**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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FORM 10-Q

**(MarkOne)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**For the quarterlyperiod ended September 30, 2004**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**For the transitionperiod from *               *to *               ***

**Commission FileNumber: 333-76055**

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**UNITEDINDUSTRIES CORPORATION**

(Exact name of registrant as specified in its charter)

| **Delaware**                                                                              | ** ** | **43-1025604**                             |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------|
| (State  or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
| **2150 Schuetz RoadSt. Louis, Missouri 63146**                                            |
| (Address of  principal executive office, including zip code)                              |
| **(314) 427-0780**                                                                   |
| (Registrant’s  telephone number, including area code)                                |

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. Yes x  No o

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the ExchangeAct). Yes o   No x

Asof November 15, 2004, the registrant had35,954,496 Class A voting and 35,954,496 Class B nonvoting shares ofcommon stock outstanding.

 

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**UNITED INDUSTRIES CORPORATIONQUARTERLY REPORT ON FORM 10-QFOR THE PERIOD ENDED SEPTEMBER 30, 2004TABLE OF CONTENTS**
|                                                                                                                                       | ** ** | **Page** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I.  FINANCIAL INFORMATION**                                                                                               |       | 4        |
| Item  1. Financial Statements (Unaudited)                                                                                             |       | 4        |
| Consolidated  Balance Sheets as of September 30, 2004 and 2003 and December 31,  2003                                       |       | 4        |
| Consolidated  Statements of Operations and Comprehensive Income for the Three and Nine  Months Ended September 30, 2004 and 2003 |       | 5        |
| Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2004  and 2003                                    |       | 6        |
| Notes  to Consolidated Financial Statements                                                                                           |       | 7        |
| Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations                                  |       | 34       |
| Item  3. Quantitative and Qualitative Disclosures About Market Risk                                                                   |       | 55       |
| Item  4. Controls and Procedures                                                                                                      |       | 57       |
| **PART II.  OTHER INFORMATION**                                                                                                  |       | 59       |
| Item 1.  Legal Proceedings                                                                                                            |       | 59       |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                                                  |       | 59       |
| Item 5.  Other Information                                                                                                            |       | 59       |
| Item 6.  Exhibits                                                                                                                     |       | 59       |
| SIGNATURES                                                                                                                            |       | 60       |
| EXHIBIT INDEX                                                                                                                         |       | 61       |

 

**TRADEMARKS**

Spectracide®, Spectracide Triazicide®,Spectracide Terminate®, Spectracide Pro®, Hot Shot®,Garden Safe®, SchultzTM, Rid-a-Bug®, Bag-a-Bug®,Real-Kill®, No-Pest®, Repel®, Vigoro®,Sta-Green®, Bandini®, Wilson®, So-Green®,Greenleaf®, Green Earth®, IB Nitrogen®,Nitroform®,Nutralene®, S.C.U. ®,Organiform® Marineland®, Perfecto®, InstantOcean®, Regent®, 8-in-1®, Nature’sMiracle®, Dingo®, Wild Harvest®, One Earth®,Lazy Pet® and JungleTalk® are our trademarks and tradenames. We also license certain Cutter® trademarks from Bayer A.G.,Peters® and Peters Professional® trademarks from TheScotts Company, CIL® trademarks from ICI Canada Inc., Plant-Prod®trademarks from Plant Products Co. Ltd. and Pickseed® trademarksfrom Pickseed Canada Inc. Other trademarks and trade names used in thisQuarterly Report are the property of their respective owners.

2

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**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

This Quarterly Reportcontains forward-looking statements. These statements are subject to a numberof risks and uncertainties, many of which are beyond our control. Allstatements other than statements of historical facts included in this QuarterlyReport, including statements regarding our strategy, future operations orfinancial position, estimated revenues, projected costs, projections, plans andobjectives of management, are forward-looking statements. As may be used inthis Quarterly Report, the words “will,” “should,” “believe,” “plan,” “may,” “strategies,”“goals,” “anticipate,” “indicate,” “intend,” “determine,” “estimate,” “expect,”“project” and similar expressions are intended to identify forward-lookingstatements, although not all forward-looking statements contain suchidentifying words. All forward-looking statements apply only as of the datethey are disclosed and are based on our expectations at that time. We do notundertake any obligation to update or revise publicly any forward-lookingstatements, whether as a result of new information, future events or otherwise.Although we believe that our plans, intentions and expectations reflected in orsuggested by any forward-looking statements we make in this Quarterly Reportare reasonable, we can give no assurance that such plans, intentions orexpectations will be achieved.

Ouractual results could differ significantly from the results discussed in anyforward-looking statements contained in this Quarterly Report. Factors thatcould cause or contribute to such differences include, without limitation, thefollowing:

·  general economic and business conditions;

·  the loss or bankruptcy of major customers,suppliers or parties with whom we have a strategic relationship;

·  the loss of a significant amount of productspurchased by major customers;

·  weather conditions, primarily during the peaklawn and garden season, and/or historicalseasonality and related fluctuations in our operating results and cash flows;

·  our ability to repay indebtedness, meetrequirements under our debt covenants or fulfill other obligations;

·  industry trends and competition, includingconsolidation trends in the retail industry;

·  our ability to manage rapid growth, theintegration of acquisitions and the diversification of our businesses;

·  our ability to achieve the benefits we expectfrom acquisitions, including our acquisitions of The Nu-Gro Corporation andUnited Pet Group, Inc.;

·  our ability to successfully implement orintegrate our information systems;

·  public perception regarding the safety of ourproducts, including the potential for environmental liabilities, productliability claims, litigation and other claims;

·  governmental regulations;

·  terrorist attacks or acts of war;

·  cost and availability of raw materials orproduct components;

·  changes in our business strategy ordevelopment plans;

·  uncertainty regarding product innovations andmarketing activities;

·  our ability to recruit and retain qualitypersonnel, including key executive officers and other members of seniormanagement;

·  availability, terms and deployment of capitalresources; and

·  the other risks described in our filings withthe SEC, including our Annual Report on Form 10-K.

3

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**PART I**.FINANCIAL INFORMATION

**ITEM 1.**   FINANCIAL STATEMENTS

**UNITED INDUSTRIESCORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Dollars in thousands, except share data)(Unaudited)**
| ** **                                                                                                                                                                                                                                                                                                         | ** ** | **September 30,** | ** ** | **December 31,**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                         | ** ** | **2004**               | ** ** | **2003**               | ** ** | **2003** | ** ** |
| ** **                                                                                                                                                                                                                                                                                                         | ** ** | ** **             | ** ** | **(As Restated)** | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                                                         |       |                   |       |                   |       |   |   |   |   |   |   |
| Current assets:                                                                                                                                                                                                                                                                                                    |       |                   |       |                   |       |   |   |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                                         |       | $                      | 8,290      |                   |       | $ | 44,122 |   |   |   | $ | 11,413 |   |   |
| Accounts  receivable, net of reserves of $6,699 and $3,926 at September 30, 2004  and 2003, respectively, and $2,753 at December 31, 2003                                                                                                                                                                |       | 107,493                |       |                   | 56,464     |   |   |   | 29,890 |   |   |
| Inventories                                                                                                                                                                                                                                                                                                        |       | 160,003                |       |                   | 67,570     |   |   |   | 96,795 |   |   |
| Prepaid expenses  and other current assets                                                                                                                                                                                                                                                                         |       | 19,885                 |       |                   | 10,058     |   |   |   | 15,141 |   |   |
| Total current  assets                                                                                                                                                                                                                                                                                              |       | 295,671                |       |                   | 178,214    |   |   |   | 153,239 |   |   |
| Property, plant  and equipment, net                                                                                                                                                                                                                                                                                |       | 99,365                 |       |                   | 34,360     |   |   |   | 37,153 |   |   |
| Deferred tax asset                                                                                                                                                                                                                                                                                                 |       | 78,495                 |       |                   | 86,266     |   |   |   | 186,562 |   |   |
| Goodwill                                                                                                                                                                                                                                                                                                           |       | 247,446                |       |                   | 6,176      |   |   |   | 6,221 |   |   |
| Intangible assets,  net                                                                                                                                                                                                                                                                                            |       | 310,898                |       |                   | 88,342     |   |   |   | 86,872 |   |   |
| Other assets, net                                                                                                                                                                                                                                                                                                  |       | 22,839                 |       |                   | 10,243     |   |   |   | 9,897 |   |   |
| Total assets                                                                                                                                                                                                                                                                                                       |       | $                      | 1,054,714  |                   |       | $ | 403,601 |   |   |   | $ | 479,944 |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY (DEFICIT)**                                                                                                                                                                                                                                                           |       |                   |       |                   |       |   |   |   |   |   |   |
| Current liabilities:                                                                                                                                                                                                                                                                                               |       |                   |       |                   |       |   |   |   |   |   |   |
| Current maturities  of long-term debt and capital lease obligations                                                                                                                                                                                                                                                |       | $                      | 6,678      |                   |       | $ | 1,341 |   |   |   | $ | 1,349 |   |   |
| Accounts payable                                                                                                                                                                                                                                                                                                   |       | 41,653                 |       |                   | 15,861     |   |   |   | 29,774 |   |   |
| Accrued expenses                                                                                                                                                                                                                                                                                                   |       | 67,195                 |       |                   | 59,454     |   |   |   | 39,574 |   |   |
| Total current  liabilities                                                                                                                                                                                                                                                                                         |       | 115,526                |       |                   | 76,656     |   |   |   | 70,697 |   |   |
| Long-term debt,  net of current maturities                                                                                                                                                                                                                                                                         |       | 862,445                |       |                   | 388,096    |   |   |   | 387,657 |   |   |
| Capital lease  obligations, net of current maturities                                                                                                                                                                                                                                                              |       | 3,222                  |       |                   | 3,333      |   |   |   | 3,191 |   |   |
| Other liabilities                                                                                                                                                                                                                                                                                                  |       | 5,290                  |       |                   | 3,199      |   |   |   | 3,256 |   |   |
| Total liabilities                                                                                                                                                                                                                                                                                                  |       | 986,483                |       |                   | 471,284    |   |   |   | 464,801 |   |   |
| Commitments and contingencies (see Notes 10 and 11)                                                                                                                                                                                                                                                                |       |                   |       |                   |       |   |   |   |   |   |   |
| Stockholders’ equity (deficit):                                                                                                                                                                                                                                                                               |       |                   |       |                   |       |   |   |   |   |   |   |
| Preferred stock  (no shares of $0.01 par value Class A issued and outstanding at  September 30, 2004, 40,000 authorized; 37,600 shares issued and  outstanding at September 30, 2003 and December 31, 2003, 40,000  authorized)                                                                |       | —                 |       |                   | —     |   |   |   | — |   |   |
| Common stock  (Class A and Class B shares authorized, issued and outstanding were  each 51.5 million, 39.0 million and 36.0 million, respectively, as of  September 30, 2004; 43.6 million, 33.2 million and 33.2 million,  respectively, as of September 30, 2003 and December 31, 2003) |       | 782                    |       |                   | 665        |   |   |   | 665 |   |   |
| Treasury stock  (3.1 million shares each of $0.01 par value Class A and Class B, at  cost at September 30, 2004; 9,569 shares of each, at cost at  September 30, 2003 and December 31, 2003)                                                                                              |       | (24,469                | )          |                   | (96        | ) |   |   | (96 | ) |   |
| Warrants and  options                                                                                                                                                                                                                                                                                              |       | 11,745                 |       |                   | 11,745     |   |   |   | 11,745 |   |   |
| Additional paid-in  capital                                                                                                                                                                                                                                                                                        |       | 241,034                |       |                   | 210,806    |   |   |   | 210,908 |   |   |
| Accumulated  deficit                                                                                                                                                                                                                                                                                               |       | (161,321               | )          |                   | (261,633   | ) |   |   | (179,738 | ) |   |
| Common stock  subscription receivable                                                                                                                                                                                                                                                                              |       | —                 |       |                   | (23,363    | ) |   |   | (22,534 | ) |   |
| Common stock  repurchase option                                                                                                                                                                                                                                                                                    |       | —                 |       |                   | (2,636     | ) |   |   | (2,636 | ) |   |
| Common stock held  in grantor trusts                                                                                                                                                                                                                                                                               |       | (3,326                 | )          |                   | (2,847     | ) |   |   | (2,847 | ) |   |
| Loans to executive  officer                                                                                                                                                                                                                                                                                        |       | (215                   | )          |                   | (324       | ) |   |   | (324 | ) |   |
| Accumulated other  comprehensive income                                                                                                                                                                                                                                                                            |       | 4,001                  |       |                   | —     |   |   |   | — |   |   |
| Total stockholders’  equity (deficit)                                                                                                                                                                                                                                                                         |       | 68,231                 |       |                   | (67,683    | ) |   |   | 15,143 |   |   |
| Total liabilities  and stockholders’ equity (deficit)                                                                                                                                                                                                                                                         |       | $                      | 1,054,714  |                   |       | $ | 403,601 |   |   |   | $ | 479,944 |   |   |

 

See accompanying notes to consolidated financial statements.

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**UNITED INDUSTRIESCORPORATION AND SUBISIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVEINCOME(Dollars in thousands)(Unaudited)**
| ** **                                                                                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2004**                                             | ** ** | **2003**                                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                        | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | **(As Restated)** | ** ** |
| **CONSOLIDATED STATEMENTS OF  OPERATIONS:**                                                       | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Net sales                                                                                         |       | $                                                    | 171,040    |                                                | $          | 104,019 |   | $ | 593,578 |   |   | $ | 488,834 | ** ** |   |
| Operating costs and  expenses:                                                                    |       |                                                 |       |                                                |       |   |   |   |   | ** ** |   |
| Cost of goods sold                                                                                |       | 123,511                                              |       | 64,750                                              |       | 392,776 |   |   | 297,302 | ** ** |   |
| Selling, general and administrative expenses                                                      |       | 48,387                                               |       | 32,195                                              |       | 138,152 |   |   | 111,499 | ** ** |   |
| Total operating costs and expenses                                                                |       | 171,898                                              |       | 96,945                                              |       | 530,928 |   |   | 408,801 | ** ** |   |
| Operating income (loss)                                                                           |       | (858                                                 | )          | 7,074                                               |       | 62,650 |   |   | 80,033 | ** ** |   |
| Interest expense                                                                                  |       | 12,799                                               |       | 9,173                                               |       | 34,328 |   |   | 29,147 | ** ** |   |
| Interest income                                                                                   |       | 16                                                   |       | 568                                                 |       | 388 |   |   | 1,522 | ** ** |   |
| Income (loss)  before income taxes                                                                |       | (13,641                                              | )          | (1,531                                              | )          | 28,710 |   |   | 52,408 | ** ** |   |
| Provision for  income taxes                                                                       |       | (5,184                                               | )          | (698                                                | )          | 7,447 |   |   | 20,827 | ** ** |   |
| Net income (loss)                                                                                 |       | (8,457                                               | )          | (833                                                | )          | 21,263 |   |   | 31,581 | ** ** |   |
| Preferred stock  dividends                                                                        |       | —                                               |       | 1,952                                               |       | 2,781 |   |   | 5,622 | ** ** |   |
| Net income (loss)  available to common stockholders                                               |       | $                                                    | (8,457     | )                                                   | $          | (2,785 | ) | $ | 18,482 |   |   | $ | 25,959 | ** ** |   |
| **CONSOLIDATED  STATEMENTS OF COMPREHENSIVE INCOME:**                                             |       |                                                 |       |                                                |       |   |   |   |   | ** ** |   |
| Net income (loss)                                                                                 |       | $                                                    | (8,457     | )                                                   | $          | (833 | ) | $ | 21,263 |   |   | $ | 31,581 | ** ** |   |
| Other comprehensive  income:                                                                      |       |                                                 |       |                                                |       |   |   |   |   | ** ** |   |
| Gain (loss) on derivative hedging instruments, net  of tax of $17, $2, $17 and $300, respectively |       | (29                                                  | )          | 3                                                   |       | (29 | ) |   | 489 | ** ** |   |
| Foreign currency translation gain (loss), net of tax  of $1,859, $0, $2,470 and $0, respectively  |       | 3,028                                                |       | —                                              |       | 4,030 |   |   | — | ** ** |   |
| Comprehensive income  (loss)                                                                      |       | $                                                    | (5,458     | )                                                   | $          | (830 | ) | $ | 25,264 |   |   | $ | 32,070 | ** ** |   |

 

See accompanying notes to consolidated financial statements.

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**UNITED INDUSTRIESCORPORATION AND SUBISIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Dollars in thousands)(Unaudited)**
| ** **                                                                        | ** ** | **Nine Months Ended September 30,**                                                                          | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **          2004          ** | ** ** | **          2003          ** | ** ** |
| ** **                                                                        | ** ** | ** **                                                                                                                       | ** ** | **(As Restated)** | ** ** |
| Cash flows from operating activities:                                             | ** ** |                                                                                                                             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net income                                                                        |       |                                                                                                                             | $          | 21,263 | ** ** |   |   | $ | 31,581 | ** ** |   |
| Adjustments to reconcile  net income to net cash flows from operating activities: |       |                                                                                                                             |       | ** ** |   |   |   | ** ** |   |
| Depreciation and  amortization                                                    |       |                                                                                                                             | 24,145     | ** ** |   |   | 12,135 | ** ** |   |
| Amortization and  write-off of deferred financing fees                            |       |                                                                                                                             | 4,168      | ** ** |   |   | 4,747 | ** ** |   |
| Deferred income  tax expense                                                      |       |                                                                                                                             | 7,448      | ** ** |   |   | 18,875 | ** ** |   |
| Gain on sale of  aircraft                                                         |       |                                                                                                                             | (1,497     | ) |   |   | — | ** ** |   |
| Stock-based  compensation for shares held in grantor trusts                       |       |                                                                                                                             | 479        | ** ** |   |   | — | ** ** |   |
| Changes in operating  assets and liabilities, net of effects from acquisitions:   |       |                                                                                                                             |       | ** ** |   |   |   | ** ** |   |
| Accounts receivable                                                               |       |                                                                                                                             | 18,569     | ** ** |   |   | (34,670 | ) |   |
| Inventories                                                                       |       |                                                                                                                             | 24,760     | ** ** |   |   | 18,271 |   |   |
| Prepaid expenses                                                                  |       |                                                                                                                             | 6,455      | ** ** |   |   | 1,280 |   |   |
| Other assets                                                                      |       |                                                                                                                             | (392       | ) |   |   | (1,622 | ) |   |
| Accounts payable                                                                  |       |                                                                                                                             | (41,825    | ) |   |   | (10,968 | ) |   |
| Accrued expenses                                                                  |       |                                                                                                                             | 21,687     | ** ** |   |   | 8,086 |   |   |
| Other operating  activities, net                                                  |       |                                                                                                                             | 1,169      | ** ** |   |   | (703 | ) |   |
| Net cash flows provided  by (used in) operating activities                        |       |                                                                                                                             | 86,429     | ** ** |   |   | 47,012 |   |   |
| Cash flows from investing activities:                                             |       |                                                                                                                             |       | ** ** |   |   |   |   |   |
| Purchases of  property, plant and equipment                                       |       |                                                                                                                             | (12,036    | ) |   |   | (6,724 | ) |   |
| Payment for  acquisition of the Nu-Gro Corporation                                |       |                                                                                                                             | (146,698   | ) |   |   | — |   |   |
| Payment for  acquisition of United Pet Group                                      |       |                                                                                                                             | (371,534   | ) |   |   | — |   |   |
| Proceeds from sale  of aircraft                                                   |       |                                                                                                                             | 2,787      | ** ** |   |   | — |   |   |
| Proceeds from sale  of WPC product lines                                          |       |                                                                                                                             | —     |   |   |   | 4,204 |   |   |
| Net cash flows used in  investing activities                                      |       |                                                                                                                             | (527,481   | ) |   |   | (2,520 | ) |   |
| Cash flows from financing activities:                                             |       |                                                                                                                             |       |   |   |   |   | ** ** |   |
| Proceeds from issuance of  senior subordinated notes                              |       |                                                                                                                             | —     |   |   |   | 86,275 |   |   |
| Proceeds from borrowings  on new senior credit facility                           |       |                                                                                                                             | 635,000    |   |   |   | — |   |   |
| Proceeds from issuance of  common stock                                           |       |                                                                                                                             | 70,000     |   |   |   | 84 |   |   |
| Payments received for  common stock subscription receivable                       |       |                                                                                                                             | —     |   |   |   | 2,863 |   |   |
| Payments received on  loans to executive officer                                  |       |                                                                                                                             | 109        |   |   |   | 80 |   |   |
| Payment for repurchase of  senior subordinated notes                              |       |                                                                                                                             | (3,100     | ) |   |   | — |   |   |
| Repayment of borrowings  on term debt                                             |       |                                                                                                                             | (181,827   | ) |   |   | (98,127 | ) |   |
| Payments for capital  lease obligations                                           |       |                                                                                                                             | (3,938     | ) |   |   | (445 | ) |   |
| Payments for debt  issuance costs                                                 |       |                                                                                                                             | (14,922    | ) |   |   | (2,924 | ) |   |
| Payments for repurchase  of preferred stock and accrued dividends                 |       |                                                                                                                             | (57,557    | ) |   |   | — |   |   |
| Payment for Bayer  transactions for treasury stock                                |       |                                                                                                                             | (1,500     | ) |   |   | — |   |   |
| Change in book cash  overdraft                                                    |       |                                                                                                                             | —     |   |   |   | 1,506 |   |   |
| Net cash flows provided  by (used in) financing activities                        |       |                                                                                                                             | 442,265    |   |   |   | (10,688 | ) |   |
| Effect of exchange  rates on cash and cash equivalents                            |       |                                                                                                                             | (4,336     | ) |   |   | — |   |   |
| Net increase  (decrease) in cash and cash equivalents                             |       |                                                                                                                             | (3,123     | ) |   |   | 33,804 |   |   |
| Cash and cash  equivalents, beginning of period                                   |       |                                                                                                                             | 11,413     |   |   |   | 10,318 |   |   |
| Cash and cash  equivalents, end of period                                         |       |                                                                                                                             | $          | 8,290 |   |   |   | $ | 44,122 |   |   |
| Noncash financing  activities:                                                    |       |                                                                                                                             | ** ** | ** ** |   |   |   |   |   |
| Debt assumed in Nu-Gro  acquisition                                               |       |                                                                                                                             | $          | 26,654 | ** ** |   |   | $ | — |   |   |
| Bayer transactions for  treasury stock (see Note 12)                              |       |                                                                                                                             | $          | 22,873 | ** ** |   |   | $ | — |   |   |
| Execution of capital  lease for aircraft                                          |       |                                                                                                                             | $          | 3,525 | ** ** |   |   | $ | — |   |   |
| Preferred stock dividends  accrued                                                |       |                                                                                                                             | $          | 2,781 | ** ** |   |   | $ | 5,622 |   |   |
| Retirement of preferred stock                                                     |       |                                                                                                                             | $          | 37,665 | ** ** |   |   | $ | — |   |   |

 

See accompanying notes to consolidated financial statements.

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**UNITED INDUSTRIES CORPORATION AND SUBISIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except where indicated)(Unaudited)**

**Note 1—Description of Business and Basis ofPresentation**

Under its three operating divisions, which own and license awide variety of brand names, United Industries Corporation (the Company)manufactures and markets broad product lines in the lawn and garden, household and the pet suppliesindustries. Its largest operating division, Spectrum Brands, iscomprised of a number of leading lawn and garden care and household products, includingdry, granular lawn fertilizers, lawn fertilizer combination and lawn controlproducts, herbicides, water-soluble and controlled-release garden and indoorplant foods, plant care products, potting soils and other growing mediaproducts, grass seed and indoor and outdoorinsecticide and insect repellent products.Spectrum Brands represents the Company’s largest business segment, referred toas U.S. Home & Garden, and its brands include, among others,Spectracide®, Garden Safe® and Real-Kill® inthe controls category, Sta-Green®, Vigoro®, SchultzTM andBandini® in the lawn and garden,fertilizer and growing media categories, and Hot Shot®,Cutter® and Repel® in the household category.

The Company’s Canadianoperating division, The Nu-Gro Company(Nu-Gro), manufactures and markets a number of lawn and garden and household products similar to theU.S. Home & Garden products, which are sold primarily throughoutCanada, and a variety of controlled-release nitrogen products and fertilizertechnology, which are sold primarily throughout the United States, with somesales in Canada and other countries. Nu-Gro represents the Company’s smallestbusiness segment, referred to as Canada, and its brands include, among others,Wilson®, So-Green®, Greenleaf® and Green Earth®in the lawn and garden categories, and IB Nitrogen®, Nitroform®,Nutralene®, S.C.U. ® and Organiform® inthe fertilizer technology category.

The products of theCompany’s U.S. Home & Garden and Canada segments are targeted towardconsumers who want products and packaging that are comparable or superior to,and sold at lower prices than, premium-priced brands, while its opening pricepoint brands are designed for cost-conscious consumers who want qualityproducts. The home and garden products of both segments are marketed to mass merchandisers,home improvement centers, hardware, grocery and drug chains, nurseries andgarden centers.

The Company’s pet suppliesoperating division, United Pet Group, Inc.(UPG), manufactures and markets a diverse portfolio of branded pet supplies. UPGrepresents the Company’s second largest business segment, referred to as Pet,and its brands include, among others, Marineland®, Perfecto®,Instant Ocean® and Regent® in the aquatics category and 8-in-1®,Nature’s Miracle®, Dingo®, Lazy Pet®, WildHarvest® and One Earth® in the specialty pet category. UPG’sproducts are sold primarily in the United States through mass merchandisers,large chain pet retailers, smaller independent pet retailers, national andregional grocery chains and consumer catalogs and websites.

As described in moredetail in Note 14, the basis of the Company’s segmentation has been modifiedsince June 30, 2004 to accommodate the acquisitions of Nu-Gro and UPG (seeNote 2).

The accompanyingconsolidated financial statements include the accounts and balances of theCompany and its wholly-owned subsidiaries. All material intercompanytransactions have been eliminated in consolidation. The accompanyingconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial information and the rules and regulations of the Securities andExchange Commission. Accordingly, certain information and footnote disclosurestypically included in the Company’s Annual Report on Form 10-K havebeen 

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condensedor omitted for this report. As such, this report should be read in conjunctionwith the consolidated financial statements and accompanying notes in theCompany’s Annual Report on Form 10-K for the year ended December 31,2003. Certain amounts in the 2003 consolidated financial statements includedherein have been reclassified to conform to the 2004 presentation.

The accompanyingconsolidated financial statements are unaudited. In the opinion of management,such financial statements include all adjustments, which consist of only normalrecurring adjustments, necessary for a fair presentation of the results for theperiods presented. Interim results are not necessarily indicative of resultsfor a full year. The preparation of financial statements in conformity withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from suchestimates and assumptions.

**Note 2—Acquisitions**

***United Pet Group, Inc.***

On July 30, 2004, theCompany and a wholly-owned subsidiary completed a merger of the subsidiary withand into UPG, a privately owned manufacturer and marketer of branded pet supplies. As a resultof the merger, UPG and its subsidiaries became wholly-owned subsidiaries of theCompany. The total purchase price included cash consideration of $371.5million, including transaction costs of $5.0 million and the assumption of $113.3million of outstanding debt and equity obligations, which were immediatelyrepaid by the Company at closing. The transaction has been accounted for as anacquisition using the purchase method of accounting. Accordingly, the resultsof operations of UPG have been included in the Company’s results of operationsfrom July 30, 2004, the date of acquisition. The Company financed thetransaction with proceeds generated from amending and increasing its creditagreement by $250.0 million, including the addition of a $75.0 million secondlien term loan (see Note 9), with $70.0 million of proceeds from the issuanceof 5.8 million shares each of the Company’s Class A voting and Class Bnonvoting common stock to affiliates of Thomas H. Lee Partners, the Company’slargest shareholder, Banc of America Securities LLC and certain UPG sellingshareholders (see Note 12) and the remainder from cash balances. Theacquisition was executed in an attempt to further diversify the Company’sproduct offerings, mitigate the effects of seasonality trends, decreasedependence on certain of its largest customers and expand the opportunity forfuture growth.

