**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

**(Mark One)**

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

**Forthe quarterly period ended June 30, 2004**

**OR**

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

**Forthe transition period from***               *to *               *

**CommissionFile Number: 333-76055**

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**UNITED INDUSTRIES CORPORATION**

(Exact name of registrantas 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 markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). Yes o   No x

Asof August 16, 2004, the registrant had 35,954,496 Class A voting and35,954,496 Class B nonvoting shares of common stock outstanding.

 

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**UNITED INDUSTRIES CORPORATIONQUARTERLY REPORT ON FORM 10-QFOR THE PERIOD ENDED JUNE 30, 2004TABLE OF CONTENTS**
|                                                                                                                                 | ** ** | **Page** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I. FINANCIAL  INFORMATION**                                                                                         |       | 4        |
| Item 1. Financial  Statements (Unaudited)                                                                                       |       | 4        |
| Consolidated Balance Sheets  as of June 30, 2004 and 2003 and December 31, 2003                                       |       | 4        |
| Consolidated  Statements of Operations and Comprehensive Income for the Three and Six  Months Ended June 30, 2004 and 2003 |       | 5        |
| Consolidated  Statements of Cash Flows for the Six Months Ended June 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                            |       | 35       |
| Item  3. Quantitative and Qualitative Disclosures About Market Risk                                                             |       | 56       |
| Item 4. Controls  and Procedures                                                                                                |       | 57       |
| **PART II. OTHER  INFORMATION**                                                                                            |       | 59       |
| Item 1. Legal  Proceedings                                                                                                      |       | 59       |
| Item 6. Exhibits and Reports on Form 8-K                                                                                        |       | 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. ® andOrganiform® are our trademarks and trade names. We also licensecertain Cutter® trademarks from Bayer A.G., Peters® andPeters Professional® trademarks from The Scotts Company, CIL® trademarksfrom ICI Canada Inc., Plant-Prod® trademarks from Plant Products Co.Ltd. and Pickseed® trademarks from Pickseed Canada Inc. Othertrademarks and trade names used in this Quarterly Report are the property oftheir respective owners.

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**CAUTIONARY STATEMENTREGARDING 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:

·       generaleconomic and business conditions;

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

·       the loss ofa significant amount of products purchased by major customers;

·       weatherconditions and/or historical seasonality;

·       our abilityto repay our indebtedness or meet other obligations;

·       industrytrends and competition;

·       our abilityto manage rapid growth, the integration of acquisitions and the diversificationof our businesses;

·       our abilityto achieve the benefits we expect from acquisitions, including The Nu-GroCorporation and United Pet Group, Inc. transactions;

·       our abilityto successfully implement or integrate our information systems;

·       publicperception regarding the safety of our products;

·       governmentalregulations;

·       terroristattacks or acts of war;

·       cost andavailability of raw materials or product components;

·       changes inour business strategy or development plans;

·       our abilityto recruit and retain quality personnel;

·       availability,terms and deployment of capital resources; and

·       the otherrisks described in our filings with the SEC, including our Annual Report on Form 10-K.

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**PART I. FINANCIAL INFORMATION**

**ITEM 1.**   FINANCIALSTATEMENTS

**UNITED INDUSTRIES CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Dollars in thousands, except share data)(Unaudited)**
| ** **                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | **2004**          | ** ** | **2003**              | ** ** | **2003** | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                                                                                                                                                |       |              |       |                  |       |   |   |   |   |
| Current assets:                                                                                                                                                                                                                                                                                                                                                                                           |       |              |       |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                 |       | $                 | 8,502      |                  | $          | 10,823 |   |   | $ | 11,413 |   |   |
| Accounts receivable, net of reserves of $5,307 and  $4,941 at June 30, 2004 and 2003, respectively, and $2,753 at  December 31, 2003                                                                                                                                                                                                                                                  |       | 161,192           |       | 126,026               |       |   | 29,890 |   |   |
| Inventories                                                                                                                                                                                                                                                                                                                                                                                               |       | 126,707           |       | 77,703                |       |   | 96,795 |   |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                                                                                                                                                                                 |       | 15,323            |       | 8,470                 |       |   | 15,141 |   |   |
| Total current assets                                                                                                                                                                                                                                                                                                                                                                                      |       | 311,724           |       | 223,022               |       |   | 153,239 |   |   |
| Equipment and leasehold improvements, net                                                                                                                                                                                                                                                                                                                                                                 |       | 69,251            |       | 32,878                |       |   | 37,153 |   |   |
| Deferred tax asset                                                                                                                                                                                                                                                                                                                                                                                        |       | 123,894           |       | 84,953                |       |   | 186,562 |   |   |
| Goodwill                                                                                                                                                                                                                                                                                                                                                                                                  |       | 61,398            |       | 8,839                 |       |   | 6,221 |   |   |
| Intangible assets, net                                                                                                                                                                                                                                                                                                                                                                                    |       | 157,621           |       | 87,038                |       |   | 86,872 |   |   |
| Other assets, net                                                                                                                                                                                                                                                                                                                                                                                         |       | 17,598            |       | 11,863                |       |   | 9,897 |   |   |
| Total assets                                                                                                                                                                                                                                                                                                                                                                                              |       | $                 | 741,486    |                  | $          | 448,593 |   |   | $ | 479,944 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                                                                                                                                                                                                                                                                                   |       |              |       |                  |       |   |   |   |   |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                                                                      |       |              |       |                  |       |   |   |   |   |
| Current maturities of long-term debt and capital  lease obligations                                                                                                                                                                                                                                                                                                                                       |       | $                 | 4,151      |                  | $          | 1,434 |   |   | $ | 1,349 |   |   |
| Accounts payable                                                                                                                                                                                                                                                                                                                                                                                          |       | 57,754            |       | 41,092                |       |   | 29,774 |   |   |
| Accrued expenses                                                                                                                                                                                                                                                                                                                                                                                          |       | 54,923            |       | 56,984                |       |   | 39,574 |   |   |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                                                                 |       | 116,828           |       | 99,510                |       |   | 70,697 |   |   |
| Long-term debt, net of current maturities                                                                                                                                                                                                                                                                                                                                                                 |       | 613,591           |       | 408,071               |       |   | 387,657 |   |   |
| Capital lease obligations, net of current maturities                                                                                                                                                                                                                                                                                                                                                      |       | 3,324             |       | 3,483                 |       |   | 3,191 |   |   |
| Other liabilities                                                                                                                                                                                                                                                                                                                                                                                         |       | 4,055             |       | 3,231                 |       |   | 3,256 |   |   |
| Total liabilities                                                                                                                                                                                                                                                                                                                                                                                         |       | 737,798           |       | 514,295               |       |   | 464,801 |   |   |
| Commitments and  contingencies (see Note 11)                                                                                                                                                                                                                                                                                                                                                              |       |              |       |                  |       |   |   |   |   |
| Stockholders’  equity (deficit):                                                                                                                                                                                                                                                                                                                                                                     |       |              |       |                  |       |   |   |   |   |
| Preferred stock (no shares of $0.01 par value  Class A issued and outstanding at June 30, 2004, 40,000 authorized;  37,600 shares issued and outstanding at June 30, 2003 and December 31,  2003, 40,000 authorized)                                                                                                                                                                  |       | —            |       | —                |       |   | — |   |   |
| Common stock (33.2 million shares each of $0.01 par  value Class A and Class B issued, 30.1 million shares of each  outstanding and 43.6 million shares of each authorized at June 30, 2004;  33.2 million shares each of $0.01 par value Class A and Class B  issued and outstanding, 43.6 million shares of each authorized at  June 30, 2003 and December 31, 2003) |       | 665               |       | 665                   |       |   | 665 |   |   |
| Treasury stock (3.1 million shares each of $0.01 par  value Class A and Class B, at cost at June 30, 2004; 9,569  shares of each, at cost at June 30, 2003 and December 31, 2003)                                                                                                                                                                                                |       | (24,469           | )          | (96                   | )          |   | (96 | ) |   |
| Warrants and options                                                                                                                                                                                                                                                                                                                                                                                      |       | 11,745            |       | 11,745                |       |   | 11,745 |   |   |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                                                                                |       | 170,672           |       | 210,806               |       |   | 210,908 |   |   |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                                                                                       |       | (152,865          | )          | (258,848              | )          |   | (179,738 | ) |   |
| Common stock subscription receivable                                                                                                                                                                                                                                                                                                                                                                      |       | —            |       | (24,177               | )          |   | (22,534 | ) |   |
| Common stock repurchase option.                                                                                                                                                                                                                                                                                                                                                                           |       | —            |       | (2,636                | )          |   | (2,636 | ) |   |
| Common stock held in grantor trusts                                                                                                                                                                                                                                                                                                                                                                       |       | (2,847            | )          | (2,847                | )          |   | (2,847 | ) |   |
| Loans to executive officer                                                                                                                                                                                                                                                                                                                                                                                |       | (215              | )          | (324                  | )          |   | (324 | ) |   |
| Accumulated other comprehensive income                                                                                                                                                                                                                                                                                                                                                                    |       | 1,002             |       | 10                    |       |   | — |   |   |
| Total stockholders’ equity (deficit)                                                                                                                                                                                                                                                                                                                                                                 |       | 3,688             |       | (65,702               | )          |   | 15,143 |   |   |
| Total liabilities  and stockholders’ equity (deficit)                                                                                                                                                                                                                                                                                                                                                |       | $                 | 741,486    |                  | $          | 448,593 |   |   | $ | 479,944 |   |   |

 

See accompanying notes to consolidated financial statements.

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**UNITED INDUSTRIES CORPORATION AND SUBISIDIARIESCONSOLIDATED STATEMENTS OFOPERATIONS AND COMPREHENSIVE INCOME(Dollars in thousands)(Unaudited)**
| ** **                                                                                         | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2004**                                        | ** ** | **2003**                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                         | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | **(As Restated)** | ** ** |
| **CONSOLIDATED STATEMENTS OF   OPERATIONS:**                                                       | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Net sales                                                                                          |       | $                                               | 239,835    |                                          | $          | 206,003 |   | $ | 422,538 |   |   | $ | 384,815 | ** ** |   |
| Operating costs and  expenses:                                                                     |       |                                            |       |                                          |       |   |   |   |   | ** ** |   |
| Cost of goods sold                                                                                 |       | 155,857                                         |       | 123,797                                       |       | 269,265 |   |   | 232,552 | ** ** |   |
| Selling, general and administrative expenses                                                       |       | 49,784                                          |       | 37,905                                        |       | 89,765 |   |   | 79,304 | ** ** |   |
| Total operating costs and expenses                                                                 |       | 205,641                                         |       | 161,702                                       |       | 359,030 |   |   | 311,856 | ** ** |   |
| Operating income                                                                                   |       | 34,194                                          |       | 44,301                                        |       | 63,508 |   |   | 72,959 | ** ** |   |
| Interest expense                                                                                   |       | 11,908                                          |       | 10,271                                        |       | 21,528 |   |   | 19,974 | ** ** |   |
| Interest income                                                                                    |       | 86                                              |       | 455                                           |       | 371 |   |   | 954 | ** ** |   |
| Income before  income tax expense                                                                  |       | 22,372                                          |       | 34,485                                        |       | 42,351 |   |   | 53,939 | ** ** |   |
| Income tax  expense                                                                                |       | 5,039                                           |       | 13,123                                        |       | 12,631 |   |   | 21,525 | ** ** |   |
| Net income                                                                                         |       | 17,333                                          |       | 21,362                                        |       | 29,720 |   |   | 32,414 | ** ** |   |
| Preferred stock  dividends                                                                         |       | 585                                             |       | 1,863                                         |       | 2,781 |   |   | 3,670 | ** ** |   |
| Net income available  to common stockholders                                                       |       | $                                               | 16,748     |                                          | $          | 19,499 |   | $ | 26,939 |   |   | $ | 28,744 | ** ** |   |
| **CONSOLIDATED STATEMENTS OF  COMPREHENSIVE INCOME:**                                              |       |                                            |       |                                          |       |   |   |   |   | ** ** |   |
| Net income                                                                                         |       | $                                               | 17,333     |                                          | $          | 21,362 |   | $ | 29,720 |   |   | $ | 32,414 | ** ** |   |
| Other comprehensive  income:                                                                       |       |                                            |       |                                          |       |   |   |   |   | ** ** |   |
| Gain (loss) on derivative hedging instruments, net  of tax of $110, $11, $0 and $481, respectively |       | (179                                            | )          | (18                                           | )          | — |   |   | 784 | ** ** |   |
| Foreign currency translation gain, net of tax of  $614, $0, $614 and $0, respectively              |       | 1,002                                           |       | —                                        |       | 1,002 |   |   | — | ** ** |   |
| Comprehensive income                                                                               |       | $                                               | 18,156     |                                          | $          | 21,344 |   | $ | 30,722 |   |   | $ | 33,198 | ** ** |   |

 

See accompanying notes to consolidated financial statements.

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**UNITED INDUSTRIES CORPORATION AND SUBISIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Dollars in thousands)(Unaudited)**
| ** **                                                                        | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2004**                                          | ** ** | **2003** | ** ** |
| ** **                                                                        | ** ** | ** **                                        | ** ** | **(As Restated)** | ** ** |
| Cash flows from operating  activities:                                            | ** ** | ** **                                        | ** ** |   | ** ** | ** ** |   |
| Net income                                                                        |       | $                                                 | 29,720     |   |   | $ | 32,414 | ** ** |   |
| Adjustments  to reconcile net income to net cash flows from operating activities: |       |                                              |       |   |   | ** ** |   |
| Depreciation and amortization                                                     |       | 15,498                                            |       |   | 8,336 | ** ** |   |
| Amortization and write-off of deferred financing fees                             |       | 2,960                                             |       |   | 3,663 | ** ** |   |
| Deferred income tax expense                                                       |       | 12,631                                            |       |   | 20,188 | ** ** |   |
| Gain on sale of aircraft                                                          |       | (1,497                                            | )          |   | — | ** ** |   |
| Changes  in operating assets and liabilities, net of effects from acquisition:    |       |                                              |       |   |   | ** ** |   |
| Accounts receivable                                                               |       | (76,752                                           | )          |   | (104,296 | **)** |   |
| Inventories                                                                       |       | 12,736                                            |       |   | 7,488 | ** ** |   |
| Prepaid expenses                                                                  |       | 949                                               |       |   | 2,878 | ** ** |   |
| Other assets                                                                      |       | (3,151                                            | )          |   | (3,353 | **)** |   |
| Accounts payable                                                                  |       | (3,925                                            | )          |   | 14,413 | ** ** |   |
| Accrued expenses                                                                  |       | 27,726                                            |       |   | 3,270 | ** ** |   |
| Other operating activities, net                                                   |       | 799                                               |       |   | 1,082 | ** ** |   |
| Net cash flows provided by (used in) operating  activities                        |       | 17,694                                            |       |   | (13,917 | **)** |   |
| Cash flows from investing  activities:                                            |       |                                              |       |   |   | ** ** |   |
| Purchases of equipment and leasehold improvements                                 |       | (6,826                                            | )          |   | (3,425 | **)** |   |
| Payment for acquisition of the Nu-Gro Corporation                                 |       | (146,448                                          | )          |   | — | ** ** |   |
| Proceeds from sale of aircraft                                                    |       | 2,780                                             |       |   | — | ** ** |   |
| Proceeds from sale of WPC product lines                                           |       | —                                            |       |   | 4,204 | ** ** |   |
| Net cash flows provided by (used in) investing  activities                        |       | (150,494                                          | )          |   | 779 | ** ** |   |
| Cash flows from financing  activities:                                            |       |                                              |       |   |   | ** ** |   |
| Proceeds from issuance of senior subordinated notes                               |       | —                                            |       |   | 86,275 | ** ** |   |
| Proceeds from borrowings on new senior credit  facility                           |       | 385,000                                           |       |   | — | ** ** |   |
| Proceeds from issuance of common stock                                            |       | —                                            |       |   | 84 | ** ** |   |
| Payments received for common stock subscription  receivable                       |       | —                                            |       |   | 2,049 | ** ** |   |
| Payments received on loans to executive officer                                   |       | 109                                               |       |   | 80 | ** ** |   |
| Payment for repurchase of senior subordinated notes                               |       | (3,100                                            | )          |   | — | ** ** |   |
| Repayment of borrowings on term debt                                              |       | (179,986                                          | )          |   | (78,059 | **)** |   |
| Payments for capital lease obligations                                            |       | (3,841                                            | )          |   | (295 | **)** |   |
| Payments for debt issuance costs                                                  |       | (9,954                                            | )          |   | (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                                                     |       | 4,079                                             |       |   | 6,433 | ** ** |   |
| Net cash flows provided by financing activities                                   |       | 133,250                                           |       |   | 13,643 | ** ** |   |
| Effect of exchange rates on cash and cash equivalents                             |       | (3,361                                            | )          |   | — | ** ** |   |
| Net increase (decrease) in cash and cash equivalents                              |       | (2,911                                            | )          |   | 505 | ** ** |   |
| Cash and cash equivalents, beginning of period                                    |       | 11,413                                            |       |   | 10,318 | ** ** |   |
| Cash and cash equivalents, end of period                                          |       | $                                                 | 8,502      |   |   | $ | 10,823 | ** ** |   |
| Noncash financing  activities:                                                    |       |                                              |       |   |   | ** ** |   |
| Debt assumed in Nu-Gro acquisition                                                |       | $                                                 | 26,654     |   |   | $ | — | ** ** |   |
| Bayer transactions for treasury stock (see Note 13)                               |       | $                                                 | 22,873     |   |   | $ | — | ** ** |   |
| Execution of capital lease for transportation  equipment                          |       | $                                                 | 3,525      |   |   | $ | — | ** ** |   |
| Preferred stock dividends accrued                                                 |       | $                                                 | 585        |   |   | $ | 3,670 | ** ** |   |
| Retirement of  preferred stock                                                    |       | $                                                 | 37,665     |   |   | $ | — | ** ** |   |

 

See accompanying notes to consolidated financial statements.

