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TABLE OF CONTENTS

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

FORM 10-Q

(Mark One)

For the quarterly period ended JuneSeptember 30, 2002

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 ý    No o.

        As of July 31,November 12, 2002, the Registrantregistrant had 33,143,000 Class A voting and 33,143,000 Class B non-voting shares of common stock outstanding and 37,600 Class A non-voting shares of Class A preferred stock outstanding.

UNITED INDUSTRIES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
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 1
I. FINANCIAL INFORMATION

Item 1. Financial Statements

UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2002 AND 2001, AND DECEMBER 31, 2001

(Dollars in thousands)

(Unaudited)thousands, except share data)

See accompanying notes to consolidated financial statements.

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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 SIX MONTHS ENDED JUNE 30, 2002 AND 2001

(Dollars in thousands)

(Unaudited)

See accompanying notes to financial statements.

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UNITED INDUSTRIES CORPORATION

STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001

(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 material 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, 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 combinationCombination

        On May 9, 2002, a wholly owned subsidiary of the Company completed a merger with and into Schultz Company (Schultz). Schultz manufactures, a manufacturer of horticultural products and specialty items, particularly for the indoor houseplant care segment of the market. Schultz also distributesmarket, and a distributor of charcoal, potting soil and soil conditioners. Schultz distributes its products mainlyare 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. Goodwill was recognized inAs a result of the merger, due to the purchase price being in excessSchultz became a wholly owned subsidiary of the estimated fair value of net assets acquired, including identified intangibles and tradenames. The transaction was accounted for using purchase accounting.Company. The total purchase price included cash payments of $37,550,$38.3 million, including related acquisition costs, issuance of 600,000 shares of Class A Voting Common Stockvoting common stock valued at $3,000$3.0 million and issuance of 600,000 shares of Class B Non-Voting Common Stocknon-voting common stock valued at $3,000.$3.0 million. In exchange for the Company's cash and Common Stockcommon stock consideration, the Company received all of the outstanding shares of Schultz. The Company has preliminarily allocated 50% of the purchase price in excessto 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 estimated fair valuepurchase method of accounting and, accordingly, the results of operations of the assets acquired and liabilities assumed to intangibles and 50% to goodwill.have been included in the

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consolidated financial statements from the date of acquisition. The actual purchase price allocationwas allocated to reflect the fair values of assets acquired and liabilities assumed will be completed oncebased on fair values. The allocation of the Company finishes itspurchase price is based, in part, on preliminary information, which is subject to adjustment upon obtaining complete valuation of such assets acquired and liabilities assumed. The valuation will be completed duringinformation. While the third quarter of 2002. The final purchase price allocation may differ significantly from the preliminary allocation included in this report. The merger included estimated goodwill and other intangible assetsreport, management believes that finalization of $38,050. The acquired intangible assets consistthe allocation of tradenames and other intellectual property and arethe purchase price will not deductible for tax purposes. Thehave a material impact on the consolidated results of Schultz are included in the Company's consolidatedoperations or financial statements from the dateposition of the merger through the endCompany. Allocation of the period.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, assumingas if the merger had occurred at the beginning of fiscalon January 1, 2001, are:include net sales of $386,289 and $264,964$487.0 million for the sixnine months ended JuneSeptember 30, 2002 and June$333.5 million for the nine months ended September 30, 2001 respectively. Netand net income of $40,227 and $23,827$40.6 million for the sixnine months ended JuneSeptember 30, 2002 and June$21.7 million for the nine months ended September 30, 2001, respectively. These2001. This unaudited pro forma results arefinancial information does not purport to be indicative of the operatingconsolidated results of operations that would have occurredbeen achieved had these acquisitionsthis transaction been consummated at the beginningcompleted as of the yearassumed date or of future operating results.which may be obtained in the future.