The purchase price waspreliminarily allocated to assets acquired and liabilities assumed based onestimated fair values. The Company preliminarily allocated $172.5 million ofthe purchase price to intangible assets and $174.5 million to goodwill forconsideration paid in excess of the fair value of net assets acquired, which isnot deductible for tax purposes. The acquired intangible assets consistprimarily of trade names, which are currently being amortized using thestraight-line method over periods ranging from fifteen to forty years, and tocustomer relationships, which are currently being amortized using thestraight-line method over periods ranging from five to ten years and otherintangible assets, primarily patents, which are currently being amortized usingthe straight-line method over periods ranging from ten to fifteen years. Amortization expense for the two-month period endedSeptember 30, 2004 was $1.6 million. In addition, the Companyincreased the value of inventory acquired from UPG by $6.0 million to reflectestimated fair value on the date of acquisition, which is currently beingrecorded as cost of goods sold commensurate with related subsequent salesactivity during 2004. For the two months ended September 30, 2004,amortization expense of $4.0 million was recorded in cost of goods sold forthis write-up of inventory to estimated fair value. The Company also increasedthe value of property, plant and equipment acquired from UPG by $2.0 million toreflect estimated fair value on the date of acquisition, which is currentlybeing depreciated using the straight-line method over varying periods, theaverage of which is approximately 10 years.

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The purchase priceallocation is based on preliminary information, which is subject to adjustmentupon obtaining the final report of the valuation of assets acquired andliabilities assumed by an independent third-party valuation firm. The Companyis currently in the process of obtaining such report and expects the finalpurchase price allocation to be completed during the fourth quarter of 2004. Thefinal purchase price allocation may differ significantly from the preliminaryallocation provided herein and may change as theresult of contingent payments based on the performance of aparticular product line through December 31, 2005.

Thefollowing table summarizes the preliminary purchase price calculation and thepreliminary estimated fair values of assets acquired and liabilities assumed asof July 30, 2004, the date of acquisition:
| ** **                     | ** ** | **July 30, 2004** | ** ** |
|--------------------------------|------------|-----------------------------|------------|
| Purchase price:                |       |                        |       |   |   |
| Cash and liabilities assumed   |       |                        | $          | 366,500 |   |   |
| Transaction costs              |       |                        | 5,034      |   |   |
| Total purchase price           |       |                        | $          | 371,534 |   |   |
| Allocation of  purchase price: |       |                        |       |   |   |
| Assets:                        |       |                        |       |   |   |
| Accounts receivable            |       |                        | $          | 27,615 |   |   |
| Inventories                    |       |                        | 46,901     |   |   |
| Other current assets           |       |                        | 9,789      |   |   |
| Property, plant and equipment  |       |                        | 24,902     |   |   |
| Goodwill                       |       |                        | 174,529    |   |   |
| Trade names                    |       |                        | 97,237     |   |   |
| Customer relationships         |       |                        | 47,500     |   |   |
| Patents                        |       |                        | 27,800     |   |   |
| Other assets                   |       |                        | 3,659      |   |   |
| Liabilities:                   |       |                        |       |   |   |
| Accounts payable               |       |                        | (11,637    | ) |   |
| Accrued expenses               |       |                        | (19,101    | ) |   |
| Deferred income taxes          |       |                        | (57,660    | ) |   |
| Total purchase  price          |       |                        | $          | 371,534 |   |   |

 

***The Nu-GroCorporation***

On April 30, 2004,the Company completed the acquisition of all of the outstanding common sharesof Nu-Gro, a lawn and garden products company then incorporated under the lawsof Ontario, Canada. As a result of the acquisition, Nu-Gro and its subsidiariesbecame wholly-owned subsidiaries of the Company. The total purchase price includedcash consideration of $146.7 million, including $5.3 million of relatedacquisition costs and theassumption of $26.7 million of outstanding debt, which was immediately repaidby the Company at closing. The transaction was financed with proceeds from theCompany’s New Senior Credit Facility (see Note 9). The acquisition was executedin an attempt to expand the Company’s reach throughout North America, broadenits product offerings and customer base, vertically integrate certain of itsoperations, including gaining access to advanced fertilizer technologies, andto achieve economies of scale and synergistic efficiencies.

The transaction wasaccounted for using the purchase method of accounting and, accordingly, theresults of operations have been included in the consolidated financialstatements from April 30, 2004, the date of acquisition. The purchaseprice was preliminarily allocatedto assets acquired and liabilities assumed based on estimated fair values. TheCompany allocated $51.1 million of the purchase price to intangible and otherassets and $46.7 million to goodwill for consideration paid in excess of thefair value of net assets acquired, based on valuations obtained from anindependent third-party appraisal firm, which 

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is notdeductible for tax purposes. The acquired intangible assets consist primarilyof trade names, which are currently being amortized using the straight-linemethod over periods ranging from fifteen to forty years, and to customerrelationships, which are currently being amortized using the straight-linemethod over periods ranging from five to ten years. In addition, the Companyincreased the value of inventory acquired from Nu-Gro by $5.2 million toreflect estimated fair value on the date of acquisition, which was fully amortizedin cost of goods sold commensurate with related subsequent sales activityduring the second quarter of 2004.

Thepurchase price allocation is based on preliminary information, which is subjectto adjustment upon obtaining the final report of the valuation of assetsacquired and liabilities assumed by an independent third-party valuation firm.The Company is currently in the process of obtaining such report and expectsthe final purchase price allocation to be completed during the fourth quarterof 2004. The final purchase price allocation may differ significantly from thepreliminary allocation provided herein.

Thefollowing table summarizes the preliminarypurchase price calculation and the preliminary estimated fair valuesof assets acquired and liabilities assumed as of April 30, 2004, the dateof acquisition:
| ** **                                                      | ** ** | **April 30, 2004** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------|------------|
| Purchase price:                                                 |       |                         |       |   |   |
| Cash and liabilities assumed                                    |       |                         | $          | 141,402 |   |   |
| Transaction costs                                               |       |                         | 5,296      |   |   |
| Total purchase price                                            |       |                         | $          | 146,698 |   |   |
| Allocation of  purchase price:                                  |       |                         |       |   |   |
| Assets:                                                         |       |                         |       |   |   |
| Accounts receivable                                             |       |                         | $          | 53,617 |   |   |
| Inventories                                                     |       |                         | 40,937     |   |   |
| Other current assets                                            |       |                         | 1,377      |   |   |
| Property, plant and equipment                                   |       |                         | 31,676     |   |   |
| Goodwill                                                        |       |                         | 46,660     |   |   |
| Trade names                                                     |       |                         | 28,900     |   |   |
| Customer relationships                                          |       |                         | 19,600     |   |   |
| Other assets                                                    |       |                         | 2,639      |   |   |
| Liabilities:                                                    |       |                         |       |   |   |
| Accounts payable and accrued expenses                           |       |                         | (31,714    | ) |   |
| Short-term borrowings and current maturities of  long-term debt |       |                         | (20,951    | ) |   |
| Long-term debt, net of current maturities                       |       |                         | (5,703     | ) |   |
| Deferred income taxes                                           |       |                         | (20,340    | ) |   |
| Total purchase price                                            |       |                         | $          | 146,698 |   |   |

 

With the acquisitions ofNu-Gro and UPG, the Company has become subject to foreign currency translationgains and losses, as UPG purchases certain inventory components using the Euroand the Canadian dollar is the functional currency of Nu-Gro’s Canadiansubsidiaries. For translation of the Canadian subsidiaries’ financialstatements, assets and liabilities are translated at the period-end exchangerate, while statement of operations accounts are translated at average exchangerates monthly. The resulting translation adjustments are recorded inaccumulated other comprehensive income, a component of stockholders’ equity.Transaction gains or losses on intercompany balances with Nu-Gro that aredesignated as foreign currency transactions are recorded monthly in selling,general and administrative expenses in the consolidated statement ofoperations. Foreign currency transactions are recorded at the prevailingexchange rate on the transaction date.

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***ProForma Results of Operations***

Thefollowing table presents the Company’s unaudited consolidated results ofoperations on a pro forma basis, as if the Nu-Gro and UPG acquisitions hadoccurred on January 1, 2004 and 2003, as applicable:
| ** **        | ** ** | **Three Months Ended September 30, **                                                                   | ** ** | **Nine Months Ended September 30,**                                                                          | ** ** |
|-------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **        | ** ** | **          2004          ** | ** ** | **          2003          ** | ** ** | **          2004          ** | ** ** | **          2003          ** | ** ** |
| Net sales         |       |                                                                                                                             | $          | 191,171                                                                                                                          |       |   |   | $ | 194,617 |   |   |   | $ | 803,140 |   |   |   | $ | 799,541 |   |   |
| Net income (loss) |       |                                                                                                                             | (3,056     | )                                                                                                                                |       |   | 1,166 |   |   |   | 45,430 |   |   |   | 43,312 |   |   |

 

The unaudited pro formaconsolidated financial information presented herein is not necessarilyindicative of the consolidated results of operations or financial position thatwould have resulted had the acquisitions been completed at the beginning of oras of the periods presented, nor is it indicative of the results of operationsin future periods or the future financial position of the combined companies.

**Note 3—Stock-BasedCompensation**

The Company accounts for stock options issued toemployees in accordance with Accounting Principles Board (APB) Opinion No. 25,“Accounting for Stock Issued to Employees” and applies the disclosureprovisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accountingfor Stock-Based Compensation,” and SFAS No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure, an amendment of FASBStatement No. 123.” Under APB No. 25 and related interpretations,compensation expense is recognized using the intrinsic value method for thedifference between the exercise price of the options and the estimated fairvalue of the Company’s common stock on the date of grant.

SFAS No. 123 requirespro forma disclosure of the impact on earnings as if the Company determinedstock-based compensation expense using the fair value method. The followingtable presents net income, as reported, stock-based compensation expense thatwould have been recorded using the fair value method and pro forma net incomethat would have been reported had the fair value method been applied:
| ** **                                                                | ** ** | **Three Months Ended September 30,**                                                                                     | ** ** | **Nine Months Ended September 30,**                                                                                      | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **           2004           ** | ** ** | **           2003           ** | ** ** | **           2004           ** | ** ** | **           2003           ** | ** ** |
| ** **                                                                | ** ** | ** **                                                                                                                                   | ** ** | ** **                                                                                                                                   | ** ** | ** ** | ** ** | **(As Restated)** | ** ** |
| Net income (loss), as reported                                       |       |                                                                                                                                         | $          | (8,457                                                                                                                                       | )          |   |   | $ | (833 | ) |   |   | $ | 21,263 |   |   |   | $ | 31,581 |   |   |
| Stock-based  compensation expense using the fair value method, net of tax |       |                                                                                                                                         | 351        |                                                                                                                                         |       |   | 368 |   |   |   | 818 |   |   |   | 1,088 |   |   |
| Pro forma net income  (loss)                                              |       |                                                                                                                                         | $          | (8,808                                                                                                                                       | )          |   |   | $ | (1,201 | ) |   |   | $ | 20,445 |   |   |   | $ | 30,493 |   |   |

 

**Note 4—Inventories**

Inventoriesconsist of the following:
| ** **                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2004**               | ** ** | **2003**              | ** ** | **2003** | ** ** |
| Raw materials, components  and packaging          |       | $                      | 64,032     |                  | $          | 24,607 |   |   | $ | 34,619 |   |   |
| Finished goods                                    |       | 104,816                |       | 48,883                |       |   | 67,794 |   |   |
| Allowance for  obsolete and slow-moving inventory |       | (8,845                 | )          | (5,920                | )          |   | (5,618 | ) |   |
| Total inventories                                 |       | $                      | 160,003    |                  | $          | 67,570 |   |   | $ | 96,795 |   |   |

 

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**Note 5—Property,Plant and Equipment**

Property,plant and equipment consist of the following:
| ** **                                            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|------------------|------------|
| ** **                                            | ** ** | **2004**               | ** ** | **2003**         | ** ** | **2003** | ** ** |
| Machinery and equipment                               |       | $                      | 67,378     |             | $          | 35,613 |   |   | $ | 39,024 |   |   |
| Office furniture,  equipment and capitalized software |       | 36,209                 |       | 28,622           |       |   | 30,183 |   |   |
| Transportation  equipment                             |       | 4,399                  |       | 6,435            |       |   | 6,418 |   |   |
| Leasehold  improvements                               |       | 6,016                  |       | 3,163            |       |   | 3,157 |   |   |
| Land and  buildings                                   |       | 26,129                 |       | 114              |       |   | 114 |   |   |
|                                                  |       | 140,131                |       | 73,947           |       |   | 78,896 |   |   |
| Accumulated  depreciation and amortization            |       | (40,766                | )          | (39,587          | )          |   | (41,743 | ) |   |
| Total property,  plant and equipment                  |       | $                      | 99,365     |             | $          | 34,360 |   |   | $ | 37,153 |   |   |

 

For the three months endedSeptember 30, 2004 and 2003, depreciation and amortization expense was$4.3 million and $1.8 million, respectively. For the nine months ended September 30,2004 and 2003, depreciation and amortization expense was $10.4 million and $5.2million, respectively.

***Aircraft Replacement***

In February 2004, theCompany executed a capital lease agreement for the use of an aircraft for $3.5million. In April 2004, the Company closed an agreement that was executedin March 2004 to sell the aircraft it replaced in February 2004. Thecarrying value of the aircraft sold was $1.2 million and proceeds from the salewere $2.8 million. Accordingly, after related expenses of $0.1 million, theCompany recorded a $1.5 million gain on sale, which is included in selling,general and administrative expenses in the accompanying consolidated statementof operations for the nine months ended September 30, 2004. As of September 30,2004 and 2003 and December 31, 2003, the cost of the aircraft held undercapital lease, including taxes and closing costs, was $3.8 million, $5.3 millionand $5.3 million, respectively, and related accumulated amortization was$0.2 million, $3.8 million and $4.4 million, respectively (seeNote 10).

**Note 6—Goodwilland Intangible Assets**

Intangibleassets consist of the following:
|                    | ** ** | ** **        | ** ** | **September 30, 2004** | ** ** | **September 30, 2003** | ** ** | **December 31, 2003** | ** ** |                     |
|--------------------|------------|-------------------|------------|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|--------------------------|
| ** **         | ** ** | **Amortization**  | ** ** | **Gross**                        | ** ** | ** **                       | ** ** | **Net**                         | ** ** | **Gross**                | ** ** | ** ** | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |   |
| ** **         | ** ** | **Period**        | ** ** | **Carrying**                     | ** ** | **Accumulated**                  | ** ** | **Carrying**                    | ** ** | ** Carrying ** | ** ** | **Accumulated** | ** ** | ** Carrying ** | ** ** | ** Carrying ** | ** ** | **Accumulated** | ** ** | ** Carrying ** | ** ** |   |
| ** **         | ** ** | **in Years** | ** ** | **Value**                        | ** ** | **Amortization**                 | ** ** | **Value**                       | ** ** | **Value**                | ** ** | **Amortization** | ** ** | **Value** | ** ** | **Value** | ** ** | **Amortization** | ** ** | **Value** | ** ** |   |
| ** **         | ** ** | ** **        | ** ** | **(As Restated)**           | ** ** |                             |
| Intangible assets: |       |              |       |                             |       |                             |       |                            |       |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                    |            |                   |            |                                  |            |                                  |            |                                 |            |                          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Trade names                                |   | 5-40           |   | $       | 193,234 |   |    | $      | (7,547  | )       |    | $      | 185,687 |   |   | $      | 61,548 |   |   |   | $      | (2,558  | )      |   |   | $      | 58,990 |   |   |   | $      | 61,548 |   |   |   | $      | (2,958  | )      |   |   | $ | 58,590 |   |   |
|--------------------------------------------|--------|----------------|--------|---------|---------|--------|---------|--------|---------|---------|---------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|---|--------|--------|--------|
| Customer relationships                     |   | 5-10           |   | 104,156 |    |   | (16,792 | )      |    | 87,364  |    |   | 31,196  |   |   |   | (6,927 | )      |   |   | 24,269 |    |   |   | 31,196 |   |   |   | (8,566 | )      |   |   | 22,630 |   |   |
| Patents                                    |   | 10-20          |   | 27,800  |    |   | (232    | )      |    | 27,568  |    |   | —  |   |   |   | — |   |   |   | — |    |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Supply   agreements                        |   | 3-10           |   | 8,601   |    |   | (1,065  | )      |    | 7,536   |    |   | 5,694   |   |   |   | (1,043 | )      |   |   | 4,651  |    |   |   | 5,694  |   |   |   | (380   | )      |   |   | 5,314  |   |   |
| Other intangible  assets                   |   | 6 mos - 25 yrs |   | 3,657   |    |   | (914    | )      |    | 2,743   |    |   | 604     |   |   |   | (172   | )      |   |   | 432    |    |   |   | 604    |   |   |   | (266   | )      |   |   | 338    |   |   |
| Total intangible assets, net               |   |           |   | $       | 337,448 |   |    | $      | (26,550 | )       |    | $      | 310,898 |   |   | $      | 99,042 |   |   |   | $      | (10,700 | )      |   |   | $      | 88,342 |   |   |   | $      | 99,042 |   |   |   | $      | (12,170 | )      |   |   | $ | 86,872 |   |   |
| Goodwill                                   |   |           |   |    |    |   |    |   |    | 247,446 |    |   |    |   |   |   |   |   |   |   | 6,176  |    |   |   |   |   |   |   |   |   |   |   | 6,221  |   |   |
| Total goodwill and intangible assets,  net |   |           |   |    |    |   |    |   |    | $       | 558,344 |   |    |   |   |   |   |   |   |   |   | $       | 94,518 |   |   |   |   |   |   |   |   |   |   |   | $      | 93,093 |    |   |

 

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Intangible assets includetrade names, customer relationships, supply agreements and other intangibleassets, which are valued upon acquisition through independent third-partyappraisals, where material, or using other valuation methods. Intangible assetsare amortized using the straight-line method over periods ranging from five toforty years, or three to ten years inthe case of the supply agreements, theperiod in which their economic benefits are expected to be utilized.

Amounts recorded forgoodwill in connection with the UPG acquisition totaled $174.5 million at July 30,2004 and was allocated based on preliminary information, which is subject toadjustment upon obtaining the final report of an independent third-party valuationfirm. Amounts recorded for goodwill in connection with the Nu-Gro acquisitiontotaled $46.7 million at April 30, 2004. See Note 14 for informationregarding goodwill reported by operating segment.

***Restatement***

The Company had initiallyreflected the guidance outlined in EITF 02-17, “Recognition of CustomerRelationship Intangible Assets Acquired in a Business Combination” as of thedate it finalized the allocation of the purchase price of Schultz Company, inthe first quarter of 2003, and began amortizing the customer relationshipintangible asset over its remaining useful life. In March 2004, theCompany determined that the effect of the application of EITF 02-17should have been applied from the date of acquisition and, as such should haveresulted in a $2.4 million noncash charge for the additional amortizationrelated to the final valuation of the $24.6 million customer relationshipintangible asset. Accordingly, in the fourth quarter of 2003, the Companyrestated the March 31, 2003 quarterly financial information to include thenoncash adjustment, which increased first quarter 2003 selling, general andadministrative expenses by $2.4 million and decreased income before income taxexpense and net income by $2.4 million, as the intangible assets are notdeductible for tax purposes. Operating income and net income as originally reported for the threemonths ended March 31, 2003 of $31,058 and $13,453, respectively, werehigher than the respective restated first quarter amounts of $28,658 and$11,053 due to the additional amortization expense described above. Inaddition, operating income and net income as originally reported for the ninemonths ended September 30, 2003 of $82,433 and $33,981, respectively, werehigher than the respective restated amounts of $80,033 and $31,581 due to theadditional amortization expense described above.

***Customer Agreement***

On February 12, 2004,the Company and its largest customer executed a licensing, manufacturing andsupply agreement (the Agreement). Under the Agreement, the Company will licensecertain of its trademarks and be the exclusive manufacturer and supplier forcertain products branded with such trademarks from January 1, 2004, theeffective date of the Agreement, through December 31, 2008 or such laterdate as is specified in the Agreement. Provided the customer achieves certainrequired minimum purchase volumes and other conditions during such period, andthe manufacturing and supply portion of the Agreement is extended for anadditional three-year period as specified in the Agreement, the Company willassign the trademarks to the customer not earlier than May 1, 2009, butotherwise within thirty days after the date upon which such required minimumpurchase volumes are achieved. The carrying value of such trademarks as of February 12,2004 was approximately $16.0 million. If the customer fails to achieve therequired minimum purchase volumes or meet other certain conditions, assignmentmay occur at a later date, if certain conditions are met. In addition, as a resultof executing the Agreement, the Company has modified the trademarks’ initialamortization period of forty years and will record amortization in a mannerconsistent with projected sales activity over five years, because the Companybelieves the customer will achieve all required conditions by May 2009. For the three and nine months ended September 30, 2004, amortization expense was $0.4million and $2.4 million, respectively. The modification ofthe amortization period will result in additional annual amortization expenseof approximately $2.7 million in the year ending December 31, 2004.

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***AmortizationExpense***

Forthe three months ended September 30, 2004 and 2003, aggregate amortizationexpense related to intangible assets was $4.9 million and $2.0 million,respectively. For the nine months ended September 30, 2004 and 2003,aggregate amortization expense related to intangible assets was$14.4 million and $4.5 million, respectively. The following tablepresents estimated amortization expense for intangible assets during each ofthe next five years:
| **Year**          | ** ** | ** ** | ** ** | **Amount** | ** ** |
|-------------------|------------|------------|------------|------------|------------|
| Remainder of 2004 |       | $          | 6,633      |       |
| 2005              |       | 25,366     |       |
| 2006              |       | 25,269     |       |
| 2007              |       | 21,089     |       |
| 2008              |       | 18,284     |       |
|                   |            |            |            |            |            |  |

 

**Note 7—Other Assets**

Otherassets consist of the following:
| ** **                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2004**               | ** ** | **2003**              | ** ** | **2003** | ** ** |
| Deferred financing fees      |       | $                      | 26,973     |                  | $          | 23,394 |   |   | $ | 23,841 |   |   |
| Accumulated  amortization    |       | (7,201                 | )          | (14,146               | )          |   | (14,948 | ) |   |
| Deferred financing fees, net |       | 19,772                 |       | 9,248                 |       |   | 8,893 |   |   |
| Other                        |       | 3,067                  |       | 995                   |       |   | 1,004 |   |   |
| Total other assets, net      |       | $                      | 22,839     |                  | $          | 10,243 |   |   | $ | 9,897 |   |   |

 

As described in Note 9,during the nine months ended September 30, 2004, the Company recordeddeferred financing fees of $10.0 million in connection with the execution ofits New Senior Credit Facility on April 30, 2004 and wrote-off $1.7million of deferred financing fees in connection with the repayment ofobligations under its Prior Senior Credit Facility. Furthermore, the Companyrecorded deferred financing fees of $5.0 million in connection with theamendment of its New Senior Credit Facility on July 30, 2004. These deferred financing fees are being amortizedover the term of the New Senior Credit Facility.

**Note 8—AccruedExpenses**

Accruedexpenses consist of the following:
| ** **                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2004**               | ** ** | **2003**              | ** ** | **2003** | ** ** |
| Advertising and promotion               |       | $                      | 22,166     |                  | $          | 21,862 |   |   | $ | 9,605 |   |   |
| Interest                                |       | 4,665                  |       | 12,404                |       |   | 6,219 |   |   |
| Preferred stock  dividends              |       | —                 |       | 15,082                |       |   | 17,111 |   |   |
| Compensation and  related benefits      |       | 10,363                 |       | 3,997                 |       |   | 4,103 |   |   |
| Commissions                             |       | 1,144                  |       | 505                   |       |   | 459 |   |   |
| Workers’  compensation             |       | 2,109                  |       | 127                   |       |   | 179 |   |   |
| Income taxes  payable                   |       | 3,660                  |       | 840                   |       |   | — |   |   |
| Severance costs                         |       | 123                    |       | 258                   |       |   | 201 |   |   |
| Freight                                 |       | 2,973                  |       | 1,082                 |       |   | 1,152 |   |   |
| Acquisition costs                       |       | 7,229                  |       | —                |       |   | — |   |   |
| Payment received under Supply Agreement |       | 5,301                  |       | —                |       |   | — |   |   |
| Other                                   |       | 7,460                  |       | 3,297                 |       |   | 545 |   |   |
| Total accrued  expenses                 |       | $                      | 67,193     |                  | $          | 59,454 |   |   | $ | 39,574 |   |   |

 

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As of September 30,2004, the Company had a bank overdraft balance of $4.9 million, representingchecks written by and drawn against the Company’s bank balances but notreported by its lenders as borrowings against the revolving credit facility. Suchbalances have been reclassified to accounts payable.

**Note 9—Long-TermDebt**

Long-termdebt, excluding capital lease obligations, consists of the following:
| ** **                                                                                                                                       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                       | ** ** | **2004**               | ** ** | **2003**              | ** ** | **2003** | ** ** |
| New Senior Credit  Facility:                                                                                                                     | ** ** | ** **             | ** ** | ** **            | ** ** |   | ** ** | ** ** |   |
| Term Loan                                                                                                                                        |       | $                      | 507,890    |                  | $          | — |   |   | $ | — | ** ** |   |
| Canadian Loan                                                                                                                                    |       | 53,259                 |       | —                |       |   | — | ** ** |   |
| Revolving Credit Facility                                                                                                                        |       | —                 |       | —                |       |   | — | ** ** |   |
| Second Lien Term Loan                                                                                                                            |       | 74,812                 |       |                  |       |   |   | ** ** |   |
| Prior Senior Credit  Facility:                                                                                                                   | ** ** | ** **             | ** ** | ** **            | ** ** |   | ** ** | ** ** |   |
| Term Loan B                                                                                                                                      |       | —                 |       | 152,767               |       |   | 152,368 | ** ** |   |
| Revolving Credit Facility                                                                                                                        |       | —                 |       | —                |       |   | — | ** ** |   |
| Senior Subordinated  Notes:                                                                                                                      |       |                   |       |                  |       |   |   | ** ** |   |
| 97¤8% Series B Senior Subordinated Notes                                                                                                    |       | —                 |       | 3,100                 |       |   | 3,100 | ** ** |   |
| 97¤8% Series D Senior Subordinated Notes,  including unamortized premium of $1.0 million, $1.1 million and $1.1  million, respectively |       | 232,861                |       | 233,025               |       |   | 232,985 | ** ** |   |
| Total long-term debt                                                                                                                             |       | 868,822                |       | 388,892               |       |   | 388,453 | ** ** |   |
| Less current maturities                                                                                                                          |       | (6,377                 | )          | (796                  | )          |   | (796 | ) |   |
| Total long-term  debt, net of current maturities                                                                                                 |       | $                      | 862,445    |                  | $          | 388,096 |   |   | $ | 387,657 | ** ** |   |

 

***Senior Credit Facility in Effect Prior to April 30,2004***

The senior credit facility, as amended as of March 14,2003, in effect prior to April 30, 2004 (the Prior Senior CreditFacility), with Bank of America, N.A., Morgan Stanley Senior Funding, Inc.and Canadian Imperial Bank of Commerce was terminated and all obligationsoutstanding thereunder were repaid on April 30, 2004. The Prior SeniorCredit Facility consisted of (1) a $90.0 million revolving creditfacility; (2) a $75.0 million term loan facility (Term Loan A),which was repaid in full during the year ended December 31, 2003; and (3) a$240.0 million term loan facility (Term Loan B).

The Prior Senior Credit Facility agreement containedaffirmative, negative and financial covenants. Affirmative and negativecovenants placed restrictions on, among other things, levels of investments,indebtedness, insurance, capital expenditures and dividend payments. Thefinancial covenants required the maintenance of certain financial ratios atdefined levels. As of and during the nine months ended September 30, 2003and year ended December 31, 2003, as applicable, the Company was incompliance with all covenants. Under the Prior Senior Credit Facilityagreement, interest rates on the revolving credit facility and Term Loan Branged from 1.50% to 4.00% plus LIBOR, or other base rate as provided in thePrior Senior Credit Facility agreement, depending on certain financial ratios.LIBOR was 1.16% as of September 30, 2003 and December 31, 2003. Theinterest rate applicable to Term Loan B was 5.11% as of September 30,2003 and 5.12% as of December 31, 2003. Unused commitments under therevolving credit facility were subject to a 0.5% annual commitment fee.