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

**Note 1—Descriptionof Business and Basis of Presentation**

Under a variety of brand names, and operating asSpectrum Brands and Nu-Gro, United Industries Corporation (the Company)manufactures and markets one of the broadest lines of products in the industry,including herbicides and indoor and outdoor insecticides, as well as insectrepellents, fertilizers, growing media and soils. The Company’s value brandsare targeted toward consumers who want products and packaging that arecomparable or superior to, and at lower prices than, premium-priced brands,while its opening price point brands are designed for cost-conscious consumerswho want quality products. The Company’s products are marketed to massmerchandisers, home improvement centers, hardware, grocery and drug chains,nurseries and garden centers throughout North America.

The Company’s operations are divided into threebusiness segments: Consumer Lawn and Garden, Consumer Household and FertilizerTechnology and Other. The Company’s lawn and garden brands include, amongothers, Spectracide®, Garden Safe® and Real-Kill®in the controls category, as well as Sta-Green®, Vigoro®,SchultzTM and Bandini® brands in the lawn and garden fertilizer andgrowing media categories. The Company’s household brands include, among others,Hot Shot®, Cutter® and Repel®. The FertilizerTechnology and Other segment includes a variety of controlled-release nitrogenproducts and technology, as well as a variety of compounds and chemicals, suchas cleaning solutions and other consumer products. The Company’s fertilizertechnology brands include, among others, Nutralene® and Nitroform®.As described in more detail in Note 15, the basis of the Company’s segmentationhas been modified since March 31, 2004 to accommodate the acquisition ofThe Nu-Gro Corporation (Nu-Gro) (see Note 3).

The accompanying consolidated financial statementsinclude the accounts and balances of the Company and its wholly-ownedsubsidiaries. All material intercompany transactions have been eliminated inconsolidation. The accompanying consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and the rules andregulations of the Securities and Exchange Commission. Accordingly, certaininformation and footnote disclosures typically included in the Company’s AnnualReport on Form 10-K have been condensed or omitted for this report. Assuch, this report should be read in conjunction with the consolidated financialstatements and accompanying notes in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2003. Certain amounts in the 2003consolidated financial statements included herein have been reclassified toconform 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.

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

**Note 2—DefinitiveAgreement to Acquire United Pet Group, Inc.**

On June 14, 2004, theCompany and a wholly-owned subsidiary entered into a definitive agreement tocomplete a merger of the subsidiary with and into United Pet Group, Inc.(UPG), a privately owned manufacturer and marketer of premium branded petsupplies. UPG’s stockholders approved the transaction on June 16, 2004 andthe Company completed the merger on July 30, 2004 for cash consideration of$360.0 million. The transaction was financed with $250.0 million of proceedsfrom the Company’s New Senior Credit Facility, as amended (see Note 10),including $75.0 million under a second lien facility, $70.0 million of proceedsfrom the issuance of 5.8 million shares each of the Company’s Class A and Class Bcommon stock to affiliates of Thomas H. Lee Partners, the Company’s largeststockholder, Banc of America Securities LLC and certain UPG sellingstockholders and the remainder from the Company’s cash balances. Thetransaction will be accounted for as an acquisition and, accordingly, theresults of operations of UPG will be included in the Company’s results ofoperations from July 30, 2004, the date of acquisition. The Company iscurrently in the process of obtaining an independent third-party valuation ofassets acquired and liabilities assumed for purchase price allocation purposesand expects the valuation to be completed during the fourth quarter of 2004.

**Note 3—Acquisition of TheNu-Gro Corporation**

On April 30, 2004, the Company completed theacquisition of all of the outstanding common shares of Nu-Gro, a lawn andgarden products company then incorporated under the laws of Ontario, Canada. Asa result of the acquisition, Nu-Gro and its subsidiaries became wholly-ownedsubsidiaries of the Company. The total purchase price included cashconsideration of $146.4 million, including $5.0 million of related acquisitioncosts, and the assumption of $26.7 million of outstanding debt, which wasimmediately repaid by the Company at closing. The transaction was financed withproceeds from the Company’s New Senior Credit Facility (see Note 10). Theacquisition was executed to expand the Company’s reach throughout NorthAmerica, broaden its product offerings and customer base, vertically integratecertain of its 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 the consolidated financial statements from April 30, 2004, thedate of acquisition. The purchase price was allocated to assets acquired andliabilities assumed based on estimated fair values. The Company preliminarilyallocated $66.4 million of the purchase price to intangible assets and $40.5million to goodwill for consideration paid in excess of the fair value of netassets acquired, which is not deductible for tax purposes. The acquiredintangible assets consist primarily of trade names, which are currently beingamortized using the straight-line method over periods ranging from fifteen tothirty years, and to customer relationships, which are currently beingamortized using the straight-line method over periods ranging from five to tenyears. In addition, the Company increased the value of inventory acquired fromNu-Gro by $6.1 million to reflect estimated fair value on the date ofacquisition, which is currently being recorded as cost of goods soldcommensurate with related subsequent sales activity during 2004. For the threemonths ended June 30, 2004, amortization expense associated with suchwrite-up of inventory to estimated fair value of $5.2 million was recorded incost of goods sold.

8

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

**Note3—Acquisition of The Nu-Gro Corporation (Continued)**

The purchase price allocation is based on preliminaryinformation, which is subject to adjustment upon obtaining the final report ofan independent third-party valuation firm. The Company is currently in theprocess of obtaining such report and expects the final purchase priceallocation to be completed during the third quarter of 2004. While the finalpurchase price allocation may differ significantly from the preliminaryallocation provided herein, management believes any adjustments resulting fromthe final allocation will not have a material impact on the consolidatedresults of operations or financial position of the Company.

The following tablesummarizes the preliminary purchase price calculation and the preliminaryestimated fair values of assets acquired and liabilities assumed as of April 30,2004, the date of acquisition:
| ** **                                                    | ** ** | **April 30, 2004** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|
| Purchase price:                                               |       |                         |       |   |   |
| Cash                                                          |       |                         | $          | 141,402 |   |   |
| Transaction costs                                             |       |                         | 5,046      |   |   |
| Total purchase price                                          |       |                         | $          | 146,448 |   |   |
| Allocation of purchase price:                                 |       |                         |       |   |   |
| Assets:                                                       |       |                         |       |   |   |
| Accounts receivable                                           |       |                         | $          | 53,617 |   |   |
| Inventories                                                   |       |                         | 41,856     |   |   |
| Other current assets                                          |       |                         | 1,158      |   |   |
| Equipment and leasehold improvements                          |       |                         | 27,991     |   |   |
| Goodwill                                                      |       |                         | 40,492     |   |   |
| Trade names                                                   |       |                         | 47,750     |   |   |
| Customer relationships                                        |       |                         | 18,600     |   |   |
| Other assets                                                  |       |                         | 1,058      |   |   |
| Liabilities:                                                  |       |                         |       |   |   |
| Accounts payable and accrued expenses                         |       |                         | (33,109    | ) |   |
| Short-term borrowings and currentmaturities of long-term debt |       |                         | (20,951    | ) |   |
| Long-term debt, net of current maturities                     |       |                         | (5,703     | ) |   |
| Deferred income taxes                                         |       |                         | (26,311    | ) |   |
| Total purchase  price                                         |       |                         | $          | 146,448 |   |   |

 

Thefollowing table presents the Company’s unaudited consolidated results ofoperations on a pro forma basis, as if the Nu-Gro acquisition had occurred on January 1,2004 and 2003, as applicable:
| ** ** | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** ** | ** ** | **2004**                                        | ** ** | **2003**                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net sales  |       | $                                               | 265,124    |                                          | $          | 269,452 |   | $ | 489,772 |   | $ | 496,484 |   |
| Net income |       | 24,114                                          |       | 25,465                                        |       | 37,874 |   | 39,137 |   |
|            |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |

 

9

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

**Note3—Acquisition of The Nu-Gro Corporation (Continued)**

The unaudited pro forma consolidated financialinformation presented herein is not necessarily indicative of the consolidatedresults of operations or financial position that would have resulted had theacquisition been completed at the beginning of or as of the periods presented,nor is it indicative of the results of operations in future periods or thefuture financial position of the combined companies.

With the acquisition ofNu-Gro, the Company has become subject to foreign currency translation gainsand losses, as the Canadian dollar is the functional currency of Nu-Gro’sCanadian subsidiaries. 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(deficit). Transaction gains or losses on intercompany balances with Nu-Grothat are designated as foreign currency transactions are recorded monthly inselling, general and administrative expenses in the consolidated statement ofoperations. Foreign currency transactions are recorded at the prevailingexchange rate on the transaction date.

**Note 4—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. 123requires pro forma disclosure of the impact on earnings as if the Companydetermined stock-based compensation expense using the fair value method. Thefollowing table presents net income, as reported, stock-based compensationexpense that would have been recorded using the fair value method and pro formanet income that would have been reported had the fair value method beenapplied:
| ** **                                                                | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                | ** ** | **2004**                                        | ** ** | **2003**                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | **(As Restated)** | ** ** |
| Net income, as  reported                                                  |       | $                                               | 17,333     |                                          | $          | 21,362 |   | $ | 29,720 |   |   | $ | 32,414 |   |   |
| Stock-based  compensation expense using the fair value method, net of tax |       | (289                                            | )          | (368                                          | )          | (467 | ) |   | (720 | ) |   |
| Pro forma net income                                                      |       | $                                               | 17,044     |                                          | $          | 20,994 |   | $ | 29,253 |   |   | $ | 31,694 |   |   |

 

10

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

**Note 5—Inventories**

Inventoriesconsist of the following:
| ** **                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2004**          | ** ** | **2003**              | ** ** | **2003** | ** ** |
| Components and  packaging                         |       | $                 | 42,514     |                  | $          | 29,554 |   |   | $ | 34,619 |   |   |
| Finished goods                                    |       | 90,784            |       | 54,546                |       |   | 67,794 |   |   |
| Allowance for  obsolete and slow-moving inventory |       | (6,591            | )          | (6,397                | )          |   | (5,618 | ) |   |
| Total inventories                                 |       | $                 | 126,707    |                  | $          | 77,703 |   |   | $ | 96,795 |   |   |

 

**Note 6—Equipment andLeasehold Improvements**

Equipmentand leasehold improvements consist of the following:
| ** **                                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2004**          | ** ** | **2003**              | ** ** | **2003** | ** ** |
| Machinery and  equipment                              |       | $                 | 49,588     |                  | $          | 37,886 |   |   | $ | 39,024 |   |   |
| Office furniture,  equipment and capitalized software |       | 32,605            |       | 24,015                |       |   | 30,183 |   |   |
| Transportation  equipment                             |       | 4,441             |       | 5,998                 |       |   | 6,418 |   |   |
| Leasehold  improvements                               |       | 3,716             |       | 2,815                 |       |   | 3,157 |   |   |
| Land and  buildings                                   |       | 15,941            |       | —                |       |   | 114 |   |   |
|                                                  |       | 106,291           |       | 70,714                |       |   | 78,896 |   |   |
| Accumulated  depreciation and amortization            |       | (37,040           | )          | (37,836               | )          |   | (41,743 | ) |   |
| Total equipment  and leasehold improvements, net      |       | $                 | 69,251     |                  | $          | 32,878 |   |   | $ | 37,153 |   |   |

 

For the three months endedJune 30, 2004 and 2003, depreciation and amortization expense was $4.1million and $1.6 million, respectively. For the six months ended June 30,2004 and 2003, depreciation and amortization expense was $6.6 million and $3.4million, respectively. In February 2004, the Company executed a capitallease agreement for the use of an aircraft for $3.5 million. In April 2004, the Company closed an agreement that was executed in March 2004 tosell the aircraft it replaced in February 2004. The carrying value of theaircraft sold was $1.2 million and proceeds from the sale were $2.8 million.Accordingly, after related expenses of $0.1 million, the Company recorded a$1.5 million gain on sale which is included in operating income in theaccompanying consolidated statement of operations. As of June 30, 2004 and2003 and December 31, 2003, the cost of the aircraft held under capitallease was $3.8 million, $5.3 million and $5.3 million, respectively, and relatedaccumulated amortization was $0.1 million, $3.8 million and$4.4 million, respectively.

11

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

**Note 7—Goodwill andIntangible Assets**

Intangibleassets consist of the following:

| ** **                                | ** ** | ** **        | ** ** | **June 30, 2004** | ** ** | **June 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       |                        |       | $115,534                    |       |                            | $ (6,235 | ) |   | $109,299 |   |   | $64,351 |   |   |   | $(2,494 | ) |   |   | $61,857 |   |   |   | $61,548 |   |   |   | $ (2,958 | ) |   |   | $58,590 |   |   |
| Customer relationships                    |       |              | 5-10       |                        |       | 54,428                      |       |                            | (13,922       | ) |   | 40,506 |   |   | 24,897 |   |   |   | (4,895 | ) |   |   | 20,002 |   |   |   | 31,196 |   |   |   | (8,566 | ) |   |   | 22,630 |   |   |
| Supply agreements                         |       |              | 3-10       |                        |       | 8,601                       |       |                            | (991          | ) |   | 7,610 |   |   | 5,694 |   |   |   | (1,033 | ) |   |   | 4,661 |   |   |   | 5,694 |   |   |   | (380 | ) |   |   | 5,314 |   |   |
| Other intangible assets                   |       |              | 25         |                        |       | 708                         |       |                            | (502          | ) |   | 206 |   |   | 601 |   |   |   | (83 | ) |   |   | 518 |   |   |   | 604 |   |   |   | (266 | ) |   |   | 338 |   |   |
| Total intangible assets, net              |       |              |       |                        |       | $179,271                    |       |                            | $(21,650      | ) |   | $157,621 |   |   | $95,543 |   |   |   | $(8,505 | ) |   |   | $87,038 |   |   |   | $99,042 |   |   |   | $(12,170 | ) |   |   | $86,872 |   |   |
| Goodwill                                  |       |              |       |                        |       |                        |       |                            |          |   |   | 61,398 |   |   |   |   |   |   |   |   |   |   | 8,839 |   |   |   |   |   |   |   |   |   |   |   | 6,221 |   |   |
| Total goodwill and intangible assets, net |       |              |       |                        |       |                        |       |                            |          |   |   | $219,019 |   |   |   |   |   |   |   |   |   |   | $95,877 |   |   |   |   |   |   |   |   |   |   |   | $93,093 |   |   |

 

Intangible assets include trade names, customerrelationships, supply agreements and other intangible assets, which are valuedupon acquisition through independent third-party appraisals, where material, orusing other valuation methods. Intangible assets are amortized using thestraight-line method over periods ranging from five to forty years, or inthe case of the supply agreements, over the period in which their economic benefits are expected to beutilized, or three to ten years. The table above reflectsreclassifications of approximately $4.4 million from trade names to customerrelationships and approximately $4.1 million from goodwill to customerrelationships recorded during the second and third quarters of 2003 due to thefinal independent third-party valuation reports received during such quartersand the establishment of related deferred tax liabilities.

Amounts recorded forgoodwill in connection with the Nu-Gro acquisition totaled $40.5 million at June 30,2004 and was allocated based on preliminary information, which is subject toadjustment upon obtaining the final report of an independent third-partyvaluation firm. Goodwill by segment was $36.6 million for the Consumer Lawn andGarden segment, $6.8 million for the Consumer Household segment and $18.0million for the Fertilizer Technology and Other segment as of June 30,2004. Goodwill by segment was $6.2 million for the Consumer Lawn and Gardensegment, $2.5 million for the Consumer Household segment and $0.2 million forthe Fertilizer Technology and Other segment as of June 30, 2003. Goodwillby segment was $4.2 million for the Consumer Lawn and Garden segment, $1.9million for the Consumer Household segment and $0.1 million for the FertilizerTechnology and Other segment as of December 31, 2003.

***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 

12

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

**Note7—Goodwill and Intangible Assets (Continued)**

allocationof the purchase price of Schultz Company, in the first quarter of 2003, andbegan amortizing the customer relationship intangible asset over its remaininguseful life. In March 2004, the Company determined that the effect of theapplication of EITF 02-17 should have been applied from the date of acquisitionand, as such should have resulted in a $2.4 million noncash charge for theadditional amortization related to the final valuation of the $24.6 millioncustomer relationship intangible asset. Accordingly, in the fourth quarter of2003, the Company restated the March 31, 2003 quarterly financialinformation to include the noncash adjustment which increased first quarter2003 selling, general and administrative expenses by $2.4 million and decreasedincome before income tax expense and net income by $2.4 million, as theintangible assets are not deductible for tax purposes. Operating income and net income as originallyreported for the three months ended March 31, 2003 of $31,058 and $13,453,respectively, were higher than the respective restated first quarter amounts of$28,658 and $11,053 due to the additional amortization expense described above.In addition, operating income and net income as originally reported for the sixmonths ended June 30, 2003 of $75,359 and $34,814, respectively, werehigher than the respective restated amounts of $72,959 and $32,414 due to theadditional amortization expense described above.