        The Company's funding sources for the merger were as follows: (1)an additional $35,000$35.0 million add-on to the Term Loan B of the Company's Senior Credit Facility. The newly amended Senior Credit Facility increased the Term Loan B from $180,000 to $215,000, increased the revolvingsenior credit facility from $80,000 to $90,000 and provided additional capital expenditure flexibility. The Senior Credit Facility retains Banc of America Securities, L.L.C. as sole Lead Arranger and Lead Agent. The Company

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incurred $2,168 of fees related to(see Note 9), the new amendment to the Senior Credit Facility. The new amendment to the Senior Credit Facility did not cause a change in the existing financial covenants; and (2) Issuanceissuance of 1,690,000 shares of Class A Voting Common Stockvoting common stock to UIC Holdings, L.L.C. in exchange for $8,450$8.5 million and the issuance of 1,690,000 shares of Class B Non-Voting Common Stocknon-voting common stock to UIC Holdings, L.L.C. in exchange for $8,450.$8.5 million. The issuance of shares to UIC Holdings, L.L.C. was a condition precedent to the effectivenessamendment of the newly amended Senior Credit Facility.senior credit facility.

Note 3—Inventories

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

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Note 4—Equipment and leasehold improvementsLeasehold Improvements

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

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Note 5—Goodwill and intangible assetsIntangible Assets

        Goodwill and intangible assets are as follows: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".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 separateseparately from goodwill. SFAS No. 142, among other things, eliminates the amortization of goodwill and insteadindefinite-lived intangible assets and requires goodwillthem to be tested for impairment at least annually. Under SFAS 142, if the intangible asset has an indefinite useful life, it is not amortized until its life is determined to be finite. SFAS No. 142 provides a staggered timeline for completing transitional impairment testing of goodwill and indefinite-lived intangible assets. The Company completed its transitional impairment analysis inDuring the first quarter of 2002. Fair value was estimated2002, the Company performed an impairment analysis of its goodwill and intangible assets using the discounted cash flow method. The Company did not identifyincur any significant impairment charges related to the completion of this transitional analysis. Prospectively, the Company will test its goodwill and intangible assets for impairment annually, or more frequently as part of its annual business planning cyclewarranted by events or changes in the fourth quarter of each fiscal year.circumstances.

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        As requiredprescribed by SFAS No. 142, theprior period operating results for prior periods were not restated in the accompanying statements of operations. Arestated. However, a reconciliation betweenfollows which reflects net income available to common stockholders as reported by the Company and income available to common stockholdersas adjusted to reflect the impact of SFAS No. 142, is as follows:if it had been adopted as of January 1, 2001 (dollars in thousands):

        On December 17, 2001, the Company acquired Vigoro®the Vigoro®, Sta-Green®Sta-Green® and Bandini®,Bandini® brand names, as well as licensing rights to the Best®Best® line of fertilizer products from Pursell Industries, Inc. (Pursell) for $37,500.$37.5 million. The acquired brandsbrand names and licensing rights are being amortized over 40 years.

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        On        As described in Note 2, on May 9, 2002, a wholly owned subsidiary of the Company completed a merger with Schultz Company.and into Schultz. The merger included a preliminary allocation of purchase price to goodwill and other intangible assetsincluded cash payments of $38,050. The$38.3 million, including related acquisition costs, of which the Company has preliminarily allocated 50% of the purchase price in excess of the fair value ofto intangible assets acquired and liabilities assumed to intangibles and 50% to goodwill. The intangiblesacquired 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 assetsAssets

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

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Note 7—Accrued expensesExpenses

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

Note 8—Facilities and Organization 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 as follows: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 8—9—Long-term debtDebt

        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 $90,000$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 $215,000$215.0 million term loan facility ("Term(Term Loan B")B). The Revolving Credit Facility and Term Loan A mature 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 $10,000$10.0 million for 30 consecutive days occurring during the period between August 1 and November 30 in each calendar year. On JuneAt September 30, 2002, $0 wasthe 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 June 30, 2002.

        On May 9, 2002 the Company merged with Schultz. In conjunction with the Schultz acquisition the Company received approval from its banking syndicate for an amendment$80.0 million to its Senior Credit Facility. The newly amended Senior Credit Facility increased the Term Loan B from $180,000 to $215,000, increased the revolving credit facility from $80,000 to $90,000$90.0 million and providedprovide additional capital expenditure flexibility. The Senior Credit Facility retains BancCompany incurred $2.2 million of America Securities, L.L.C.fees related to the amendment which were recorded as deferred financing fees and are being amortized over the sole Lead Arranger and Lead Agent.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 JuneSeptember 30, 2002, the Company was in compliance with all financial covenants. While the Company does not anticipate an event of non-compliance with financial covenants in the immediate future, the effect of non-compliance with financial covenants would causerequire the Company to request a waiver or an

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amendment to the Senior Credit Facility.senior credit facility. The result of amending the Senior Credit Facilitysenior credit facility could cause a reductionresult in the limit ofchanges to the Company's Revolving Credit Facility and changes in theborrowing capacity or its effective interest rates of the Revolving Credit Facility.

