expires on September 30, 2007. The agreement provides the Company with early termination rights without penalty. In addition, beginning on March 1, 2004 and on each anniversary thereafter, the fixed payment is subject to certain increases for labor, materials, inflation and other reasonable costs as outlined in the tolling agreement.

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Item 2:2. Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

    Certain statements contained herein constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this report regarding the Company's financial position, business strategy, budgets and plans and objectives of management for future operations are forward-looking statements. Although the management of the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from those contemplated or projected, forecasted, estimated or budgeted in or expressed or implied by such forward-looking statements. Such factors include, among others, the risks and other factors set forth under Item 7A in the Company's Annual Report on Form 10-K for the year ended December 31, 2000 as well as the following: general economic and business conditions; governmental regulations; industry trends; the loss of major customers or suppliers; cost and availability of raw materials; changes in business strategy or development plans; availability and quality of management; and availability, terms and deployment of capital. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

        The Company isdiscussion and analysis of our consolidated financial condition and results of operations included herein should be read in conjunction with our historical financial information included in the unaudited consolidated financial statements and the related notes thereto included elsewhere in this report.

General

        We are the leading manufacturer and marketer of value-oriented branded products for the consumer lawn and garden pesticidecare and household insecticideinsect control markets in the United States. The Company manufacturesWe manufacture and marketsmarket one of the broadest lines of pesticides in the industry, including herbicides and indoor and outdoor insecticides, as well as insect repellents, fertilizers and water-soluble fertilizers,soils, under a variety of brand names. The Company believesWe believe that the key drivers of growth for the $2.7$2.8 billion consumer lawn and garden pesticide and household insecticide retail markets include: (a) the aging of the population of the United States;States population; (b) growth in the home improvement center and mass merchandiser channels; and (c) shifting consumers preferences'consumer preferences toward value-oriented branded products; and (d) increased levels in consumer income, debt and spending.

        During the third quarter of 2002, we began reporting operating results using three reportable segments: Lawn and Garden, Household and Contract. Segments were established primarily by product type which represents the basis upon which management reviews and assesses our financial performance. The Lawn and Garden segment primarily consists of dry, granular slow-release lawn fertilizers, lawn fertilizer combination and lawn control products, herbicides and selective herbicides, water-soluble and controlled-release garden and indoor plant foods, plant care products, potting soils and other growing media products, and outdoor pesticide products. Products are marketed to mass merchandisers, home improvement centers, hardware chains, nurseries and gardens centers. This segment includes, among others, our Spectracide®, Spectracide Terminate®, Peters®, Garden Safe®, Schultz®, Expert Gardener®, Vigoro® and Sta-Green® brands.

        The Household segment represents household insecticides and insect repellants that allow consumers to achieve and maintain a pest-free household and repel insects. The Household segment includes, among others, our Hot Shot® and Cutter® brands, as well as a number of private label products.

        The following discussionContract segment represents our non-core products and analysisincludes various compounds and chemicals such as charcoal, cleaning solutions and automotive products.

Critical Accounting Policies

        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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Company's financial conditionstatements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates and assumptions on an ongoing basis based on a combination of historical information and various other assumptions that are believed to be reasonable under the particular circumstances. Actual results of operationsmay differ from these estimates based on different assumptions or conditions. The accounting policies that we believe most impact our consolidated financial statements and that require our management to make difficult, subjective or complex judgments are described below. These should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Note 1—Summary of Significant Accounting Policies" to our financial statements included in our Annual Report filed on Form 10-K for the year ended December 31, 2001.

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Revenue Recognition

        Net sales represent gross sales less any applicable customer discounts from list price, customer returns and promotion expense through cooperative programs with retailers. The provision for customer returns is based on historical sales returns, analysis of credit memo information and any other pertinent factors. If the historical or other data used to calculate these estimates do not properly reflect future returns, net sales could be overstated.

Inventories

        Inventories are reported at the lower of cost or market. Cost is determined using the first-in, first-out method and includes raw materials, direct labor and overhead. An allowance for potentially obsolete or slow-moving finished goods and raw materials is recorded based on management's analysis of inventory levels and future sales forecasts. In the event that our estimates of future usage and sales differ from actual results, the allowance for obsolete or slow-moving finished goods and raw materials may be adjusted.

Promotion Expense

        We advertise and promote our products through national and regional media. Products are also advertised and promoted through cooperative programs with retailers. Advertising and promotion costs are expensed as incurred, although costs incurred during interim periods are generally expensed ratably in relation to revenues. Management judgment is required to estimate the amount of costs that have been incurred by the retailers under our cooperative programs. Actual costs incurred may differ significantly from our estimates if factors such as the level of participation and success of the retailers' programs or other conditions differ from our expectations.

Income Taxes

        In conjunction with our recapitalization consummated on January 20, 1999, we converted our company from an S corporation to a C corporation. As a C corporation, we account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial information includedreporting basis and the tax basis of our assets and liabilities at enacted tax rates expected to be in effect when such amounts are recovered or settled. Management judgment is required to determine income tax expense, deferred tax assets and any valuation allowance recorded against such assets and deferred tax liabilities. We have recorded a valuation allowance of $111.4 million as of September 30, 2002 due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily consisting of certain net operating loss carryforwards and deductible goodwill recorded in connection with our recapitalization in 1999. The valuation allowance is based on our estimates of taxable income by jurisdiction in which our deferred tax assets will be recoverable. In the event that actual results differ from those estimates or we adjust these estimates in future periods, we may need to adjust the valuation allowance, which could materially impact our consolidated financial position and results of operations.