The Prior Senior Credit Facility agreement allowed theCompany to make prepayments in whole or in part at any time without premium orpenalty. During the four months ended April 30, 2004, the Company madeprincipal payments of $152.4 million to fully repay Term Loan B,which primarily represented 

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optional principal prepayments.During the nine months ended September 30, 2003, the Company madeprincipal payments of $28.3 million to fully repay Term Loan A and$69.2 million on Term Loan B, which primarily represented optionalprincipal prepayments. During the year ended December 31, 2003, theCompany made principal payments of $28.3 million to fully repay TermLoan A and $69.6 million on Term Loan B, which primarilyrepresented optional principal prepayments. The optional principal prepaymentswere made from operating cash flows and proceeds from the New Senior CreditFacility described below and allowed the Company to remain several quarterlypayments ahead of the regular payment schedule. In connection with theseprepayments, the Company recorded write-offs totaling $0.2 million inpreviously deferred financing fees, which were included in interest expense inthe consolidated statement of operations for the three months ended September 30,2003 and $1.7 million and $1.8 million for the nine months ended September 30,2004 and 2003, respectively.

The Prior Senior CreditFacility was secured by substantially all of the Company’s properties andassets and by substantially all of the properties and assets of the Company’scurrent domestic subsidiaries. The carrying amount of the Company’s obligationsunder the Prior Senior Credit Facility approximated fair value because theinterest rates were based on floating interest rates identified by reference tomarket rates.

***New Senior Credit Facility in Effect as of April 30,2004***

In conjunction with the closing of the acquisition ofNu-Gro, on April 30, 2004, the Company entered into a new $510.0 millionsenior credit facility (the New Senior Credit Facility) with Bank of America,N.A., Banc of America Securities LLC, Citigroup Global Markets, Inc.,Citicorp North America, Inc. and certain other lenders to retire theindebtedness under its Prior Senior Credit Facility and execute a new seniorcredit facility at more favorable rates, to provide funds for the Nu-Groacquisition, to repurchase all of its outstanding preferred stock, along withaccrued but unpaid dividends thereon, and for general working capital purposes.The New Senior Credit Facility consists of (1) a $125.0 million U.S.dollar denominated revolving credit facility; (2) a $335.0 millionU.S. dollar denominated term loan facility; and (3) a Canadian dollardenominated term loan facility valued at U.S. $50.0 million. Subject tothe terms of the New Senior Credit Facility agreement, the revolving loanportion of the New Senior Credit Facility matures on April 30, 2010, andthe term loan obligations under the New Senior Credit Facility mature on April 30,2011. The term loan obligations are to be repaid in 28 consecutive quarterlyinstallments and commenced on June 30, 2004, with a final installment dueon March 31, 2011. All of the loan obligations are subject to mandatoryprepayment upon certain events, including sales of certain assets, issuances ofindebtedness or equity or from excess cash flow. The New Senior Credit Facilityagreement also allows the Company to make voluntary prepayments, in whole or inpart, at any time without premium or penalty.

The New Senior Credit Facility agreement containsaffirmative, negative and financial covenants that are more favorable than thoseof the Prior Senior Credit Facility. The negative covenants place restrictionson, among other things, levels of investments, indebtedness, capitalexpenditures and dividend payments that the Company may make or incur. Thefinancial covenants require the maintenance of certain financial ratios atdefined levels. Under the New Senior Credit Facility agreement, interest rateson the new revolving credit facility can range from 1.75% to 2.50% plus LIBOR,or from 0.75% to 1.50% plus a base rate, subject to adjustment and depending oncertain financial ratios. As of September 30, 2004, the term loans weresubject to interest rates equal to 2.50% plus LIBOR or 1.50% plus a base rate,as provided in the New Senior Credit Facility agreement. LIBOR was 2.01% as of September 30,2004. The weighted average interest rate applicable to the Company’soutstanding borrowings under its New Senior Credit Facility was 4.18% as of September 30,2004. Unused commitments under the new revolving credit facility are subject toa 0.5% annual commitment fee. Unused availability under the new revolvingcredit facility was $124.0 million as of September 30, 2004, which isreflective of $6.0 million of standby letters of credit pledged as collateral(see Note 10). The New Senior Credit Facility is secured by substantially allof the 

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Company’s properties andassets and substantially all of the properties and assets of the Company’scurrent and future domestic subsidiaries. The carrying amount of the Company’sobligations under the New Senior Credit Facility approximate fair value becausethe interest rates are based on floating interest rates identified by referenceto market rates.

In connection with theclosing of the Nu-Gro acquisition, Bank of America, N.A., Canada Branch,separately loaned the Company Cdn $110.0 million for structuring purposes,which loan was repaid on April 30, 2004.

***Amendment to New Senior Credit Facility in Effect asof July 30, 2004***

On July 30, 2004, inconnection with the closing of and to partially fund its merger with UPG, theCompany amended and restated the credit agreement related to the New SeniorCredit Facility to increase the revolving credit facility from$125.0 million to $130.0 million, increase the U.S. term loan from$335.0 million to $510.0 million, add a $75.0 million second lien termloan and leave the Canadian term loan of U.S. $50.0 million unchanged for atotal New Senior Credit Facility, as amended, of $765.0 million. Subject to theterms of the New Senior Credit Facility agreement, as amended, the second lienterm loan is to be repaid in 29 consecutive quarterly installments commencingon September 30, 2004, with a final installment due on September 30,2011, and matures on October 31, 2011. Interest on the second lien termloan accrues at 4.50% plus LIBOR or 3.5% plus a base rate, subject toadjustment and depending on certain financial ratios. The second lien term loanis subject to affirmative, negative and financial covenants. The Companyincurred $5.0 million in costs related to the amendment, which were recorded asdeferred financing fees and are being amortized over the remaining term of theNew Senior Credit Facility. The amendment did not change any other key terms orexisting covenants of the New Senior Credit Facility.

***Senior Subordinated Notes***

In November 1999, the Company issued$150.0 million in aggregate principal amount of 97¤8%Series B senior subordinated notes (the Series B Notes) due April 1,2009. Interest accrued at a rate of 97¤8%per annum, payable semi-annually on April 1 and October 1. Asdescribed in more detail below, as of September 30, 2004, there were no Series BNotes outstanding.

In March 2003, the Company issued$85.0 million in aggregate principal amount of 97¤8%Series C senior subordinated notes (the Series C Notes) due April 1,2009. Interest accrued at a rate of 97¤8%per annum, payable semi-annually on April 1 and October 1. Asdescribed in more detail below, as of September 30, 2004, there were no Series CNotes outstanding.

In May 2003, the Company registered $235.0million in aggregate principal amount of 97¤8% Series Dsenior subordinated notes (the Series D Notes and collectively with the Series BNotes and Series C Notes, the Senior Subordinated Notes), with termssubstantially similar to the Series B Notes and Series C Notes, withthe United States Securities and Exchange Commission and offered to exchangethe Series D Notes for up to 100% of the Series B Notes and Series CNotes. The exchange offering closed in July 2003, resulting in$85.0 million, or 100%, of the Series C Notes being exchanged and$146.9 million, or 98%, of the Series B Notes being exchanged. On April 14,2004, the Company repurchased all of the remaining Series B Notesoutstanding, together with accrued interest and repurchase premium of 4.938%,for $3.3 million. As of September 30, 2004, $232.9 million of the Series DNotes, including unamortized premium, were outstanding and no Series BNotes or Series C Notes were outstanding.

The fair value of theSenior Subordinated Notes was $240.0 million, $243.2 million and$242.1 million as of September 30, 2004 and 2003 and December 31,2003, respectively, based on their quoted market price on such dates. The fairvalue at September 30, 2004 reflects the repurchase of all outstanding Series BNotes in April 2004, as previously described. In accordance with theindentures that govern them, 

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theSenior Subordinated Notes are full and unconditionallyand jointly and severally guaranteed by the Company’s wholly-owned domesticsubsidiaries (see Note 15).

***Debt Covenants***

The Company’sagreements that govern the New Senior Credit Facility and the SeniorSubordinated Notes contain a number of significant covenants that couldrestrict or limit the Company’s ability to:

·  incur more debt;

·  pay dividends, subject to financial ratios andother conditions;

·  make other distributions;

·  issue stock of subsidiaries;

·  make investments;

·  repurchase stock;

·  create subsidiaries;

·  create liens;

·  enter into transactions with affiliates;

·  merge or consolidate; and

·  transfer and sell assets.

The ability to comply withthese provisions may be affected by events beyond the Company’s control. Thebreach of any of these covenants will result in a default under the applicabledebt agreement or instrument and could trigger acceleration of repayment underthe applicable agreements. Any default under such agreements might adverselyaffect the Company’s growth, financial condition, results of operations and theability to make payments on indebtedness or meet other obligations. As of andduring the nine months ended September 30, 2004 and 2003 and year ended December 31,2003, the Company was in compliance with all covenants under the Prior SeniorCredit Facility, the New Senior Credit Facility and the Senior Subordinated Notesin effect as of such dates.

***Future Principal Payments***

As of September 30,2004, aggregate future principal payments of long-term debt, excluding capitallease obligation, are as follows:
| **Year**                                         | ** ** | ** ** | ** ** | **Amount** | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|
| Remainder of 2004                                |       | $          | 1,594      |       |
| 2005                                             |       | 6,377      |       |
| 2006                                             |       | 6,377      |       |
| 2007                                             |       | 6,377      |       |
| 2008                                             |       | 6,377      |       |
| Thereafter                                       |       | 840,759    |       |
|                                             |       | 867,861    |       |
| Unamortized premium on Senior Subordinated Notes |       | 961        |       |
|                                             |       | $          | 868,822    |       |

 

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**Note 10—Commitmentsand Contingencies**

***Commitments***

In the normal course of business, the Company is aparty to certain guarantees and financial instruments with off-balance sheetrisk, such as standby letters of credit and indemnifications, which are not reflectedin the accompanying consolidated balance sheets. As of September 30, 2004and 2003 and December 31, 2003, the Company had $6.0 million,$2.5 million and $2.7 million, respectively, in standby letters of creditpledged as collateral to support the lease of its primary distribution facilityin St. Louis, a U.S. customs bond, certain product purchases, various workers’compensation obligations and transportation equipment. These agreements matureat various dates through September 2005 and may be renewed ascircumstances warrant. Such financial instruments are valued based on theamount of exposure under the instruments and the likelihood of performancebeing required. In the Company’s past experience, no claims have been madeagainst these financial instruments nor does management expect the exposure tomaterial losses resulting therefrom to be anything other than remote. As aresult, the Company determined such agreements do not have significant valueand has not recorded any related amounts in its accompanying consolidatedfinancial statements.

The Company is the lessee under a number of equipmentand property leases. It is common in such commercial lease agreements for theCompany to agree to indemnify the lessor for the value of the property or equipmentleased should it be damaged during the course of the Company’s operations. TheCompany expects that any losses that may occur with respect to the leasedproperty would be covered by insurance, subject to deductible amounts. As aresult, the Company determined such indemnifications do not have significantvalue and has not recorded any related amounts in its accompanying consolidatedfinancial statements for such remote loss exposure.

The Company is the lessee of several operatingfacilities from Rex Realty, Inc., a company owned by certain of theCompany’s stockholders and operated by a former executive and past member ofits Board of Directors. The operating leases expire at various dates through December 31,2010. The Company has options to terminate the leases on an annual basis bygiving advance notice of at least one year. The Company also leases a portionof its operating facilities from the same company under a sublease agreementexpiring on December 31, 2005 with minimum annual rentals of $0.7 million.The Company has two five-year options to renew this lease, beginning January 1,2006. Rent expense under these leases was $0.7 million for the three monthsended September 30, 2004, $0.3 million for the three months ended September 30,2003, $1.3 million for the nine months ended September 30, 2004 and $0.9million for the nine months ended September 30, 2003.

The Company is obligated under additional operatingleases for other operations and the use of warehouse space. The leases expireat various dates through January 31, 2015. Five of the leases provide foras many as five options to renew for five years each. Aggregate rent expenseunder these leases was $2.8 million for the three months ended September 30,2004, $1.8 million for the three months ended September 30, 2003,$8.3 million for the nine months ended September 30, 2004 and $5.4 millionfor the nine months ended September 30, 2003.

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Thefollowing table presents future minimum lease payments due under operating andcapital leases as of September 30, 2004:
| ** **                                   | ** ** | **Operating Leases** | ** ** | **Capital**   | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|---------------------------|------------|---------------|------------|------------|------------|
| **Year**                                     | ** ** | ** **                | ** ** | **Affiliate** | ** ** | **Other**  | ** ** | **Lease** | ** ** | **Total** | ** ** |
| Remainder 2004                               |       | $                         | 1,556      |          | $          | 4,388      |       | $ | 227 |   | $ | 6,171 |   |
| 2005                                         |       | 3,854                     |       | 9,694         |       | 457        |       | 14,005 |   |
| 2006                                         |       | 3,898                     |       | 8,346         |       | 457        |       | 12,701 |   |
| 2007                                         |       | 3,140                     |       | 6,678         |       | 457        |       | 10,275 |   |
| 2008                                         |       | 2,397                     |       | 6,029         |       | 457        |       | 8,883 |   |
| Thereafter                                   |       | 3,118                     |       | 25,340        |       | 2,370      |       | 30,828 |   |
| Total minimum lease payments                 |       | $                         | 17,963     |          | $          | 60,475     |       | 4,425 |   | $ | 82,863 |   |
| Less amount  representing interest           |       |                      |       |          |       | (990       | )          |   |   |
| Present value of  net minimum lease payments |       |                      |       |          |       | $          | 3,435      |   |   |   |
|                                              |            |                           |            |               |            |            |            |  |  |  |  |  |  |  |  |

 

***Contingencies***

The Company is involvedfrom time to time in routine legal matters and other claims incidental to itsbusiness. When it appears probable in management’s judgment that the Companywill incur monetary damages or other costs in connection with such claims andproceedings, and such costs can be reasonably estimated, liabilities arerecorded in the consolidated financial statements and charges are recorded toresults of operations. Management believes that it is remote the resolution ofsuch routine matters and other incidental claims will have a materialadverse impact on the Company’s consolidated financial position, results ofoperations or liquidity.

**Note 11—Accountingfor Derivative Instruments and Hedging Activities**

In the normal course of business, the Company isexposed to fluctuations in raw materials prices, foreign currency exchangerates and interest rates. The Company has established policies and proceduresthat govern the management of these exposures through the use of derivativehedging instruments. The Company’s objective in managing its exposure to suchfluctuations is to decrease the volatility of earnings and cash flowsassociated with changes in certain raw materials prices, foreign currencyexchange rates and interest rates. To achieve this objective, the Companyperiodically enters into derivative instrument agreements with values thatchange in the opposite direction of anticipated cash flows. Derivativeinstruments related to forecasted transactions are considered to hedge futurecash flows, and the effective portion of any gains or losses is included inaccumulated other comprehensive income until earnings are affected by thevariability of cash flows. Any remaining gain or loss is recognized currentlyin results of operations.

The Company formally documents, designates andassesses the effectiveness of any transactions that receive hedge accountingtreatment. The cash flows of derivative hedging instruments utilized by theCompany are generally expected to be highly effective in achieving offsettingcash flows attributable to fluctuations in the cash flows of the hedged risk.Changes in the fair value of agreements designated as derivative hedginginstruments are reported as either an asset or liability in the accompanyingconsolidated balance sheets with the associated unrealized gains or lossesreflected in accumulated other comprehensive income. As of September 30,2004, the Company had five outstanding agreements representing derivativehedging instruments. Such agreements are comprised of one foreign currencyforward agreement, which is described below, and four agreements designated ashedges against forecasted purchases of granular urea and diammonium phosphates,materials used in the production of fertilizer, with maturity dates rangingthrough December 2004 and an aggregate contract value upon execution of$2.1 million. Such derivative hedging instruments had an unrealized loss ofless than $0.1 million as of September 30, 2004, which is 

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included in accumulatedother comprehensive income in the accompanying consolidated balance sheet as ofsuch date. Amounts included in accumulated other comprehensive income, whichwere subsequently reclassified into cost of goods sold for the nine monthsended September 30, 2004 and 2003 included a net loss of $0.2 million anda net gain of $1.4 million, respectively. No such amounts were reclassifiedinto cost of goods sold for the three months ended September 30, 2004 and2003. Although derivative hedging instruments were used for forecastedpurchases of granular urea throughout 2003, no such instruments wereoutstanding as of September 30, 2003 and December 31, 2003.

The Company also had one foreign currency forwardagreement outstanding as of September 30, 2004 designated as a hedgeagainst exchange rate fluctuations of the Euro, used to purchase certaincomponents from European suppliers. The agreement matures in December 2004and had an aggregate contract value upon execution of less than $0.1 million. Theunrealized gain on such agreement as of September 30, 2004, included inaccumulated other comprehensive income in the accompanying consolidated balancesheet as of such date, and any amounts reclassified into cost of goods sold forthe three and nine months ended September 30, 2004 were nominal. No suchderivative hedging instruments were used as hedges against exchange ratefluctuations during 2003.

If it becomes probablethat a forecasted transaction will not occur, any gains or losses in accumulatedother comprehensive income will be recognized in results of operations. TheCompany has not incurred any material gains or losses for hedge ineffectivenessor due to excluding a portion of the value from measuring effectiveness. TheCompany has not generally entered into derivatives or other hedgingarrangements for trading or speculative purposes but may consider doing so inthe future if strategic circumstances warrant, and its bank covenants and bondindentures permit, such transactions. While management expects its derivativehedging instruments to manage the Company’s exposure to the potentialfluctuations described above, no assurance can be provided that suchinstruments will be effective in fully mitigating exposure to these risks, norcan assurance be provided that the Company will be successful in passing onpricing increases to its customers.

**Note 12—Stockholders’Equity**

***Bayer Transactions***

On June 14, 2002, the Company consummated atransaction with Bayer Corporation and Bayer Advanced, L.L.C. (togetherreferred to herein as Bayer), which allows the Company to gain access tocertain Bayer active ingredient technologies through a Supply Agreement and toperform certain merchandising services for Bayer through an In-Store ServiceAgreement. In consideration for the Supply and In-Store Service Agreements, andin exchange for the promissory notes previously issued to Bayer by U.S.Fertilizer, the Company issued to Bayer 3,072,000 shares of Class A votingcommon stock valued at $15.4 million and 3,072,000 shares of Class Bnonvoting common stock valued at $15.4 million (collectively representingapproximately 9.3% of the Company’s fully-diluted common stock) and recorded$0.4 million of related issuance costs. The Company reserved for theentire face value of the promissory notes due from U.S. Fertilizer, as theCompany did not believe the notes were collectible and an independent thirdparty valuation did not ascribe any significant value to them. The independentthird party valuation also indicated that value should be ascribed to therepurchase option, which is reflected in stockholders’ equity (deficit) in theaccompanying consolidated balance sheets as of September 30, 2003 and December 31,2003.

Under the terms of the agreements, Bayer was requiredto make payments to the Company, which total $5.0 million annually throughJune 15, 2009, the present value of which equaled the value assigned tothe common stock subscription receivable as of June 14, 2002, which hasbeen reflected in stockholders’ equity (deficit) in the accompanyingconsolidated balance sheets as of September 30, 2003 and December 31,2003. The common stock subscription receivable was to be repaid by Bayer in 28quarterly 

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installments of$1.25 million, the first of which was received at closing on June 17,2002. The difference between the value ascribed to the common stocksubscription receivable and the installment payments received has been recordedas interest income in the accompanying consolidated statements of operationsfor the nine months ended September 30, 2004 and 2003.

The value of the Supply Agreement has been and isbeing amortized to cost of goods sold over the period in which its economicbenefits are expected to be utilized, which was initially anticipated to be overa three to five-year period. The Company has been amortizing the obligationassociated with the In-Store Service Agreement to revenues over the seven-yearlife of the agreement, the period in which its obligations were originallyexpected to be fulfilled. However, in December 2002, the Company and Bayeramended the In-Store Service Agreement to reduce the scope of services providedby approximately 80%. As a result, the Company reduced its obligation under theIn-Store Service Agreement accordingly and reclassified $3.6 million toadditional paid-in capital to reflect the increase in value of the In-StoreService Agreement.

On October 22, 2003, the Company gave notice toBayer regarding the termination of the In-Store Service Agreement, as amended.Upon termination, which became effective on December 21, 2003, the Companywas relieved of its obligation to perform merchandising services for Bayer.Accordingly, the remaining liability of $0.7 million on the date of terminationwas recognizedin selling, general and administrative expenses as abenefit in the consolidated statement of operations for theyear ended December 31, 2003.

Following the termination of the In-Store ServiceAgreement, on December 22, 2003, the Company exercised its option torepurchase all outstanding common stock previously issued to Bayer. Bayerdisputed the Company’s interpretation of a related agreement (the ExchangeAgreement) as to the calculation of the repurchase price. As a result, theCompany and Bayer entered negotiations to determine an agreed upon repurchaseprice based on equations included in the Exchange Agreement and other factors.The Company commenced an arbitration proceeding against Bayer to resolve thedispute on January 30, 2004. However, the Company and Bayer reached anegotiated settlement of the dispute on February 23, 2004, pursuant towhich Bayer agreed to deliver all of its shares of the Company’s common stockto the Company in exchange for a cash payment of $1.5 million, cancellation of$22.5 million in remaining payments required to be made in connection with thecommon stock subscription receivable and forgiveness of interest related tosuch payments of $0.3 million.

The Company recorded treasury stock of $24.4 million,based on the consideration given to Bayer, reduced the common stocksubscription receivable by $22.5 million, the remaining balance on the date ofrepurchase, and reversed the common stock repurchase option of $2.6 million, asa result of its exercise, and recorded a corresponding amount to additionalpaid-in capital. As a result of this transaction, both parties agreed that theExchange Agreement and In-Store Service Agreement are fully terminated, withthe exception of certain provisions contained therein that expressly survivetermination, and that the Supply Agreement shall remain in full force andeffect according to its terms. Under the terms of the Supply Agreement, anyremaining balance at January 30, 2009 is unconditionally and immediatelypayable to the Company by Bayer regardless of whether or not the Companypurchases ingredients under the Supply Agreement. As of September 30,2004, the remaining balance of the Supply Agreement, net of amortization, andexcluding accrued interest of $0.5 million, was $4.8 million.

22

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Basedon the independent third party valuation as of June 14, 2002, the originaltransaction date, the Company assigned a fair value of $30.7 million to thetransaction components recorded in connection with the common stock issued toBayer. The following table presents the values of these components as of September 30,2004 and 2003 and December 31, 2003 based on such valuation and as aresult of the activities and transactions previously described, net ofamortization and excluding accrued interest:
| ** **                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **Description**                      | ** ** | ** **             | ** ** | **2004**              | ** ** | **2003** | ** ** | **2003** | ** ** |
| Common stock subscription receivable |       | $                      | —     |                  | $          | 23,363 |   |   | $ | 22,534 |   |   |
| Supply Agreement                     |       | 4,779                  |       | 5,314                 |       |   | 5,314 |   |   |
| Repurchase option                    |       | —                 |       | 2,636                 |       |   | 2,636 |   |   |
| In-Store Service  Agreement          |       | —                 |       | 663                   |       |   | — |   |   |
|                                 |       | $                      | 4,779      |                  | $          | 31,976 |   |   | $ | 30,484 |   |   |
|                                      |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |

 

Bayer recently sent noticeto the Company purporting to terminate the Supply Agreement, effective August 17,2004, as well as $5.2 million,the remaining amount due under the Supply Agreement. TheCompany responded by notifying Bayer that it did not have a right to terminate and hassince held the amount in escrow. The parties were in agreementthat the amount due in the event of termination at that time was $5.2 million,including $0.5 million of accrued interest. The outcome of the Company’sdisagreement with Bayer concerning termination of the Supply Agreement is notexpected to have a material adverse impact on the Company’s consolidatedfinancial position, results of operations or cash flows.

***Issuance of Common Stock***

As described in Note 2, inconnection with, and to partially fund, its acquisition of UPG, on July 30,2004, the Company issued 5.8 million shares each of its Class A voting andClass B nonvoting common stock to affiliates of Thomas H. Lee Partners,its largest stockholder, Banc of America Securities LLC and certain UPG sellingstockholders for proceeds of $70.0 million.

***Repurchase of Preferred Stock***

In conjunction with thefinancing activities described in Note 9, on April 30, 2004, the Companyrepurchased all 37,600 shares of its outstanding Class A nonvotingpreferred stock for $57.6 million, including $19.9 million for all accrueddividends thereon. Such repurchase resulted in a reduction of additionalpaid-in capital of $37.7 million.

**Note 13—Fair Valueof Financial Instruments**

The Company has estimated the fair value of itsfinancial instruments as of September 30, 2004 and 2003 and December 31,2003 using available market information or other appropriate valuation methods.Considerable judgment, however, is required in interpreting data to developestimates of fair value. Accordingly, the estimates presented in theaccompanying consolidated financial statements are not necessarily indicativeof the amounts the Company would realize in a current market exchange.

The carrying amounts ofcash, accounts receivable, accounts payable and other current assets andliabilities approximate fair value because of the short maturity of suchinstruments. The Company’s Senior Credit Facility bears interest at currentmarket rates and, thus, carrying value approximates fair value as of September 30,2004 and 2003 and December 31, 2003. The Company is exposed to interestrate volatility with respect to the variable interest rates of the New SeniorCredit Facility. The fair value of the Senior Subordinated Notes was $240.0million, $243.2 million and $242.1 million as of September 30, 2004and 2003 and December 31, 2003, respectively, based on their quoted marketprice on such dates.

23

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**Note 14—SegmentInformation**

As of September 30, 2004, the Company reportedits operating results using three reportable business segments: U.S. Home &Garden (represents 62% of third quarter 2004 net sales), Canada (represents 13%of third quarter 2004 net sales) and Pet (represents 25% of third quarter 2004net sales). The basis of the Company’s segmentation was modified since December 31, 2003to accommodate the acquisitions of Nu-Gro and UPG. The Company’s previously-existing segments atDecember 31, 2003 have been combined into the new U.S. Home & Gardensegment due to their similar nature. This change representsthe only reclassifications of 2003 segment information required to achievecomparability of financial information for the periods presented herein. Theacquisition of Nu-Gro represents thesecond reportable segment, Canada, and the aquisition of UPG represents the third reportablesegment, Pet.