***Customer Agreement***

On February 12, 2004, the Company and its largestcustomer executed a licensing, manufacturing and supply agreement (theAgreement). Under the Agreement, the Company will license certain of itstrademarks and be the exclusive manufacturer and supplier for certain productsbranded with such trademarks from January 1, 2004, the effective date ofthe Agreement, through December 31, 2008 or such later date as isspecified in the Agreement. Provided the customer achieves certain requiredminimum purchase volumes and other conditions during such period, and themanufacturing and supply portion of the Agreement is extended for an additionalthree-year period as specified in the Agreement, the Company will assign thetrademarks to the customer not earlier than May 1, 2009, but otherwisewithin thirty days after the date upon which such required minimum purchasevolumes 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 aresult of executing the Agreement, the Company has modified the trademarks’initial amortization period of forty years and will record amortization in amanner consistent with projected sales activity over five years, because theCompany believes the customer will achieve all required conditions by May 2009.The modification of the amortization period will result in additional annualamortization expense of approximately $2.7 million in the year ended December 31,2004.

13

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

**Note7—Goodwill and Intangible Assets (Continued)**

For the three months endedJune 30, 2004 and 2003 and the year ended December 31, 2003,aggregate amortization expense related to intangible assets was$5.2 million, $2.1 million and $9.3 million, respectively. For thesix months ended June 30, 2004 and 2003, aggregate amortization expenserelated to intangible assets was $8.9 million and $4.9 million,respectively. The following table presents estimated amortization expense forintangible assets during each of the next five years:
| **Year**          | ** ** | ** ** | ** ** | **Amount** | ** ** |
|-------------------|------------|------------|------------|------------|------------|
| Remainder of 2004 |       | $11,069    |       |
| 2005              |       | 17,387     |       |
| 2006              |       | 17,502     |       |
| 2007              |       | 13,343     |       |
| 2008              |       | 10,544     |       |

 

**Note 8—Other Assets**

Otherassets consist of the following:
| ** **                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2004**          | ** ** | **2003**              | ** ** | **2003** | ** ** |
| Deferred  financing fees     |       | $                 | 22,005     |                  | $          | 23,542 |   |   | $ | 23,841 |   |   |
| Accumulated  amortization    |       | (6,198            | )          | (13,063               | )          |   | (14,948 | ) |   |
| Deferred financing fees, net |       | 15,807            |       | 10,479                |       |   | 8,893 |   |   |
| Other                        |       | 1,791             |       | 1,384                 |       |   | 1,004 |   |   |
| Total other  assets, net     |       | $                 | 17,598     |                  | $          | 11,863 |   |   | $ | 9,897 |   |   |

 

As described in Note 10, during the three months endedJune 30, 2004, the Company recorded deferred financing fees of $10.0million in connection with its New Senior Credit Facility and wrote-off $1.7million of deferred financing fees in connection with the repayment ofobligations under its Prior Senior Credit Facility.

14

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

**Note 9—AccruedExpenses**

Accruedexpenses consist of the following:
| ** **                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2004**          | ** ** | **2003**              | ** ** | **2003** | ** ** |
| Advertising and  promotion |       | $                 | 25,143     |                  | $          | 26,023 |   |   | $ | 9,605 |   |   |
| Interest                   |       | 8,863             |       | 6,897                 |       |   | 6,219 |   |   |
| Cash overdraft             |       | 4,079             |       | —                |       |   | — |   |   |
| Preferred stock  dividends |       | —            |       | 13,128                |       |   | 17,111 |   |   |
| Salaries and  benefits     |       | 3,590             |       | 4,491                 |       |   | 3,644 |   |   |
| Commissions                |       | 1,440             |       | 620                   |       |   | 459 |   |   |
| Income taxes  payable      |       | 1,650             |       | 346                   |       |   | — |   |   |
| Severance costs            |       | 414               |       | 545                   |       |   | 201 |   |   |
| Freight                    |       | 2,631             |       | 1,874                 |       |   | 1,152 |   |   |
| Acquisition costs          |       | 1,478             |       | 453                   |       |   | — |   |   |
| Other                      |       | 5,635             |       | 2,607                 |       |   | 1,183 |   |   |
| Total accrued  expenses    |       | $                 | 54,923     |                  | $          | 56,984 |   |   | $ | 39,574 |   |   |

 

**Note 10—Long-TermDebt**

Long-termdebt, excluding capital lease obligations, consists of the following:
| ** **                                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                        | ** ** | **2004**          | ** ** | **2003**              | ** ** | **2003** | ** ** |
| New Senior Credit  Facility:                                                                                                      |       |              |       |                  |       |   |   |   |   |
| Term Loan                                                                                                                         |       | $                 | 334,163    |                  | $          | — |   |   | $ | — |   |   |
| Canadian Loan                                                                                                                     |       | 50,380            |       | —                |       |   | — |   |   |
| Revolving Credit Facility                                                                                                         |       | —            |       | —                |       |   | — |   |   |
| Prior Senior Credit  Facility:                                                                                                    |       |              |       |                  |       |   |   |   |   |
| Term Loan B                                                                                                                       |       | —            |       | 172,767               |       |   | 152,368 |   |   |
| Revolving Credit Facility                                                                                                         |       | —            |       | —                |       |   | — |   |   |
| Senior Subordinated  Notes:                                                                                                       |       |              |       |                  |       |   |   |   |   |
| 97¤8% Series B Senior Subordinated  Notes                                                                               |       | —            |       | 150,000               |       |   | 3,100 |   |   |
| 97¤8% Series C Senior Subordinated  Notes, including unamortizedpremium  of $1.2 million                                |       | —            |       | 86,202                |       |   | — |   |   |
| 97¤8% Series D Senior Subordinated  Notes, including unamortizedpremium  of $1.0 million and $1.1 million, respectively |       | 232,903           |       | —                |       |   | 232,985 |   |   |
| Total long-term debt                                                                                                              |       | 617,446           |       | 408,969               |       |   | 388,453 |   |   |
| Less current maturities                                                                                                           |       | (3,855            | )          | (898                  | )          |   | (796 | ) |   |
| Total long-term  debt, net of current maturities                                                                                  |       | $                 | 613,591    |                  | $          | 408,071 |   |   | $ | 387,657 |   |   |

 

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

**Note10—Long-Term Debt (Continued)**

***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 six months ended June 30, 2004 and2003 and 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 1.12% as of June 30, 2003 and 1.16% as of December 31,2003. The interest rate applicable to Term Loan B was 5.32% as of June 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 six months ended June 30, 2004, the Company madeprincipal payments of $152.4 million to fully repay Term Loan B,which primarily represented optional principal prepayments. During the sixmonths ended June 30, 2003, the Company made principal payments of$28.3 million to fully repay Term Loan A and $49.2 million onTerm Loan B, which primarily represented optional principal prepayments.During the year ended December 31, 2003, the Company made principalpayments of $28.3 million to fully repay Term Loan A and$69.6 million on Term Loan B, which primarily represented optionalprincipal prepayments. The optional principal prepayments were made fromoperating cash flows and proceeds from the New Senior Credit Facility describedbelow and allowed the Company to remain several quarterly payments ahead of theregular payment schedule. In connection with these prepayments, the Companyrecorded write-offs totaling $1.7 million and $0.3 million in previouslydeferred financing fees which were included in interest expense in the consolidatedstatement of operations for the three months ended June 30, 2004 and 2003,respectively, and $1.7 million and $1.6 million for the six months ended June 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.

16

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

**Note10—Long-Term Debt (Continued)**

***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 commencing on June 30, 2004, with a final installment due on March 31,2011. All of the loan obligations are subject to mandatory prepayment uponcertain events, including sales of certain assets, issuances of indebtedness orequity or from excess cash flow. The New Senior Credit Facility agreement alsoallows the Company to make voluntary prepayments, in whole or in part, at anytime 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 the Company may make or incur.The financial 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 June 30, 2004, the term loans were subjectto interest rates equal to 2.50% plus LIBOR or 1.50% plus a base rate, asprovided in the New Senior Credit Facility agreement. The interest rateapplicable to the Company’s outstanding borrowings was 3.84% as of June 30,2004, 5.32% as of June 30, 2003 and 5.12% as of December 31, 2003. Unusedcommitments under the new revolving credit facility are subject to a 0.5%annual commitment fee. Unused availability under the new revolving creditfacility was $121.1 million as of June 30, 2004 which is reflective of$3.9 million of standby letters of credit pledged as collateral (see Note 11). TheNew Senior Credit Facility is secured by substantially all of the Company’s propertiesand assets and substantially all of the properties and assets of the Company’scurrent and future domestic subsidiaries.

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.

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

**Note10—Long-Term Debt (Continued)**

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

On July 30,2004, in connection with the closing of and to partially fund its merger withUPG, the Company amended and restated the credit agreement related to the NewSenior 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 Canadian term loan of U.S. $50 million 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. The Company 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.

***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.

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 June 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 U.S. Securities and Exchange Commission and offered to exchange the Series DNotes for up to 100% of the Series B Notes and Series C Notes. Theexchange offering closed in July 2003, resulting in $85.0 million, or100%, of the Series C Notes being exchanged and $146.9 million, or98%, of the Series B Notes being exchanged. On April 14, 2004, theCompany repurchased all of the remaining Series B Notes outstanding,together with accrued interest and repurchase premium of 4.938%, for $3.3million. As of June 30, 2004, $232.9 million of the Series D Noteswere outstanding and no Series B Notes or Series C Notes wereoutstanding.

The fair value of the Senior Subordinated Notes was$241.1 million, $246.8 million and $242.1 million as of June 30, 2004and 2003 and December 31, 2003, respectively, based on their quoted marketprice on such dates. The fair value at June 30, 2004 reflects therepurchase of all outstanding Series B Notes in April 2004, aspreviously described. In accordance with the indentures that govern them, the Senior

18

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

**Note10—Long-Term Debt (Continued)**

Subordinated Notes areunconditionally and jointly and severally guaranteed by the Company’swholly-owned domestic subsidiaries (see Note 16).

The Company’s agreements that govern the New SeniorCredit Facility and the Senior Subordinated Notes contain a number ofsignificant covenants that could restrict or limit the Company’s ability to:

·       incurmore debt;

·       pay dividends, subject tofinancial ratios and other conditions;

·       makeother distributions;

·       issuestock of subsidiaries;

·       makeinvestments;

·       repurchasestock;

·       createsubsidiaries;

·       createliens;

·       enterinto transactions with affiliates;

·       mergeor consolidate; and

·       transferand sell assets.

The ability to comply with these provisions may beaffected by events beyond the Company’s control. The breach of any of thesecovenants will result in a default under the applicable debt agreement orinstrument and could trigger acceleration of repayment under the applicableagreements. Any default under such agreements might adversely affect theCompany’s growth, financial condition, results of operations and the ability tomake payments on indebtedness or meet other obligations. As of and during thesix months ended June 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 SubordinatedNotes in effect as of such dates.

19

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

**Note10—Long-Term Debt (Continued)**

As of July 30, 2004,after giving effect to the financing activities previously described, aggregatefuture principal payments of long-term debt, excluding capital leaseobligation, are as follows:
| **Year**                                         | ** ** | ** ** | ** ** | **Amount** | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|
| Remainder of 2004                                |       | $          | 3,175      |       |
| 2005                                             |       | 6,351      |       |
| 2006                                             |       | 6,351      |       |
| 2007                                             |       | 6,351      |       |
| 2008                                             |       | 6,351      |       |
| Thereafter                                       |       | 606,374    |       |
|                                             |       | 634,953    |       |
| Unamortized premium on Senior Subordinated Notes |       | 1,003      |       |
|                                             |       | $          | 635,956    |       |

 

**Note 11—Contingencies**

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 notreflected in the accompanying consolidated balance sheets. As of June 30,2004 and 2003 and December 31, 2003, the Company had $3.9 million,$1.7 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 May 2005 and may be renewed as circumstanceswarrant. Such financial instruments are valued based on the amount of exposureunder the instruments and the likelihood of performance being required. In theCompany’s past experience, no claims have been made against these financialinstruments nor does management expect the exposure to material losses resultingtherefrom to be anything other than remote. As a result, the Company determinedsuch agreements do not have significant value and has not recorded any relatedamounts in its accompanying consolidated financial 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 orequipment leased should it be damaged during the course of the Company’s operations.The Company 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 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 

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

**Note11—Contingencies (Continued)**

otherincidental claims, taking into account established reserves and insurance, willhave a material adverse impact on the Company’s consolidated financialposition, results of operations or liquidity.

**Note 12—Accountingfor Derivative Instruments and Hedging Activities**

In the normal course of business, the Company isexposed to fluctuations in interest rates and raw materials prices. The Companyhas established policies and procedures that govern the management of theseexposures through the use of derivative hedging instruments, including swapagreements. The Company’s objective in managing its exposure to suchfluctuations is to decrease the volatility of earnings and cash flowsassociated with changes in interest rates and certain raw materials prices. Toachieve this objective, the Company periodically enters into swap agreementswith values that change in the opposite direction of anticipated cash flows.Derivative instruments related to forecasted transactions are considered tohedge future cash flows, and the effective portion of any gains or losses isincluded in accumulated other comprehensive income until earnings are affectedby the variability of cash flows. Any remaining gain or loss is recognizedcurrently in 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 the Company entersinto are generally expected to be highly effective in achieving offsetting cashflows 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 losses reflectedin accumulated other comprehensive income. As of June 30, 2004, theCompany had no outstanding derivative hedging instruments. As of June 30,2003, the Company had one derivative hedging instrument, with a maturity datein July 2003, designated as a hedge against the purchase of granular ureafor a contract value upon the date of execution of $0.4 million. Suchderivative hedging instrument had an unrealized gain of less than $0.1 millionas of June 30, 2003 which is included in accumulated other comprehensiveincome in the accompanying consolidated balance sheet as of such date. Althoughderivative hedging instruments were used throughout 2004 and 2003, no suchinstruments were outstanding as of June 30, 2004 or December 31,2003. The amounts recorded in accumulated other comprehensive income weresubsequently reclassified into cost of goods sold in the same period in whichthe underlying hedged transactions affected earnings. Such amounts reclassifiedinto cost of goods sold included a net loss of $0.2 million for the three andsix months ended June 30, 2004, a net gain of $1.2 million for the threemonths ended June 30, 2003 and a net gain of $1.4 million for the sixmonths ended June 30, 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. The Company has not incurred any gains or losses for hedgeineffectiveness or due to excluding a portion of the value from measuring effectiveness.The Company 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 

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

**Note12—Accounting for Derivative Instruments and Hedging Activities(Continued)**

derivativehedging instruments to manage the Company’s exposure to such pricefluctuations, no assurance can be provided that such instruments will beeffective in fully mitigating exposure to these risks, nor can assurance beprovided that the Company will be successful in passing on pricing increases toits customers.

**Note 13—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 to certainBayer active 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, 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 June 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 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 accompanying consolidated balance sheetsas of June 30, 2003 and December 31, 2003. The common stocksubscription receivable was to be repaid by Bayer in 28 quarterly installmentsof $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 six months ended June 30, 2004 and 2003 and year ended December 31,2003.

The value of the Supply Agreement has been and is beingamortized to cost of goods sold over the period in which its economic benefitsare expected to be utilized which was initially anticipated to be over a threeto five-year period. The Company has 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, the Company and Bayer amended theIn-Store Service Agreement to reduce the scope of services provided byapproximately 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-Store ServiceAgreement.

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

**Note13—Stockholders’ Equity (Continued)**

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 fully written off and recorded in selling, general and administrativeexpenses in the accompanying consolidated statement of operations for the yearended 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 June 30, 2004, theremaining balance of the Supply Agreement, net of amortization and excludingaccrued interest, was $4.7 million.

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

**Note13—Stockholders’ Equity (Continued)**

Based on the independentthird party valuation as of June 14, 2002, the original transaction date,the Company 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 June 30,2004 and 2003 and December 31, 2003 based on such valuation and as aresult of the activities and transactions previously described, net of amortizationand excluding accrued interest:
| ** **                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **Description**                       | ** ** | ** **        | ** ** | **2004**              | ** ** | **2003** | ** ** | **2003** | ** ** |
| Common stock  subscription receivable |       | $                 | —     |                  | $          | 24,177 |   |   | $ | 22,534 |   |   |
| Supply Agreement                      |       | 4,710             |       | 5,694                 |       |   | 5,314 |   |   |
| Repurchase option                     |       | —            |       | 2,636                 |       |   | 2,636 |   |   |
| In-Store Service  Agreement           |       | —            |       | (729                  | )          |   | — |   |   |
|                                  |       | $                 | 4,710      |                  | $          | 31,778 |   |   | $ | 30,484 |   |   |
|                                       |            |                   |            |                       |            |  |  |  |  |  |  |  |  |  |

 

Bayer recently sent noticeto the Company purporting to terminate the Supply Agreement, effective August 17,2004. The Company responded by notifying Bayer that it did not have a right toterminate. The Company therefore returned to Bayer the payment due upontermination, which Bayer had tendered to the Company. The parties are inagreement that the amount due in the event of termination 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***

In conjunction with itsacquisition of UPG (see Note 2) on July 30, 2004, the Company issued 5.8million shares each of Class A and Class B common stock for proceedsof $70.0 million.