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 1.84%1.82% at JuneSeptember 30, 2002.

        The Senior Credit Facilitysenior credit facility may be prepaid at any time in whole or in part without premium or penalty. During fiscal 2001, the Company made principal payments of $9.2 million on Term LoansLoan A and $1.4 million on Term Loan B, of $9,200 and $1,400, respectively, were paid, which included optional principal prepayments of $4,100 and $700$4.1 million on Term Loan A and $0.7 million on Term Loan B, respectively.B. During the six month periodnine months ended JuneSeptember 30, 2002, the Company made optional principal prepayments of $4,612 and $936$4.6 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 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 installments in 2002 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 the Company'sany current or future domestic subsidiaries of the Company secure obligations under the Senior Credit Facility.senior credit facility.

        The carrying amount of the Company's obligation under the Senior Credit Facility approximatesenior 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.

        Aggregate maturitiesThe table below presents the aggregate future principal payments under the Senior Credit Facilitysenior credit facility and the Senior Subordinated Notes are as follows:of September 30, 2002 (dollars in thousands):

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Note 9—10—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.

        The Company is obligated under other operating leases for use of warehouse space. The leases expire at various dates through December 31, 2012. Five of the leases provide as many as five five-year options to renew.renew for five years per renewal.

Note 10—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 are remote.operations.

Note 11—12—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 Contract 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 accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The accounting policies of the reportable segments are the same as those described in the summary of significant policies in Note 1 to the financial statements included in the Company'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 income tax expense. Operating income is the measure of profitability used by management to assess the Company's financial performance. Operating margin represents operating income as a percentage of net sales.

        The majority 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 74.8% 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 are not recorded or analyzed by segment. Substantially all of the Company's assets are located in the United States.

Note 13—Shipping and handling costsHandling 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 the selling, general and administrative expenses line item onin the Company's Statementsaccompanying consolidated statements of Operations. The amount is $4,752 and $4,230 for the three months ended June 30, 2002 and 2001, respectively. The amount included is $8,536 and $7,906 for the six months ended June 30, 2002 and 2001, respectively. This cost representsoperations. These costs represent internal freight movements and distribution cost. The remainingcosts. Additional shipping and

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

Note 12—14—Derivatives and Hedging Activities

        The Company is exposed to market risks relating to changes in interest rates and raw materials prices. The Company periodically enters into derivative or hedging agreements to manage and reduce the impact of changes in interest 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 did not utilize any derivative or hedging instruments.

Note 15—Comprehensive incomeIncome

        Comprehensive income differs from net income in prior periods due to an one yeara one-year interest rate hedging arrangement which expired on April 1, 2002 that was accounted for as a cash flow hedge and expired on April 1, 2002.hedge. Comprehensive income (loss) was $0.4 million for the three months ended JuneSeptember 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 2001 was $26,614 and $15,424, respectively. Comprehensive income$19.5 million for the sixnine months ended JuneSeptember 30, 2002 and 2001 was $37,095 and $19,660, respectively.2001.

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Note 13—Facilities and organization rationalization

        During the fourth quarter of 2001 the Company recorded a $5,550 charge related to facilities and organizational rationalization. The following is a rollforward of the charge for the six months ended June 30, 2002.