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Segmentswere established primarily by operating division, which represents theoperating structure of the Company and the basis upon which management,including the Chief Executive Officer who is the chief operating decision-makerof the Company, reviews and assesses the Company’s financial performance. Thetable which follows presents selected financial segment information inaccordance with SFAS No. 131, “Disclosures about Segments of an Enterpriseand Related Information,” for the three and nine months ended September 30,2004 and 2003. The accounting policies of the reportable segments are the sameas those described in the summary of significant accounting policies inNote 2 to the consolidated financial statements included in the Company’sAnnual Report on Form 10-K for the year ended December 31,2003, as applicable. The segment financial information presented below includes comparative periodsprepared on a basis consistent with the current year presentation. Operating results have been presented for theCanada segment since April 30, 2004, the date Nu-Gro was acquired, and for the Pet segmentsince July 30, 2004, the date UPG was acquired.
| ** **                                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **Statement of Operations Information:** | ** ** | ** **                                           | ** ** | **2004**                                            | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                              | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | **(As Restated)** | ** ** |
| Net sales:                                              |       |                                                 |       |                                                |       |   |   |   |   |   |   |
| U.S. Home & Garden                                  |       | $                                                    | 104,342    |                                                | $          | 104,019 |   | $ | 493,775 |   |   | $ | 488,834 |   |   |
| Canada                                                  |       | 23,615                                               |       | —                                              |       | 56,720 |   |   | — |   |   |
| Pet                                                     |       | 43,083                                               |       | —                                              |       | 43,083 |   |   | — |   |   |
| Total net sales                                         |       | 171,040                                              |       | 104,019                                             |       | 593,578 |   |   | 488,834 |   |   |
| Operating costs and  expenses:                          |       |                                                 |       |                                                |       |   |   |   |   |   |   |
| Cost of goods sold                                      |       | 123,511                                              |       | 64,750                                              |       | 392,776 |   |   | 297,302 |   |   |
| Selling, general and administrative expenses            |       | 48,387                                               |       | 32,195                                              |       | 138,152 |   |   | 111,499 |   |   |
| Total operating costs and expenses                      |       | 171,898                                              |       | 96,945                                              |       | 530,928 |   |   | 408,801 |   |   |
| Operating income (loss)  by segment:                    |       |                                                 |       |                                                |       |   |   |   |   |   |   |
| U.S. Home & Garden                                  |       | (1,049                                               | )          | 7,074                                               |       | 63,924 |   |   | 80,033 |   |   |
| Canada                                                  |       | (657                                                 | )          | —                                              |       | (2,122 | ) |   | — |   |   |
| Pet                                                     |       | 848                                                  |       | —                                              |       | 848 |   |   | — |   |   |
| Total operating income (loss)                           |       | (858                                                 | )          | 7,074                                               |       | 62,650 |   |   | 80,033 |   |   |
| Interest expense                                        |       | 12,799                                               |       | 9,173                                               |       | 34,328 |   |   | 29,147 |   |   |
| Interest income                                         |       | 16                                                   |       | 568                                                 |       | 388 |   |   | 1,522 |   |   |
| Income (loss)  before income tax expense (benefit)      |       | (13,641                                              | )          | (1,531                                              | )          | 28,710 |   |   | 52,408 |   |   |
| Income tax  expense (benefit)                           |       | (5,184                                               | )          | (698                                                | )          | 7,447 |   |   | 20,827 |   |   |
| Net income (loss)                                       |       | $                                                    | (8,457     | )                                                   | $          | (833 | ) | $ | 21,263 |   |   | $ | 31,581 |   |   |
| Operating margin:                                       |       |                                                 |       |                                                |       |   |   |   |   |   |   |
| U.S. Home & Garden                                  |       | -1.0                                                 | %          | 6.8                                                 | %          | 12.9 | % |   | 16.4 | % |   |
| Canada                                                  |       | -2.8                                                 | %          | —                                              |       | -3.7 | % |   | — |   |   |
| Pet                                                     |       | 2.0                                                  | %          | —                                              |       | 2.0 | % |   | — |   |   |
| Total operating  margin                                 |       | -0.5                                                 | %          | 6.8                                                 | %          | 10.6 | % |   | 16.4 | % |   |
|                                                         |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Operating income represents earnings before interestexpense, interest income and income tax expense. Operating income is onemeasure of profitability used by management to assess the Company’s financialperformance. Operating margin represents operating income as a percentage ofnet sales.

The majority of the Company’s sales are conducted withcustomers in the United States. As a percentage of total net sales, for thethree months ended September 30, 2004, the Company’s net sales in the UnitedStates were 88%, net sales in Canada were 10%, and remaining internationalsales were less than 2%. For the three and nine months ended September 30,2003, the Company’s international sales, including Canada, comprised less than2% of total net sales. In addition, no single item comprised more 

25

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than 10% of the Company’snet sales. For the three months ended September 30, 2004, the Company’sthree largest customers were responsible for 20%, 18% and 17% of net sales. Forthe nine months ended September 30, 2004, the Company’s three largestcustomers were responsible for 25%, 15% and 14% of net sales. Of these salesfor the nine months ended September 30, 2004, 96% relate to the U.S. Home &Garden segment, less than 1% relates to the Canada segment and nearly 4% relateto the Pet segment.

As of September 30,2004, approximately 6% of the Company’s total assets were located in Canadawhile the remaining assets were located in the United States. The table whichfollows presents segment information with respect to certain of the Company’sbalance sheet information:
| ** **                               | ** ** | **As of September 30,** | ** ** | **As of December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| **Balance Sheet Information:** | ** ** | ** **                             | ** ** | **2004**                              | ** ** | **2003** | ** ** | **2003** | ** ** |
| ** **                               | ** ** | ** **                             | ** ** | **(As Restated)**                | ** ** | ** ** | ** ** |
| U.S. Home & Garden:                  |       |                                   |       |                                  |       |   |   |   |   |   |   |
| Property, plant and equipment, net       |       | $                                      | 41,809     |                                  |       | $ | 34,360 |   |   |   | $ | 37,153 |   |   |
| Capital expenditures (year-to-date)      |       | 13,470                                 |       |                                  | 6,724      |   |   |   | 11,674 |   |   |
| Goodwill                                 |       | 26,257                                 |       |                                  | 6,176      |   |   |   | 6,221 |   |   |
| Total assets                             |       | 538,558                                |       |                                  | 403,601    |   |   |   | 479,944 |   |   |
| Canada:                                  |       |                                   |       |                                  |       |   |   |   |   |   |   |
| Property, plant and equipment, net       |       | 32,610                                 |       |                                  | —     |   |   |   | — |   |   |
| Capital expenditures (year-to-date)      |       | 1,442                                  |       |                                  | —     |   |   |   | — |   |   |
| Goodwill                                 |       | 46,660                                 |       |                                  | —     |   |   |   | — |   |   |
| Total assets                             |       | 114,136                                |       |                                  | —     |   |   |   | — |   |   |
| Pet:                                     |       |                                   |       |                                  |       |   |   |   |   |   |   |
| Property, plant and equipment, net       |       | 24,946                                 |       |                                  | —     |   |   |   | — |   |   |
| Capital expenditures (year-to-date)      |       | 649                                    |       |                                  | —     |   |   |   | — |   |   |
| Goodwill                                 |       | 174,529                                |       |                                  | —     |   |   |   | — |   |   |
| Total assets                             |       | 402,020                                |       |                                  | —     |   |   |   | — |   |   |
|                                          |            |                                        |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 15—FinancialInformation for Guarantor Subsidiaries**

The Company’s Senior Subordinated Notes are full and unconditionally andjointly and severally guaranteed by all of the Company’s existing domesticsubsidiaries. The Company’s subsidiaries are 100% owned by the Company. Theconsolidating financial information, which follows, has been prepared inaccordance with the requirements for presentation of such information. TheCompany believes that separate financial statements concerning each guarantorsubsidiary would not be material to investors and that the informationpresented herein provides sufficient detail to determine the nature of theaggregate financial position, results of operations and cash flows of theguarantor subsidiaries. The guarantor subsidiaries’ information presentedherein represents the Company’s domestic subsidiaries, including the UPGsubsidiaries and U.S. subsidiaries of Nu-Gro, while the non-guarantorsubsidiaries’ financial information represents the Company’s foreignsubsidiaries, which are comprised only of the Canadian subsidiaries of Nu-Gro.

TheCompany’s investment in subsidiaries is accounted for using the equity methodof accounting. Earnings of the subsidiaries are reflected in the respectiveinvestment accounts of the parent company accordingly. The investments insubsidiaries and all intercompany balances and transactions have beeneliminated. Various assumptions and estimates were used to establish thefinancial statements of such subsidiaries for the information presented herein.

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**UNITED INDUSTRIESCORPORATION AND SUBSIDIARIESBALANCE SHEETAS OF SEPTEMBER 30, 2004(Unaudited)**
| ** **                                                          | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                                          | ** ** | ** ** | ** ** |                        | ** ** | ** **                      |       |             | ** ** | ** **       |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current assets:                                                     | ** ** | ** ** | ** ** |                        | ** ** | ** **                      |       |             | ** ** | ** **       |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Cash and cash  equivalents                                          |       | $          | 5,301      |                        |       | $                               | 475        | ** **       |       |             | $          | 2,514 | ** ** |   |   | $ | — | ** ** |   |   | $ | 8,290 | ** ** |   |
| Accounts  receivable, net                                           |       | 53,938     |       |                        | 40,662     | ** **                      |       |             | 12,893     | ** **       |       |   | — | ** ** |   |   | 107,493 | ** ** |   |
| Inventories                                                         |       | 55,613     |       |                        | 73,257     | ** **                      |       |             | 31,133     | ** **       |       |   | — | ** ** |   |   | 160,003 | ** ** |   |
| Prepaid expenses  and other current assets                          |       | 11,511     |       |                        | 5,970      | ** **                      |       |             | 2,404      | ** **       |       |   | — | ** ** |   |   | 19,885 | ** ** |   |
| Total current  assets                                               |       | 126,363    |       |                        | 120,364    | ** **                      |       |             | 48,944     | ** **       |       |   | — | ** ** |   |   | 295,671 | ** ** |   |
| Equipment and  leasehold improvements, net                          |       | 35,980     |       |                        | 32,032     | ** **                      |       |             | 31,353     | ** **       |       |   | — | ** ** |   |   | 99,365 | ** ** |   |
| Investment in  subsidiaries                                         |       | 483,172    |       |                        | —     | ** **                      |       |             | —     | ** **       |       |   | (483,172 | ) |   |   | — | ** ** |   |
| Intercompany  assets                                                |       | 127,121    |       |                        | —     | ** **                      |       |             | —     | ** **       |       |   | (127,121 | ) |   |   | — | ** ** |   |
| Deferred tax asset                                                  |       | 156,644    |       |                        | (65,583    | )                               |       |             | (12,566    | )                |       |   | — | ** ** |   |   | 78,495 | ** ** |   |
| Goodwill                                                            |       | 5,616      |       |                        | 191,408    | ** **                      |       |             | 50,422     | ** **       |       |   | — | ** ** |   |   | 247,446 | ** ** |   |
| Intangible assets,  net                                             |       | 40,578     |       |                        | 251,727    | ** **                      |       |             | 18,593     | ** **       |       |   | — | ** ** |   |   | 310,898 | ** ** |   |
| Other assets, net                                                   |       | 20,637     |       |                        | 2,078      | ** **                      |       |             | 124        | ** **       |       |   | — | ** ** |   |   | 22,839 | ** ** |   |
| Total assets                                                        |       | $          | 996,111    |                        |       | $                               | 532,026    | ** **       |       |             | $          | 136,870 | ** ** |   |   | $ | (610,293 | ) |   |   | $ | 1,054,714 | ** ** |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                       |       |       |       |                        |       | ** **                      |       |             |       | ** **       |       |   |   | ** ** |   |   |   | ** ** |   |
| Current liabilities:                                                |       |       |       |                        |       | ** **                      |       |             |       | ** **       |       |   |   | ** ** |   |   |   | ** ** |   |
| Current maturities  of long-term debt and capital lease obligations |       | $          | 6,678      |                        |       | $                               | —     | ** **       |       |             | $          | — | ** ** |   |   | $ | — | ** ** |   |   | $ | 6,678 | ** ** |   |
| Accounts payable                                                    |       | 20,581     |       |                        | 16,663     | ** **                      |       |             | 4,409      | ** **       |       |   | — | ** ** |   |   | 41,653 | ** ** |   |
| Accrued expenses                                                    |       | 33,492     |       |                        | 25,771     | ** **                      |       |             | 7,932      | ** **       |       |   | — | ** ** |   |   | 67,195 | ** ** |   |
| Total current liabilities                                           |       | 60,751     |       |                        | 42,434     | ** **                      |       |             | 12,341     | ** **       |       |   | — | ** ** |   |   | 115,526 | ** ** |   |
| Long-term debt,  net of current maturities                          |       | 862,445    |       |                        | —     | ** **                      |       |             | —     | ** **       |       |   | — | ** ** |   |   | 862,445 | ** ** |   |
| Capital lease  obligations, net of current maturities               |       | 3,222      |       |                        | —     | ** **                      |       |             | —     | ** **       |       |   | — | ** ** |   |   | 3,222 | ** ** |   |
| Other liabilities                                                   |       | 4,019      |       |                        | 724        | ** **                      |       |             | 547        | ** **       |       |   | — | ** ** |   |   | 5,290 | ** ** |   |
| Intercompany  liabilities                                           |       | —     |       |                        | 56,405     | ** **                      |       |             | 70,716     | ** **       |       |   | (127,121 | ) |   |   | — | ** ** |   |
| Total liabilities                                                   |       | 930,437    |       |                        | 99,563     | ** **                      |       |             | 83,604     | ** **       |       |   | (127,121 | ) |   |   | 986,483 | ** ** |   |
| Commitments and  contingencies                                      |       |       |       |                        |       | ** **                      |       |             |       | ** **       |       |   |   | ** ** |   |   |   | ** ** |   |
| Stockholders’ equity:                                          |       |       |       |                        |       | ** **                      |       |             |       | ** **       |       |   |   | ** ** |   |   |   | ** ** |   |
| Common stock                                                        |       | 782        |       |                        | —     | ** **                      |       |             | —     | ** **       |       |   | — | ** ** |   |   | 782 | ** ** |   |
| Treasury stock                                                      |       | (24,469    | )          |                        | —     | ** **                      |       |             | —     | ** **       |       |   | — | ** ** |   |   | (24,469 | ) |   |
| Warrants and  options                                               |       | 11,745     |       |                        | —     | ** **                      |       |             | —     | ** **       |       |   | — | ** ** |   |   | 11,745 | ** ** |   |
| Investment from  parent                                             |       | —     |       |                        | 444,488    | ** **                      |       |             | 52,271     | ** **       |       |   | (496,759 | ) |   |   | — | ** ** |   |
| Additional paid-in  capital                                         |       | 241,034    |       |                        | —     | ** **                      |       |             | —     | ** **       |       |   | — | ** ** |   |   | 241,034 | ** ** |   |
| Accumulated  deficit                                                |       | (159,924   | )          |                        | (12,025    | )                               |       |             | (2,959     | )                |       |   | 13,587 | ** ** |   |   | (161,321 | ) |   |
| Common stock held  in grantor trusts                                |       | (3,326     | )          |                        | —     | ** **                      |       |             | —     | ** **       |       |   | — | ** ** |   |   | (3,326 | ) |   |
| Loans to executive  officer                                         |       | (215       | )          |                        | —     | ** **                      |       |             | —     | ** **       |       |   | — | ** ** |   |   | (215 | ) |   |
| Accumulated other  comprehensive income                             |       | 47         |       |                        | —     | ** **                      |       |             | 3,954      | ** **       |       |   | — | ** ** |   |   | 4,001 | ** ** |   |
| Total stockholders’  equity                                    |       | 65,674     |       |                        | 432,463    | ** **                      |       |             | 53,266     | ** **       |       |   | (483,172 | ) |   |   | 68,231 | ** ** |   |
| Total liabilities  and stockholders’ equity                    |       | $          | 996,111    |                        |       | $                               | 532,026    | ** **       |       |             | $          | 136,870 | ** ** |   |   | $ | (610,293 | ) |   |   | $ | 1,054,714 | ** ** |   |

 

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**UNITED INDUSTRIESCORPORATION AND SUBSIDIARIESBALANCE SHEETAS OF SEPTEMBER 30, 2003(Unaudited) (As Restated)**
| ** **                                                         | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                                         | ** ** | ** ** | ** ** |                        | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current assets:                                                    | ** ** | ** ** | ** ** |                        | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Cash and cash equivalents                                          |       | $          | 43,382     |                        |       | $                | 740        | ** **       |       |   | $ | — | ** ** |   |   | $ | 44,122 | ** ** |   |
| Accounts receivable, net                                           |       | 53,946     |       |                        | 2,518      | ** **       |       |             | —     | ** ** |   |   | 56,464 | ** ** |   |
| Inventories                                                        |       | 34,783     |       |                        | 32,787     | ** **       |       |             | —     | ** ** |   |   | 67,570 | ** ** |   |
| Prepaid expenses and  other current assets                         |       | 9,751      |       |                        | 307        | ** **       |       |             | —     | ** ** |   |   | 10,058 | ** ** |   |
| Total current assets                                               |       | 141,862    |       |                        | 36,352     | ** **       |       |             | —     | ** ** |   |   | 178,214 | ** ** |   |
| Equipment and  leasehold improvements, net                         |       | 29,618     |       |                        | 4,742      | ** **       |       |             | —     |   |   |   | 34,360 | ** ** |   |
| Investment in  subsidiaries                                        |       | 25,499     |       |                        | —     | ** **       |       |             | (25,499    | ) |   |   | — | ** ** |   |
| Intercompany  assets                                               |       | 67,693     |       |                        | 5,938      | ** **       |       |             | (73,631    | ) |   |   | — | ** ** |   |
| Deferred tax asset                                                 |       | 85,840     |       |                        | 426        | ** **       |       |             | —     |   |   |   | 86,266 | ** ** |   |
| Goodwill, net                                                      |       | 6,176      |       |                        | —     | ** **       |       |             | —     |   |   |   | 6,176 | ** ** |   |
| Intangible assets,  net                                            |       | 37,899     |       |                        | 50,443     | ** **       |       |             | —     |   |   |   | 88,342 | ** ** |   |
| Other assets, net                                                  |       | 9,522      |       |                        | 721        | ** **       |       |             | —     |   |   |   | 10,243 | ** ** |   |
| Total assets                                                       |       | $          | 404,109    |                        |       | $                | 98,622     | ** **       |       |   | $ | (99,130 | ) |   |   | $ | 403,601 | ** ** |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**  |       |       |       |                        |       | ** **       |       |             |       |   |   |   |   | ** ** |   |
| Current liabilities                                                |       |       |       |                        |       | ** **       |       |             |       |   |   |   |   | ** ** |   |
| Current maturities of  long-term debt and capital lease obligation |       | $          | 1,341      |                        |       | $                | —     | ** **       |       |   | $ | — |   |   |   | $ | 1,341 | ** ** |   |
| Accounts payable                                                   |       | 12,295     |       |                        | 3,566      | ** **       |       |             | —     |   |   |   | 15,861 | ** ** |   |
| Accrued expenses                                                   |       | 57,590     |       |                        | 1,864      | ** **       |       |             | —     |   |   |   | 59,454 | ** ** |   |
| Total current liabilities                                          |       | 71,226     |       |                        | 5,430      | ** **       |       |             | —     |   |   |   | 76,656 | ** ** |   |
| Long-term debt,  net of current maturities                         |       | 388,096    |       |                        | —     | ** **       |       |             | —     |   |   |   | 388,096 | ** ** |   |
| Capital lease  obligation, net of current maturities               |       | 3,333      |       |                        | —     | ** **       |       |             | —     |   |   |   | 3,333 | ** ** |   |
| Other liabilities                                                  |       | 3,199      |       |                        | —     | ** **       |       |             | —     |   |   |   | 3,199 | ** ** |   |
| Intercompany  liabilities                                          |       | 5,938      |       |                        | 67,693     | ** **       |       |             | (73,631    | ) |   |   | — | ** ** |   |
| Total liabilities                                                  |       | 471,792    |       |                        | 73,123     | ** **       |       |             | (73,631    | ) |   |   | 471,284 | ** ** |   |
| Commitments and contingencies                                      |       |       |       |                        |       | ** **       |       |             |       |   |   |   |   | ** ** |   |
| Stockholders’ equity (deficit):                               |       |       |       |                        |       | ** **       |       |             |       |   |   |   |   | ** ** |   |
| Preferred stock                                                    |       | —     |       |                        | —     | ** **       |       |             | —     |   |   |   | — | ** ** |   |
| Common stock                                                       |       | 665        |       |                        | —     | ** **       |       |             | —     |   |   |   | 665 | ** ** |   |
| Treasury stock                                                     |       | (96        | )          |                        | —     | ** **       |       |             | —     |   |   |   | (96 | **)** |   |
| Warrants and options                                               |       | 11,745     |       |                        | —     | ** **       |       |             | —     |   |   |   | 11,745 | ** ** |   |
| Investment from parent                                             |       | —     |       |                        | 23,708     | ** **       |       |             | (23,708    | ) |   |   | — | ** ** |   |
| Additional paid-in capital                                         |       | 210,806    |       |                        | —     | ** **       |       |             | —     |   |   |   | 210,806 |   |   |
| Accumulated deficit                                                |       | (261,633   | )          |                        | 1,791      | ** **       |       |             | (1,791     | ) |   |   | (261,633 | ) |   |
| Common stock subscription  receivable                              |       | (23,363    | )          |                        | —     | ** **       |       |             | —     |   |   |   | (23,363 | ) |   |
| Common stock repurchase  option                                    |       | (2,636     | )          |                        | —     | ** **       |       |             | —     |   |   |   | (2,636 | ) |   |
| Common stock held in  grantor trust                                |       | (2,847     | )          |                        | —     | ** **       |       |             | —     |   |   |   | (2,847 | ) |   |
| Loans  to executive officer                                        |       | (324       | )          |                        | —     | ** **       |       |             | —     |   |   |   | (324 | ) |   |
| Total stockholders’  equity (deficit)                         |       | (67,683    | )          |                        | 25,499     | ** **       |       |             | (25,499    | ) |   |   | (67,683 | ) |   |
| Total liabilities and stockholders’ equity (deficit)          |       | $          | 404,109    |                        |       | $                | 98,622     | ** **       |       |   | $ | (99,130 | ) |   |   | $ | 403,601 | ** ** |   |

 

28

----

**UNITED INDUSTRIESCORPORATION AND SUBSIDIARIESBALANCE SHEETAS OF DECEMBER 31, 2003**
| ** **                                                         | ** ** | ** **                                     | ** ** | **Guarantor**                                        | ** ** | ** **                                           | ** ** | ** **                                           | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                         | ** ** | **   Parent   ** | ** ** | **   Subsidiaries   ** | ** ** | **   Eliminations   ** | ** ** | **   Consolidated   ** | ** ** |
| **ASSETS**                                                         |       |                                           |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |
| Current assets:                                                    |       |                                           |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |
| Cash and cash equivalents                                          |       | $                                              | 11,132     |                                                 |       | $                                                    | 281        |                                                 |       |   | $ | — |   |   |   | $ | 11,413 |   |   |
| Accounts receivable, net                                           |       | 25,548                                         |       |                                                 | 4,342      |                                                 |       |                                                 | —     |   |   |   | 29,890 |   |   |
| Inventories                                                        |       | 56,677                                         |       |                                                 | 40,118     |                                                 |       |                                                 | —     |   |   |   | 96,795 |   |   |
| Prepaid expenses and  other current assets                         |       | 14,989                                         |       |                                                 | 152        |                                                 |       |                                                 | —     |   |   |   | 15,141 |   |   |
| Total current assets                                               |       | 108,346                                        |       |                                                 | 44,893     |                                                 |       |                                                 | —     |   |   |   | 153,239 |   |   |
| Equipment and  leasehold improvements, net                         |       | 32,641                                         |       |                                                 | 4,512      |                                                 |       |                                                 | —     |   |   |   | 37,153 |   |   |
| Investment in  subsidiaries                                        |       | 18,950                                         |       |                                                 | —     |                                                 |       |                                                 | (18,950    | ) |   |   | — |   |   |
| Intercompany  assets                                               |       | 82,982                                         |       |                                                 | 10,768     |                                                 |       |                                                 | (93,750    | ) |   |   | — |   |   |
| Deferred tax asset                                                 |       | 186,542                                        |       |                                                 | 20         |                                                 |       |                                                 | —     |   |   |   | 186,562 |   |   |
| Goodwill                                                           |       | —                                         |       |                                                 | 6,221      |                                                 |       |                                                 | —     |   |   |   | 6,221 |   |   |
| Intangible assets,  net                                            |       | 46,554                                         |       |                                                 | 40,318     |                                                 |       |                                                 | —     |   |   |   | 86,872 |   |   |
| Other assets, net                                                  |       | 5,059                                          |       |                                                 | 4,838      |                                                 |       |                                                 | —     |   |   |   | 9,897 |   |   |
| Total assets                                                       |       | $                                              | 481,074    |                                                 |       | $                                                    | 111,570    |                                                 |       |   | $ | (112,700 | ) |   |   | $ | 479,944 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                     |       |                                           |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |
| Current liabilities:                                               |       |                                           |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |
| Current maturities of  long-term debt and capital lease obligation |       | $                                              | 1,349      |                                                 |       | $                                                    | —     |                                                 |       |   | $ | — |   |   |   | $ | 1,349 |   |   |
| Accounts payable                                                   |       | 23,024                                         |       |                                                 | 6,750      |                                                 |       |                                                 | —     |   |   |   | 29,774 |   |   |
| Accrued expenses                                                   |       | 36,686                                         |       |                                                 | 2,888      |                                                 |       |                                                 | —     |   |   |   | 39,574 |   |   |
| Total current liabilities                                          |       | 61,059                                         |       |                                                 | 9,638      |                                                 |       |                                                 | —     |   |   |   | 70,697 |   |   |
| Long-term debt,  net of current maturities                         |       | 387,657                                        |       |                                                 | —     |                                                 |       |                                                 | —     |   |   |   | 387,657 |   |   |
| Capital lease  obligation, net of current maturities               |       | 3,191                                          |       |                                                 | —     |                                                 |       |                                                 | —     |   |   |   | 3,191 |   |   |
| Other liabilities                                                  |       | 3,256                                          |       |                                                 | —     |                                                 |       |                                                 | —     |   |   |   | 3,256 |   |   |
| Intercompany  liabilities                                          |       | 10,768                                         |       |                                                 | 82,982     |                                                 |       |                                                 | (93,750    | ) |   |   | — |   |   |
| Total liabilities                                                  |       | 465,931                                        |       |                                                 | 92,620     |                                                 |       |                                                 | (93,750    | ) |   |   | 464,801 |   |   |
| Commitments and contingencies                                      |       |                                           |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |
| Stockholders’ equity:                                         |       |                                           |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |
| Preferred stock                                                    |       | —                                         |       |                                                 | —     |                                                 |       |                                                 | —     |   |   |   | — |   |   |
| Common stock                                                       |       | 665                                            |       |                                                 | —     |                                                 |       |                                                 | —     |   |   |   | 665 |   |   |
| Treasury stock                                                     |       | (96                                            | )          |                                                 | —     |                                                 |       |                                                 | —     |   |   |   | (96 | ) |   |
| Warrants and options                                               |       | 11,745                                         |       |                                                 | —     |                                                 |       |                                                 | —     |   |   |   | 11,745 |   |   |
| Investment from parent                                             |       | —                                         |       |                                                 | 27,925     |                                                 |       |                                                 | (27,925    | ) |   |   | — |   |   |
| Additional paid-in  capital                                        |       | 210,908                                        |       |                                                 | —     |                                                 |       |                                                 | —     |   |   |   | 210,908 |   |   |
| Accumulated deficit                                                |       | (179,738                                       | )          |                                                 | (8,975     | )                                                    |       |                                                 | 8,975      |   |   |   | (179,738 | ) |   |
| Common stock subscription  receivable                              |       | (22,534                                        | )          |                                                 | —     |                                                 |       |                                                 | —     |   |   |   | (22,534 | ) |   |
| Common stock repurchase  option                                    |       | (2,636                                         | )          |                                                 | —     |                                                 |       |                                                 | —     |   |   |   | (2,636 | ) |   |
| Common stock held in  grantor trusts                               |       | (2,847                                         | )          |                                                 | —     |                                                 |       |                                                 | —     |   |   |   | (2,847 | ) |   |
| Loans to executive  officer                                        |       | (324                                           | )          |                                                 | —     |                                                 |       |                                                 | —     |   |   |   | (324 | ) |   |
| Total stockholders’  equity                                   |       | 15,143                                         |       |                                                 | 18,950     |                                                 |       |                                                 | (18,950    | ) |   |   | 15,143 |   |   |
| Total liabilities and stockholders’ equity                    |       | $                                              | 481,074    |                                                 |       | $                                                    | 111,570    |                                                 |       |   | $ | (112,700 | ) |   |   | $ | 479,944 |   |   |

 