***Repurchase of Preferred Stock***

In conjunction with the financing activities describedin Note 10, on April 30, 2004, the Company repurchased all 37,600 sharesof its outstanding Class A nonvoting preferred stock for $57.6 million,including $19.9 million for all accrued dividends thereon. Such repurchase resultedin a decline in additional paid-in capital of $37.7 million.

**Note 14—Fair Value ofFinancial Instruments**

The Company has estimated the fair value of itsfinancial instruments as of June 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.

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

**Note 14—Fair Value ofFinancial Instruments (Continued)**

The carrying amounts of cash, accounts receivable,accounts payable and other current assets and liabilities approximate fairvalue because of the short maturity of such instruments. The Company’s SeniorCredit Facility bears interest at current market rates and, thus, carryingvalue approximates fair value as of June 30, 2004 and 2003 and December 31,2003. The Company is exposed to interest rate volatility with respect to thevariable interest rates of the New Senior Credit Facility. The estimated fairvalues of the Company’s Senior Subordinated Notes of $241.1 million,$246.8 million, and $242.1 million, respectively, as of June 30, 2004and 2003 and December 31, 2003 are based on quoted market prices.

**Note 15—SegmentInformation**

As of June 30, 2004, the Company reported itsoperating results using three reportable segments: Consumer Lawn and Garden,Consumer Household and Fertilizer Technology and Other. The basis of theCompany’s segmentation has been modified since March 31, 2004 toaccommodate the acquisition of Nu-Gro. Changes to segments previously reportedinclude the addition of Nu-Gro’s consumer lawn and garden brands and productsto the Company’s existing Lawn and Garden segment to form the new Consumer Lawnand Garden segment, as well as the addition of Nu-Gro’s fertilizer technologybrands and other products to the Company’s existing Contract segment to formthe new Fertilizer Technology and Other segment. No changes were made to theCompany’s existing Household segment but the name was changed to ConsumerHousehold. No reclassification of the 2003 segment information was necessaryfor comparability between the periods presented herein.

Segments were established primarily by brand andproduct type, which represents the basis upon which management, including theChief Executive Officer who is the chief operating decision-maker of theCompany, reviews and assesses the Company’s financial performance. The ConsumerLawn and Garden segment primarily consists of dry, granular lawn fertilizers,lawn fertilizer combination and lawn control products, herbicides, water-solubleand controlled-release garden and indoor plant foods, plant care products,potting soils and other growing media products and insecticide products.Products are marketed to mass merchandisers, home improvement centers,hardware, grocery and drug chains, nurseries and garden centers. This segmentincludes, among others, the Company’s Spectracide, Garden Safe, Schultz,Vigoro, Sta-Green, Real-Kill, Wilson, So-Green, Greenleaf and Green Earthbrands.

The Consumer Household segment represents household insecticidesand insect repellents that allow consumers to maintain a pest-free householdand repel insects. The Consumer Household segment includes the Company’s HotShot, Cutter and Repel brands, as well as a number of private label and otherproducts.

The Fertilizer Technology and Other segment consistsof a variety of controlled-release nitrogen products and technology, as well asa variety of compounds and chemicals, such as cleaning solutions and otherconsumer products. The Fertilizer Technology and Other segment includes theCompany’s Nutralene and Nitroform brands.

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

**Note15—Segment Information (Continued)**

The table below presentsselected financial segment information in accordance with SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” for the three and sixmonths ended June 30, 2004 and 2003. The accounting policies of thereportable segments are the same as those described in the summary ofsignificant accounting policies in Note 2 to the consolidated financialstatements included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2003, as applicable. The segment financialinformation presented includes comparative periods prepared on a basis consistentwith the current year presentation.
| ** **                                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                   | ** ** | **2004**                                            | ** ** | **2003**                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                   | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | **(As Restated)** | ** ** |
| Net sales:                                   |       |                                                |       |                                              |       |   |   |   |   |   |   |
| Consumer Lawn and Garden                     |       | $                                                   | 152,467    |                                              | $          | 142,256 |   | $ | 302,974 |   |   | $ | 287,870 |   |   |
| Consumer Household                           |       | 71,095                                              |       | 61,021                                            |       | 102,320 |   |   | 88,588 |   |   |
| Fertilizer Technology and Other              |       | 16,273                                              |       | 2,726                                             |       | 17,244 |   |   | 8,357 |   |   |
| Total net sales                              |       | 239,835                                             |       | 206,003                                           |       | 422,538 |   |   | 384,815 |   |   |
| Operating costs and  expenses:               |       |                                                |       |                                              |       |   |   |   |   |   |   |
| Cost of goods sold                           |       | 155,857                                             |       | 123,797                                           |       | 269,265 |   |   | 232,552 |   |   |
| Selling, general and administrative expenses |       | 49,784                                              |       | 37,905                                            |       | 89,765 |   |   | 79,304 |   |   |
| Total operating costs and expenses           |       | 205,641                                             |       | 161,702                                           |       | 359,030 |   |   | 311,856 |   |   |
| Operating income (loss) by  segment:         |       |                                                |       |                                              |       |   |   |   |   |   |   |
| Consumer Lawn and Garden                     |       | 14,947                                              |       | 26,119                                            |       | 35,395 |   |   | 48,192 |   |   |
| Consumer Household                           |       | 19,432                                              |       | 17,795                                            |       | 28,480 |   |   | 24,421 |   |   |
| Fertilizer Technology and Other              |       | (185                                                | )          | 387                                               |       | (367 | ) |   | 346 |   |   |
| Total operating income                       |       | 34,194                                              |       | 44,301                                            |       | 63,508 |   |   | 72,959 |   |   |
| Interest expense                             |       | 11,908                                              |       | 10,271                                            |       | 21,528 |   |   | 19,974 |   |   |
| Interest income                              |       | 86                                                  |       | 455                                               |       | 371 |   |   | 954 |   |   |
| Income before  income tax expense            |       | 22,372                                              |       | 34,485                                            |       | 42,351 |   |   | 53,939 |   |   |
| Income tax  expense                          |       | 5,039                                               |       | 13,123                                            |       | 12,631 |   |   | 21,525 |   |   |
| Net income                                   |       | $                                                   | 17,333     |                                              | $          | 21,362 |   | $ | 29,720 |   |   | $ | 32,414 |   |   |
| Operating margin:                            |       |                                                |       |                                              |       |   |   |   |   |   |   |
| Consumer Lawn and Garden                     |       | 9.8                                                 | %          | 18.4                                              | %          | 11.7 | % |   | 16.7 | % |   |
| Consumer Household                           |       | 27.3                                                | %          | 29.2                                              | %          | 27.8 | % |   | 27.6 | % |   |
| Fertilizer Technology and Other              |       | -1.1                                                | %          | 14.2                                              | %          | -2.1 | % |   | 4.1 | % |   |
| Total operating  margin                      |       | 14.3                                                | %          | 21.5                                              | %          | 15.0 | % |   | 19.0 | % |   |

 

Sales between segments totaled $1.8 million during thethree and six months ended June 30, 2004 and represented raw materialssold from the Fertilizer Technology and Other segment to the Consumer Lawn andGarden segment. Operating income represents earnings before interest expense,interest income and income tax expense. Operating income is one measure ofprofitability used by management to assess the 

26

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

**Note15—Segment Information (Continued)**

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 June 30, 2004, the Company’s net sales in the UnitedStates were 91%, net sales in Canada were 7%, and remaining international saleswere less than 2%. For the three and six months ended June 30, 2003, theCompany’s international sales comprised less than 2% of total annual net sales.In addition, no single item comprised more than 10% of the Company’s net sales.For the three months ended June 30, 2004, the Company’s three largestcustomers were responsible for 25%, 31% and 20% of net sales. For the sixmonths ended June 30, 2003, the Company’s three largest customers wereresponsible for 28%, 20% and 18% of net sales.

As the Company’s assetssupport production across all segments, they are managed on an entity-widebasis at the corporate level and are not recorded or analyzed by segment. As ofJune 30, 2004, approximately 62% of the Company’s assets were located inthe United States while approximately 38% were located in Canada.

**Note 16—FinancialInformation for Guarantor Subsidiaries**

The Company’s Senior Subordinated Notes areunconditionally and jointly and severally guaranteed by all of the Company’sexisting domestic subsidiaries.  TheCompany’s subsidiaries are 100% owned by the Company. The consolidatingfinancial information which follows has been prepared in accordance with therequirements for presentation of such information. The Company believes thatseparate financial statements concerning each guarantor subsidiary would not bematerial to investors and that the information presented herein providessufficient detail to determine the nature of the aggregate financial position,results of operations and cash flows of the guarantor subsidiaries.  The guarantor subsidiaries’ informationpresented herein represents the Company’s domestic subsidiaries, including theU.S. subsidiaries of Nu-Gro, while the non-guarantor subsidiaries’ financialinformation represents the Company’s foreign subsidiaries which are comprisedonly of the Canadian subsidiaries of Nu-Gro. 

The Company’s investment in subsidiaries is accountedfor using the equity method of accounting. Earnings of the subsidiaries arereflected in the respective investment accounts of the parent companyaccordingly. The investments in subsidiaries and all intercompany balances andtransactions have been eliminated. Various assumptions and estimates were usedto establish the financial statements of such subsidiaries for the informationpresented herein.

27

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**UNITED INDUSTRIES CORPORATION AND SUBSIDIARIESBALANCE SHEETAS OF JUNE 30, 2004(Unaudited)**
| ** **                                                          | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                                          |       |       |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Current  assets:                                                    |       |       |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                           |       | $          | 5,451      |                        |       | $                               | 1,241      |             |       |             | $          | 1,810 |   |   |   | $ | — |   |   |   | $ | 8,502 |   |   |
| Accounts receivable, net                                            |       | 105,108    |       |                        | 28,894     |                            |       |             | 27,190     |             |       |   | — |   |   |   | 161,192 |   |   |
| Inventories                                                         |       | 61,441     |       |                        | 34,684     |                            |       |             | 30,582     |             |       |   | — |   |   |   | 126,707 |   |   |
| Prepaid expenses and other current assets                           |       | 13,520     |       |                        | 611        |                            |       |             | 1,192      |             |       |   | — |   |   |   | 15,323 |   |   |
| Total current assets                                                |       | 185,520    |       |                        | 65,430     |                            |       |             | 60,774     |             |       |   | — |   |   |   | 311,724 |   |   |
| Equipment and leasehold improvements, net                           |       | 35,511     |       |                        | 7,532      |                            |       |             | 26,208     |             |       |   | — |   |   |   | 69,251 |   |   |
| Investment in subsidiaries                                          |       | 145,345    |       |                        | 3,311      |                            |       |             | (3,311     | )                |       |   | (145,345 | ) |   |   | — |   |   |
| Intercompany assets                                                 |       | 115,022    |       |                        | —     |                            |       |             | —     |             |       |   | (115,022 | ) |   |   | — |   |   |
| Deferred tax asset                                                  |       | 154,117    |       |                        | (4,169     | )                               |       |             | (26,054    | )                |       |   | — |   |   |   | 123,894 |   |   |
| Goodwill                                                            |       | 5,048      |       |                        | 10,706     |                            |       |             | 45,644     |             |       |   | — |   |   |   | 61,398 |   |   |
| Intangible assets, net                                              |       | 44,776     |       |                        | 52,773     |                            |       |             | 60,072     |             |       |   | — |   |   |   | 157,621 |   |   |
| Other assets, net                                                   |       | 13,438     |       |                        | 3,062      |                            |       |             | 1,098      |             |       |   | — |   |   |   | 17,598 |   |   |
| Total assets                                                        |       | $          | 698,777    |                        |       | $                               | 138,645    |             |       |             | $          | 164,431 |   |   |   | $ | (260,367 | ) |   |   | $ | 741,486 |   |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                      |       |       |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Current liabilities:                                                |       |       |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Current maturities of long-term debt and capital  lease obligations |       | $          | 4,151      |                        |       | $                               | —     |             |       |             | $          | — |   |   |   | $ | — |   |   |   | $ | 4,151 |   |   |
| Accounts payable                                                    |       | 35,623     |       |                        | 11,275     |                            |       |             | 10,856     |             |       |   | — |   |   |   | 57,754 |   |   |
| Accrued expenses                                                    |       | 34,431     |       |                        | 10,522     |                            |       |             | 9,970      |             |       |   | — |   |   |   | 54,923 |   |   |
| Total current liabilities                                           |       | 74,205     |       |                        | 21,797     |                            |       |             | 20,826     |             |       |   | — |   |   |   | 116,828 |   |   |
| Long-term debt, net of current maturities                           |       | 613,591    |       |                        | —     |                            |       |             | —     |             |       |   | — |   |   |   | 613,591 |   |   |
| Capital lease obligations, net of current maturities                |       | 3,324      |       |                        | —     |                            |       |             | —     |             |       |   | — |   |   |   | 3,324 |   |   |
| Other liabilities                                                   |       | 3,539      |       |                        | —     |                            |       |             | 516        |             |       |   | — |   |   |   | 4,055 |   |   |
| Intercompany liabilities                                            |       | —     |       |                        | 44,033     |                            |       |             | 70,989     |             |       |   | (115,022 | ) |   |   | — |   |   |
| Total liabilities                                                   |       | 694,659    |       |                        | 65,830     |                            |       |             | 92,331     |             |       |   | (115,022 | ) |   |   | 737,798 |   |   |
| Commitments and  contingencies                                      |       |       |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Stockholders’ equity:                                          |       |       |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Common stock                                                        |       | 665        |       |                        | —     |                            |       |             | —     |             |       |   | — |   |   |   | 665 |   |   |
| Treasury stock                                                      |       | (24,469    | )          |                        | —     |                            |       |             | —     |             |       |   | — |   |   |   | (24,469 | ) |   |
| Warrants and options                                                |       | 11,745     |       |                        | —     |                            |       |             | —     |             |       |   | — |   |   |   | 11,745 |   |   |
| Investment from parent                                              |       | —     |       |                        | 52,456     |                            |       |             | 72,518     |             |       |   | (124,974 | ) |   |   | — |   |   |
| Additional paid-in capital                                          |       | 170,672    |       |                        | —     |                            |       |             | —     |             |       |   | — |   |   |   | 170,672 |   |   |
| Accumulated deficit                                                 |       | (151,468   | )          |                        | 20,359     |                            |       |             | (1,385     | )                |       |   | (20,371 | ) |   |   | (152,865 | ) |   |
| Common stock held in grantor trusts                                 |       | (2,847     | )          |                        | —     |                            |       |             | —     |             |       |   | — |   |   |   | (2,847 | ) |   |
| Loans to executive officer                                          |       | (215       | )          |                        | —     |                            |       |             | —     |             |       |   | — |   |   |   | (215 | ) |   |
| Accumulated other comprehensive income                              |       | 35         |       |                        | —     |                            |       |             | 967        |             |       |   | — |   |   |   | 1,002 |   |   |
| Total stockholders’ equity                                     |       | 4,118      |       |                        | 72,815     |                            |       |             | 72,100     |             |       |   | (145,345 | ) |   |   | 3,688 |   |   |
| Total liabilities  and stockholders’ equity                    |       | $          | 698,777    |                        |       | $                               | 138,645    |             |       |             | $          | 164,431 |   |   |   | $ | (260,367 | ) |   |   | $ | 741,486 |   |   |

 