Goodwill and Other Intangible Assets

        We have acquired intangible assets or made acquisitions in the unaudited quarterly financial statementspast that resulted in the recording of goodwill, including our acquisition of fertilizer brands in December 2001 and our merger with Schultz Company in May 2002, respectively. Under generally accepted accounting principles previously in effect, these assets were amortized over their estimated useful lives, and were tested periodically to determine if they were recoverable from operating earnings on an undiscounted basis over their useful lives.

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        Effective in 2002, goodwill is no longer amortized and is subject to impairment testing at least annually. We evaluate the recoverability of long-lived assets, including goodwill and intangible assets, for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such events or changes in circumstances could include such factors as changes in technological advances, fluctuations in the fair value of such assets or adverse changes in relationships with vendors or customers. If a review indicates that the carrying value of an asset is not recoverable based on projected undiscounted net cash flows related notes to the unaudited quarterly financial statements contained elsewhereasset over its remaining life, the carrying value of such asset is reduced to its estimated fair value. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect our evaluations. Therefore, impairment losses could be recorded in this report.the future.

Results of Operations

Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001

        The following discussion regarding resultstable presents amounts and the percentages of net sales that items in the accompanying consolidated statements of operations refers to net sales, cost of goods sold and selling and general and administrative expenses, whichconstitute for the Company defines as follows:periods presented (dollars in thousands):

•

			Three Months Ended September 30,
			2002					2001
			(unaudited)					(unaudited)
Net sales by segment:
	Lawn and Garden		$	64,465		64.0	%	$	31,013		55.6	%
	Household			29,406		29.2	%		24,101		43.2	%
	Contract			6,806		6.8	%		679		1.2	%
	Total net sales			100,677		100.0	%		55,793		100.0	%
Operating costs and expenses:
	Cost of goods sold			65,209		64.8	%		30,104		54.0	%
	Selling, general and administrative expenses			27,567		27.4	%		16,970		30.4	%
	Total operating costs and expenses			92,776		92.2	%		47,074		84.4	%
Operating income by segment:
	Lawn and Garden			1,372		1.4	%		3,668		6.6	%
	Household			5,963		5.9	%		5,065		9.0	%
	Contract			566		0.5	%		(14	)	0.0	%
	Total operating income			7,901		7.8	%		8,719		15.6	%
Interest expense, net				7,386		7.3	%		8,407		15.0	%
Income before income tax expense				515		0.5	%		312		0.6	%
Income tax expense				98		0.1	%		91		0.2	%
	Net income		$	417		0.4	%	$	221		0.4	%

        Net Sales.Net sales arerepresent gross sales of products sold to customers in accordance with the shipping terms applicable to each sale less any applicable customer discounts from list price, and customer returns;returns and promotion expense of products through cooperative programs with retailers.



•

Cost Net sales increased $44.9 million, or 80.5%, to $100.7 million for the three months ended September 30, 2002 from $55.8 million for the three months ended September 30, 2001. The increase, primarily in our Lawn and Garden segment, and the change in our sales mix by segment, were due to our expanded product line resulting from our merger with Schultz in May 2002 and our acquisition of goods sold includes chemicals, containervarious fertilizer brands in December 2001, coupled with an increase in sales of specific product lines described further below. This increase was partially offset by an increase in promotion expense and packaging materialretailers maintaining lower inventory levels.

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        Net sales in the Lawn and Garden segment increased $33.5 million, or 108.1%, to $64.5 million for the three months ended September 30, 2002 from $31.0 million for the three months ended September 30, 2001. Net sales of this segment increased $14.6 million as a result of our merger with Schultz, $18.4 million as a result of our acquisition of various fertilizer brands and $7.2 million from strong sales growth of our Spectracide® brand. These increases were partially offset by lower sales volume of various other products in the Lawn and Garden segment. Net sales in the Household segment increased $5.3 million, or 22.0%, to $29.4 million for the three months ended September 30, 2002 from $24.1 million for the three months ended September 30, 2001. Net sales of this segment increased primarily due to increases in sales of our Cutter® and Hot Shot® brands and in our private label products. Net sales in the Contract segment increased $6.1 million to $6.8 million for the three months ended September 30, 2002 from $0.7 million for the three months ended September 30, 2001. Net sales of this segment increased primarily due to our merger with Schultz.

        Gross Profit.    Gross profit increased $9.8 million, or 38.1%, to $35.5 million for the three months ended September 30, 2002 from $25.7 million for the three months ended September 30, 2001. The increase in gross profit was primarily due to our merger with Schultz in May 2002 and our acquisition of various fertilizer brands in December 2001, coupled with favorable materials costs of key ingredients. As a percentage of net sales, gross profit decreased to 35.2% for the three months ended September 30, 2002 from 46.0% for the three months ended September 30, 2001. The decrease in gross profit as well as direct labor, outside labor, manufacturing overheada percentage of net sales was primarily due to our merger with Schultz in May 2002 and freight.



•

our acquisition of various fertilizer brands in December 2001, which have lower margins than our other products.

Selling, General and Administrative Expenses.    Selling, general and administrative expenses include all costs associated with the selling and distribution of product, product registrations, and administrative functions such as finance, information systems and human resources.

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