29

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**UNITED INDUSTRIESCORPORATION AND SUBSIDIARIESSTATEMENT OF OPERATIONSFOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004(Unaudited)**
| ** **                                   | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Net sales                                    |       | $          | 110,836    |                        |       | $                               | 55,956     |             |       |             | $          | 17,760 |   |   |   | $ | (13,512 | ) |   |   | $ | 171,040 |   |   |
| Operating costs and  expenses:               |       |       |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Cost of goods sold                           |       | 72,360     |       |                        | 53,486     |                            |       |             | 14,843     |             |       |   | (17,178 | ) |   |   | 123,511 |   |   |
| Selling, general and administrative expenses |       | (4,106     | )          |                        | 44,306     |                            |       |             | 4,521      |             |       |   | 3,666 |   |   |   | 48,387 |   |   |
| Total operating costs and expenses           |       | 68,254     |       |                        | 97,792     |                            |       |             | 19,364     |             |       |   | (13,512 | ) |   |   | 171,898 |   |   |
| Operating income  (loss)                     |       | 42,582     |       |                        | (41,836    | )                               |       |             | (1,604     | )                |       |   | — |   |   |   | (858 | ) |   |
| Interest expense                             |       | 812        |       |                        | 10,981     |                            |       |             | 1,006      |             |       |   | — |   |   |   | 12,799 |   |   |
| Interest income                              |       | 16         |       |                        | —     |                            |       |             | —     |             |       |   | — |   |   |   | 16 |   |   |
| Income (loss)  before income taxes           |       | 41,786     |       |                        | (52,817    | )                               |       |             | (2,610     | )                |       |   | — |   |   |   | (13,641 | ) |   |
| Provision for  income taxes                  |       | 16,284     |       |                        | (20,433    | )                               |       |             | (1,035     | )                |       |   | — |   |   |   | (5,184 | ) |   |
| Equity loss in subsidiaries                  |       | 33,958     |       |                        | —     |                            |       |             | —     |             |       |   | (33,958 | ) |   |   | — |   |   |
| Net loss                                     |       | $          | (8,456     | )                           |       | $                               | (32,384    | )                |       |             | $          | (1,575 | ) |   |   | $ | 33,958 |   |   |   | $ | (8,457 | ) |   |

 

**UNITED INDUSTRIESCORPORATION AND SUBSIDIARIESSTATEMENT OF OPERATIONSFOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003(Unaudited)**
| ** **                                   | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------|------------|------------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| Net sales                                    |       | $          | 94,305     |                        |       | $                | 24,630     |             |       |   | $ | (14,916 | ) |   |   | $ | 104,019 |   |   |
| Operating costs and  expenses:               |       |       |       |                        |       |             |       |             |       |   |   |   |   |   |   |
| Cost of goods sold                           |       | 56,989     |       |                        | 24,471     |             |       |             | (16,710    | ) |   |   | 64,750 |   |   |
| Selling, general and administrative expenses |       | 27,682     |       |                        | 2,719      |             |       |             | 1,794      |   |   |   | 32,195 |   |   |
| Total operating costs and expenses           |       | 84,671     |       |                        | 27,190     |             |       |             | (14,916    | ) |   |   | 96,945 |   |   |
| Operating income  (loss)                     |       | 9,634      |       |                        | (2,560     | )                |       |             | —     |   |   |   | 7,074 |   |   |
| Interest expense                             |       | 9,032      |       |                        | 141        |             |       |             | —     |   |   |   | 9,173 |   |   |
| Interest income                              |       | 568        |       |                        | —     |             |       |             | —     |   |   |   | 568 |   |   |
| Income (loss)  before income taxes           |       | 1,170      |       |                        | (2,701     | )                |       |             | —     |   |   |   | (1,531 | ) |   |
| Provision for  income taxes                  |       | 326        |       |                        | (1,024     | )                |       |             | —     |   |   |   | (698 | ) |   |
| Equity loss in  subsidiaries                 |       | 1,677      |       |                        | —     |             |       |             | (1,677     | ) |   |   | — |   |   |
| Net loss                                     |       | $          | (833       | )                           |       | $                | (1,677     | )                |       |   | $ | 1,677 |   |   |   | $ | (833 | ) |   |

** **

30

----

**UNITED INDUSTRIESCORPORATION AND SUBSIDIARIESSTATEMENT OF OPERATIONSFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004(Unaudited)**
| ** **                                   | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | ** Eliminations ** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------------------|------------|------------------|------------|
| Net sales                                    |       | $          | 435,189    |                        |       | $                               | 232,659    |                         |       |             | $          | 46,527 |   |   |   | $ | (120,797 | ) |   |   | $ | 593,578 |   |   |
| Operating costs and  expenses:               |       |       |       |                        |       |                            |       |                         |       |             |       |   |   |   |   |   |   |   |   |
| Cost of goods sold                           |       | 268,979    |       |                        | 182,438    |                            |       |                         | 41,298     |             |       |   | (99,939 | ) |   |   | 392,776 |   |   |
| Selling, general and administrative expenses |       | 100,223    |       |                        | 50,660     |                            |       |                         | 8,127      |             |       |   | (20,858 | ) |   |   | 138,152 |   |   |
| Total operating costs and expenses           |       | 369,202    |       |                        | 233,098    |                            |       |                         | 49,425     |             |       |   | (120,797 | ) |   |   | 530,928 |   |   |
| Operating income                             |       | 65,987     |       |                        | (439       | )                               |       |                         | (2,898     | )                |       |   | — |   |   |   | 62,650 |   |   |
| Interest expense                             |       | 21,626     |       |                        | 10,827     |                            |       |                         | 1,875      |             |       |   | — |   |   |   | 34,328 |   |   |
| Interest income                              |       | 388        |       |                        | —     |                            |       |                         | —     |             |       |   | — |   |   |   | 388 |   |   |
| Income before income  taxes                  |       | 44,749     |       |                        | (11,266    | )                               |       |                         | (4,773     | )                |       |   | — |   |   |   | 28,710 |   |   |
| Provision for  income taxes                  |       | 17,004     |       |                        | (7,743     | )                               |       |                         | (1,814     | )                |       |   | — |   |   |   | 7,447 |   |   |
| Equity loss in subsidiaries                  |       | 6,482      |       |                        | —     |                            |       |                         | —     |             |       |   | (6,482 | ) |   |   | — |   |   |
| Net income (loss)                            |       | $          | 21,263     |                        |       | $                               | (3,523     | )                            |       |             | $          | (2,959 | ) |   |   | $ | 6,482 |   |   |   | $ | 21,263 |   |   |

 

**UNITED INDUSTRIESCORPORATION AND SUBSIDIARIESSTATEMENT OF OPERATIONSFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003(Unaudited) (As Restated)**
| ** **                                   | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------|------------|------------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| Net sales                                    |       | $          | 404,518    |                        |       | $                | 174,064    |             |       |   | $ | (89,748 | ) |   |   | $ | 488,834 |   |   |
| Operating costs and  expenses:               |       |       |       |                        |       |             |       |             |       |   |   |   |   |   |   |
| Cost of goods sold                           |       | 232,263    |       |                        | 152,234    |             |       |             | (87,195    | ) |   |   | 297,302 |   |   |
| Selling, general and administrative expenses |       | 95,623     |       |                        | 18,429     |             |       |             | (2,553     | ) |   |   | 111,499 |   |   |
| Total operating costs and expenses           |       | 327,886    |       |                        | 170,663    |             |       |             | (89,748    | ) |   |   | 408,801 |   |   |
| Operating income                             |       | 76,632     |       |                        | 3,401      |             |       |             | —     |   |   |   | 80,033 |   |   |
| Interest expense                             |       | 28,719     |       |                        | 428        |             |       |             | —     |   |   |   | 29,147 |   |   |
| Interest income                              |       | 1,522      |       |                        | —     |             |       |             | —     |   |   |   | 1,522 |   |   |
| Income before  income taxes                  |       | 49,435     |       |                        | 2,973      |             |       |             | —     |   |   |   | 52,408 |   |   |
| Provision for  income taxes                  |       | 18,785     |       |                        | 2,042      |             |       |             | —     |   |   |   | 20,827 |   |   |
| Equity income in  subsidiaries               |       | (931       | )          |                        | —     |             |       |             | 931        |   |   |   | — |   |   |
| Net income                                   |       | $          | 31,581     |                        |       | $                | 931        |             |       |   | $ | (931 | ) |   |   | $ | 31,581 |   |   |

 

31

----

**UNITED INDUSTRIESCORPORATION AND SUBSIDIARIESSTATEMENT OF CASH FLOWSFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004(Unaudited)**
| ** **                                                                                                | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Cash flows from operating activities:                                                                     | ** ** | ** ** |       |                        | ** ** | ** **                      |       |             | ** ** | ** **       |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net income (loss)                                                                                         |       | $          | 21,263     |                        |       | $                               | (3,523     | )                |       |             | $          | (2,959 | ) |   |   | $ | 6,482 | ** ** |   |   | $ | 21,263 | ** ** |   |
| Adjustments to reconcile net income (loss) to net  cash flows provided by (used in) operating activities: |       |       |       |                        |       | ** **                      |       |             |       | ** **       |       |   |   | ** ** |   |   |   | ** ** |   |
| Depreciation and  amortization                                                                            |       | 24,145     |       |                        | —     | ** **                      |       |             | —     | ** **       |       |   | — | ** ** |   |   | 24,145 | ** ** |   |
| Amortization and  write-off of deferred financing fees                                                    |       | 4,168      |       |                        | —     | ** **                      |       |             | —     | ** **       |       |   | — | ** ** |   |   | 4,168 | ** ** |   |
| Deferred income tax  expense (benefit)                                                                    |       | 7,448      |       |                        | —     | ** **                      |       |             | —     | ** **       |       |   | — | ** ** |   |   | 7,448 |   |   |
| Gain on sale of aircraft                                                                                  |       | (1,497     | )          |                        | —     | ** **                      |       |             | —     | ** **       |       |   | — | ** ** |   |   | (1,497 | ) |   |
| Stock-based compensation  for shares held in grantor trust                                                |       | 479        |       |                        | —     | ** **                      |       |             | —     | ** **       |       |   | — | ** ** |   |   | 479 | ** ** |   |
| Equity (income) loss in  subsidiaries                                                                     |       | 6,482      |       |                        | —     | ** **                      |       |             | —     | ** **       |       |   | (6,482 | ) |   |   | — | ** ** |   |
| Changes in operating assets and liabilities, net of  effects from acquisitions:                           |       |       |       |                        |       | ** **                      |       |             |       | ** **       |       |   |   |   |   |   |   | ** ** |   |
| Accounts receivable                                                                                       |       | 107,347    |       |                        | 13,814     | ** **                      |       |             | 18,205     | ** **       |       |   | (120,797 | ) |   |   | 18,569 | ** ** |   |
| Inventories                                                                                               |       | (98,745    | )          |                        | 30,956     | ** **                      |       |             | (7,390     | )                |       |   | 99,939 | ** ** |   |   | 24,760 | ** ** |   |
| Prepaid expenses                                                                                          |       | 3,511      |       |                        | 4,549      | ** **                      |       |             | (1,605     | )                |       |   | — | ** ** |   |   | 6,455 | ** ** |   |
| Other assets                                                                                              |       | (6,687     | )          |                        | 6,419      | ** **                      |       |             | (124       | )                |       |   | — | ** ** |   |   | (392 | ) |   |
| Accounts payable                                                                                          |       | (12,796    | )          |                        | (15,044    | )                               |       |             | (13,985    | )                |       |   | — | ** ** |   |   | (41,825 | ) |   |
| Accrued expenses                                                                                          |       | 9,631      |       |                        | 4,124      | ** **                      |       |             | 7,932      |             |       |   | — | ** ** |   |   | 21,687 |   |   |
| Other operating  activities, net                                                                          |       | (20,618    | )          |                        | 382        | ** **                      |       |             | 547        |             |       |   | 20,858 | ** ** |   |   | 1,169 |   |   |
| Net cash flows  provided by (used in) operating activities                                                |       | 44,131     |       |                        | 41,677     | ** **                      |       |             | 621        |             |       |   | — | ** ** |   |   | 86,429 |   |   |
| Cash flows from investing activities:                                                                     |       |       |       |                        |       | ** **                      |       |             |       |             |       |   |   | ** ** |   |   |   |   |   |
| Purchases of equipment  and leasehold  improvements                                                       |       | (12,036    | )          |                        | —     | ** **                      |       |             | —     |             |       |   | — | ** ** |   |   | (12,036 | ) |   |
| Payment for acquisition  of the Nu-Gro Corporation                                                        |       | (146,698   | )          |                        | —     | ** **                      |       |             | —     |             |       |   | — | ** ** |   |   | (146,698 | ) |   |
| Payment for acquisition  of United Pet Group                                                              |       | (371,534   | )          |                        | —     | ** **                      |       |             | —     |             |       |   | — | ** ** |   |   | (371,534 | ) |   |
| Proceeds from sale of  aircraft                                                                           |       | 2,787      |       |                        | —     | ** **                      |       |             | —     |             |       |   | — | ** ** |   |   | 2,787 |   |   |
| Net cash flows  provided by (used in) investing activities                                                |       | (527,481   | )          |                        | —     | ** **                      |       |             | —     |             |       |   | — | ** ** |   |   | (527,481 | ) |   |
| Cash flows from financing activities:                                                                     |       |       |       |                        |       | ** **                      |       |             |       |             |       |   |   | ** ** |   |   |   |   |   |
| Proceeds from borrowings  on new senior credit facility                                                   |       | 635,000    |       |                        | —     | ** **                      |       |             | —     |             |       |   | — | ** ** |   |   | 635,000 |   |   |
| Proceeds from issuance of  common stock                                                                   |       | 70,000     |       |                        | —     | ** **                      |       |             | —     |             |       |   | — | ** ** |   |   | 70,000 |   |   |
| Payments received on  loans to executive officer                                                          |       | 109        |       |                        | —     | ** **                      |       |             | —     |             |       |   | — | ** ** |   |   | 109 |   |   |
| Repayment for repurchase  of senior subordinated notes                                                    |       | (3,100     | )          |                        | —     | ** **                      |       |             | —     |             |       |   | — | ** ** |   |   | (3,100 | ) |   |
| Repayment of borrowings  on term debt                                                                     |       | (181,827   | )          |                        | —     | ** **                      |       |             | —     |             |       |   | — | ** ** |   |   | (181,827 | ) |   |
| Payments for capital  lease obligation                                                                    |       | (3,938     | )          |                        | —     | ** **                      |       |             | —     |             |       |   | — | ** ** |   |   | (3,938 | ) |   |
| Payments for debt  issuance costs                                                                         |       | (14,922    | )          |                        | —     | ** **                      |       |             | —     |             |       |   | — | ** ** |   |   | (14,922 | ) |   |
| Payments for repurchase  of preferred stock and accrued dividends                                         |       | (57,557    | )          |                        | —     | ** **                      |       |             | —     |             |       |   | — | ** ** |   |   | (57,557 | ) |   |
| Payments for Bayer  transactions for treasury stock                                                       |       | (1,500     | )          |                        | —     | ** **                      |       |             | —     |             |       |   | — | ** ** |   |   | (1,500 | ) |   |
| Other financing and  intercompany activities                                                              |       | 39,590     |       |                        | (41,483    | )                               |       |             | 1,893      |             |       |   | — | ** ** |   |   | — |   |   |
| Net cash flows  provided by (used in) financing activities                                                |       | 481,855    |       |                        | (41,483    | )                               |       |             | 1,893      |             |       |   | — | ** ** |   |   | 442,265 |   |   |
| Effect of exchange  rates on cash and cash equivalents                                                    |       | (4,336     | )          |                        | —     | ** **                      |       |             | —     |             |       |   | — | ** ** |   |   | (4,336 | ) |   |
| Net increase  (decrease) in cash and cash equivalents                                                     |       | (5,831     | )          |                        | 194        | ** **                      |       |             | 2,514      |             |       |   | — | ** ** |   |   | (3,123 | ) |   |
| Cash and cash  equivalents, beginning of period                                                           |       | 11,132     |       |                        | 281        | ** **                      |       |             | —     |             |       |   | — | ** ** |   |   | 11,413 |   |   |
| Cash and cash  equivalents, end of period                                                                 |       | $          | 5,301      |                        |       | $                               | 475        | ** **       |       |             | $          | 2,514 | ** ** |   |   | $ | — | ** ** |   |   | $ | 8,290 |   |   |

 

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**UNITED INDUSTRIESCORPORATION AND SUBSIDIARIESSTATEMENT OF CASH FLOWSFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003(Unaudited) (As Restated)**
| ** **                                                                               | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                               | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Cash flows from  operating activities:                                                   |       |       |       |             |       |             |       |             |       |   |   |   |   |   |   |
| Net income                                                                               |       | $          | 31,581     |             |       | $                | 931        |             |       |   | $ | (931 | ) |   |   | $ | 31,581 |   |   |
| Adjustments to  reconcile net income to net cash flows provided by operating activities: |       |       |       |             |       |             |       |             |       |   |   |   |   |   |   |
| Depreciation and amortization                                                            |       | 3,945      |       |             | 8,190      |             |       |             | —     |   |   |   | 12,135 |   |   |
| Amortization of deferred financing fees                                                  |       | 4,747      |       |             | —     |             |       |             | —     |   |   |   | 4,747 |   |   |
| Deferred income tax expense                                                              |       | 18,518     |       |             | 357        |             |       |             | —     |   |   |   | 18,875 |   |   |
| Equity income in subsidiaries                                                            |       | (931       | )          |             | —     |             |       |             | 931        |   |   |   | — |   |   |
| Changes in  operating assets and liabilities:                                            |       |       |       |             |       |             |       |             |       |   |   |   |   |   |   |
| Accounts receivable                                                                      |       | 52,766     |       |             | 2,312      |             |       |             | (89,748    | ) |   |   | (34,670 | ) |   |
| Inventories                                                                              |       | (76,221    | )          |             | 7,297      |             |       |             | 87,195     |   |   |   | 18,271 |   |   |
| Prepaid expenses and other current assets                                                |       | (218       | )          |             | 1,498      |             |       |             | —     |   |   |   | 1,280 |   |   |
| Other assets                                                                             |       | (4,844     | )          |             | 3,222      |             |       |             | —     |   |   |   | (1,622 | ) |   |
| Accounts payable                                                                         |       | 1,199      |       |             | (12,167    | )                |       |             | —     |   |   |   | (10,968 | ) |   |
| Accrued expenses                                                                         |       | 12,098     |       |             | (4,012     | )                |       |             | —     |   |   |   | 8,086 |   |   |
| Other operating activities, net                                                          |       | (3,838     | )          |             | 582        |             |       |             | 2,553      |   |   |   | (703 | ) |   |
| Net cash flows provided by operating activities                                          |       | 38,802     |       |             | 8,210      |             |       |             | —     |   |   |   | 47,012 |   |   |
| Cash flows from  investing activities:                                                   |       |       |       |             |       |             |       |             |       |   |   |   |   |   |   |
| Purchases of equipment and leasehold improvements                                        |       | (6,724     | )          |             | —     |             |       |             | —     |   |   |   | (6,724 | ) |   |
| Proceeds from sale of WPC product lines                                                  |       | 4,204      |       |             | —     |             |       |             | —     |   |   |   | 4,204 |   |   |
| Net cash flows used in investing activities.                                             |       | (2,520     | )          |             | —     |             |       |             | —     |   |   |   | (2,520 | ) |   |
| Cash flows from  financing activities:                                                   |       |       |       |             |       |             |       |             |       |   |   |   |   |   |   |
| Proceeds from additional debt                                                            |       | 86,275     |       |             | —     |             |       |             | —     |   |   |   | 86,275 |   |   |
| Proceeds from issuance of common stock                                                   |       | 84         |       |             | —     |             |       |             | —     |   |   |   | 84 |   |   |
| Payments received for common stock subscription  receivable                              |       | 2,863      |       |             | —     |             |       |             | —     |   |   |   | 2,863 |   |   |
| Payments received on loans to executive officer                                          |       | 80         |       |             | —     |             |       |             | —     |   |   |   | 80 |   |   |
| Repayment of borrowings on debt                                                          |       | (98,127    | )          |             | —     |             |       |             | —     |   |   |   | (98,127 | ) |   |
| Payments for capital lease obligations                                                   |       | (445       | )          |             | —     |             |       |             | —     |   |   |   | (445 | ) |   |
| Payments for debt issuance costs                                                         |       | (2,924     | )          |             | —     |             |       |             | —     |   |   |   | (2,924 | ) |   |
| Change in book cash overdraft                                                            |       | 1,506      |       |             | —     |             |       |             | —     |   |   |   | 1,506 |   |   |
| Other financing and intercompany activities                                              |       | 7,597      |       |             | (7,597     | )                |       |             | —     |   |   |   | — |   |   |
| Net cash flows used in financing activities                                              |       | (3,091     | )          |             | (7,597     | )                |       |             | —     |   |   |   | (10,688 | ) |   |
| Net increase in cash and cash equivalents                                                |       | 33,191     |       |             | 613        |             |       |             | —     |   |   |   | 33,804 |   |   |
| Cash and cash  equivalents, beginning of period                                          |       | 10,191     |       |             | 127        |             |       |             | —     |   |   |   | 10,318 |   |   |
| Cash and cash  equivalents, end of period                                                |       | $          | 43,382     |             |       | $                | 740        |             |       |   | $ | — |   |   |   | $ | 44,122 |   |   |

 

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**ITEM 2.**   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS.

The discussion andanalysis of our consolidated financial condition and results of operationsincluded herein should be read in conjunction with our historical financialinformation included in the consolidated financial statements and the relatednotes thereto included elsewhere in this Quarterly Report. Future results coulddiffer materially from those discussed below for many reasons, including therisks described under the heading “Certain Trends and Uncertainties” in thissection and elsewhere in this Quarterly Report and in our Annual Report on Form 10-Kfor the year ended December 31, 2003.

**Overview andManagement Report**

Under our three operating divisions, which own and license awide variety of brand names, we manufacture and market broad product lines inboth the lawn and garden, household and pet suppliesindustries. Our largest operating division, Spectrum Brands, iscomprised of a number of leading lawn and garden care products, including dry,granular lawn fertilizers, lawn fertilizer combination and lawn controlproducts, herbicides, water-soluble and controlled-release garden and indoorplant foods, plant care products, potting soils and other growing mediaproducts, grass seed and indoor and outdoorinsecticide and insect repellent products.Spectrum Brands represents our largest business segment, referred to as U.S.Home & Garden, and its brands include, among others, Spectracide®,Garden Safe® and Real-Kill® in the controlscategory, Sta-Green®, Vigoro®, SchultzTM and Bandini®in the lawn and garden, fertilizer and growing media categories,and Hot Shot®, Cutter® and Repel® in thehousehold category.

Our Canadian operating division, The Nu-Gro Company, orNu-Gro, manufactures and markets a number of lawn and garden and household products similar to theU.S Home & Garden products, which are sold primarily throughoutCanada, and a variety of controlled-release nitrogen products and fertilizertechnology, which are sold primarily throughout the United States, with somesales in Canada and other countries. Nu-Gro represents our smallest businesssegment, referred to as Canada, and its brands include, among others, Wilson®,So-Green®, Greenleaf® and Green Earth® in thelawn and garden categories, and IB Nitrogen®, Nitroform®,Nutralene®, S.C.U.® and Organiform® inthe fertilizer technology category.

The products in both our U.S. Home & Gardenand Canada segments are targeted toward consumers who want products andpackaging that are comparable or superior to, and sold at lower prices than,premium-priced brands, while our opening price point brands are designed forcost-conscious consumers who want quality products. The home and gardenproducts of both segments are marketed to mass merchandisers, home improvementcenters, hardware, grocery and drug chains, nurseries and garden centers.

Our pet supplies operating division, United Pet Group, Inc.,or UPG, manufactures and markets a diverse portfolio of branded pet supplies. UPGrepresents our second largest business segment, referred to as Pet, and itsbrands include, among others, Marineland®, Perfecto®,Instant Ocean® and Regent® in the aquatics category and 8-in-1®,Nature’s Miracle®, Dingo®, Wild Harvest®, OneEarth®, Lazy Pet® and JungleTalk® in thespecialty pet category. UPG’s products are sold primarily in the United Statesthrough mass merchandisers, large chain pet retailers, smaller independent petretailers, national and regional grocery chains and consumer catalogs andwebsites.

The basis of our segmentation was modified since December 31, 2003to accommodate the acquisitions of Nu-Gro and UPG. Our previously-existing segments at December 31,2003 have been combined into the new U.S. Home & Garden segment due totheir similar nature. This change representsthe only reclassifications of 2003 segment information required to achievecomparability of financial information for the periods presented herein. The acquisition of Nu-Gro represents thesecond reportable segment, Canada, and the acquisition of UPG represents the third reportablesegment, Pet. As of September 30, 2004, net sales bybusiness segment were as follows: U.S. Home & Garden, 62% of third 

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quarter 2004 net sales;Canada, 13% of third quarter 2004 net sales; and Pet, 25% of third quarter 2004net sales.

Our U.S. Home & Garden segment competes inthe $2.9 billion consumer lawn and garden and $1.0 billion householdinsect control retail markets in the United States, while our Canada segmentcompetes in the $335.0 million lawn and garden market in Canada. We believe akey growth factor in the lawn and garden retail market is the aging of theUnited States population, as consumers over the age of forty-five represent thelargest segment of lawn and garden care product users and typically have moreleisure time and higher levels of discretionary income than the generalpopulation. We also believe the growth in the home improvement center and massmerchandiser channels has increased the popularity of do-it-yourselfactivities, including lawn and garden projects. The three largest customers ofthese segments are The Home Depot, Lowe’s and Wal-Mart.

Our Pet segment competes in the approximately $8.0 billion petsupplies industry. We believe the pet supplies industry is projected to grow ata rate of approximately 6.5% annually for atleast the next several years. We believe the key growth factorsin the pet supplies industry are the increase in U.S. households that own oneor more pets; the “humanization” of pets, whereby owners treat their pets asmembers of the family and increase related spending levels; and favorabledemographic trends due to an increase in the number of U.S. households withchildren under the age of 18 or only adults over the age of 55. We also believethe growth in the pet specialty superstore and mass merchandiser channels hasincreased the convenience and ability for pet owners to obtain a broaderassortment of high quality branded products. The three largest customers ofthis segment are Wal-Mart, Petco and PetSmart.

We believe that ourhistorical financial condition and results of operations are not necessarilyaccurate indicators of future results because of diversification of ourbusinesses, variability in our product listings at customers, and historicallack of long-term supply contracts with most customers and because of certainsignificant past events. Those events include merger, acquisition, strategicand equity and debt financing transactions over the last several years.Furthermore, our sales, primarily in the U.S. Home & Garden and Canadasegments, are seasonal in nature and are susceptible to weather conditions thatvary from year to year.

**Critical AccountingPolicies**

While all of the significant accounting policiesdescribed in the notes to our consolidated financial statements are important,some of these policies may be viewed as being critical. Such policies are thosethat are both most important to the portrayal of our financial condition andrequire our most difficult, subjective or complex estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of our consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period. We base our estimates and assumptions on historicalexperience and various other factors that we believe to be reasonable under thecircumstances. Actual results could differ from these estimates andassumptions. We believe our most critical accounting policies are as follows.

***RevenueRecognition.******  ***We recognize revenue when title andrisk of loss transfer to the customer. Net sales represent gross sales less anyapplicable customer discounts from list price, customer sales returns andpromotion expense through cooperative programs with our customers. Theprovision for customer returns is based on historical sales returns andanalysis of credit memo and other relevant information. If the historical orother data used to develop these estimates do not properly reflect futurereturns, net sales may require adjustment. Sales reductions related to returnswere $3.0 million for the three months ended September 30, 2004 and $3.5million for the three months ended September 30, 2003. Sales reductionsrelated to returns were $9.7 million for the nine months ended September 30,2004 and $10.6 million for the nine months ended September 30, 2003. Thedecrease was driven primarily by the mix of products sold 

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during the nine monthsended September 30, 2004. Amounts included in the accounts receivablereserves for product returns were $3.1 million as of September 30, 2004,$2.7 million as of September 30, 2003 and $1.4 million as of December 31,2003.