28

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**UNITED INDUSTRIESCORPORATION AND SUBSIDIARIESBALANCE SHEETAS OF JUNE 30, 2003(Unaudited) (As Restated)**
| ** **                                                               | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                               | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                               |       |       |       |             |       |             |       |             |       |   |   |   |   |   |   |
| Current assets:                                                          |       |       |       |             |       |             |       |             |       |   |   |   |   |   |   |
| Cash and cash equivalents                                                |       | $          | 10,509     |             |       | $                | 314        |             |       |   | $ | — |   |   |   | $ | 10,823 |   |   |
| Accounts receivable, net                                                 |       | 118,643    |       |             | 7,383      |             |       |             | —     |   |   |   | 126,026 |   |   |
| Inventories                                                              |       | 48,444     |       |             | 29,259     |             |       |             | —     |   |   |   | 77,703 |   |   |
| Prepaid expenses and other current assets                                |       | 8,071      |       |             | 399        |             |       |             | —     |   |   |   | 8,470 |   |   |
| Total current assets                                                     |       | 185,667    |       |             | 37,355     |             |       |             | —     |   |   |   | 223,022 |   |   |
| Equipment and leasehold improvements, net                                |       | 27,750     |       |             | 5,128      |             |       |             | —     |   |   |   | 32,878 |   |   |
| Investment in subsidiaries                                               |       | 24,491     |       |             | —     |             |       |             | (24,491    | ) |   |   |   |   |   |
| Intercompany assets                                                      |       | 56,473     |       |             | —     |             |       |             | (56,473    | ) |   |   | — |   |   |
| Deferred tax asset                                                       |       | 84,527     |       |             | 426        |             |       |             | —     |   |   |   | 84,953 |   |   |
| Goodwill, net                                                            |       | 8,839      |       |             | —     |             |       |             | —     |   |   |   | 8,839 |   |   |
| Intangible assets, net                                                   |       | 37,950     |       |             | 49,088     |             |       |             | 87,038     |   |   |   |   |   |   |
| Other assets, net                                                        |       | 10,596     |       |             | 1,267      |             |       |             | —     |   |   |   | 11,863 |   |   |
| Total assets                                                             |       | $          | 436,293    |             |       | $                | 93,264     |             |       |   | $ | (80,964 | ) |   |   | $ | 448,593 |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY (DEFICIT)**                 |       |       |       |             |       |             |       |             |       |   |   |   |   |   |   |
| Current liabilities                                                      |       |       |       |             |       |             |       |             |       |   |   |   |   |   |   |
| Current maturities of long-term debt and capital  lease obligation  |       | $          | 1,434      |             |       | $                | —     |             |       |   | $ | — |   |   |   | $ | 1,434 |   |   |
| Accounts payable                                                         |       | 30,276     |       |             | 10,816     |             |       |             | —     |   |   |   | 41,092 |   |   |
| Accrued expenses                                                         |       | 55,500     |       |             | 1,484      |             |       |             | —     |   |   |   | 56,984 |   |   |
| Total current liabilities                                                |       | 87,210     |       |             | 12,300     |             |       |             | —     |   |   |   | 99,510 |   |   |
| Long-term debt, net of current maturities                                |       | 408,071    |       |             | —     |             |       |             | —     |   |   |   | 408,071 |   |   |
| Capital lease obligation, net of current maturities                      |       | 3,483      |       |             | —     |             |       |             | —     |   |   |   | 3,483 |   |   |
| Other liabilities                                                        |       | 3,231      |       |             | —     |             |       |             | —     |   |   |   | 3,231 |   |   |
| Intercompany liabilities                                                 |       | —     |       |             | 56,473     |             |       |             | (56,473    | ) |   |   | — |   |   |
| Total liabilities                                                        |       | 501,995    |       |             | 68,773     |             |       |             | (56,473    | ) |   |   | 514,295 |   |   |
| 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                                                      |       | (258,848   | )          |             | 783        |             |       |             | (783       | ) |   |   | (258,848 | ) |   |
| Common stock subscription receivable                                     |       | (24,177    | )          |             | —     |             |       |             | —     |   |   |   | (24,177 | ) |   |
| Common stock repurchase option                                           |       | (2,636     | )          |             | —     |             |       |             | —     |   |   |   | (2,636 | ) |   |
| Common stock held in grantor trust                                       |       | (2,847     | )          |             | —     |             |       |             | —     |   |   |   | (2,847 | ) |   |
| Loans to executive officer                                               |       | (324       | )          |             | —     |             |       |             | —     |   |   |   | (324 | ) |   |
| Accumulated other comprehensive income                                   |       | 10         |       |             | —     |             |       |             | —     |   |   |   | 10 |   |   |
| Total stockholders’ equity (deficit)                                |       | (65,702    | )          |             | 24,491     |             |       |             | (24,491    | ) |   |   | (65,702 | ) |   |
| Total liabilities  and stockholders’ equity (deficit)               |       | $          | 436,293    |             |       | $                | 93,264     |             |       |   | $ | (80,964 | ) |   |   | $ | 448,593 |   |   |

 

29

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**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 |   |   |

 

30

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** **

**UNITED INDUSTRIESCORPORATION AND SUBSIDIARIESSTATEMENT OF OPERATIONSFOR THE THREE MONTHS ENDED JUNE 30, 2004(Unaudited)**
| ** **                                         | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Net sales                                          |       | $171,318   |       |                        | $75,277    |                            |       |             | $28,767    |             |       |   | $(35,527 | ) |   |   | $239,835 |   |   |
| Operating costs and  expenses:                     |       |       |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Cost of goods sold                                 |       | 103,050    |       |                        | 55,128     |                            |       |             | 26,455     |             |       |   | (28,776 | ) |   |   | 155,857 |   |   |
| Selling, general and administrative expenses       |       | 48,139     |       |                        | 4,790      |                            |       |             | 3,606      |             |       |   | (6,751 | ) |   |   | 49,784 |   |   |
| Total operating costs and expenses                 |       | 151,189    |       |                        | 59,918     |                            |       |             | 30,061     |             |       |   | (35,527 | ) |   |   | 205,641 |   |   |
| Operating income  (loss)                           |       | 20,129     |       |                        | 15,359     |                            |       |             | (1,294     | )                |       |   | — |   |   |   | 34,194 |   |   |
| Interest expense                                   |       | 11,039     |       |                        | —     |                            |       |             | 869        |             |       |   | — |   |   |   | 11,908 |   |   |
| Interest income                                    |       | (68        | )          |                        | 154        |                            |       |             | —     |             |       |   | — |   |   |   | 86 |   |   |
| Income (loss)  before income tax expense (benefit) |       | 9,022      |       |                        | 15,513     |                            |       |             | (2,163     | )                |       |   | — |   |   |   | 22,372 |   |   |
| Income tax  expense (benefit)                      |       | 3,495      |       |                        | 2,323      |                            |       |             | (779       | )                |       |   | — |   |   |   | 5,039 |   |   |
| Equity income in  subsidiaries                     |       | (11,806    | )          |                        | —     |                            |       |             | —     |             |       |   | 11,806 |   |   |   | — |   |   |
| Net income (loss)                                  |       | $17,333    |       |                        | $13,190    |                            |       |             | $(1,384    | )                |       |   | $(11,806 | ) |   |   | $17,333 |   |   |

 

**UNITED INDUSTRIESCORPORATION AND SUBSIDIARIESSTATEMENT OF OPERATIONSFOR THE THREE MONTHS ENDED JUNE 30, 2003(Unaudited)**
| ** **                                   | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------|------------|------------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| Net sales                                    |       | $          | 167,184    |                        |       | $                | 65,435     |             |       |   | $ | (26,616 | ) |   |   | $ | 206,003 |   |   |
| Operating costs and  expenses:               |       |       |       |                        |       |             |       |             |       |   |   |   |   |   |   |
| Cost of goods sold                           |       | 96,922     |       |                        | 52,784     |             |       |             | (25,909    | ) |   |   | 123,797 |   |   |
| Selling, general and administrative expenses |       | 34,682     |       |                        | 3,930      |             |       |             | (707       | ) |   |   | 37,905 |   |   |
| Total operating costs and expenses           |       | 131,604    |       |                        | 56,714     |             |       |             | (26,616    | ) |   |   | 161,702 |   |   |
| Operating income                             |       | 35,580     |       |                        | 8,721      |             |       |             | —     |   |   |   | 44,301 |   |   |
| Interest expense,  net                       |       | 9,666      |       |                        | 150        |             |       |             | —     |   |   |   | 9,816 |   |   |
| Income before  income tax expense            |       | 25,914     |       |                        | 8,571      |             |       |             | —     |   |   |   | 34,485 |   |   |
| Income tax  expense                          |       | 9,878      |       |                        | 3,245      |             |       |             | —     |   |   |   | 13,123 |   |   |
| Equity (income)  loss in subsidiaries        |       | (5,325     | )          |                        | —     |             |       |             | 5,325      |   |   |   | — |   |   |
| Net income                                   |       | $          | 21,361     |                        |       | $                | 5,326      |             |       |   | $ | (5,325 | ) |   |   | $ | 21,362 |   |   |

 

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**UNITED INDUSTRIESCORPORATION AND SUBSIDIARIESSTATEMENT OF OPERATIONSFOR THE SIX MONTHS ENDED JUNE 30, 2004(Unaudited)**
| ** **                                             | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Net sales                                              |       | $          | 324,351    |                        |       | $                               | 176,703    |             |       |             | $          | 28,767 |   |   |   | $ | (107,283 | ) |   |   | $ | 422,538 |   |   |
| Operating costs and  expenses:     |       |       |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Cost of goods sold                                     |       | 196,619    |       |                        | 128,952    |                            |       |             | 26,455     |             |       |   | (82,761 | ) |   |   | 269,265 |   |   |
| Selling, general and administrative expenses           |       | 104,327    |       |                        | 6,354      |                            |       |             | 3,606      |             |       |   | (24,522 | ) |   |   | 89,765 |   |   |
| Total operating costs and  expenses                    |       | 300,946    |       |                        | 135,306    |                            |       |             | 30,061     |             |       |   | (107,283 | ) |   |   | 359,030 |   |   |
| Operating income  (loss)                               |       | 23,405     |       |                        | 41,397     |                            |       |             | (1,294     | )                |       |   | — |   |   |   | 63,508 |   |   |
| Interest expense                                       |       | 20,659     |       |                        | —     |                            |       |             | 869        |             |       |   | — |   |   |   | 21,528 |   |   |
| Interest income                                        |       | 217        |       |                        | 154        |                            |       |             | —     |             |       |   | — |   |   |   | 371 |   |   |
| Income (loss)  before income tax expense (benefit)     |       | 2,963      |       |                        | 41,551     |                            |       |             | (2,163     | )                |       |   | — |   |   |   | 42,351 |   |   |
| Income tax  expense (benefit)                          |       | 1,192      |       |                        | 12,218     |                            |       |             | (779       | )                |       |   | — |   |   |   | 12,631 |   |   |
| Equity income in  subsidiaries                         |       | (27,949    | )          |                        | —     |                            |       |             | —     |             |       |   | 27,949 |   |   |   | — |   |   |
| Net income (loss)                                      |       | $          | 29,720     |                        |       | $                               | 29,333     |             |       |             | $          | (1,384 | ) |   |   | $ | (27,949 | ) |   |   | $ | 29,720 |   |   |

 

**UNITED INDUSTRIESCORPORATION AND SUBSIDIARIESSTATEMENT OF OPERATIONSFOR THE SIX MONTHS ENDED JUNE 30, 2003(Unaudited) (As Restated)**
| ** **                                   | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------|------------|------------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| Net sales                                    |       | $          | 310,213    |                        |       | $                | 149,434    |             |       |   | $ | (74,832 | ) |   |   | $ | 384,815 |   |   |
| Operating costs and  expenses:               |       |       |       |                        |       |             |       |             |       |   |   |   |   |   |   |
| Cost of goods sold                           |       | 175,274    |       |                        | 127,763    |             |       |             | (70,485    | ) |   |   | 232,552 |   |   |
| Selling, general and administrative expenses |       | 67,942     |       |                        | 15,709     |             |       |             | (4,347     | ) |   |   | 79,304 |   |   |
| Total operating costs and expenses           |       | 243,216    |       |                        | 143,472    |             |       |             | (74,832    | ) |   |   | 311,856 |   |   |
| Operating income                             |       | 66,997     |       |                        | 5,962      |             |       |             | —     |   |   |   | 72,959 |   |   |
| Interest expense,  net                       |       | 18,732     |       |                        | 288        |             |       |             | —     |   |   |   | 19,020 |   |   |
| Income before  income tax expense            |       | 48,265     |       |                        | 5,674      |             |       |             | —     |   |   |   | 53,939 |   |   |
| Income tax  expense                          |       | 18,459     |       |                        | 3,066      |             |       |             | —     |   |   |   | 21,525 |   |   |
| Equity (income)  loss in subsidiaries        |       | (2,608     | )          |                        | —     |             |       |             | 2,608      |   |   |   | — |   |   |
| Net income                                   |       | $          | 32,414     |                        |       | $                | 2,608      |             |       |   | $ | (2,608 | ) |   |   | $ | 32,414 |   |   |

 

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**UNITED INDUSTRIESCORPORATION AND SUBSIDIARIESSTATEMENT OF CASH FLOWSFOR THE SIX MONTHS ENDED JUNE 30, 2004(Unaudited)**
| ** **                                                                        | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | **Non-  Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|---------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                        | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**    | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Cash flows from operating  activities:                                            |       |       |       |             |       |                |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Net income                                                                        |       | $          | 29,720     |             |       | $                   | 29,333     |             |       |             | $          | (1,384 | ) |   |   | $ | (27,949 | ) |   |   | $ | 29,720 |   |   |
| Adjustments  to reconcile net income to net cash flows from operating activities: |       |       |       |             |       |                |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                                     |       | 8,812      |       |             | 5,655      |                |       |             | 1,031      |             |       |   | — |   |   |   | 15,498 |   |   |
| Amortization and write-off of deferred financing fees                             |       | 2,492      |       |             | 468        |                |       |             | —     |             |       |   | — |   |   |   | 2,960 |   |   |
| Deferred income tax expense (benefit)                                             |       | 1,192      |       |             | 12,218     |                |       |             | (779       | )                |       |   | — |   |   |   | 12,631 |   |   |
| Gain on sale of aircraft                                                          |       | (1,497     | )          |             | —     |                |       |             | —     |             |       |   | — |   |   |   | (1,497 | ) |   |
| Equity (income) loss in subsidiaries                                              |       | (27,949    | )          |             | —     |                |       |             | —     |             |       |   | 27,949 |   |   |   | — |   |   |
| Changes  in operating assets and liabilities, net of effects from acquisit        |       |       |       |             |       |                |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Accounts receivable                                                               |       | 82,273     |       |             | (24,552    | )                   |       |             | (27,190    | )                |       |   | (107,283 | ) |   |   | (76,752 | ) |   |
| Inventories                                                                       |       | (44,877    | )          |             | 5,434      |                |       |             | (30,582    | )                |       |   | 82,761 |   |   |   | 12,736 |   |   |
| Prepaid expenses                                                                  |       | 2,600      |       |             | (459       | )                   |       |             | (1,192     | )                |       |   | — |   |   |   | 949 |   |   |
| Other assets                                                                      |       | (4,927     | )          |             | 1,776      |                |       |             | —     |             |       |   | — |   |   |   | (3,151 | ) |   |
| Accounts payable                                                                  |       | (19,306    | )          |             | 4,525      |                |       |             | 10,856     |             |       |   | — |   |   |   | (3,925 | ) |   |
| Accrued expenses                                                                  |       | 10,123     |       |             | 7,634      |                |       |             | 9,969      |             |       |   | — |   |   |   | 27,726 |   |   |
| Other operating activities, net                                                   |       | (20,117    | )          |             | —     |                |       |             | (3,606     | )                |       |   | 24,522 |   |   |   | 799 |   |   |
| Net cash flows provided by (used  in) operating activities                        |       | 18,539     |       |             | 42,032     |                |       |             | (42,877    | )                |       |   | — |   |   |   | 17,694 |   |   |
| Cash flows from  investing activities:                                            |       |       |       |             |       |                |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Purchases of equipment and leasehold improvements                                 |       | (6,826     | )          |             | —     |                |       |             | —     |             |       |   | — |   |   |   | (6,826 | ) |   |
| Payment for acquisition of the Nu-Gro Corporation                                 |       | (146,448   | )          |             | —     |                |       |             | —     |             |       |   | — |   |   |   | (146,448 | ) |   |
| Proceeds from sale of aircraft                                                    |       | 2,780      |       |             | —     |                |       |             | —     |             |       |   | — |   |   |   | 2,780 |   |   |
| Net cash flows used in investing activities                                       |       | (150,494   | )          |             | —     |                |       |             | —     |             |       |   | — |   |   |   | (150,494 | ) |   |
| Cash flows from  financing activities:                                            |       |       |       |             |       |                |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Proceeds from borrowings on new senior credit  facility                      |       | 385,000    |       |             |       |                |       |             |       |             |       |   |   |   |   |   | 385,000 |   |   |
| 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                                              |       | (179,986   | )          |             | —     |                |       |             | —     |             |       |   | — |   |   |   | (179,986 | ) |   |
| Payments for capital lease obligation                                             |       | (3,841     | )          |             | —     |                |       |             | —     |             |       |   | — |   |   |   | (3,841 | ) |   |
| Payments for debt issuance costs                                                  |       | (9,954     | )          |             | —     |                |       |             | —     |             |       |   | — |   |   |   | (9,954 | ) |   |
| Payments for repurchase of preferred stock and  accrued dividends                 |       | (57,557    | )          |             | —     |                |       |             | —     |             |       |   | — |   |   |   | (57,557 | ) |   |
| Payments for Bayer transactions for treasury stock                                |       | (1,500     | )          |             | —     |                |       |             | —     |             |       |   | — |   |   |   | (1,500 | ) |   |
| Change in book cash overdraft                                                     |       | 4,079      |       |             | —     |                |       |             | —     |             |       |   | — |   |   |   | 4,079 |   |   |
| Other financing and intercompany activities                                       |       | (6,976     | )          |             | (41,072    | )                   |       |             | 48,048     |             |       |   | — |   |   |   | — |   |   |
| Net cash flows provided by (used in) financing  activities                        |       | 126,274    |       |             | (41,072    | )                   |       |             | 48,048     |             |       |   | — |   |   |   | 133,250 |   |   |
| Effect of exchange rates on cash and cash equivalents                             |       | —     |       |             | —     |                |       |             | (3,361     | )                |       |   | — |   |   |   | (3,361 | ) |   |
| Net increase (decrease) in cash and cash equivalents                              |       | (5,681     | )          |             | 960        |                |       |             | 1,810      |             |       |   | — |   |   |   | (2,911 | ) |   |
| Cash and cash equivalents, beginning of period                                    |       | 11,132     |       |             | 281        |                |       |             | —     |             |       |   | — |   |   |   | 11,413 |   |   |
| Cash and cash  equivalents, end of period                                         |       | $          | 5,451      |             |       | $                   | 1,241      |             |       |             | $          | 1,810 |   |   |   | $ | — |   |   |   | $ | 8,502 |   |   |