Note 14—16—Bayer strategic partnershipStrategic Partnership

        On June 14, 2002, the Company and Bayer Corporation and Bayer Advanced, L.L.C. (Bayer)(together referred to herein as Bayer) consummated thea strategic partnership that the parties entered into on June 7, 2002.partnership. The strategic partnership is built upon three key components: (1) Theallows the Company gainsto gain access to certain Bayer active ingredient technologies through a Supply Agreement; (2) The Company performsAgreement and to perform certain merchandising services for Bayer through aan In-Store Services Agreement; and (3)Service Agreement. In connection with the strategic partnership, Bayer obtainsacquired a 9.3% minority ownership ininterest, approximately 9.3% of the issued and outstanding Common Stock shares of the CompanyCompany's common stock, under the terms of thean Exchange Agreement in exchange for promissory notes due to Bayer from Pursell (see Note 19) and the execution of the two agreements previously mentioned.Supply and In-Store Service Agreements.

        Under the terms of the Exchange Agreement, the Company has the right to repurchase the shares exchanged withissued to Bayer upon the termination of the In-Store ServicesService Agreement. Termination of the In-Store ServicesService Agreement can occur with or without cause. If the Company elects to terminate the In-Store ServicesService Agreement without cause, it must give Bayer sixty days notice of its intention to terminate the In-Store Services Agreement.terminate. If the Company exercises its repurchase option, it will repurchase its shares based on a price as determined byprovided for in the In-Store ServicesService 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 agreements,Service Agreements, the Company issued to Bayer 3.1 million3,072,000 shares of Class A Voting Common Stockvoting common stock valued at $15,360$15.4 million and 3.1 million3,072,000 shares of Class B Non-Voting Common Stocknon-voting common stock valued at $15,360.$15.4 million. The promissory notes received from Bayer are due from Pursell Industries, Inc. The Company has reserved for the entire face value of the promissory notes based ondue to Bayer from Pursell as the Company did not believe they were collectible and an independent third party valuation.valuation did not ascribe any value to them.

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        In addition, based on anthe independent third party valuation, the Company has assigned the $30,720a fair value of $30.7 million to the Common Stock exchanged withcommon stock issued to Bayer as follows:follows (dollars in thousands):

        Under the requirements of the agreements, Bayer will make payments to the Company which total $5,000$5.0 million annually for the next seven years, the present value of which equates toequals the value assigned to the Common Stockcommon stock subscription receivable, which is reflected in the equity section ofin the Company's accompanying consolidated balance sheet at JuneSeptember 30, 2002. The Common Stockcommon stock subscription receivable will be repaid in 28 quarterly installments of $1,250,$1.25 million, one of which was received at closing on June 17, 2002. The difference between the value ascribed to the Common Stockcommon stock subscription receivable and the installment payments will be reflected as interest income in the Company's Statementconsolidated statements of Operationsoperations over the next seven years.

        Bayer has the right to put the shares received from the Company 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 Company's Common Stockshares received back to the Company within 30 days of the termination of the Exchange Agreement at a price as determined byprovided 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 ServicesService Agreement will be amortized over the pattern and period in which economic benefits under the Supply Agreement are consumedutilized and the obligations under the In-Store Service Agreement are fulfilled. The Company will amortizeis 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 yearfive-year period. The Company will amortizeis amortizing the obligation associated with the In-Store ServicesService Agreement to revenues and currently anticipates the obligation will be recognized over the seven-year life of the agreement.agreement (see Note 19). The independent third party valuation obtained by the Company also determinedindicated that value should be ascribed to a repurchase option owned by the Company under the agreements has value.agreements. The effect of the repurchase option is reflected as a reduction to equity in the Company's equity.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.

13Note 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 to allow Mr. Caulk to purchase shares of the Company's common and 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.

Note 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, 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. 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 care and insect 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 fertilizers,soils, under a variety of brand names. The Company believesWe believe that the key drivers of growth for the $2.8 billion consumer lawn and garden pesticide and household insecticide retail markets include: (a) the aging of the United States population; (b) growth in the home improvement center and mass merchandiser channels; and (c) shifting consumers'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 analysis of the Company's financial conditionincludes various compounds and results of operations should be read in conjunction with the historical financial information included in the unaudited quarterly financial statementschemicals such as charcoal, cleaning solutions and the related notes to the unaudited quarterly financial statements.automotive products.