***Inventories.******  ***We reportinventories at the lower of cost or market. Cost is determined using a standardcosting system that approximates the first-in, first-out method and includesraw materials, direct labor and overhead. An allowance for obsolete orslow-moving inventory is recorded based on our analysis of inventory levels andfuture sales forecasts. In the event that our estimates of future usage andsales differ from actual results, the allowance for obsolete or slow-movinginventory may require adjustment. The allowance for obsolete or slow-movinginventory increased $2.3 million during the third quarter of 2004 and $3.2million since December 31, 2003. The allowance for obsolete or slow-movinginventory was $8.8 million as of September 30, 2004, $5.9 million as of September 30,2003 and $5.6 million as of December 31, 2003.

***PromotionExpense.******  ***We record promotion expense, includingcooperative programs with customers, as a reduction of gross sales. Inaddition, we incur advertising costs irrespective of promotions. We includesuch costs in selling, general and administrative expenses in our consolidatedstatements of operations. We advertise and promote our products throughnational and regional media. Products are also advertised and promoted throughcooperative programs with retailers. Advertising and promotion costs areexpensed as incurred, although costs incurred during interim periods aregenerally expensed ratably in relation to revenues. Management develops anestimate of the amount of costs that have been incurred by the retailers underour cooperative programs based on an analysis of specific programs offered tothem and historical information. Actual costs incurred may differ significantlyfrom our estimates if factors such as the level of participation and success ofthe retailers’ programs or other conditions differ from our expectations.

***IncomeTaxes.******  ***We account for income taxes under theasset and liability method. Under this method, deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial reporting basis and the tax basis of assetsand liabilities at enacted tax rates expected to be in effect when such amountsare recovered or settled. Judgment is required to determine the amount of anyvaluation allowance to apply against deferred tax assets. We will establish avaluation allowance if we determine that it is more likely than not that someportion or all of our deferred tax assets will not be realized and include anychanges to such valuation allowance in our consolidated statements ofoperations as income tax expense or benefit, as appropriate.

During the third quarter of 2004, we revised ourexpected annual effective income tax rate to 26%, due primarily to theamortization of certain deferred tax liabilities from prior years. In addition,because of our tax-deductible goodwill and net operating loss carryforwards,most of our income tax expense is deferred, and no significant cash paymentsfor income taxes are expected for the next several years.

Although we believe it is more likely than not that wewill utilize our deferred tax assets, we can provide no assurance of this, asour ability to utilize such assets is contingent upon our ability to generatesufficient taxable income in the future. We will continue to assess therealizability of the deferred tax assets based upon actual and forecastedoperating results. If we conclude it is not more likely than not that we willrealize the benefit of our deferred tax assets, we may have to establish avaluation allowance and, accordingly, record a charge to income tax expense.

***Goodwill, Intangible andOther Long-Lived Assets.******  ***We haveacquired intangible assets or made acquisitions in the past that resulted inthe recording of goodwill and intangible assets. Goodwill is not amortized andis subject to impairment testing at least annually. We evaluate therecoverability of long-lived assets, including goodwill and intangibleassets, for impairment annually or when events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable from itsfuture. Such events or changes in circumstances could include such factors aschanges in technological 

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advances,fluctuations in the fair value of such assets or adverse changes in customerrelationships or vendors. Recoverability is evaluated by brand and product type,which represent the reporting unit components within our operating segments. Ifa review of goodwill using current market rates, discounted cash flows andother methods, or if a review of other intangible assets using current marketrates, undiscounted cash flows and other methods, indicates that the carryingvalue is not recoverable, the carrying value of such asset is reduced to itsestimated fair value. No impairments existed as of or during the periods ended September 30,2004 and 2003 and December 31, 2003. While we believe that our estimatesof future cash flows at our last evaluation are reasonable, differentassumptions regarding such cash flows could materially affect our evaluations.Therefore, impairment losses could be recorded in the future. We willperform our annual impairment test of goodwill and intangible assets in thefourth quarter of 2004.

**Recent Events**

***Acquisition ofUnited Pet Group,****** Inc.  ***On July 30, 2004,we and our wholly-owned subsidiary completed a merger of the subsidiary withand into UPG, a privately owned manufacturer and marketer of branded pet supplies. As a resultof the merger, UPG and its subsidiaries became wholly-owned subsidiaries ofours. The total purchase price included cash consideration of $371.5 million,including transaction costs of $5.0 millionand the assumption of $113.3 million of outstanding debt and equityobligations, which were immediately repaid by us at closing. The transactionhas been accounted for as an acquisition using the purchase method ofaccounting. Accordingly, the results of operations of UPG have been included inour results of operations from July 30, 2004, the date of acquisition. Wefinanced the transaction with proceeds generated from amending and increasingour credit agreement by $250.0 million, including the addition of a $75.0million second lien term loan, with proceeds of $70.0 million from the issuanceof 5.8 million shares each of our Class A voting and Class Bnonvoting common stock to affiliates of Thomas H. Lee Partners, our largestshareholder, Banc of America Securities LLC and certain UPG sellingshareholders and the remainder from cash balances. The acquisition was executedin an attempt to further diversify our product offerings, mitigate the effectsof seasonality trends, decrease dependence on certain of our largest customersand expand the opportunity for future growth.

The purchase price was preliminarily allocated toassets acquired and liabilities assumed based on estimated fair values. Wepreliminarily allocated $172.5 million of the purchase price to intangibleassets and $174.5 million to goodwill for consideration paid in excess of thefair value of net assets acquired, which is not deductible for tax purposes.The acquired intangible assets consist primarily of trade names, which arecurrently being amortized using the straight-line method over periods rangingfrom fifteen to forty years, and to customer relationships, which are currentlybeing amortized using the straight-line method over periods ranging from fiveto ten years and other intangible assets, primarily patents, which arecurrently being amortized using the straight-line method over periods rangingfrom ten to fifteen years. Amortization expense forthe two-month period ended September 30, 2004 was $1.6 million. Inaddition, we increased the value of inventory acquired from UPG by $6.0 millionto reflect estimated fair value on the date of acquisition, which is currentlybeing recorded as cost of goods sold commensurate with related subsequent salesactivity during 2004. For the two months ended September 30, 2004,amortization expense of $4.0 million was recorded in cost of goods sold forthis write-up of inventory to estimated fair value. We also increased the valueof property, plant and equipment acquired from UPG by $2.0 million to reflectestimated fair value on the date of acquisition, which is currently beingdepreciated using the straight-line method over varying periods, the average ofwhich is approximately 10 years. For the two month period ended September 30,2004, depreciation expense associated with such write-up of property, plant andequipment to estimated fair value was less than $0.1 million.

The purchase price allocation is based on preliminaryinformation, which is subject to adjustment upon obtaining the final report ofthe valuation of assets acquired and liabilities assumed by an 

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independent third-partyvaluation firm. We are currently in the process of obtaining such report andexpect the final purchase price allocation to be completed during the fourthquarter of 2004. The final purchase price allocation may differ significantlyfrom the preliminary allocation provided herein and may change as the result of contingentpayments based on the performance of a particular product line through December31, 2005.

***Acquisition of TheNu-Gro Corporation.***   On April 30, 2004,we completed the acquisition of all of the outstanding common shares of TheNu-Gro Corporation, or Nu-Gro, a lawn and garden products company thenincorporated under the laws of Ontario, Canada. As a result of the acquisition,Nu-Gro and its subsidiaries became our wholly-owned subsidiaries. The totalpurchase price included cash consideration of $146.7 million, including $5.3million of related acquisition costsand the assumption of $26.7 million of outstanding debt, which we immediatelyrepaid at closing. The transaction was financed with proceeds from our new seniorcredit facility (see financing activities included elsewhere in this section).The acquisition was executed in an attempt to expand our reach throughout NorthAmerica, broaden our product offerings and customer base, vertically integratecertain of our operations, including gaining access to advanced fertilizertechnologies, and to achieve economies of scale and synergistic efficiencies.

The transaction was accounted for using the purchasemethod of accounting and, accordingly, the results of operations have beenincluded in our consolidated financial statements included elsewhere in thisQuarterly Report from April 30, 2004, the date of acquisition. Thepurchase price was preliminarily allocatedto assets acquired and liabilities assumed based on estimated fair values. Weallocated $51.1 million of the purchase price to intangible and other assetsand $46.7 million to goodwill for consideration paid in excess of the fairvalue of net assets acquired, based on valuations obtained from an independentthird-party appraisal firm, which is not deductible for tax purposes. Theacquired intangible assets consist primarily of trade names, which arecurrently being amortized using the straight-line method over periods rangingfrom fifteen to forty years, and to customer relationships, which are currentlybeing amortized using the straight-line method over periods ranging fromfive to ten years. In addition, we increased the value of inventory acquiredfrom Nu-Gro by $5.2 million to reflect estimated fair value on the date ofacquisition, which was fully amortized in cost of goods sold commensurate withrelated subsequent sales activity during the second quarter of 2004.

The purchase price allocation is based onpreliminary information, which is subject to adjustment upon obtaining thefinal report of the valuation of assets acquired and liabilities assumed by anindependent third-party valuation firm. We are currently in the process ofobtaining such report and expect the final purchase price allocation to becompleted during the fourth quarter of 2004. The final purchase priceallocation may differ significantly from the preliminary allocation providedherein.

***NewSenior Credit Facility in Effect as of April 30, 2004.******  ***In conjunction with theclosing of the acquisition of Nu-Gro, on April 30, 2004, we entered into anew $510.0 million senior credit facility (referred to herein as the new seniorcredit facility) with Bank of America, N.A., Banc of America Securities LLC,Citigroup Global Markets, Inc., Citicorp North America, Inc. andcertain other lenders to refinance the indebtedness under our prior seniorcredit facility at more favorable rates, to provide funds for the Nu-Groacquisition, to repurchase all of our outstanding preferred stock, along withaccrued but unpaid dividends thereon, and for general working capital purposes.The new senior credit facility consists of (1) a $125.0 million U.S.dollar denominated revolving credit facility; (2) a $335.0 millionU.S. dollar denominated term loan facility; and (3) a Canadian dollardenominated term loan facility valued at U.S. $50.0 million. Subject tothe terms of the new senior credit facility agreement, the revolving loanportion of the new senior credit facility matures on April 30, 2010, andthe term loan obligations under the new senior credit facility mature on April 30,2011. The term loan obligations are to be repaid in 28 consecutive quarterlyinstallments and commenced on June 30, 2004, with a final installment dueon March 31, 2011. All of the loan obligations are subject to mandatoryprepayment upon certain events, including sales of certain assets, issuances ofindebtedness or equity or from excess cash flow. The new senior credit facility

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agreement also allows usto make voluntary prepayments, in whole or in part, at any time without premiumor penalty.

The new senior credit facility agreement containsaffirmative, negative and financial covenants that are more favorable thanthose of the prior senior credit facility. The negative covenants placerestrictions on, among other things, levels of investments, indebtedness,capital expenditures and dividend payments that we may make or incur. Thefinancial covenants require the maintenance of certain financial ratios atdefined levels. Under the new senior credit facility agreement, interest rateson the new revolving credit facility can range from 1.75% to 2.50% plus LIBOR,or from 0.75% to 1.50% plus a base rate, subject to adjustment and depending oncertain financial ratios. As of April 30, 2004, the term loans weresubject to interest rates equal to 2.50% plus LIBOR or 1.50% plus a base rate,as provided in the new senior credit facility agreement. LIBOR was 2.01% as of September 30,2004. The weighted average interest rate applicable to our outstanding borrowingsunder the new senior credit facility was 4.18% as of September 30, 2004.Unused commitments under the new revolving credit facility are subject to a0.5% annual commitment fee. Unused availability under the new revolving creditfacility was $124.0 million as of September 30, 2004, which is reflectiveof $6.0 million of standby letters of credit pledged as collateral. The newsenior credit facility is secured by substantially all of our properties andassets and substantially all of the properties and assets of our current andfuture domestic subsidiaries.

In connection with the closing of the Nu-Groacquisition, Bank of America, N.A., Canada Branch, separately loaned us Cdn$110.0 million for structuring purposes, which loan was repaid on April 30,2004.

***Amendment to NewSenior Credit Facility in Effect as of July 30, 2004.  ***OnJuly 30, 2004, in connection with the closing of and to partially fund ourmerger with UPG, we amended and restated the credit agreement related to ournew senior credit facility to increase the revolving credit facility from$125.0 million to $130.0 million, increase the U.S. term loan from$335.0 million to $510.0 million, add a $75.0 million second lien term loan andleave the U.S. $50.0 million Canadian term loan unchanged for a total NewSenior Credit Facility, as amended, of $765.0 million. Subject to the terms ofthe new senior credit facility agreement, as amended, the second lien term loanis to be repaid in 29 consecutive quarterly installments commencing on September 30,2004, with a final installment due on September 30, 2011, and matures on October 31,2011. Interest on the second lien term loan accrues at 4.50% plus LIBOR or 3.5%plus a base rate, subject to adjustment and depending on certain financialratios. The second lien term loan is subject to affirmative, negative andfinancial covenants. We incurred $5.0 million in costs related to theamendment, which were recorded as deferred financing fees and are beingamortized over the remaining term of the new senior credit facility. Theamendment did not change any other key terms or existing covenants of the newsenior credit facility.

***Repurchaseof Preferred Stock.******  ***In conjunction with the financing activitiesdescribed above, on April 30, 2004, we repurchased all 37,600 shares ofour outstanding Class A nonvoting preferred stock for $57.6 million,including $19.9 million for all accrued dividends thereon. Such repurchaseresulted in a reduction of additional paid-in capital of $37.7 million.

***CustomerAgreement.***   On February 12, 2004, ourlargest customer and we executed a licensing, manufacturing and supplyagreement. Under the agreement, we will license certain of our trademarks andbe the exclusive manufacturer and supplier for certain products branded withsuch trademarks from January 1, 2004, the effective date of the agreement,through December 31, 2008 or such later date as is specified in theagreement. Provided the customer achieves certain required minimum purchasevolumes and other conditions during such period, and the manufacturing andsupply portion of the agreement is extended for an additional three-year periodas specified in the agreement, we will assign the trademarks to the customernot earlier than May 1, 2009, but otherwise within thirty days after thedate upon which such required minimum purchase volumes are achieved. The carryingvalue of such trademarks as of February 12, 2004 was approximately $16.0million. If the customer fails to achieve the required minimum 

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purchase volumes or meetother certain conditions, assignment may occur at a later date, if certainconditions are met. In addition, as a result of executing the agreement, wehave modified the trademarks’ initial amortization period of forty years andwill record amortization in a manner consistent with projected sales activityover five years, because we believe the customer will achieve all requiredconditions by May 2009. Amortizationexpense was $0.4 million for the three months ended September 30, 2004 and $2.4million for the nine months ended September 30, 2004. Themodification of the amortization period will result in additional annualamortization expense of approximately $2.7 million in the year ended December 31,2004.

***BayerTransactions.******  ***On June 14, 2002, we consummateda transaction with Bayer Corporation and Bayer Advanced, L.L.C. (togetherreferred to herein as Bayer), which allows us to gain access to certain Bayeractive ingredient technologies through a Supply Agreement and to performcertain merchandising services for Bayer through an In-Store Service Agreement.In consideration for the Supply and In-Store Service Agreements, and inexchange for the promissory notes previously issued to Bayer by U.S.Fertilizer, we issued to Bayer 3,072,000 shares of Class A voting commonstock valued at $15.4 million and 3,072,000 shares of Class B nonvotingcommon stock valued at $15.4 million (collectively representing approximately9.3% of our fully-diluted common stock) and recorded $0.4 million of relatedissuance costs. We reserved for the entire face value of the promissory notesdue from U.S. Fertilizer, as we did not believe the notes were collectible andan independent third party valuation did not ascribe any significant value tothem. The independent third party valuation also indicated that value should beascribed to the repurchase option, which is reflected in stockholders’ equity(deficit) in the consolidated balance sheets as of September 30, 2003 and December 31,2003 included elsewhere in this Quarterly Report.

Under the terms of the agreements, Bayer was requiredto make payments to us which total $5.0 million annually through June 15,2009, the present value of which equaled the value assigned to the common stocksubscription receivable as of June 14, 2002, which has been reflected instockholders’ equity (deficit) in the consolidated balance sheets as of September 30,2003 and December 31, 2003 included elsewhere in this Quarterly Report.The common stock subscription receivable was to be repaid by Bayer in 28quarterly installments of $1.25 million, the first of which was received atclosing on June 17, 2002. The difference between the value ascribed to thecommon stock subscription receivable and the installment payments received hasbeen recorded as interest income in our consolidated statements of operationsfor the nine months ended September 30, 2004 and 2003.

The value of the Supply Agreement has been and isbeing amortized to cost of goods sold over the period in which its economicbenefits are expected to be utilized which was initially anticipated to be overa three to five-year period. We have been amortizing the obligation associatedwith the In-Store Service Agreement to revenues over the seven-year life of theagreement, the period in which its obligations were originally expected to befulfilled. However, in December 2002, we and Bayer amended the In-StoreService Agreement to reduce the scope of services provided by approximately80%. As a result, we reduced our obligation under the In-Store ServiceAgreement accordingly and reclassified $3.6 million to additional paid-incapital to reflect the increase in value of the In-Store Service Agreement.

On October 22, 2003, we gave notice to Bayerregarding the termination of the In-Store Service Agreement, as amended. Upontermination, which became effective on December 21, 2003, we were relievedof our obligation to perform merchandising services for Bayer. Accordingly, theremaining liability of $0.7 million on the date of termination was recognized in selling, general andadministrative expense as a benefit in the consolidatedstatement of operations for the year ended December 31, 2003.

Following the termination of the In-Store ServiceAgreement, on December 22, 2003, we exercised our option to repurchase alloutstanding common stock previously issued to Bayer. Bayer disputed ourinterpretation of a related agreement (the Exchange Agreement) as to thecalculation of the repurchase price. As a result, we and Bayer enterednegotiations to determine an agreed upon repurchase price based 

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on equations included inthe Exchange Agreement and other factors. We commenced an arbitrationproceeding against Bayer to resolve the dispute on January 30, 2004.However, we reached a negotiated settlement of the dispute with Bayer on February 23,2004, pursuant to which Bayer agreed to deliver all of its shares of our commonstock to us in exchange for a cash payment of $1.5 million, cancellation of$22.5 million in remaining payments required to be made in connection with thecommon stock subscription receivable and forgiveness of interest related tosuch payments of $0.3 million.

We recorded treasury stock of $24.4 million, based onthe consideration given to Bayer, and reduced the common stock subscriptionreceivable by $22.5 million, the remaining balance on the date of repurchase.We also reversed the common stock repurchase option of $2.6 million, as aresult of its exercise, and recorded a corresponding amount to additionalpaid-in capital. As a result of this transaction, we and Bayer agreed that the ExchangeAgreement and In-Store Service Agreement are fully terminated, with theexception of certain provisions contained therein that expressly survivetermination, and that the Supply Agreement shall remain in full force andeffect according to its terms. Under the terms of the Supply Agreement, anyremaining balance at January 30, 2009 is unconditionally and immediatelypayable to us by Bayer regardless of whether or not we purchase any ingredientsunder the Supply Agreement. As of September 30, 2004, the remainingbalance of the Supply Agreement, net of amortization, and excluding accruedinterest of $0.5 million, was $4.8 million.

Basedon the independent third party valuation as of June 14, 2002, the originaltransaction date, we assigned a fair value of $30.7 million to the transactioncomponents recorded in connection with the common stock issued to Bayer. Thefollowing table presents the values of these components as of September 30,2004 and 2003 and December 31, 2003 based on such valuation and as aresult of the activities and transactions previously described, net ofamortization and excluding accrued interest:
| ** **                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **Description**                      | ** ** | ** **             | ** ** | **2004**              | ** ** | **2003** | ** ** | **2003** | ** ** |
| Common stock subscription receivable |       | $                      | —     |                  | $          | 23,363 |   |   | $ | 22,534 |   |   |
| Supply Agreement                     |       | 4,779                  |       | 5,314                 |       |   | 5,314 |   |   |
| Repurchase option                    |       | —                 |       | 2,636                 |       |   | 2,636 |   |   |
| In-Store Service  Agreement          |       | —                 |       | 663                   |       |   | — |   |   |
|                                 |       | $                      | 4,779      |                  | $          | 31,976 |   |   | $ | 30,484 |   |   |
|                                      |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |

 

Bayer recently sent notice to us purporting toterminate the Supply Agreement, effective August 17, 2004, as wellas $5.2 million, the remaining amount due under the Supply Agreement.We responded by notifying Bayer that it did not have a right to terminate and have since held the amount in escrow.We therefore returned to Bayer the payment due upon termination, which Bayerhad tendered to us. Both Bayer and we were in agreement that the amount due inthe event of termination at that time was $5.2 million, including $0.5 millionof accrued interest. The outcome of our disagreement with Bayer concerning terminationof the Supply Agreement is not expected to have a material adverse impact onour consolidated financial position, results of operations or cash flows.

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**Results ofOperations**

The information anddiscussion which follow reflect the segments previously described in thisQuarterly Report and include the operating results of Nu-Gro (the Canada segment)from April 30, 2004, its date of acquisition, and the operating results ofUPG (the Pet segment) fromJuly 30, 2004, its date of acquisition.

***Three Months Ended September 30, 2004 Compared tothe Three Months Ended September 30, 2003***

Thefollowing table presents amounts and the percentages of net sales that items inthe accompanying consolidated statements of operations constitute for theperiods presented:
| ** **                                         | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                         | ** ** | **2004**                                                 | ** ** | **2003** | ** ** |
| Net sales by segment:                              | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. Home & Garden                        |       | $                                                        | 104,342    |   | 61.0 | % | $ | 104,019 |   | 100.0 | % |
| Canada                                             |       | 23,615                                                   |       | 13.8 | % | — |   | 0.0 | % |
| Pet                                                |       | 43,083                                                   |       | 25.2 | % | — |   | 0.0 | % |
| Total net sales                                    |       | 171,040                                                  |       | 100.0 | % | 104,019 |   | 100.0 | % |
| Operating costs and  expenses:                     |       |                                                     |       |   |   |   |   |   |   |
| Cost of goods sold                                 |       | 123,511                                                  |       | 72.3 | % | 64,750 |   | 62.2 | % |
| Selling, general and administrative expenses       |       | 48,387                                                   |       | 28.3 | % | 32,195 |   | 31.0 | % |
| Total operating costs and expenses                 |       | 171,898                                                  |       | 100.6 | % | 96,945 |   | 93.2 | % |
| Operating income (loss)  by segment:               |       |                                                     |       |   |   |   |   |   |   |
| U.S. Home & Garden                        |       | (1,049                                                   | )          | -0.6 | % | 7,074 |   | 6.8 | % |
| Canada                                             |       | (657                                                     | )          | -0.4 | % | — |   | 0.0 | % |
| Pet                                                |       | 848                                                      |       | 0.5 | % | — |   | 0.0 | % |
| Total operating income (loss)                      |       | (858                                                     | )          | -0.5 | % | 7,074 |   | 6.8 | % |
| Interest expense                                   |       | 12,799                                                   |       | 7.5 | % | 9,173 |   | 8.8 | % |
| Interest income                                    |       | 16                                                       |       | 0.0 | % | 568 |   | 0.5 | % |
| Income (loss)  before income tax expense (benefit) |       | (13,641                                                  | )          | -8.0 | % | (1,531 | ) | -1.5 | % |
| Income tax  expense (benefit)                      |       | (5,184                                                   | )          | -3.0 | % | (698 | ) | -0.7 | % |
| Net income (loss)                                  |       | $                                                        | (8,457     | ) | -5.0 | % | $ | (833 | ) | -0.8 | % |

*** ***

***Net Sales.  ***Netsales represent gross sales less any applicable customer discounts from listprice, customer sales returns and promotion expense through cooperative programswith our customers. Net sales increased $67.0 million, or 64.4%, to$171.0 million for the three months ended September 30, 2004 from$104.0 million for the three months ended September 30, 2003. Theincrease was primarily due to our acquisitions of Nu-Gro, which contributed$23.6 million to the increase, and UPG, which contributed $43.1 million to theincrease, as well as stronger sales of our indoor insecticide products andinsect repellent products compared to 2003. This increase was partially offsetby a decline in sales of other lawn and garden products, namely outdoorpesticides at one key retailer, during the three months ended September 30,2004 compared to the three months ended September 30, 2003.

Net sales in the U.S. Home & Garden segment increased$0.3 million, or 0.3% to $104.3 million for the three months ended September 30,2004 from $104.0 million for the three months ended September 30,2003. Net sales of this segment increased primarily due to stronger sales ofindoor insecticide products and insect repellent products and, to a lesserextent, by higher sales of various fertilizer products, partially offset by adecline in sales of outdoor pesticides at one key retailer and other growingmedia products. Net sales in the Canada segment were $23.6 million dueto weak lawn and garden sales and weaker than prior year’s salesof fertilizer technology products. Net sales in the Pet segment were 

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$43.1 milliondue primarily to strong specialty pet sales and, to a lesser extent, strongsales of aquatics products.

***Gross Profit.******  ***Gross profitincreased $8.2 million, or 20.9%, to $47.5 million for the threemonths ended September 30, 2004 from $39.3 million for the threemonths ended September 30, 2003. The increase in gross profit dollars was primarily due to ouracquisitions of Nu-Gro and UPG and increased sales of indoorinsecticide products and insect repellent products in our U.S. Home &Garden segment.Such increase in gross profit dollars waspartially offset by higher raw materials and freight costs, non-cashamortization of the write-up of acquired inventory to estimated fair value,which is reflected in cost of goods sold, and the change in mix of productsales resulting from a decline in sales of outdoor pesticides at one key retailerand lower margins on products sold by our Canada segment. As a percentage ofnet sales, gross profit decreased to 27.8% for the three months ended September 30,2004 from 37.8% for the three months ended September 30, 2003 dueprimarily to the factors previously described.

***Selling, Generaland Administrative Expenses.******  ***Selling,general and administrative expenses include all costs associated with theselling and distribution of products, product registrations and administrativefunctions such as finance, information systems and human resources. Selling,general and administrative expenses increased $16.2 million, or 50.3%, to$48.4 million for the three months ended September 30, 2004 from$32.2 million for the three months ended September 30, 2003. Theincrease was primarily due to our acquisitions of Nu-Gro and UPG, noncashamortization expense due to the write-up of acquired intangible assets toestimated fair value and higher distribution costs. Such increase was partiallyoffset by lower selling and marketing costs. As a percentage of netsales, selling, general and administrative expenses decreased to 28.3% for thethree months ended September 30, 2004 from 31.0% for the three monthsended September 30, 2003 due to the factors previously described.

***Operating Income.******  ***Operatingincome decreased $7.9 million to a net loss of $0.9 million for thethree months ended September 30, 2004 from $7.1 million for the threemonths ended September 30, 2003 due to the factors previously described. Asa percentage of net sales, operating income decreased to zero for the threemonths ended September 30, 2004 from 6.8% for the three months ended September 30,2003.

Operating income in the U.S. Home & Gardensegment decreased $8.1 million to a net loss of $1.0 million for the threemonths ended September 30, 2004 from $7.1 million for the three monthsended September 30, 2003, due primarily to higher raw materials andfreight costs, offset partially by operational efficiencies. Operating loss in the Canada segment was$0.7 million for the three months ended September 30, 2004 dueprimarily to higher raw materials and freight costs, non-cash amortization ofthe write-up of acquired inventory and intangible assets to estimated fairvalue and the mix of product sales. Operating income in the Pet segment was$0.8 million for the three months ended September 30, 2004due primarily to strong specialty pet and aquatics products sales, offsetpartially by higher freight costs and non-cash amortization of the write-up ofacquired inventory and intangible assets to estimated fair value.

***Interest Expense******.  ***Interestexpense increased $3.6 million, or 39.4%, to $12.8 million for thethree months ended September 30, 2004 from $9.2 million for the threemonths ended September 30, 2003. The increase in interest expense wasprimarily due to additional borrowings to finance our acquisitions of Nu-Groand UPG, partially offset by a general decline in interest rates in 2004compared to 2003.