 

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**UNITED INDUSTRIESCORPORATION AND SUBSIDIARIESSTATEMENT OF CASH FLOWSFOR THE SIX MONTHS ENDED JUNE 30, 2003(Unaudited) (As Restated)**
| ** **                                                                        | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                        | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Cash flows from operating  activities:                                            |       |       |       |             |       |             |       |             |       |   |   |   |   |   |   |
| Net income                                                                        |       | $          | 32,414     |             |       | $                | 2,608      |             |       |   | $ | (2,608 | ) |   |   | $ | 32,414 |   |   |
| Adjustments  to reconcile net income to net cash flows from operating activities: |       |       |       |             |       |             |       |             |       |   |   |   |   |   |   |
| Depreciation and amortization                                                     |       | 2,474      |       |             | 5,862      |             |       |             | —     |   |   |   | 8,336 |   |   |
| Amortization of deferred financing fees                                           |       | 3,663      |       |             | —     |             |       |             | —     |   |   |   | 3,663 |   |   |
| Deferred income tax expense                                                       |       | 19,831     |       |             | 357        |             |       |             | —     |   |   |   | 20,188 |   |   |
| Equity (income) loss in subsidiaries                                              |       | (2,608     | )          |             | —     |             |       |             | 2,608      |   |   |   | — |   |   |
| Changes  in operating assets and liabilities, net of effects from acquisition:    |       |       |       |             |       |             |       |             |       |   |   |   |   |   |   |
| Accounts receivable                                                               |       | (26,910    | )          |             | (2,554     | )                |       |             | (74,832    | ) |   |   | (104,296 | ) |   |
| Inventories                                                                       |       | (73,822    | )          |             | 10,825     |             |       |             | 70,485     |   |   |   | 7,488 |   |   |
| Prepaid expenses and other current assets                                         |       | 1,472      |       |             | 1,406      |             |       |             | —     |   |   |   | 2,878 |   |   |
| Other assets                                                                      |       | (4,984     | )          |             | 1,631      |             |       |             | —     |   |   |   | (3,353 | ) |   |
| Accounts payable                                                                  |       | 19,330     |       |             | (4,917     | )                |       |             | —     |   |   |   | 14,413 |   |   |
| Accrued expenses                                                                  |       | 7,662      |       |             | (4,392     | )                |       |             | —     |   |   |   | 3,270 |   |   |
| Other operating activities, net                                                   |       | (1,571     | )          |             | (1,694     | )                |       |             | 4,347      |   |   |   | 1,082 |   |   |
| Net cash flows provided by (used  in) operating activities                        |       | (23,049    | )          |             | 9,132      |             |       |             | —     |   |   |   | (13,917 | ) |   |
| Cash flows from  investing activities:                                            |       |       |       |             |       |             |       |             |       |   |   |   |   |   |   |
| Purchases of equipment and leasehold improvements                                 |       | (3,425     | )          |             | —     |             |       |             | —     |   |   |   | (3,425 | ) |   |
| Proceeds from sale of WPC product lines                                           |       | 4,204      |       |             | —     |             |       |             | —     |   |   |   | 4,204 |   |   |
| Net cash flows provided by investing activities                                   |       | 779        |       |             | —     |             |       |             | —     |   |   |   | 779 |   |   |
| Cash flows from financing  activities:                                            |       |       |       |             |       |             |       |             |       |   |   |   |   |   |   |
| Proceeds from additional debt                                                     |       | 126,275    |       |             | —     |             |       |             | —     |   |   |   | 126,275 |   |   |
| Proceeds from issuance of common stock                                            |       | 84         |       |             | —     |             |       |             | —     |   |   |   | 84 |   |   |
| Payments received for common stock subscription  receivable                       |       | 2,049      |       |             | —     |             |       |             | —     |   |   |   | 2,049 |   |   |
| Repayment of borrowings on revolver and other debt                                |       | (118,354   | )          |             | —     |             |       |             | —     |   |   |   | (118,354 | ) |   |
| Payments for debt issuance costs                                                  |       | (2,924     | )          |             | —     |             |       |             | —     |   |   |   | (2,924 | ) |   |
| Change in cash overdraft                                                          |       | 6,433      |       |             | —     |             |       |             | —     |   |   |   | 6,433 |   |   |
| Other financing and intercompany activities                                       |       | 9,025      |       |             | (8,945     | )                |       |             | —     |   |   |   | 80 |   |   |
| Net cash flows provided by (used in) financing  activities                        |       | 22,588     |       |             | (8,945     | )                |       |             | —     |   |   |   | 13,643 |   |   |
| Net increase in cash and cash equivalents                                         |       | 318        |       |             | 187        |             |       |             | —     |   |   |   | 505 |   |   |
| Cash and cash equivalents, beginning of period                                    |       | 10,191     |       |             | 127        |             |       |             | —     |   |   |   | 10,318 |   |   |
| Cash and cash  equivalents, end of period                                         |       | $          | 10,509     |             |       | $                | 314        |             |       |   | $ | — |   |   |   | $ | 10,823 |   |   |

 

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**ITEM 2.  **MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Thediscussion and analysis of our consolidated financial condition and results ofoperations included 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.

**Overviewand Management Report**

Operating as SpectrumBrands and Nu-Gro, we are majority owned by UIC Holdings, L.L.C. and are theleading manufacturer and marketer of value-oriented products for the consumerlawn and garden care and insect control markets in North America. Under avariety of brand names, we manufacture and market one of the broadest lines ofproducts in the industry, including herbicides and indoor and outdoorinsecticides, as well as insect repellents, fertilizers, growing media andsoils. Our value brands are targeted toward consumers who want products andpackaging that are comparable or superior to, and at lower prices than,premium-priced brands, while our opening price point brands are designed forcost-conscious consumers who want quality products. Our products are marketedto mass merchandisers, home improvement centers, hardware, grocery and drugchains, nurseries and garden centers. Our three largest customers are The HomeDepot, Lowe’s and Wal*Mart, which are leading retailers in our larger segments.

We compete in the$2.9 billion consumer lawn and garden and $1.0 billion insect controlretail markets in the United States and the $335.0 million lawn and gardenmarket in Canada. We believe a key growth factor in the lawn and garden retailmarket is the aging of the United States population, as consumers over the ageof forty-five represent the largest segment of lawn and garden care productusers and typically have more leisure time and higher levels of discretionaryincome than the general population. We also believe the growth in the homeimprovement center and mass merchandiser channels has increased the popularityof do-it-yourself activities, including lawn and garden projects.

Asof June 30, 2004, we reported our operating results using three reportablesegments, as follows:

·        ***Consumer Lawn and Garden****(63% of second quarter 2004 net sales).*This segment primarily consists of dry granular lawn fertilizers, lawnfertilizer combination with lawn control products, herbicides, water-solubleand controlled-release garden and indoor plant foods, plant care products,potting soils and other growing media products and insecticide products. Thissegment includes, among others, our Spectracide, Garden Safe, Schultz, Vigoro,Sta-Green, Real-Kill, Wilson, So-Green, Greenleaf and Earth Green brands.

·        ***Consumer Household****(30% of second quarter 2004 net sales).*This segment represents household insecticides and insect repellents that allowconsumers to repel insects and maintain pest-free households. This segmentincludes our Hot Shot, Cutter and Repel brands, as well as a number of privatelabel and other products.

·        ***Fertilizer Technology and Other****(7% of second quarter 2004 net sales).*This segment consists of a variety of controlled-release nitrogen products andtechnology, as well as a variety of compounds and chemicals, such as cleaningsolutions and other consumer products. The Fertilizer Technology and Othersegment includes our Nutralene and Nitroform brands.

The basis of oursegmentation has been modified since March 31, 2004 to accommodate theacquisition of Nu-Gro. Changes to segments previously reported include theaddition of Nu-Gro’s consumer lawn and garden brands and products to ourexisting Lawn and Garden segment to form the new Consumer Lawn and Gardensegment, as well as the addition of Nu-Gro’s fertilizer technology brands andother products to our existing Contract segment to form the new FertilizerTechnology and Other segment. 

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The nameof our existing Household segment was changed to Consumer Household. Noreclassification of the 2003 segment information was necessary forcomparability between the periods presented herein.

Webelieve that our historical financial condition and results of operations arenot necessarily accurate indicators of future results because of variability inour product listings at customers, our historical lack of long-term supplycontracts with most customers and because of certain significant past events.Those events include merger, acquisition, strategic and equity and debtfinancing transactions over the last several years. Furthermore, our sales areseasonal in nature and are susceptible to weather conditions that vary fromyear to year.

**CriticalAccounting Policies**

While all of thesignificant accounting policies described in the notes to our consolidatedfinancial statements are important, some of these policies may be viewed asbeing critical. Such policies are those that are both most important to theportrayal of our financial condition and require our most difficult, subjectiveor complex estimates and assumptions that affect the reported amounts of assetsand liabilities and the disclosure of contingent assets and liabilities at thedate of our consolidated financial statements and the reported amounts ofrevenues and expenses during the reporting period. We base our estimates andassumptions on historical experience and various other factors that we believeto be reasonable under the circumstances. Actual results could differ fromthese estimates and assumptions. We believe our most critical accountingpolicies are as follows.

***RevenueRecognition.******  ***We recognize revenue when title and riskof 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 $3.6 million for the three months ended June 30, 2004 and $3.2million for the three months ended June 30, 2003. Sales reductions relatedto returns were $6.3 million for the six months ended June 30, 2004 and$7.1 million for the six months ended June 30, 2003. The increase in thesecond quarter of 2004 was driven primarily by higher sales and the mix ofproducts sold during the first quarter of 2004. Amounts included in theaccounts receivable reserves for product returns were $3.4 million as of June 30,2004, $2.9 million as of June 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 $1.7 million since the first quarter of 2004 and $1.0million since December 31, 2003. The allowance for obsolete or slow-movinginventory was $6.6 million as of June 30, 2004, $6.4 million as of June 30,2003 and $5.6 million as of December 31, 2003.

***PromotionExpense.******  *** Promotion expense, including cooperativeprograms with customers, is recorded as a reduction of gross sales. Inaddition, advertising costs are incurred irrespective of promotions. Such costsare included in selling, general and administrative expenses in ourconsolidated statements of operations. We advertise and promote our productsthrough national and regional media. Products are also advertised and promotedthrough cooperative programs with retailers. Advertising and promotion costsare expensed 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.

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***Income Taxes.******  ***We accountfor income taxes under the asset and liability method. Under this method,deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial reporting basisand the tax basis of assets and liabilities at enacted tax rates expected to bein effect when such amounts are recovered or settled. Judgment is required todetermine the amount of any valuation allowance to apply against deferred taxassets. We will establish a valuation allowance if we determine that it is morelikely than not that some portion or all of our deferred tax assets will not berealized and include any changes to such valuation allowance in ourconsolidated statements of operations as income tax expense or benefit, asappropriate.

We expect our revisedannual effective income tax rate to be 18%, due primarily to the amortizationof certain deferred tax liabilities associated with acquired intangible assets.In addition, because of the tax-deductible goodwill and net operating losscarryforwards, most of our income tax expense is deferred, and no significantcash payments for income taxes are expected for the next several years.

Although we believe itis more likely than not that we will utilize our deferred tax assets, we canprovide no assurance of this, as our ability to utilize such assets iscontingent upon our ability to generate sufficient taxable income in thefuture. We will continue to assess the realizability of the deferred tax assetsbased upon actual and forecasted operating results. If we conclude it is notmore likely than not that we will realize the benefit of our deferred taxassets, we may have to establish a valuation allowance and, accordingly, recorda charge to income tax expense.

***Goodwill,Intangible and Other Long-Lived Assets.******  ***We haveacquired intangible assets or made acquisitions in the past that resulted inthe recording of goodwill or intangible assets. Under generally acceptedaccounting principles in effect prior to 2002, goodwill and intangible assetswere amortized over their estimated useful lives, and were tested periodicallyto determine if they were recoverable from their cash flows on an undiscountedbasis over their useful lives.

Beginningin 2002, goodwill is no longer amortized and is subject to impairment testingat least annually. We evaluate the recoverability of long-lived assets,including goodwill and intangible assets, for impairment annually or whenevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. Such events or changes in circumstances couldinclude such factors as changes in technological advances, fluctuations in thefair value of such assets or adverse changes in customer relationships orvendors. Recoverability is evaluated by brand and product type, which representthe reporting unit components within our operating segments. If a review ofgoodwill using current market rates, discounted cash flows and other methods,or if a review of other intangible assets using current market rates,undiscounted cash flows and other methods, indicates that the carrying value isnot recoverable, the carrying value of such asset is reduced to estimated fairvalue. No impairments existed as of June 30, 2004 and 2003 and December 31,2003. While we believe that our estimates of future cash flows are reasonable,different assumptions regarding such cash flows could materially affect ourevaluations. Therefore, impairment losses could be recorded in the future.

**RecentEvents**

***Acquisition ofUnited Pet Group, Inc.  ***On June 14, 2004,we and our wholly-owned subsidiary entered into a definitive agreement tocomplete a merger of the subsidiary with and into United Pet Group, Inc.,or UPG, a privately owned manufacturer and marketer of premium branded petsupplies. UPG’s stockholders approved the transaction on June 16, 2004 andwe completed the merger on July 30, 2004 for cash consideration of $360.0million. The transaction was financed with $250.0 million of proceeds from ournew senior credit facility, as amended (see financing activities in thissection), including $75.0 million under a second lien facility, $70.0 millionof proceeds from the issuance of 5.8 million shares each of our Class Aand Class B common stock to affiliates of Thomas H. Lee Partners, ourlargest stockholder, Banc of America Securities LLC and certain UPGstockholders and the remainder from our cash balances. The transaction will beaccounted for as an acquisition and, accordingly, the results of operations ofUPG will be included in our results of operations from July 30, 2004, thedate of acquisition. We are currently in the process of obtaining anindependent third-party valuation of assets acquired and liabilities assumedfor 

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purchase price allocationpurposes and expect the valuation to be completed during the fourth quarter of2004.

***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 $146.4 million, including $5.0million of related acquisition costs, and the assumption of $26.7 million ofoutstanding debt, which we immediately repaid at closing. The transaction wasfinanced with proceeds from our new senior credit facility (see financingactivities in this section). The acquisition was executed to expand our reachthroughout North America, broaden our product offerings and customer base,vertically integrate certain of our operations, including gaining access toadvanced fertilizer technologies, and to achieve economies of scale andsynergistic 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 allocated to assets acquired and liabilities assumed basedon estimated fair values. We preliminarily allocated $66.4 million of thepurchase price to intangible assets and $40.5 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 thirty years, and tocustomer relationships, which are currently being amortized using thestraight-line method over periods ranging from five to ten years. In addition,we increased the value of inventory acquired from Nu-Gro by $6.1 million toreflect 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 three months ended June 30, 2004,amortization expense associated with such write-up of inventory to estimatedfair value of $5.2 million was recorded in cost of goods sold.

The purchase price allocation is based on preliminaryinformation, which is subject to adjustment upon obtaining the final report ofan independent third-party valuation firm. We are currently in the process ofobtaining such report and expect the final purchase price allocation to becompleted during the third quarter of 2004. While the final purchase priceallocation may differ significantly from the preliminary allocation providedherein, we believe any adjustments resulting from the final allocation will nothave a material impact on our consolidated results of operations or financialposition.

***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 commencing on June 30, 2004, with a final installment due on March 31,2011. All of the loan obligations are subject to mandatory prepayment uponcertain events, including sales of certain assets, issuances of indebtedness orequity 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. The interest rateapplicable to our outstanding borrowings was 3.84% as of June 30, 2004,5.32% as of June 30, 2003 and 5.12% as of December 31, 2003. Unusedcommitments under the new revolving credit facility are subject to a 0.5%annual commitment fee. Unused availability under the new revolving creditfacility was $121.1 million as of June 30, 2004 which is reflective of$3.9 million of standby letters of credit pledged as collateral. The new seniorcredit facility is secured by substantially all of our properties and assetsand substantially all of the properties and assets of our current and futuredomestic 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 financingactivities described above, on April 30, 2004, we repurchased all 37,600shares of our outstanding Class A nonvoting preferred stock for $57.6million, including $19.9 million for all accrued dividends thereon. Suchrepurchase resulted in a decline in additional paid-in capital of $37.7million.