Critical Accounting Policies

        The Company's significantpreparation 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. 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 may 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 Note 1conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Note 1—Summary of Significant Accounting Policies" to the consolidatedour financial statements included in Item 14 of the Company'sour Annual Report filed on Form 10-K for the year ended December 31, 2001. Note that the preparation of this quarterly Report on Form 10Q requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. The Company believes that it's most critical accounting policies include revenue recognition, inventories, promotion expense, income taxes and goodwill and other acquired intangible assets.

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Revenue recognitionRecognition

        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, customer returns and promotion expense of products through cooperative programs with retailers. The Company's provision for customer returns is based on historical sales returns, analysis of credit memo datainformation and any other knownpertinent factors. If the historical or other data the Company usesused to calculate these estimates doesdo not properly reflect future returns, revenuenet sales could be overstated.

Inventories

        Inventories are statedreported at the lower of cost or market, with cost beingmarket. Cost is determined using the first-in, first-out method. Costmethod and includes raw materials, direct labor and overhead. ProvisionAn allowance for potentially obsolete or slow-moving finished goods and raw materials are madeis 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, we may need to establish an additional provisionthe allowance for obsolete or slow-moving finished goods and raw materials.materials may be adjusted.

Promotion expenseExpense

        The Company advertisesWe advertise and promotes itspromote our products through printnational and electronicregional media. Products are also advertised and promoted through cooperative programs with retailers. The Company expenses advertisingAdvertising and promotion costs are expensed as incurred, although costs incurred during interim periods are generally expensed ratably in relation to revenues. Significant managementManagement judgment is required to estimate the amount of costs under our cooperative programs that hashave been incurred by the retailers.retailers under our cooperative programs. Actual costs incurred by the Company 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 taxesTaxes

        In conjunction with the Company's Recapitalizationour recapitalization consummated on January 20, 1999, the Companywe converted our company from an "S"S corporation to a "C"C corporation. As a "C"C corporation, the Company accountswe 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 reporting basis and the tax basis of the Company'sour assets and liabilities at enacted tax rates expected to be in effect when such amounts are recovered or settled. Significant managementManagement judgment is required in determining our provision forto determine income taxes, ourtax expense, deferred tax assets and liabilities and any valuation allowance recorded against our netsuch assets and deferred tax assets.liabilities. We have recorded a valuation allowance of $111.4 million as of JuneSeptember 30, 2002 due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily consisting of certain net operating losses carried forwardloss carryforwards and deductible goodwill createdrecorded in conjunctionconnection with the Recapitalization.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 establish an additional valuation allowance or reduce our currentadjust the valuation allowance, which could materially impact our consolidated financial position and results of operations.

Goodwill and Other Acquired Intangible Assets

        The Company hasWe have acquired intangible assets or made acquisitions in the past that included a significant amountresulted in the recording of goodwill, including our acquisition of fertilizer brands in December 2001 and other intangible assets.our merger with Schultz Company in May 2002, respectively. Under generally accepted accounting principles previously in effect, through December 31, 2001,

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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 willis no longer be amortized but will beand 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 annual (or under certainasset may not be recoverable. Such events or changes in circumstances more frequent) impairment testcould 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 to the asset over its remaining life, the carrying value of such asset is reduced to its estimated fair value. Other intangible assetsWhile we believe that meet certain criteria will continue to be amortized over their useful lives and will also be subject to an impairment test based on estimated fair value. Estimated fair value is typically less than values based on undiscounted operating earnings because fair valueour estimates include a discount factor in valuingof future cash flows. Thereflows are manyreasonable, different assumptions and estimates underlying the determination of an impairment loss. Another estimate using different, but still reasonable, assumptionsregarding such cash flows could produce a significantly different result.materially affect our evaluations. Therefore, additional impairment losses could be recorded in the future.

Results of Operations

        The Company currently operates in one reportable segment for financial reporting purposes. As a result of the Company's DecemberThree Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001 acquisition of fertilizer brands and the May 2002 merger with Schultz Company (Schultz) the Company will expand its segment reporting. The Company is in the process of evaluating segment classifications. We plan to complete our integration of the fertilizer brands and Schultz, and our internal management reporting in time to report segment results in the third quarter of fiscal year 2002.

        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, customer returns and less 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 activevarious 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 inert ingredients, containerretailers maintaining lower inventory levels.

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        Net sales in the Lawn and packaging materialGarden 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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