***Income Tax Expense******.  ***Income taxexpense decreased due to the decline in income before income taxes and also dueto the adjustment of deferred tax liabilities from prior years. As a result,our effective tax rate was 38.0% for the three months ended September 30,2004 compared to 45.6% for the three months ended September 30, 2003.

***Net Loss.******  ***Net lossincreased $7.7 million to $8.5 million for the three months ended September 30,2004 from $0.8 million for the three months ended September 30, 2003 dueto the factors previously described.

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***Nine Months Ended September 30, 2004 Compared tothe Nine Months Ended September 30, 2003***

Thefollowing table presents amounts and the percentages of net sales that items inthe accompanying consolidated statements of operations constitute for theperiods presented:
| ** **                                   | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                   | ** ** | **2004**                                                | ** ** | **2003** | ** ** |
| ** **                                   | ** ** | ** **                                              | ** ** | ** ** | ** ** | **(As Restated)** | ** ** |
| Net sales by segment:                        |       |                                                    |       |   |   |   |   |   |   |
| U.S. Home & Garden                  |       | $                                                       | 493,775    |   | 83.2 | % | $ | 488,834 |   | 100.0 | % |
| Canada                                       |       | 56,720                                                  |       | 9.5 | % | — |   | 0.0 | % |
| Pet                                          |       | 43,083                                                  |       | 7.3 | % | — |   | 0.0 | % |
| Total net sales                              |       | 593,578                                                 |       | 100.0 | % | 488,834 |   | 100.0 | % |
| Operating costs and  expenses:               |       |                                                    |       |   |   |   |   |   |   |
| Cost of goods sold                           |       | 392,776                                                 |       | 66.2 | % | 297,302 |   | 60.8 | % |
| Selling, general and administrative expenses |       | 138,152                                                 |       | 23.3 | % | 111,499 |   | 22.8 | % |
| Total operating costs and expenses           |       | 530,928                                                 |       | 89.5 | % | 408,801 |   | 83.6 | % |
| Operating income by  segment:                |       |                                                    |       |   |   |   |   |   |   |
| U.S. Home & Garden                  |       | 63,924                                                  |       | 10.8 | % | 80,033 |   | 16.4 | % |
| Canada                                       |       | (2,122                                                  | )          | -0.4 | % | — |   | 0.0 | % |
| Pet                                          |       | 848                                                     |       | 0.1 | % | — |   | 0.0 | % |
| Total operating income                       |       | 62,650                                                  |       | 10.5 | % | 80,033 |   | 16.4 | % |
| Interest expense                             |       | 34,328                                                  |       | 5.7 | % | 29,147 |   | 6.0 | % |
| Interest income                              |       | 388                                                     |       | 0.1 | % | 1,522 |   | 0.3 | % |
| Income before  income tax expense            |       | 28,710                                                  |       | 4.9 | % | 52,408 |   | 10.7 | % |
| Income tax  expense                          |       | 7,447                                                   |       | 1.3 | % | 20,827 |   | 4.3 | % |
| Net income                                   |       | $                                                       | 21,263     |   | 3.6 | % | $ | 31,581 |   | 6.4 | % |

*** ***

***Net Sales.  ***Netsales increased $104.7 million, or 21.4%, to $593.6 million for thenine months ended September 30, 2004 from $488.8 million for the ninemonths ended September 30, 2003. The increase was primarily due to ouracquisitions of Nu-Gro, which contributed $56.7 million to the increase, andUPG, which contributed $43.1 million to the increase, as well as stronger salesof our indoor insecticide products and insect repellent products compared to2003. This increase was partially offset by a decline in sales of other lawnand garden products, namely outdoor pesticides at one key retailer, during thenine months ended September 30, 2004 compared to the nine months ended September 30,2003.

Net sales in the U.S. Home & Garden segmentincreased $4.9 million, or 1.0%, to $493.8 million for the ninemonths ended September 30, 2004 from $488.8 million for the ninemonths ended September 30, 2003. Net sales of this segment increasedprimarily due to stronger sales of indoor insecticide products and insectrepellent products and, to a lesser extent, by higher sales of variousfertilizer products, partially offset by a decline in sales of outdoorpesticides at one key retailer and other growing media products. Net sales inthe Canada segment were $56.7 million due to weak lawn and garden sales and weaker than prior year’s sales offertilizer technology products. Net sales in the Pet segment were$43.1 million due primarily to strong specialty pet sales and,to a lesser extent, strong sales of aquatics products.

***Gross Profit.******  ***Gross profitincreased $9.3 million, or 4.9%, to $200.8 million for the ninemonths ended September 30, 2004 from $191.5 million for the ninemonths ended September 30, 2003. The increase in gross profit dollars was primarily due to ouracquisitions of Nu-Gro and UPG and increased sales of indoorinsecticide products and insect repellent products in our U.S. Home &Garden segment. Such increase in gross profit dollars waspartially offset by higher raw materials and freight costs, non-cashamortization of the write-up of acquired inventory to estimated fair value,which is reflected in cost of goods sold, and the change in mix of productsales resulting from a decline in sales of outdoor pesticides at 

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one key retailer and lowermargins on products sold by our Canada segment. As a percentage of net sales,gross profit decreased to 33.8% for the nine months ended September 30,2004 from 39.2% for the nine months ended September 30, 2003 due primarilyto the factors previously described.

***Selling, Generaland Administrative Expenses.******  ***Selling,general and administrative expenses increased $26.7 million, or 23.9%, to$138.2 million for the nine months ended September 30, 2004 from$111.5 million for the nine months ended September 30, 2003. Theincrease was primarily due to our acquisitions of Nu-Gro and UPG, noncashamortization expense due to the write-up of acquired intangible assets toestimated fair value, higher distribution costs and additional costs associatedwith our enterprise resource planning, or ERP, system. Such increase waspartially offset by lower selling and marketing costsand a $2.4 million adjustment to increase amortization expense during the ninemonths ended September 30, 2003 as a result of the final valuationreceived relative to our acquisition of Schultz Company in May 2002. As apercentage of net sales, selling, general and administrative expenses increasedto 23.3% for the nine months ended September 30, 2004 from 22.8% for thenine months ended September 30, 2003 due to the factors previouslydescribed.

***Operating Income.******  ***Operatingincome decreased $17.4 million, or 21.7%, to $62.7 million for thenine months ended September 30, 2004 from $80.0 million for the ninemonths ended September 30, 2003 due to the factors previously described. Asa percentage of net sales, operating income decreased to 10.6% for the ninemonths ended September 30, 2004 from 16.4% for the nine months ended September 30,2003.

Operating income in the U.S. Home & Gardensegment decreased $16.1 million, or 20.1%, to $63.9 million for the ninemonths ended September 30, 2004 from $80.0 million for the nine monthsended September 30, 2003, due primarily to higher raw materials andfreight costs, offset partially by operational efficiencies. Operating loss in the Canada segment was$2.1 million for the nine months ended September 30, 2004. Theoperating loss was due to the acquisition occurring midway through the lawn andgarden season and also to higher raw materials and freight costs, non-cashamortization of the write-up of acquired inventory and intangible assets toestimated fair value and the mix of product sales. Operating income in the Petsegment was $0.8 million for the nine months ended September 30, 2004due primarily to strong specialty pet and aquatics products sales, offsetpartially by higher freight costs and non-cash amortization of the write-up ofacquired inventory and intangible assets to estimated fair value.

***Interest Expense******.  ***Interestexpense increased $5.2 million, or 17.9%, to $34.3 million for thenine months ended September 30, 2004 from $29.1 million for the ninemonths ended September 30, 2003. The increase in interest expense wasprimarily due to additional borrowings to finance our acquisitions of Nu-Groand UPG and the write-off of $1.7 million of previously deferred financing feesrecorded in connection with our repayment of obligations outstanding under oursenior credit facility in effect prior to April 30, 2004, partially offsetby a general decline in interest rates in 2004 compared to 2003.

***Income Tax Expense******.  ***Income taxexpense decreased due to the decline in income before income taxes and also dueto the adjustment of deferred tax liabilities from prior years. As a result,our effective tax rate was 25.8% for the nine months ended September 30,2004 compared to 39.7% for the nine months ended September 30, 2003.

***Net Income.******  ***Net incomedecreased $10.3 million, or 32.6%, to $21.3 million for the nine months ended September 30,2004 from $31.6 million for the nine months ended September 30, 2003 dueto the factors previously described.

**Liquidity andCapital Resources**

Our principal liquidity requirements are for workingcapital, capital expenditures and debt service under our senior credit facilityand our senior subordinated notes.

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We believe that cash flows from operations, togetherwith available borrowings under our revolving credit facility, will be adequateto meet the anticipated requirements for working capital, capital expendituresand scheduled principal and interest payments for the foreseeable future. Inaddition to the Nu-Gro and UPG acquisitions described in more detail under theheading “Recent Events” in this section, we are regularly engaged inacquisition discussions with a number of other sellers although we cannotguarantee that any acquisitions will be consummated. If we do consummate anyacquisitions, such transactions could be material to our business and requireus to incur additional debt under our revolving credit facility or otherwise.We cannot ensure that sufficient cash flows will be generated from operationsto repay our senior subordinated notes and amounts outstanding under our seniorcredit facility at maturity without requiring additional financing. Our abilityto meet debt service obligations and reduce debt will be dependent on our futureperformance, which in turn, will be subject to general economic and weatherconditions and to financial, business and other factors, including factorsbeyond our control. Because a portion of our debt bears interest at floatingrates, our financial condition is and will continue to be affected by changesin prevailing interest rates.

***OperatingActivities.***   Operating activities provided net cash of $86.4million for the nine months ended September 30, 2004 compared to $47.0million for the nine months ended September 30, 2003. The increase wasprimarily due increased sales during the nine months ended September 30,2004 compared to the nine months ended September 30, 2003, declines inaccounts receivable of $18.6 million and inventories of $24.8 million, and anincrease in accounts payable of $21.7 million. These factors were partiallyoffset by a decline in accounts payable of $41.8 million and each of thesefactors are net of the effects of the Nu-Gro and UPG acquisitions. Includingthe impact of such acquisitions, accounts receivable increased $77.6 millionduring the nine months ended September 30, 2004, as we experienced ourpeak selling season during this period. The acquisition of UPG contributed$27.6 million to the increase in accounts receivable as of the acquisition dateand contributed $43.1 million in net sales from July 30, 2004, theacquisition date, through September 30, 2004. The acquisition ofNu-Gro contributed $53.6 million to the increase in accounts receivable as ofthe acquisition date and contributed $56.7 million in net sales from April 30,2004, the acquisition date, through September 30, 2004. Theseasonal nature of our U.S. Home & Garden and Canada operationsgenerally requires cash to fund significant increases in working capital,primarily accounts receivable and inventories, during the first half of theyear. Accounts receivable and accounts payable generally build substantially inthe first half of the year, in line with increasing sales as the season begins.These balances generally decline over the latter part of the year as the lawnand garden season winds down. These trends were, and will continue to be,somewhat diminished by our acquisition of UPG on July 30, 2004.

***InvestingActivities.******  ***Investing activities used net cash of$527.5 million for the nine months ended September 30, 2004 comparedto $2.5 million for the nine months ended September 30, 2003. Theincrease was due to the acquisitions of UPG for $371.5 million, includingtransaction costs of $5.0 million, and Nu-Gro for $146.7 million, includingtransaction costs of $5.3 million, and a $5.3 million increase in capitalexpenditures in 2004 compared to 2003. Capital expenditures relate primarily tothe construction of additional capacity for production and distribution, theenhancement of certain of our existing facilities and the development andimplementation of our ERP system. Cash used for capital expenditures was $12.0million for the nine months September 30, 2004 and $6.7 million forthe nine months September 30, 2003. The increase in capital expendituresfrom 2003 to 2004 was primarily related to increased construction costs toexpand our production and distribution capacity. We expect to spendapproximately $17.0 million on capital expenditures in 2004, exclusive ofexpenditures for capital leases.

***FinancingActivities.******  ***Financing activities provided net cashof $442.3 million for the nine months ended September 30, 2004compared to using net cash of $10.7 million for the nine months ended September 30,2003. The increase in net cash flows provided by financing activities was dueto borrowings, net of repayments, of $450.1 million in 2004 compared to debtrepayments, net of borrowings, of $11.9 

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million in 2003. Theincrease was also due to proceeds of $70.0 million from the issuance of 5.8million shares each of our Class A voting and Class B nonvotingcommon stock used to partially fund our acquisition of UPG. The increase in netcash provided by financing activities was partially offset by payments of $57.6million to repurchase all of our outstanding shares of preferred stock,including dividends accrued thereon of $19.9 million, and debt issuance costsof $14.9 million in 2004 related to our new senior credit facility effective asof April 30, 2004 and amended as of July 30, 2004 compared to $2.9million in 2003.

Historically, we have utilized internally generatedfunds and borrowings under credit facilities to meet ongoing working capitaland capital expenditure requirements. As a result of increased borrowings overthe past several years, we have significantly increased cash requirements fordebt service relating to our senior subordinated notes and senior creditfacility. We will rely on internally generated funds and, to the extentnecessary, borrowings under our revolving credit facility to meet liquidityneeds. We had unused availability under our revolving credit facility of $124.0million as of September 30, 2004, $87.5 million as of September 30,2003 and $87.3 million as of December 31, 2003.

Long-term debt, excluding capital lease obligations,totaled $868.9 million as of September 30, 2004, $388.9 millionas of September 30, 2003 and $388.5 million as of December 31,2003. This debt was comprised of senior subordinated notes, includingunamortized premium, of $232.9 million as of September 30, 2004 and$236.1 million as of September 30, 2003 and December 31, 2003and borrowings under our senior credit facility of $636.0 million as of September 30,2004, $152.8 million as of September 30, 2003 and $152.4 millionas of December 31, 2003. The weighted average rate on borrowings under oursenior credit facility then in effect was 4.18% as of September 30, 2004,5.11% as of September 30, 2003 and 5.12% as of December 31, 2003. Theweighted average rate on the senior subordinated notes was 9.875% as of the endof each of these periods, resulting in a blended weighted average rate on allborrowings of 5.71% as of September 30, 2004, 8.00% as of September 30,2003 and 8.01% as of December 31, 2003. The fair value of our totalfixed-rate debt was $240.0 million as of September 30, 2004,$243.2 million as of September 30, 2003 and $242.1 million as of December 31,2003. The fair value of our total variable-rate debt, including currentmaturities and short-term borrowings, approximated the carrying value of$636.0 million as of September 30, 2004, $152.8 million as of September 30,2003 and $152.4 million as of December 31, 2003. The fair value ofour fixed-rate debt is based on quoted market prices.

*SeniorCredit Facility in Effect Prior to April 30,**2004*.   Our senior credit facility, as amended as of March 14,2003, in effect prior to April 30, 2004, with Bank of America, N.A.,Morgan Stanley Senior Funding, Inc. and Canadian Imperial Bank of Commercewas terminated and all obligations outstanding thereunder were repaid on April 30,2004. The prior senior credit facility consisted of (1) a$90.0 million revolving credit facility; (2) a $75.0 millionterm loan facility (Term Loan A), which was repaid in full during the yearended December 31, 2003; and (3) a $240.0 million term loanfacility (Term Loan B).

The prior senior credit facility agreement containedaffirmative, negative and financial covenants. Affirmative and negativecovenants placed restrictions on, among other things, levels of investments,indebtedness, insurance, capital expenditures and dividend payments. Thefinancial covenants required the maintenance of certain financial ratios atdefined levels. As of and during the nine months ended September 30, 2003 andyear ended December 31, 2003, as applicable, we were in compliance withall covenants. Under the prior senior credit facility agreement, interest rateson the revolving credit facility and Term Loan B ranged from 1.50% to4.00% plus LIBOR, or other base rate as provided in the prior senior creditfacility agreement, depending on certain financial ratios. LIBOR was 1.16% asof September 30, 2003 and December 31, 2003. The interest rateapplicable to Term Loan B was 5.11% as of September 30, 2003 and 5.12%as of December 31, 2003. Unused commitments under the revolving creditfacility were subject to a 0.5% annual commitment fee.

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The prior senior credit facility agreement allowed usto make prepayments in whole or in part at any time without premium or penalty.During the four months ended April 30, 2004, we made principal payments of$152.4 million to fully repay Term Loan B, which primarilyrepresented optional principal prepayments. During the nine months ended September 30,2003, we made principal payments of $28.3 million to fully repay TermLoan A and $69.2 million on Term Loan B, which primarilyrepresented optional principal prepayments. During the year ended December 31,2003, we made principal payments of $28.3 million to fully repay TermLoan A and $69.6 million on Term Loan B, which primarilyrepresented optional principal prepayments. The optional principal prepaymentswere made from operating cash flows and proceeds from the new senior creditfacility described below and allowed us to remain several quarterly paymentsahead of the regular payment schedule. In connection with these prepayments, werecorded write-offs totaling $0.2 million in previously deferred financing feeswhich were included in interest expense in our consolidated statement ofoperations for the three months ended September 30, 2003 and $1.7 millionand $1.8 million for the nine months ended September 30, 2004 and 2003,respectively.

The prior senior credit facility was secured bysubstantially all of our properties and assets and by substantially all of theproperties and assets of our current domestic subsidiaries. The carrying amountof our obligations under the prior senior credit facility approximated fairvalue because the interest rates were based on floating interest ratesidentified by reference to market rates.

*NewSenior Credit Facility in Effect as of April 30, 2004.**  *Inconjunction with the closing of the acquisition of Nu-Gro, on April 30,2004, we entered into a new $510.0 million senior credit facility with Bank ofAmerica, N.A., Banc of America Securities LLC, Citigroup Global Markets, Inc.,Citicorp North America, Inc. and certain other lenders to retire theindebtedness under our prior senior credit facility and execute a new seniorcredit facility at more favorable rates, to provide funds for the Nu-Groacquisition, to repurchase all of our outstanding preferred stock, along withaccrued but unpaid dividends thereon, and for general working capital purposes.The new senior credit facility consists of (1) a $125.0 million U.S.dollar denominated revolving credit facility; (2) a $335.0 millionU.S. dollar denominated term loan facility; and (3) a Canadian dollardenominated term loan facility valued at U.S. $50.0 million. Subject tothe terms of the new senior credit facility agreement, the revolving loanportion of the new senior credit facility matures on April 30, 2010, andthe term loan obligations under the new senior credit facility mature on April 30,2011. The term loan obligations are to be repaid in 28 consecutive quarterlyinstallments and commenced on June 30, 2004, with a final installment dueon March 31, 2011. All of the loan obligations are subject to mandatoryprepayment upon certain events, including sales of certain assets, issuances ofindebtedness or equity or from excess cash flow. The new senior credit facilityagreement also allows us to make voluntary prepayments, in whole or in part, atany time without premium or penalty.

The new senior credit facility agreement containsaffirmative, negative and financial covenants that are more favorable thanthose of the prior senior credit facility. The negative covenants placerestrictions on, among other things, levels of investments, indebtedness,capital expenditures and dividend payments that we may make or incur. Thefinancial covenants require the maintenance of certain financial ratios atdefined levels. Under the new senior credit facility agreement, interest rateson the new revolving credit facility can range from 1.75% to 2.50% plus LIBOR,or from 0.75% to 1.50% plus a base rate, subject to adjustment and depending oncertain financial ratios. As of September 30, 2004, the term loans weresubject to interest rates equal to 2.50% plus LIBOR or 1.50% plus a base rate,as provided in the new senior credit facility agreement. LIBOR was 2.01% as of September 30,2004. The weighted average interest rate applicable to our outstandingborrowings under the new senior credit facility was 4.18% as of September 30,2004. Unused commitments under the new revolving credit facility are subject toa 0.5% annual commitment fee. Unused availability under the new revolvingcredit facility was $124.0 million as of September 30, 2004, which isreflective of $6.0 million of standby letters of credit pledged as collateral.The new senior credit facility is secured by substantially all of ourproperties and assets and substantially all of 

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the properties and assetsof our current and future domestic subsidiaries. The carrying amount of ourobligations under the new senior credit facility approximate fair value becausethe interest rates are based on floating interest rates identified by referenceto market rates.

In connection with the closing of the Nu-Groacquisition, Bank of America, N.A., Canada Branch, separately loaned us Cdn$110.0 million for structuring purposes, which loan was repaid on April 30,2004.

*Amendmentto New Senior Credit Facility in Effect as of July ****30, 2004.***   On July 30, 2004, inconnection with the closing of and to partially fund our merger with UPG, weamended and restated the credit agreement related to our new senior creditfacility to increase the revolving credit facility from $125.0 million to$130.0 million, increase the U.S. term loan from $335.0 million to $510.0million, add a $75.0 million second lien term loan and leave the U.S. $50.0million Canadian term loan unchanged for a total New Senior Credit Facility, asamended, of $765.0 million. Subject to the terms of the new senior creditfacility agreement, as amended, the second lien term loan is to be repaid in 29consecutive quarterly installments commencing on September 30, 2004, witha final installment due on September 30, 2011, and matures on October 31,2011. Interest on the second lien term loan accrues at 4.50% plus LIBOR or 3.5%plus a base rate, subject to adjustment and depending on certain financialratios. The second lien term loan is subject to affirmative, negative andfinancial covenants. We incurred $5.0 million in costs related to theamendment, which were recorded as deferred financing fees and are beingamortized over the remaining term of the new senior credit facility. Theamendment did not change any other key terms or existing covenants of the newsenior credit facility.

*9**7**¤**8% Series **B Senior Subordinated Notes.**  *InNovember 1999, we issued $150.0 million in aggregate principal amountof 9*7**¤**8*%Series B senior subordinated notes due April 1, 2009 (the Series BNotes). Interest accrued on the Series B Notes at a rate of 9*7**¤**8*% per annum, payable semi-annuallyon April 1 and October 1. As described in more detail below, as of September 30,2004, there were no Series B Notes outstanding.

*9**7**¤**8% Series **C Senior Subordinated Notes.**  *InMarch 2003, we issued $85.0 million in aggregate principal amount of9*7**¤**8*%Series C senior subordinated notes due April 1, 2009 (the Series CNotes). Interest accrued at a rate of 9*7**¤**8*% per annum, payable semi-annuallyon April 1 and October 1. As described in more detail below, as of September 30,2004, there were no Series C Notes outstanding.

*9**7**¤**8% Series **D Senior Subordinated Notes.**  *InMay 2003, we registered $235.0 million in aggregate principal amount of 9*7**¤**8*% Series D seniorsubordinated notes (the Series D Notes and collectively with the Series BNotes and Series C Notes, the senior subordinated notes), with termssubstantially similar to the Series B Notes and Series C Notes, withthe United States Securities and Exchange Commission and offered to exchangethe Series D Notes for up to 100% of the Series B Notes and Series CNotes. The exchange offering closed in July 2003, resulting in$85.0 million, or 100%, of the Series C Notes being exchanged and$146.9 million, or 98%, of the Series B Notes being exchanged. On April 14,2004, we repurchased all of the remaining Series B Notes outstanding,along with accrued interest and repurchase premium of 4.938%, for $3.3 million.As of September 30, 2004, $232.9 million of the Series D Notes,including unamortized premium, were outstanding and no Series B Notes or Series CNotes were outstanding.

The fair value of the senior subordinated notes was$240.0 million as of September 30, 2004, $243.2 million as of September 30,2003 and $242.1 million as of December 31, 2003, based on their quotedmarket price on such dates. The fair value at September 30, 2004 reflectsthe repurchase of all outstanding Series B Notes in April 2004, aspreviously described. In accordance with the indentures that govern the seniorsubordinated notes, they are full and unconditionallyand jointly and severally guaranteed by our wholly-owned domestic subsidiaries.

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*Debt Covenants.**  *Our agreements that govern the newsenior credit facility and the senior subordinated notes contain a number ofsignificant covenants that could restrict or limit our ability to:

·  incur more debt;

·  pay dividends, subject to financial ratios andother conditions;

·  make other distributions;

·  issue stock of subsidiaries;

·  make investments;

·  repurchase stock;

·  create subsidiaries;

·  create liens;

·  enter into transactions with affiliates;

·  merge or consolidate; and

·  transfer and sell assets.

The ability to comply with these provisions may beaffected by events beyond our control. The breach of any of these covenantswill result in a default under the applicable debt agreement or instrument andcould trigger acceleration of repayment under the applicable agreements. Anydefault under such agreements might adversely affect our growth, financialcondition, results of operations and the ability to make payments onindebtedness or meet other obligations. As of and during the nine months ended September 30,2004 and 2003 and year ended December 31, 2003, we were in compliance withall covenants under the prior senior credit facility, the new senior creditfacility and the senior subordinated notes in effect as of such dates.

*CommonStock Transactions.  *In connection with ourtransaction with Bayer in June 2002, we issued 3,072,000 shares of Class Avoting common stock valued at $15.4 million and 3,072,000 shares of Class Bnonvoting common stock valued at $15.4 million and recorded$0.4 million of related issuance costs. We repurchased these shares in February 2004.See more detail included under the heading “Recent Events” in this section.

In connection with, and to partially fund, ouracquisition of UPG, on July 30, 2004, we issued 5.8 million shares each ofour Class A voting and Class B nonvoting common stock to affiliatesof Thomas H. Lee Partners, our largest stockholder, Banc of America SecuritiesLLC and certain UPG selling stockholders for proceeds of $70.0 million.

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*Repurchase of PreferredStock.  *In conjunction with our refinancing on April 30,2004, we repurchased all 37,600 shares of outstanding Class A nonvotingpreferred stock for $57.6 million, including $19.9 million for all accrueddividends thereon. Such repurchase resulting in a decline in additional paid incapital of $37.7 million.

**ContractualObligations**

Thefollowing table presents the aggregate amount of future cash outflows of ourcontractual obligations as of September 30, 2004, except as otherwise noted,excluding future amounts due for interest on outstanding indebtedness:
| ** **                                        | ** ** | **Obligations due in:** | ** ** |
|---------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                        | ** ** | ** **                        | ** ** | **Remainder** | ** ** | **1 - 3** | ** ** | **4 - 5** | ** ** | **After 5** | ** ** |
| **Contractual Obligations**                  | ** ** | ** **                        | ** ** | **Total** | ** ** | **of Year** | ** ** | **Years** | ** ** | **Years** | ** ** | **Years** | ** ** |
| Senior credit facility                            |       | $                                 | 635,961    |   |   | $ | 1,594 |   |   | $ | 19,131 |   | $ | 12,754 |   | $ | 602,482 |   |
| 97¤8%  Series D senior subordinated notes(1) |       | 231,900                           |       |   | — |   |   | — |   | — |   | 231,900 |   |
| Capital leases                                    |       | 4,426                             |       |   | 228 |   |   | 1,371 |   | 914 |   | 1,913 |   |
| Operating leases                                  |       | 78,438                            |       |   | 5,944 |   |   | 35,610 |   | 18,243 |   | 18,641 |   |
| Purchase  obligations(2)                          |       | 55,545                            |       |   | 38,446 |   |   | 13,295 |   | 3,804 |   | — |   |
| Professional  services agreement(3)               |       | 15,045                            |       |   | 4,068 |   |   | 9,387 |   | 1,590 |   | — |   |
| Total contractual  obligations                    |       | $                                 | 1,021,315  |   |   | $ | 50,280 |   |   | $ | 78,794 |   | $ | 37,305 |   | $ | 854,936 |   |
|                                                   |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Excludes$1.0 million of unamortized premium.

(2)          Representsunconditional purchase obligations for goods and services not presentedelsewhere in the table.

(3)          Includesmonthly payments of $62,500 for management and other consulting servicesprovided under a professional services agreement by affiliates of Thomas H. LeePartners, L.P., which indirectly owns UIC Holdings, L.L.C., ourmajority owner. The professional services agreement automatically extends forsuccessive one-year periods beginning January 20 of each year, unlessnotice is given as provided in the agreement.

We lease several of our operating facilities from RexRealty, Inc., a company owned by certain of our stockholders and operatedby a former executive and past member of our Board of Directors. The operatingleases expire at various dates through December 31, 2010. We have optionsto terminate the leases on an annual basis by giving advance notice of at leastone year. We lease a portion of our operating facilities from the same companyunder a sublease agreement expiring on December 31, 2005 with minimumannual rentals of $0.7 million. We have two five-year options to renewthis lease, beginning January 1, 2006. Rent expense under these leases was$0.7 million for the three months ended September 30, 2004,$0.3 million for the three months ended September 30, 2003, $1.3million for the nine months ended September 30, 2004 and $0.9 million forthe nine months ended September 30, 2003.