***CustomerAgreement.***   On February 12, 2004, our largestcustomer and we executed a licensing, manufacturing and supply agreement. Underthe agreement, we will license certain of our trademarks and be the exclusivemanufacturer and supplier for certain products branded with such trademarksfrom January 1, 2004, the effective date of the agreement, through December 31,2008 or such later date as is specified in the agreement. Provided the customerachieves certain required minimum purchase volumes and other conditions duringsuch period, and the manufacturing and supply portion of the agreement isextended for an additional three-year period as specified in the agreement, wewill assign the trademarks to the customer not earlier than May 1, 2009,but otherwise within thirty days after the date upon which such requiredminimum purchase volumes are achieved. The carrying value of such trademarks asof February 12, 2004 was approximately $16.0 million. If the customerfails to achieve the required minimum purchase volumes or meet other certain conditions,assignment may occur at a later date, if certain conditions are met. Inaddition, as a result of executing the agreement, we have modified 

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thetrademarks’ initial amortization period of forty years and will recordamortization in a manner consistent with projected sales activity over fiveyears, because we believe the customer will achieve all required conditions by May 2009.The modification 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 consummated atransaction 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 June 30, 2003 and December 31,2003 included elsewhere in this Quarterly Report.

Under the terms of theagreements, Bayer was required to make payments to us which total $5.0 millionannually through June 15, 2009, the present value of which equaled thevalue assigned to the common stock subscription receivable as of June 14,2002, which has been reflected in stockholders’ equity (deficit) in theconsolidated balance sheets as of June 30, 2003 and December 31, 2003included elsewhere in this Quarterly Report. The common stock subscriptionreceivable was to be repaid by Bayer in 28 quarterly installments of $1.25million, the first of which was received at closing on June 17, 2002. Thedifference between the value ascribed to the common stock subscriptionreceivable and the installment payments received has been recorded as interestincome in our consolidated statements of operations for the six months ended June 30,2004 and 2003 and year ended December 31, 2003.

The value of the SupplyAgreement has been and is being amortized to cost of goods sold over the periodin which its economic benefits are expected to be utilized which was initiallyanticipated to be over a three to five-year period. We have been amortizing theobligation associated with the In-Store Service Agreement to revenues over theseven-year life of the agreement, the period in which its obligations wereoriginally expected to be fulfilled. However, in December 2002, we andBayer amended the In-Store Service Agreement to reduce the scope of servicesprovided by approximately 80%. As a result, we reduced our 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, we gave notice to Bayer regarding the termination of the In-Store ServiceAgreement, as amended. Upon termination, which became effective on December 21,2003, we were relieved of our obligation to perform merchandising services for Bayer.Accordingly, the remaining liability of $0.7 million on the date of terminationwas fully written off and recorded in selling, general and administrativeexpenses in the consolidated statement of operations for the year ended December 31,2003 included elsewhere in this Quarterly Report.

Following thetermination of the In-Store Service Agreement, on December 22, 2003, weexercised our option to repurchase all outstanding common stock previouslyissued to Bayer. Bayer disputed our interpretation of a related agreement (theExchange Agreement) as to the calculation of the repurchase price. As a result,we and Bayer entered negotiations to determine an agreed upon repurchase pricebased on equations included in the Exchange Agreement and other factors. Wecommenced an arbitration proceeding 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.

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Werecorded treasury stock of $24.4 million, based on the consideration given toBayer, and reduced the common stock subscription receivable by $22.5 million,the remaining balance on the date of repurchase. We also reversed the commonstock repurchase option of $2.6 million as a result of its exercise andrecorded a corresponding amount to additional paid-in capital. As a result ofthis transaction, we and Bayer agreed that the Exchange Agreement and In-StoreService Agreement are fully terminated, with the exception of certainprovisions contained therein that expressly survive termination, and that theSupply Agreement shall remain in full force and effect according to its terms.Under the terms of the Supply Agreement, any remaining balance at January 30,2009 is unconditionally and immediately payable to us by Bayer regardless ofwhether or not we purchase any ingredients under the Supply Agreement. As of June 30,2004, the remaining balance of the Supply Agreement, net of amortization andexcluding accrued interest, was $4.7 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 June 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:
| ** **                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **Description**                       | ** ** | ** **        | ** ** | **2004**              | ** ** | **2003** | ** ** | **2003** | ** ** |
| Common stock  subscription receivable |       | $                 | —     |                  | $          | 24,177 |   |   | $ | 22,534 |   |   |
| Supply Agreement                      |       | 4,710             |       | 5,694                 |       |   | 5,314 |   |   |
| Repurchase option                     |       | —            |       | 2,636                 |       |   | 2,636 |   |   |
| In-Store Service  Agreement           |       | —            |       | (729                  | )          |   | — |   |   |
|                                  |       | $                 | 4,710      |                  | $          | 31,778 |   |   | $ | 30,484 |   |   |
|                                       |            |                   |            |                       |            |  |  |  |  |  |  |  |  |  |

 

Bayer recently sent noticeto us purporting to terminate the Supply Agreement, effective August 17,2004. We responded by notifying Bayer that it did not have a right to terminate.We therefore returned to Bayer the payment due upon termination, which Bayerhad tendered to us. Both Bayer and we are in agreement that the amount due inthe event of termination was $5.2 million, including $0.5 million of accruedinterest. The outcome of our disagreement with Bayer concerning termination ofthe Supply Agreement is not expected to have a material adverse impact on ourconsolidated financial position, results of operations or cash flows.

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**Results of Operations**

All prior year results anddiscussion which follow reflect the segments previously described in thisQuarterly Report.

***Three Months Ended June 30, 2004 Compared to theThree Months Ended June 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 June 30,** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                   | ** ** | **2004**                                            | ** ** | **2003** | ** ** |
| Net sales by segment:                        |       |                                                |       |   |   |   |   |   |   |
| Consumer Lawn and Garden                     |       | $                                                   | 152,467    |   | 63.6 | % | $ | 142,256 |   | 69.1 | % |
| Consumer Household                           |       | 71,095                                              |       | 29.6 | % | 61,021 |   | 29.6 | % |
| Fertilizer Technology and Other              |       | 16,273                                              |       | 6.8 | % | 2,726 |   | 1.3 | % |
| Total net sales                              |       | 239,835                                             |       | 100.0 | % | 206,003 |   | 100.0 | % |
| Operating costs and  expenses:               |       |                                                |       |   |   |   |   |   |   |
| Cost of goods sold                           |       | 155,857                                             |       | 65.0 | % | 123,797 |   | 60.1 | % |
| Selling, general and administrative expenses |       | 49,784                                              |       | 20.7 | % | 37,905 |   | 18.4 | % |
| Total operating costs and expenses           |       | 205,641                                             |       | 85.7 | % | 161,702 |   | 78.5 | % |
| Operating income (loss) by  segment:         |       |                                                |       |   |   |   |   |   |   |
| Consumer Lawn and Garden                     |       | 14,947                                              |       | 6.2 | % | 26,119 |   | 12.7 | % |
| Consumer Household                           |       | 19,432                                              |       | 8.1 | % | 17,795 |   | 8.6 | % |
| Fertilizer Technology and Other              |       | (185                                                | )          | 0.0 | % | 387 |   | 0.2 | % |
| Total operating income                       |       | 34,194                                              |       | 14.3 | % | 44,301 |   | 21.5 | % |
| Interest expense                             |       | 11,908                                              |       | 5.0 | % | 10,271 |   | 5.0 | % |
| Interest income                              |       | 86                                                  |       | 0.0 | % | 455 |   | 0.2 | % |
| Income before  income tax expense            |       | 22,372                                              |       | 9.3 | % | 34,485 |   | 16.7 | % |
| Income tax  expense                          |       | 5,039                                               |       | 2.1 | % | 13,123 |   | 6.4 | % |
| Net income                                   |       | $                                                   | 17,333     |   | 7.2 | % | $ | 21,362 |   | 10.3 | % |

*** ***

***NetSales.  ***Net sales represent gross sales lessany applicable customer discounts from list price, customer sales returns andpromotion expense through cooperative programs with our customers. Net salesincreased $33.8 million, or 16.4%, to $239.8 million for the threemonths ended June 30, 2004 from $206.0 million for the three monthsended June 30, 2003. The increase was primarily due to our acquisition ofNu-Gro, as well as stronger sales of Consumer Household products compared to2003. This increase was partially offset by a decline in sales of outdoorpesticides at one key retailer and a decline in sales of various lawn andgarden products during the three months ended June 30, 2004.

Net sales in the Consumer Lawn and Garden segmentincreased $10.2 million, or 7.2%, to $152.5 million for the threemonths ended June 30, 2004 from $142.3 million for the three monthsended June 30, 2003. Net sales of this segment increased primarily due toour acquisition of Nu-Gro, which contributed $17.9 million to the increase, andan increase in 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 Consumer Household segment increased $10.1million, or 16.6%, to $71.1 million for the three months ended June 30,2004 from $61.0 million for the three months ended June 30, 2003. Netsales of this segment increased primarily due to an increase in sales ofvarious indoor insecticide products and insect repellent products. Net sales inthe Fertilizer Technology and Other segment increased $13.6 million to$16.3 million for the three months ended June 30, 2004 from$2.7 million for the three months ended June 30, 2003. Net sales ofthis segment increased primarily due to our acquisition of Nu-Gro, which 

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contributed $15.2 millionto the increase, partially offset by the cessation of sales of certain non-coreproducts in the second quarter of 2003.

***GrossProfit.******  ***Gross profit increased$1.8 million, or 2.2%, to $84.0 million for the three months ended June 30,2004 from $82.2 million for the three months ended June 30, 2003. Theincrease in gross profit was primarily due to our acquisition of Nu-Gro,increased sales of insecticide and insect repellent products in our ConsumerHousehold segment and our continuing ability to achieve operationalefficiencies from the merger and acquisition transactions we consummated in2002. Such increase was partially offset by noncash amortization of thewrite-up of inventory acquired from Nu-Gro to estimated fair value through costof goods sold, increased raw materials prices of certain products, includingvarious commodities, the prices of which are driven substantially by increasedenergy costs, and higher freight costs. As a percentage of net sales, grossprofit decreased to 35.0% for the three months ended June 30, 2004 from39.9% for the three months ended June 30, 2003. The decrease in grossprofit as a percentage of net sales was primarily due the factors previouslydescribed and the mix of product sales resulting from a decline in sales ofoutdoor pesticides at one key retailer.

***Selling,General and 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 $11.9 million, or 31.3%, to$49.8 million for the three months ended June 30, 2004 from$37.9 million for the three months ended June 30, 2003. The increasewas primarily due to our acquisition of Nu-Gro, higher distribution costs,noncash amortization expense due to the write-up of intangible assets acquiredfrom Nu-Gro to estimated fair value, and additional costs associated with ourenterprise resource planning, or ERP, system. Such increase was partiallyoffset by lower selling and marketing costs and various operationalefficiencies we continue to achieve from the merger and acquisitiontransactions we consummated in 2002. As a percentage of net sales, selling,general and administrative expenses increased to 20.7% for the three monthsended June 30, 2004 from 18.4% for the three months ended June 30,2003. The increase was due to the rise in expenses previously described.

***OperatingIncome.******  ***As a result of the factors previouslydescribed, operating income decreased $10.1 million, or 22.8%, to$34.2 million for the three months ended June 30, 2004 from$44.3 million for the three months ended June 30, 2003. As apercentage of net sales, operating income decreased to 14.3% for the threemonths ended June 30, 2004 from 21.5% for the three months ended June 30,2003.

Operating income in the Consumer Lawn and Gardensegment decreased $11.2 million, or 42.9%, to $14.9 million for the threemonths ended June 30, 2004 from $26.1 million for the three monthsended June 30, 2003. Operating income of this segment decreased primarilydue to noncash amortization expense resulting from the write-up of inventoryand intangible assets acquired from Nu-Gro to estimated fair value, higher rawmaterials costs for certain of our fertilizer products driven substantially byincreased energy costs, increased freight and distribution costs and a declinein sales of certain lawn and garden products, including outdoor pesticides atone key retailer. Operating income in the Consumer Household segment increased$1.6 million, or 9.0%, to $19.4 million for the three months ended June 30,2004 from $17.8 million for the three months ended June 30, 2003.Operating income of this segment increased primarily due to increased sales ofinsecticide and insect repellent products, partially offset by increasedfreight and distribution costs. Operating income in the Fertilizer Technologyand Other segment decreased to an operating loss of $0.2 million for thethree months ended June 30, 2004 from operating income of$0.4 million for the three months ended June 30, 2003. Operatingincome of this segment decreased primarily due to noncash amortization expenseand increased operating costs resulting from our acquisition of Nu-Gro, aspreviously described.

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***Interest Expense******.  ***Interestexpense increased $1.6 million, or 15.5%, to $11.9 million for thethree months ended June 30, 2004 from $10.3 million for the threemonths ended June 30, 2003. The increase in interest expense was primarilydue to additional borrowings to finance our acquisition of Nu-Gro and thewrite-off of $1.7 million of previously deferred financing fees recorded inconnection with our repayment of obligations outstanding under our seniorcredit facility in effect prior to April 30, 2004, partially offset by ageneral decline in interest rates in 2004 compared to 2003.

***IncomeTax Expense******.  ***Incometax expense decreased due to the decline in income before income taxes and alsodue to the adjustment of deferred tax liabilities associated with certainassets acquired. As a result, our effective tax rate was 22.5% for the threemonths ended June 30, 2004 compared to 38.1% for the three months ended June 30,2003.

***Net Income.******  ***Net incomedecreased $4.1 million, or 19.2%, to $17.3 million for the three months ended June 30,2004 from $21.4 million for the three months ended June 30, 2003 due tothe factors previously described.

***Six Months Ended June 30, 2004 Compared to theSix Months Ended June 30, 2003***

Thefollowing table presents amounts and the percentages of net sales that items inthe accompanying consolidated statements of operations constitute for theperiods presented:
| ** **                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                   | ** ** | **2004**                                          | ** ** | **2003** | ** ** |
| ** **                                   | ** ** | ** **                                        | ** ** | **(As Restated)** | ** ** |
| Net sales by segment:                        |       |                                              |       |   |   |   |   |   |   |
| Consumer Lawn and Garden                     |       | $                                                 | 302,974    |   | 71.7 | % | $ | 287,870 |   | 74.8 | % |
| Consumer Household                           |       | 102,320                                           |       | 24.2 | % | 88,588 |   | 23.0 | % |
| Fertilizer Technology and Other              |       | 17,244                                            |       | 4.1 | % | 8,357 |   | 2.2 | % |
| Total net sales                              |       | 422,538                                           |       | 100.0 | % | 384,815 |   | 100.0 | % |
| Operating costs and  expenses:               |       |                                              |       |   |   |   |   |   |   |
| Cost of goods sold                           |       | 269,265                                           |       | 63.7 | % | 232,552 |   | 60.4 | % |
| Selling, general and administrative expenses |       | 89,765                                            |       | 21.2 | % | 79,304 |   | 20.6 | % |
| Total operating costs and expenses           |       | 359,030                                           |       | 85.0 | % | 311,856 |   | 81.0 | % |
| Operating income (loss) by  segment:         |       |                                              |       |   |   |   |   |   |   |
| Consumer Lawn and Garden                     |       | 35,395                                            |       | 8.4 | % | 48,192 |   | 12.5 | % |
| Consumer Household                           |       | 28,480                                            |       | 6.7 | % | 24,421 |   | 6.4 | % |
| Fertilizer Technology and Other              |       | (367                                              | )          | -0.1 | % | 346 |   | 0.1 | % |
| Total operating income                       |       | 63,508                                            |       | 15.0 | % | 72,959 |   | 19.0 | % |
| Interest expense                             |       | 21,528                                            |       | 5.1 | % | 19,974 |   | 5.2 | % |
| Interest income                              |       | 371                                               |       | 0.1 | % | 954 |   | 0.2 | % |
| Income before  income tax expense            |       | 42,351                                            |       | 10.0 | % | 53,939 |   | 14.0 | % |
| Income tax  expense                          |       | 12,631                                            |       | 3.0 | % | 21,525 |   | 5.6 | % |
| Net income                                   |       | $                                                 | 29,720     |   | 7.0 | % | $ | 32,414 |   | 8.4 | % |

*** ***

***NetSales.  *** Net sales increased$37.7 million, or 9.8%, to $422.5 million for the six months ended June 30,2004 from $384.8 million for the six months ended June 30, 2003. Theincrease was primarily due to our acquisition of Nu-Gro, as well as strongersales of Consumer Household products compared to 2003. This increase waspartially offset by a decline in sales of outdoor pesticides at one keyretailer, the cessation of sales of charcoal and non-core WPC products in theFertilizer Technology and Other segment in the second quarter of 2003 and adecline in sales of various lawn and garden products during the six monthsended June 30, 2004.

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Net sales in the Consumer Lawn and Garden segmentincreased $15.1 million, or 5.2%, to $303.0 million for the sixmonths ended June 30, 2004 from $287.9 million for the six monthsended June 30, 2003. Net sales of this segment increased primarily due toour acquisition of Nu-Gro, which contributed $17.9 million to the increase, andan increase in 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 Consumer Household segment increased $13.7million, or 15.5%, to $102.3 million for the six months ended June 30,2004 from $88.6 million for the six months ended June 30, 2003. Netsales of this segment increased primarily due to an increase in sales ofvarious indoor insecticide products and insect repellent products. Net sales inthe Fertilizer Technology and Other segment increased $8.8 million, or104.8%, to $17.2 million for the six months ended June 30, 2004 from$8.4 million for the six months ended June 30, 2003. Net sales ofthis segment increased primarily due to our acquisition of Nu-Gro, whichcontributed $15.2 million to the increase, partially offset by the cessation ofsales of charcoal and non-core WPC products in the second quarter of 2003.