We are obligated underadditional operating leases for other operations and the use of warehousespace. The leases expire at various dates through January 31, 2015. Fiveof the leases provide for as many as five options to renew for five years each.Aggregate rent expense under these leases was $2.8 million for the threemonths ended September 30, 2004, $1.8 million for the three monthsended September 30, 2003, $8.3 million for the nine months ended September 30,2004 and $5.4 million for the nine months ended September 30, 2003.

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**Guarantees andOff-Balance Sheet Risk**

In the normal course of business, we are a party tocertain guarantees and financial instruments with off-balance sheet risk, suchas standby letters of credit and indemnifications, which are not reflected inour consolidated balance sheets. We had $6.0 million as of September 30, 2004,$2.5 million as of September 30, 2003 and $2.7 million as of December 31,2003 in standby letters of credit pledged as collateral to support the lease ofour primary distribution facility in St. Louis, a U.S. customs bond, certainproduct purchases, various workers’ compensation obligations and transportationequipment. These agreements mature at various dates through September 2005and may be renewed as circumstances warrant. Such financial instruments arevalued based on the amount of exposure under the instruments and the likelihoodof performance being required. In our past experience, no claims have been madeagainst these financial instruments nor do we expect the exposure to materiallosses resulting therefrom to be anything other than remote. As a result, wedetermined such agreements do not have significant value and have not recordedany related amounts in our consolidated financial statements.

We are the lessee under anumber of equipment and property leases, as described previously. It is commonin such commercial lease transactions for us to agree to indemnify the lessorfor the value of the property or equipment leased should it be damaged duringthe course of our operations. We expect that any losses that may occur withrespect to the leased property would be covered by insurance, subject todeductible amounts. As a result, we determined such indemnifications do nothave significant value and have not recorded any related amounts in ourconsolidated financial statements for such remote loss exposure.

**Certain Trends andUncertainties**

***Seasonality andLawn and Garden Dependence Upon Weather Conditions.******  ***Thelawn and garden businesses of our U.S. Home & Garden and Canadasegments are highly seasonal because our products are used primarily in thespring and summer seasons. For the past three years, approximately 71% of ourU.S. Home & Garden net sales have occurred in the first and secondquarters, resulting in higher net revenues and results of operations duringthose quarters. Our working capital needs, and correspondingly our borrowings,begin to peak at the beginning of the second quarter. If cash on hand isinsufficient to cover payments due on our senior subordinated notes and we areunable to draw on our senior credit facility or obtain other financing, thisseasonality could adversely affect our ability to make interest payments.

In addition, weather conditions in North America havea significant impact on the timing of sales in the spring selling season andour overall home and garden annual sales. Periods of dry, hot weather candecrease insecticide sales, while periods of cold, wet weather can slow salesof herbicides and fertilizers. In addition, an abnormally cold springthroughout North America could adversely affect both fertilizer and pesticidesales and therefore our financial results. If weather conditions during thefirst and second quarters are not conducive to lawn and gardening activities,they may have an adverse effect our consolidated financial position, results ofoperations or cash flows. For example, we experienced a late winter and cool,wet spring conditions in the first quarter of 2003 that delayed the start ofthe lawn and garden season, whereas the weather in the first quarter of 2004was generally more mild and dry throughout North America.

***Competition andIndustry Trends.*****  **Eachof our segments operates in highly competitive markets and competes against anumber of national and regional brands. We believe the principal factors bywhich we compete are product quality and performance, value, brand strength andmarketing. In some instances, we compete against companies with potentiallyfewer regulatory burdens, easier access to financing, greater personnelresources, greater brand name recognition or larger research and developmentdepartments. Increasing consolidation in the consumer lawn and garden and petsupplies industries may provide 

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additional benefits tocertain of our competitors, either through access to financing, resources orefficiencies of scale.

Our principal North American competitors for our U.S.Home & Garden and Canada segments include: The Scotts Company, whichmarkets lawn and garden products under the Scotts®, Ortho®,Roundup®, Green Cross®, Miracle-Gro® andHyponex® brand names; S.C. Johnson & Son, Inc.,which markets insecticide and repellent products under the Raid® andOFF!® brand names; Central Garden & Pet Company, whichmarkets insecticide and garden products under the Grant’s®, Maxide®,AMDRO®, IMAGE® and Pennington Seed® brandnames; The Clorox Company, which currently  marketsproducts under the Combat® brand name, but is in talks to sell the brand;and Bayer A.G., which markets lawn and garden products under the BayerAdvancedTM brand name. Our principal competitors in the United States for ourPet segment include: The Hartz Mountain Corporation, which manufactures andmarkets pet products under the Hartz®, Wardley®, L/MAnimal FarmsTM, Nature’s Gold® and Hartz® Pet ShoppeTMbrand names; Central Garden & Pet Company, which manufactures andmarkets pet products under the Kaytee®, Nylabone®, FourPaws®, Zodiac®, All-Glass Aquarium® andOceanic® brand names; and Tetra Holding, Inc., whichmanufactures and markets pet products under the Tetra®, Whisper®,Tetratec® and Reptomin® brand names.

With the growing trend towards retail tradeconsolidation, we are increasingly dependent upon key retailers whosebargaining strength is growing. Our top five customers, The Home Depot, Lowe’s,Wal*Mart, Petco and PetSmart, together accounted forapproximately 64% of our third quarter 2004 net sales and approximately 58% ofour outstanding accounts receivable as of September 30, 2004. To theextent such concentration continues to occur, our net sales and operatingincome may be increasingly sensitive to a deterioration in the financialcondition of, or other adverse developments involving our relationships with,one or more of our retailer customers. Our business has been, and may continueto be, negatively affected by changes in the policies and practices of ourretailer customers, such as de-stocking and other inventory managementinitiatives, limitations on access to shelf space, pricing and credit termdemands and other conditions. In addition, as a result of the desire ofretailers to more closely manage inventory levels, there is a growing trendamong them to make purchases on a “just-in-time” basis. This requires us toshorten our lead-time for production in certain cases and more closelyanticipate demand, which could in the future require the carrying of additionalinventories and increase our working capital and related financingrequirements.

***Annual Product LineReviews.  ***Each year, primarily during thethird and fourth quarters, we undertake a series of meetings with a number ofour lawn and garden retailersto review business activities for the following year. Discussions at thesemeetings address details including, but not limited to, product lines we wishto sell, product lines they intend to purchase, advertising and promotionprograms, retail service activities and customer satisfaction. While we striveto present creative and compelling products, plans and promotions in order toexpand our presence at these retailers and increase our share of the markets inwhich we compete, each year we encounter intense competition from ourcompetitors. If we are unsuccessful in repeating or increasing our current yearproduct offerings, it could adversely affect our consolidated financialposition, results of operations or cash flows.

***Acquisition Strategy.*****  **We have completed a number ofacquisitions and strategic transactions since 2001 and intend to grow throughthe acquisition of additional businesses. In addition to the Nu-Gro and UPGacquisitions described in more detail under the heading “Recent Events” in thissection, we are regularly engaged in acquisition discussions with a number ofother sellers and one or more potential acquisitions, including those thatcould be material, may become available in the near future. Further,acquisitions involve a number of special risks, including but not limited to:

·  failure of the acquired business to achieveexpected results;

·  diversion of management’s attention;

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·  failure to retain key personnel or customersof the acquired business;

·  additional financing that, if available, couldincrease leverage;

·  successor liability, including with respect tolegal and environmental matters;

·  the high cost and expenses of completingacquisitions and risks associated with unanticipated events or liabilities; and

·  failure to successfully integrate acquiredbusinesses into our internal control structure.

These risks could have a material adverse effect onour business and our consolidated financial position, results of operations andcash flows.

In addition, we expect to face competition foracquisition candidates, which may limit the number of opportunities and maylead to higher acquisition prices. We cannot assure you that we will be able toidentify, acquire or profitably manage additional businesses or to integratesuccessfully any acquired businesses into our existing business withoutsubstantial costs, delays or other operations or financial difficulties. Wealso could incur additional indebtedness or pay consideration in excess of fairvalue related to acquisitions, which could have a material adverse effect onour business and our consolidated financial position, results of operations andcash flows.

***Substantial Indebtedness.******  ***We have asignificant amount of debt. As of September 30, 2004, our total debt,excluding capital lease obligations, was $868.9 million. As of September 30,2004, we had unused availability under the revolving portion of our new seniorcredit facility of $124.0 million. Our substantial indebtedness could haveimportant consequences on our business. For example, it could:

·  make it more difficult for us to satisfy ourobligations under outstanding indebtedness and otherwise;

·  increase our vulnerability to general adverseeconomic and industry conditions, including interest rate increases because asubstantial portion of our borrowings are and will continue to be at variablerates of interest;

·  require us to dedicate a substantial portionof cash flows from operating activities to payments on obligations underoutstanding indebtedness and otherwise, which would reduce the cash flowsavailable to fund working capital, capital expenditures, advertising, researchand development efforts and other general corporate expenses;

·  limit our flexibility in planning for, orreacting to, changes in our business, the industry in which we operate and theeconomy at large;

·  place us at a competitive disadvantagecompared to our competitors that have proportionately less debt; and

·  limit our ability to borrow additional fundsin the future, if needed, on reasonable terms.

Our ability to make payments on, or to refinance any,future indebtedness and to fund planned capital expenditures and acquisitionswill depend on our ability to generate cash in the future. This, to someextent, is subject to general economic, weather, financial, competitive,legislative, regulatory and other factors that are beyond our control.

We cannot provide assurance that our business willgenerate sufficient cash flow from operating activities or that futureborrowings will be available to us under our senior credit facility in amountssufficient to enable us to pay our indebtedness or to fund our other liquidityneeds. We may need to refinance all or a portion of our indebtedness, on orbefore existing maturity dates. We cannot assure you that we would be able torefinance any of our indebtedness on commercially reasonable terms or at all.

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***Environmental andRegulatory Considerations.*****  **Local, state, federal and foreignlaws and regulations relating to environmental, health and safety mattersaffect us in several ways. In the United States, all products containingpesticides must be registered with the United States Environmental ProtectionAgency, or EPA, and, in many cases, similar state agencies before they can bemanufactured or sold. In Canada, all products containing pesticides must beregistered with the Pest Management Regulatory Agency and, in many cases,similar federal/provincial agencies before they can be manufactured orsold. The inability to obtain, or the cancellation of, any registration couldhave an adverse effect on our business. The severity of the effect would dependon which products were involved, whether another product could be substitutedand whether our competitors were similarly affected. We attempt to anticipateregulatory developments and maintain registrations of, and access to,substitute chemicals. We may not always be able to avoid these risks.

The Food Quality Protection Act establishes a standardfor food-use pesticides, which is that a reasonable certainty of no harm willresult from the cumulative effect of pesticide exposures. Under the Act, theEPA is evaluating the cumulative effects from dietary and non-dietary exposuresto pesticides. The pesticides in our products continue to be evaluated by theEPA as part of this exposure. It is possible that the EPA or a third partyactive ingredient registrant may decide that a pesticide we use in our productswill be limited or made unavailable to us. For example, in 2000, DowAgroSciences L.L.C., an active ingredient registrant, voluntarily agreed to awithdrawal of virtually all residential uses of Dursban, an active ingredientwe used in our lawn and garden products. This had a material effect on ourfinancial position, results of operations and cash flows in 2001. We cannotpredict the outcome or the severity of the effect of the EPA’s continuingevaluations of active ingredients used in our products.

In addition to the regulations already described,local, state, federal and foreign agencies regulate the disposal, handling andstorage of hazardous substances and hazardous waste, air and water dischargesfrom our facilities and the remediation of contamination. If we do not fullycomply with environmental regulations, or if a release of hazardous substancesoccurs at or from one of our facilities, we may be subject to penalties and/orheld liable for the costs of remedying the condition.

We do not anticipate incurring material capitalexpenditures for environmental control facilities during 2004. We currentlyestimate that the costs associated with compliance with environmental, healthand safety regulations could total approximately $0.3 million annually forthe next several years. The adequacy of our anticipated future expenditures isbased on our operating in substantial compliance with applicable environmentaland public health laws and regulations and the assumption that there are notsignificant conditions of potential contamination that are unknown to us. Ifthere is a significant change in the facts and circumstances surrounding thisassumption, or if we are found not to be in substantial compliance withapplicable environmental public health laws and regulations, it could have amaterial impact on future environmental capital expenditures and otherenvironmental expenses and our consolidated financial position, results ofoperations or cash flows.

As of September 30,2004 and 2003 and December 31, 2003, we believe we were substantially incompliance with applicable environmental and regulatory requirements.

**ITEM 3.**   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK.

**Raw MaterialsPrices, Foreign Currency Exchange Rates and Interest Rates**

In the normal course of business, we are exposed tofluctuations in raw materials prices, foreign currency exchange rates andinterest rates. We have established policies and procedures that govern themanagement of these exposures through the use of derivative hedginginstruments. Our objective in managing our exposure to such fluctuations is todecrease the volatility of earnings and cash flows associated with changes incertain raw materials prices, foreign currency exchange rates and interestrates. To achieve this objective, we periodically enter into derivativeinstrument agreements with values that 

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change in the oppositedirection of anticipated cash flows. Derivative instruments related toforecasted transactions are considered to hedge future cash flows, and theeffective portion of any gains or losses is included in accumulated othercomprehensive income until earnings are affected by the variability of cashflows. Any remaining gain or loss is recognized currently in results ofoperations.

We formally document, designate and assess theeffectiveness of any transactions that receive hedge accounting treatment. Thecash flows of derivative hedging instruments we utilize are generally expectedto be highly effective in achieving offsetting cash flows attributable tofluctuations in the cash flows of the hedged risk. Changes in the fair value ofagreements designated as derivative hedging instruments are reported as eitheran asset or liability in the accompanying consolidated balance sheets with theassociated unrealized gains or losses reflected in accumulated othercomprehensive income. As of September 30, 2004, we had five outstandingagreements representing derivative hedging instruments. Such agreements arecomprised of one foreign currency forward agreement, which is described below,and four agreements designated as hedges against forecasted purchases ofgranular urea and diammonium phosphates, materials used in the production offertilizer, with maturity dates ranging through December 2004 and anaggregate contract value upon execution of $2.1 million. Such derivativehedging instruments had an unrealized loss of less than $0.1 million as of September 30,2004, which is included in accumulated other comprehensive income in theaccompanying consolidated balance sheet as of such date. Amounts included inaccumulated other comprehensive income, which were subsequently reclassifiedinto cost of goods sold for the nine months ended September 30, 2004 and2003 included a net loss of $0.2 million and a net gain of $1.4 million,respectively. No such amounts were reclassified into cost of goods sold for thethree months ended September 30, 2004 and 2003. Although derivativehedging instruments were used for forecasted purchases of granular ureathroughout 2003, no such instruments were outstanding as of September 30,2003 and December 31, 2003.

We also had one foreign currency forward agreementoutstanding as of September 30, 2004 designated as a hedge againstexchange rate fluctuations of the Euro, used to purchase certain componentsfrom European suppliers. The agreement matures in December 2004 and had anaggregate contract value upon execution of less than $0.1 million. Theunrealized gain on such agreement as of September 30, 2004, included inaccumulated other comprehensive income in the accompanying consolidated balancesheet as of such date, and any amounts reclassified into cost of goods sold forthe three and nine months ended September 30, 2004 were nominal. No suchderivative hedging instruments were used as hedges against exchange ratefluctuations during 2003.

If it becomes probablethat a forecasted transaction will not occur, any gains or losses inaccumulated other comprehensive income will be recognized in results ofoperations. We have not incurred any material gains or losses for hedgeineffectiveness or due to excluding a portion of the value from measuring effectiveness.We have not generally entered into derivatives or other hedging arrangementsfor trading or speculative purposes but may consider doing so in the future ifstrategic circumstances warrant, and our bank covenants and bond indenturespermit, such transactions. While we expect these derivative hedging instrumentsand purchase commitments to manage our exposure to the potential fluctuationsdescribed above, no assurance can be provided that such instruments will beeffective in fully mitigating exposure to these risks, nor can assurance beprovided that we will be successful in passing on pricing increases to ourcustomers.

**Market RiskSensitive Instruments**

As described further under the heading, “Liquidity andCapital Resources,” of Part I, Item 2, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” much of our debt isvariable-rate debt and is subject to fluctuation in interest rates.

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Thefollowing table summarizes information about our debt instruments, excludingunamortized premium of $1.0 million on fixed rate debt, as of September 30,2004, that are sensitive to changes in interest rates. The table presentsfuture principal cash flows and certain related interest rates by expectedmaturity dates as of September 30, 2004 (dollars in thousands):
| ** **            | ** ** | **Remainder** | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **There-** | ** ** | ** ** | ** ** | **Fair**  | ** ** |
|-----------------------|------------|---------------|------------|------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-----------|------------|
| **Description**       | ** ** | ** **    | ** ** | **of 2004** | ** ** | **2005**   | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008**   | ** ** | **After**  | ** ** | **Total** | ** ** | **Value** | ** ** |
| Long-term debt:       |       |          |       |             |       |       |       |       |       |       |       |       |       |       |       |      |       |   |   |
| Fixed-rate debt       |       |          | $          | —           |       |       | $          | —     |       | $          | —     |       | $          | —     |       | $         | —     |   | $ | 231,900 |   | $ | 231,900 |   | $ | 240,017 |   |
| Average interest rate |       |          | —     |             |       | —     |       | —     |       | —     |       | —     |       | 9.875      | %          | 9.875     | %          |   |   |
| Variable-rate debt    |       |          | $          | 1,594            |       |       | $          | 6,377      |       | $          | 6,377      |       | $          | 6,377      |       | $         | 6,377      |   | $ | 608,859 |   | $ | 635,961 |   | $ | 635,961 |   |
|                       |            |               |            |                  |            |            |            |            |            |            |            |            |            |            |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

An increase in ourweighted average variable borrowing rate of 1% would have resulted in anincrease to annual interest expense of approximately $4.8 million for the ninemonths ended September 30, 2004 and $1.5 million for the nine months endedSeptember 30, 2003.

**Exchange Rate Risk**

The functional currency for the majority of ouroperations is the U.S. dollar. However, with the acquisition of Nu-Gro, we havebecome subject to foreign currency translation gains and losses, as theCanadian dollar is the functional currency of Nu-Gro’s Canadian subsidiaries. Fortranslation of the Canadian subsidiaries’ financial statements, assets andliabilities are translated at the year-end exchange rate, while statement ofoperations accounts are translated at average exchange rates monthly. Theresulting translation adjustments are recorded in accumulated othercomprehensive income, a component of stockholders’ equity (deficit). Transactiongains or losses on intercompany balances with Nu-Gro that are designated asforeign currency transactions are recorded monthly in selling, general andadministrative expenses in the consolidated statement of operations. Foreigncurrency transactions are recorded at the exchange rate prevailing on thetransaction date.

The recent weakening of the U.S. dollar compared tothe Canadian dollar positively impacted our purchase price of Nu-Gro betweenthe date we signed the definitive agreement and the date of closing, as well asthe net sales and operating income of its subsidiaries since the date ofacquisition. We are also subject to foreign exchange transaction exposure whenour Canadian businesses purchase inventory in U.S. dollars.

In addition, with theacquisition of UPG, we have become subject to further foreign currency exchangegains and losses, as some of our inventory components are sourced from certainEuropean vendors. In connection with these purchases, we have entered into acertain foreign exchange forward contract in an attempt to mitigate foreignexchange rate risk. Such contract is further described under the previousheading titled “Raw Materials Prices, Foreign Currency Exchange Rates andInterest Rates.”

**Inflation Risk**

We manage inflation risksthrough a continuing review of our product selling prices and production costs.We do not believe that inflation risks are material to our consolidatedfinancial position, results of operations or cash flows.

**ITEM 4.**   CONTROLS AND PROCEDURES.

**Evaluation ofDisclosure Controls and Procedures**

Our chief executiveofficer and our chief financial officer, after evaluating the effectiveness ofour disclosure controls and procedures (as defined in the Securities ExchangeAct of 1934 Rules 13a-15(e) and 

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15d-15(e))as of the end of the period covered by this report, have concluded that as ofsuch date, our disclosure controls and procedures are effective in bringing totheir attention on a timely basis material information relating to us and ourconsolidated subsidiaries required to be included in our periodic filings underthe Exchange Act.

**Internal ControlOver Financial Reporting**

Prior to our acquisition of UPG on July 30, 2004,UPG was a privately owned company with decentralized accounting systems andcontrols. We are conducting a review of UPG to determine whether there existany material weaknesses in UPG’s operating policies, internal controls andprocedures. Such review is not yet complete. To the extent the review identifiesany deficiencies causing material weaknesses in our internal controls andprocedures, we intend to remedy such deficiencies. Apart from the acquisitionof UPG, there were no changes in our internal control over financial reportingthat occurred during the most recent fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

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**PART II**.OTHER INFORMATION

**ITEM1**.   LEGALPROCEEDINGS.

We are involved from timeto time in routine legal matters and other claims incidental to the business.When it appears probable in management’s judgment that we will incur monetarydamages or other costs in connection with such claims and proceedings, and suchcosts can be reasonably estimated, liabilities are recorded in the consolidatedfinancial statements and charges are recorded against earnings. We believe thatthe resolution of such routine matters and other incidental claims will not have a material adverseimpact on our consolidated financial position or results of operations.

**ITEM2**.   UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

In connection with, and topartially fund, our acquisition of UPG, on July 30, 2004, we issued 5.8million shares each of our Class A voting and Class B nonvotingcommon stock to affiliates of Thomas H. Lee Partners, our largeststockholder, Banc of America Securities LLC and certain UPG sellingstockholders for proceeds of $70.0 million. We relied upon the exemptionprovided for under Section 4(2) of the Securities Act of 1933, asamended, in issuing these shares of common stock.

**ITEM5**.   OTHER INFORMATION.

On September 16, 2004, we filed a Current Reporton Form 8-K to announce the naming of the new President of our U.S.Home & Garden division. His employment agreement is being filedherewith as Exhibit 10.52 to this Quarterly Report on Form 10-Q,as listed in the accompanying Exhibit Index on page 61.

On November 9, 2004, our Board of Directorsadopted the United Industries Corporation Code of Ethics for Principal Executive Officer and Senior FinancialOfficers and the Policy of the Audit Committee of United IndustriesCorporation on Employee Complaint Procedures for Accounting and AuditingMatters. Such documents are being filed herewith as Exhibits 14.1 and 14.2,respectively, as listed in the accompanying Exhibit Index on page 61.

OnNovember 12, 2004, we amended the Restated Management Agreement we have withDaniel J. Johnston, our Executive Vice President, Chief Financial Officer and Director. Such amendment revisedthe Extended Executive Notice clause of the agreement, where by any writtennotice by Mr. Johnston of termination of his employment may occur not less than 90 daysfrom the date the Company is given the notice, instead of six months as originally described. All other provisions of the Restated ManagementAgreement remain in full force and effect.

**ITEM6**.   EXHIBITS.

The Exhibit Index begins on page 61.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                               | UNITED INDUSTRIES  CORPORATION                                                                                                   |                        |
|-------------------------------|----------------------------------------------------------------------------------------------------------------------------------|-----------------------------|
|                          | Registrant                                                                                                                       |
|                          | By:                                                                                                                              | /s/ DANIEL J. JOHNSTON |
|                          | Daniel J. Johnston                                                                                                               |
| * *                      | *Executive Vice President, Chief Financial Officer  and Director (Principal Financial Officer and Principal Accounting Officer)* |
| Dated: November 15, 2004 |                                                                                                                             |
|                               |                                                                                                                                  |                             |  |

 

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**EXHIBIT**INDEX
| Exhibit Number   | ** ** |  

**Exhibit Description**                                                                                                                                                                                                                                                                           |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    2.1 |       | Arrangement Agreement  between United Industries Corporation and Jupiter Acquisition Corporation and  The Nu-Gro Corporation dated March 1, 2004.(6)                                                                                                                                                      |
|    2.2 |       | Amending Agreement between  United Industries Corporation and Jupiter Acquisition Corporation and The  Nu-Gro Corporation dated March 19, 2004.(6)                                                                                                                                                        |
|    2.3 |       | Agreement and Plan of  merger by and among United Industries Corporation, Saturn  MergerCo., Inc., and United Pet Group, Inc., dated as of  June 14, 2004.(4)                                                                                                                                   |
|    3.1 |       | Amended and Restated  Certificate of Incorporation of the Company, dated January 13, 1999.(1)                                                                                                                                                                                                             |
|    3.2 |       | Certificate of Amendment  to the Amended and Restated Certificate of Incorporation of the Company,  dated January 20, 1999.(1)                                                                                                                                                                            |
|    3.3 |       | Certificate of Amendment  to the Amended and Restated Certificate of Incorporation of the Company,  dated November 9, 2000.(2)                                                                                                                                                                            |
|    3.4 |       | Certificate of Amendment  to the Amended and Restated Certificate of Incorporation of the Company,  dated December 13, 2001.(3)                                                                                                                                                                           |
|    3.5 |       | Certificate of Amendment  to the Amended and Restated Certificate of Incorporation of the Company,  dated May 7, 2002.(3)                                                                                                                                                                                 |
|    3.6 |       | Certificate of Amendment  to the Amended and Restated Certificate of Incorporation of the Company,  dated July 29, 2004.(5)                                                                                                                                                                               |
|    3.7 |       | By-laws of the  Company.(1)                                                                                                                                                                                                                                                                                    |
| 10.51            |       | Amended and Restated  Credit Agreement, dated as of July 30, 2004, among United Industries  Corporation, Bank of America, N.A., Banc of America Securities LLC, Citigroup  Global Markets Inc., JPMorgan Chase Bank, J.P. Morgan Securities Inc. and  Other Lenders Party Hereto (as defined therein).(4) |
| 10.52            |       | Employment and  Non-Competition Agreement, effective September 13, 2004, by and between  Stephen L. Tooker and United Industries Corporation.*                                                                                                                                                            |
| 10.53            |       | First Amendment to Restated Management Agreement,  effective November 12, 2004, by and between Daniel J. Johnston and  United Industries Corporation.*                                                                                                                                                    |
| 14.1             |       | United Industries  Corporation Code of Ethics for Principal Executive Officer and Senior  Financial Officers.*                                                                                                                                                                                                 |
| 14.2             |       | Policy of the Audit  Committee of United Industries Corporation on Employee Complaint Procedures  for Accounting and Auditing Matters.*                                                                                                                                                                        |
| 31.1             |       | Rule 13a-14(a)/Rule 15d-14(a) Certification  of Chief Executive Officer.*                                                                                                                                                                                                                       |
| 31.2             |       | Rule 13a-14(a)/Rule 15d-14(a) Certification  of Chief Financial Officer.*                                                                                                                                                                                                                       |
| 32.1             |       | Section 1350  Certifications (furnished to, but not “filed” with, the United States  Securities and Exchange Commission).*                                                                                                                                                                      |

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(1)    Previouslyfiled as an Exhibit to the Registrant’s Registration Statement on Form S-4(No. 333-76055) filed on April 9, 1999 and incorporated byreference herein.

(2)    Previously filed as an Exhibit to the Registrant’sForm 10-K filed on April 14, 2001 and incorporated by referenceherein.

(3)    Previously filed as an Exhibit to the Registrant’sForm 10-K filed on March 20, 2003 and incorporated by referenceherein.

(4)    Previously filed as an exhibit to the Registrant’s Form 8-Kfiled on July 30, 2004 and incorporated by reference herein.

(5)    Previously filed as an exhibit to the Registrant’s Form 10-Qfiled on August 16, 2004 and incorporated by reference herein.

(6)    Previously filed as an exhibit to the Registrant’s Form 8-K/Afiled on July 9, 2004 and incorporated by reference herein.

*       Filed or furnished herewith.

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