***GrossProfit.******  ***Gross profit increased$1.0 million, or 0.7%, to $153.3 million for the six months ended June 30,2004 from $152.3 million for the six months ended June 30, 2003. Theincrease in gross profit was primarily due to our acquisition of Nu-Gro,increased sales of various lawn and garden products in our Consumer Lawn andGarden segment, increased sales of insecticide and insect repellent products inour Consumer Household segment and our continuing ability to achieveoperational efficiencies from the merger and acquisition transactions weconsummated in 2002. Such increase was partially offset by noncash amortizationof the write-up of inventory acquired from Nu-Gro to estimated fair valuethrough cost of goods sold, increased raw materials prices of certain products,including various commodities, the prices of which are driven substantially byincreased energy costs, and higher freight costs. As a percentage of net sales,gross profit decreased to 36.2% for the six months ended June 30, 2004from 39.6% for the six months ended June 30, 2003. The decrease in grossprofit as a percentage of net sales was primarily due to the factors previouslydescribed and the mix of products sales resulting from a decline in sales ofoutdoor pesticides at one key retailer.

***Selling,General and Administrative Expenses.***Selling,general and administrative expenses increased $10.5 million, or 13.2%, to$89.8 million for the six months ended June 30, 2004 from$79.3 million for the six months ended June 30, 2003. The increasewas primarily due to our acquisition of Nu-Gro, higher distribution costs,noncash amortization expense due to the write-up of intangible assets acquiredfrom Nu-Gro to estimated fair value, and additional costs associated with ourERP system. Such increase was partially offset by lower selling and marketingcosts,  various operational efficiencieswe continue to achieve from the merger and acquisition transactions weconsummated in 2002 and a $2.4 million adjustment to increase amortizationexpense during the six months ended June 30, 2003 as a result of the finalvaluation received relative to our Schultz Company merger in May 2002. Asa percentage of net sales, selling, general and administrative expenses increasedto 21.2% for the six months ended June 30, 2004 from 20.6% for the sixmonths ended June 30, 2003. The increase was due primarily to certain operationalefficiencies, offset by the rise in expenses previously described.

***OperatingIncome.******  ***As a result of the factors previouslydescribed, operating income decreased $9.5 million, or 13.0%, to$63.5 million for the six months ended June 30, 2004 from$73.0 million for the six months ended June 30, 2003. As a percentageof net sales, operating income decreased to 15.0% for the six months ended June 30,2004 from 19.0% for the six months ended June 30, 2003.

Operating income in the Consumer Lawn and Gardensegment decreased $12.8 million, or 26.6%, to $35.4 million for the sixmonths ended June 30, 2004 from $48.2 million for the six monthsended June 30, 2003. Operating income of this segment decreased primarilydue to noncash amortization expense resulting from the write-up of inventoryand intangible assets acquired from Nu-Gro to estimated fair value, higher rawmaterials costs for certain of our fertilizer products driven substantially byincreased energy costs, increased freight and distribution costs and a declinein sales of certain lawn and garden 

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products, includingoutdoor pesticides at one key retailer. Operating income in the ConsumerHousehold segment increased $4.1 million, or 16.8%, to $28.5 millionfor the six months ended June 30, 2004 from $24.4 million for the sixmonths ended June 30, 2003. Operating income of this segment increasedprimarily due to increased sales of insecticide and insect repellent products,partially offset by increased freight and distribution costs. Operating incomein the Fertilizer Technology and Other segment decreased to an operating lossof $0.4 million for the six months ended June 30, 2004 from operatingincome of $0.3 million for the six months ended June 30, 2003.Operating income of this segment decreased primarily due to noncashamortization expense and increased operating costs resulting from our acquisitionof Nu-Gro, as previously described.

***InterestExpense******.  ***Interest expense increased $1.5 million,or 7.5%, to $21.5 million for the six months ended June 30, 2004 from$20.0 million for the six months ended June 30, 2003. The increase ininterest expense was primarily due to additional borrowings to finance ouracquisition of Nu-Gro and the write-off of $1.7 million of previously deferredfinancing fees recorded in connection with our repayment of obligationsoutstanding under our senior credit facility in effect prior to April 30,2004, partially offset by write-offs of previously deferred financing fees of$1.6 million in 2003 recorded in connection with our repayment of aportion of the obligations outstanding under our senior credit facility then ineffect and a general decline in interest rates in 2004 compared to 2003.

***IncomeTax Expense******.  ***Incometax expense decreased due to the decline in income before income taxes and alsodue to the adjustment of deferred tax liabilities associated with certainassets acquired. As a result, our effective tax rate was 29.8% for the sixmonths ended June 30, 2004 compared to 39.9% for the six months ended June 30,2003.

***Net Income.******  ***Net incomedecreased $2.7 million, or 8.3%, to $29.7 million for the six months ended June 30,2004 from $32.4 million for the six months ended June 30, 2003 due to thefactors previously described.

**Liquidity and Capital Resources**

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

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 in acquisitiondiscussions with a number of other sellers although we cannot guarantee thatany acquisitions will be consummated. If we do consummate any acquisitions,such transactions could be material to our business and require us to incuradditional debt under our revolving credit facility or otherwise. We cannotensure that sufficient cash flows will be generated from operations to repayour senior subordinated notes and amounts outstanding under our senior creditfacility at maturity without requiring additional financing. Our ability tomeet 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 cashof $17.7 million for the six months ended June 30, 2004 compared to usingnet cash of $13.9 million for the six months ended June 30, 2003. Theincrease in net cash from operating activities was primarily due to a smallerincrease in accounts receivable of $27.5 million and a greater increase inaccrued expenses of $24.5 million in 2004 than in 2003, net of the effects ofthe Nu-Gro acquisition. Including the impact of the Nu-Gro acquisition,accounts receivable 

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increased $131.3 millionduring the six months ended June 30, 2004, as the Company reached its peakselling season in the second quarter of 2004. The acquisition of Nu-Grocontributed $53.6 million to the increase in accounts receivable as of theacquisition date and contributed $33.1 million in net sales during May andJune 2004. The increase in net cash provided by operating activities waspartially offset by an $18.3 million decline in accounts payable as ourproductions season begins to slow down, despite the $31.3 million addition toaccounts payable from the Nu-Gro acquisition. The seasonal nature of ouroperations generally requires cash to fund significant increases in workingcapital, primarily accounts receivable and inventories, during the first halfof the year. Accounts receivable and accounts payable generally buildsubstantially in the first half of the year, in line with increasing sales asthe season begins. These balances generally decline over the latter part of theyear as the lawn and garden season winds down.

***InvestingActivities.******  ***Investing activities used net cashflows of $150.5 million for the six months ended June 30, 2004compared to net cash provided of nearly $1.0 million for the six monthsended June 30, 2003. The increase in net cash flows used in investingactivities was due to cash paid for the acquisition of Nu-Gro of $146.4million, including transaction costs of $5.0 million, and a $3.4 millionincrease in capital expenditures in 2004 compared to 2003. Capital expendituresrelate primarily to the construction of additional capacity for production anddistribution, the development and implementation of our ERP system and theenhancement of certain of our existing facilities. Cash used for capitalexpenditures was $6.8 million for the six months June 30, 2004 and$3.4 million for the six months June 30, 2003. The increase incapital expenditures from 2003 to 2004 was primarily related to increasedconstruction costs to expand our production and distribution capacity. Weexpect to spend approximately $17.1 million on capital expenditures in 2004,exclusive of expenditures on capital leases.

***FinancingActivities.******  ***Financing activities provided net cashflows of $133.3 million for the six months ended June 30, 2004compared to $13.6 million for the six months ended June 30, 2003. Theincrease in net cash flows provided by financing activities was primarily dueto borrowings, net of repayments, of $201.9 million in 2004 compared toborrowings, net of repayments, of $8.2 million in 2003. The increase waspartially offset, primarily due to payments of $57.6 million to repurchase allof our outstanding shares of preferred stock, including dividends accruedthereon of $19.9 million, and an increase in debt issuance costs of $7.0million in 2004 compared to 2003 related to our new senior credit facilityeffective as of April 30, 2004.

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 $121.1million as of June 30, 2004, $88.3 million as of June 30, 2003 and$87.3 million as of December 31, 2003.

Long-term debt, excluding capital lease obligations,totaled $617.4 million as of June 30, 2004, $409.0 million as ofJune 30, 2003 and $388.5 million as of December 31, 2003. Thisdebt was comprised of senior subordinated notes, including related premiums, of$232.9 million as of June 30, 2004, $236.2 million as of June 30,2003 and $236.1 million as of December 31, 2003 and borrowings underour senior credit facility of $384.5 million as of June 30, 2004,$172.8 million as of June 30, 2003 and $152.4 million as of December 31,2003. The weighted average rate on borrowings under our senior credit facilitythen in effect was 3.94% as of June 30, 2004, 5.32% as of June 30,2003 and 5.12% as of December 31, 2003. The weighted average rate on thesenior subordinated notes was 9.875% as of the end of each of these periods,resulting in a blended weighted average rate on all borrowings of 6.18% as of June 30,2004, 7.95% as of June 30, 2003 and 8.01% as of December 31, 2003.The fair value of our total fixed-rate debt was $241.1 million as of June 30,2004, $246.8 million as of June 30, 2003 and $242.1 million as of December 31,2003. The fair value of our total variable-rate debt, including currentmaturities and 

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short-term borrowings,approximated the carrying value of $384.5 million as of June 30,2004, $172.8 million as of June 30, 2003 and $152.4 million asof December 31, 2003. The fair values of our fixed-rate debt andvariable-rate debt are based on quoted market prices.

*Senior Credit 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 millionrevolving credit facility; (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 six months ended June 30, 2004 and2003 and year ended December 31, 2003, as applicable, we were 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 1.12% as of June 30, 2003 and 1.16% as of December 31,2003. The interest rate applicable to Term Loan B was 5.32% as of June 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 usto make prepayments in whole or in part at any time without premium or penalty.During the six months ended June 30, 2004, we made principal payments of$152.4 million to fully repay Term Loan B, which primarilyrepresented optional principal prepayments. During the six months ended June 30,2003, we made principal payments of $28.3 million to fully repay TermLoan A and $49.2 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 $1.7 million and $0.3 million in previouslydeferred financing fees which were included in interest expense in ourconsolidated statement of operations for the three months ended June 30,2004 and 2003, respectively, and $1.7 million and $1.6 million for the sixmonths ended June 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.

*New Senior 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 to 

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the terms of the newsenior credit facility agreement, the revolving loan portion of the new seniorcredit facility matures on April 30, 2010, and the term loan obligationsunder the new senior credit facility mature on April 30, 2011. The termloan obligations are to be repaid in 28 consecutive quarterly installmentscommencing on June 30, 2004, with a final installment due on March 31,2011. All of the loan obligations are subject to mandatory prepayment uponcertain events, including sales of certain assets, issuances of indebtedness orequity or from excess cash flow. The new senior credit facility agreement alsoallows us to make voluntary prepayments, in whole or in part, at any timewithout 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 June 30, 2004, the term loans were subjectto interest rates equal to 2.50% plus LIBOR or 1.50% plus a base rate, asprovided in the new senior credit facility agreement. The interest rateapplicable to our outstanding borrowings was 3.84% as of June 30, 2004,5.32% as of June 30, 2003 and 5.12% as of December 31, 2003. Unusedcommitments under the new revolving credit facility are subject to a 0.5%annual commitment fee. Unused availability under the new revolving creditfacility was $121.1 million as of June 30, 2004 which is reflective of$3.9 million of standby letters of credit pledged as collateral. The new seniorcredit facility is secured by substantially all of our properties and assetsand substantially all of the properties and assets of our current and futuredomestic 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.

*Amendmentto New Senior 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 New SeniorCredit Facility, as amended, of $765.0 million. Subject to the terms of the newsenior credit facility agreement, as amended, the second lien term loan is tobe 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. The amendmentdid not change any other key terms or existing covenants of the new seniorcredit 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-annually on April 1 and October 1.

*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-annually on April 1 and October 1. Asdescribed in more detail below, as of June 30, 2004, there were no Series CNotes outstanding.

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*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 senior subordinated notes (the Series D Notes andcollectively with the Series B Notes and Series C Notes, the seniorsubordinated notes), with terms substantially similar to the Series BNotes and Series C Notes, with the U.S. Securities and Exchange Commissionand offered to exchange the Series D Notes for up to 100% of the Series BNotes and Series C Notes. The exchange offering closed in July 2003,resulting in $85.0 million, or 100%, of the Series C Notes beingexchanged and $146.9 million, or 98%, of the Series B Notes beingexchanged. On April 14, 2004, we repurchased all of the remaining Series BNotes outstanding, along with accrued interest and repurchase premium of4.938%, for $3.3 million. As of June 30, 2004, $232.9 million of the Series DNotes were outstanding and no Series B Notes or Series C Notes wereoutstanding.

Thefair value of the senior subordinated notes was $241.1 million as of June 30,2004, $246.8 million as of June 30, 2003 and $242.1 million as of December 31,2003, based on their quoted market price on such dates. The fair value at June 30,2004 reflects the repurchase of all outstanding Series B Notes in April 2004,as previously described. In accordance with the indentures that govern thesenior subordinated notes, they are unconditionally and jointly and severallyguaranteed by our wholly-owned domestic subsidiaries.

Ouragreements that govern the new senior credit facility and the seniorsubordinated notes contain a number of significant covenants that couldrestrict or limit our ability to:

·                    incurmore debt;

·                    paydividends, subject to financial ratios and other conditions;

·                    makeother distributions;

·                    issuestock of subsidiaries;

·                    makeinvestments;

·                    repurchasestock;

·                    createsubsidiaries;

·                    createliens;

·                    enterinto transactions with affiliates;

·                    mergeor consolidate; and

·                    transferand 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 six months ended June 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.**  *Inconnection with our transaction with Bayer in June 2002, we issued3,072,000 shares of Class A voting common stock valued at$15.4 million and 3,072,000 shares of Class B nonvoting common stockvalued at $15.4 million and recorded $0.4 million of related issuancecosts. We 

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repurchased these sharesin February 2004. See more detail included under the heading “RecentEvents” in this section.

*Issuanceof Common Stock.**  *Inconjunction with our acquisition of UPG on July 30, 2004, we issued 5.8million shares each of Class A and Class B common stock for proceedsof $70.0 million.

*Repurchase of PreferredStock.**  *Inconjunction with our refinancing on April 30, 2004, we repurchased all37,600 shares of outstanding Class A nonvoting preferred stock for $57.6million, including $19.9 million for all accrued dividends thereon. Suchrepurchase resulting in a decline in additional paid in capital of $37.7million.

**Contractual Obligations**

Thefollowing table presents the aggregate amount of future cash outflows of ourcontractual obligations as of June 30, 2004, except as otherwise noted,excluding future amounts due for interest on outstanding indebtedness:
| ** **                                            | ** ** | **Obligations due in:** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                            | ** ** | ** **                        | ** ** | **Less Than** | ** ** | **1 - 3** | ** ** | **4 - 5** | ** ** | **After 5** | ** ** |
| **Contractual Obligations**                      | ** ** | ** **                        | ** ** | **Total** | ** ** | **1 Year** | ** ** | **Years** | ** ** | **Years** | ** ** | **Years** | ** ** |
| Senior credit  facility                               |       | $                                 | 384,543    |   | $ | 1,928 |   | $ | 11,566 |   | $ | 7,710 |   | $ | 363,339 |   |
| 97¤8% Series D senior subordinated notes(1) |       | 231,900                           |       | — |   | — |   | — |   | 231,900 |   |
| Capital leases                                        |       | 4,426                             |       | 228 |   | 1,371 |   | 914 |   | 1,913 |   |
| Operating leases                                      |       | 58,889                            |       | 4,885 |   | 23,199 |   | 11,948 |   | 18,857 |   |
| Purchase  obligations(2)                              |       | 46,414                            |       | 29,258 |   | 14,846 |   | 2,310 |   | — |   |
| Professional  services agreement(3)                   |       | 4,128                             |       | 378 |   | 2,250 |   | 1,500 |   | — |   |
| Total contractual obligations                         |       | $                                 | 730,300    |   | $ | 36,677 |   | $ | 53,232 |   | $ | 24,382 |   | $ | 616,009 |   |
|                                                       |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Excludes $1.0 million ofunamortized premium.

(2)          Represents unconditionalpurchase obligations for goods and services not presented elsewhere in thetable.

(3)          Includes monthlypayments of $62,500 for management and other consulting services provided undera 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. Management believes that the termsof these leases approximate fair value. Rent expense under these leases was$0.3 million for the three months ended June 30, 2004, $0.3 millionfor the three months ended June 30, 2003, $0.6 million for the six monthsended June 30, 2004 and $0.6 million for the six months ended June 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 $1.7 million for 

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thethree months ended June 30, 2004, $1.8 million for the three monthsended June 30, 2003, $3.5 million for the six months ended June 30,2004 and $3.6 million for the six months ended June 30, 2003.

**Guarantees and Off-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 $3.9 million as of June 30, 2004,$1.7 million as of June 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 May 2005 andmay be renewed as circumstances warrant. Such financial instruments are valuedbased on the amount of exposure under the instruments and the likelihood ofperformance being required. In our past experience, no claims have been madeagainst these financial instruments nor do we expect the exposure to material lossesresulting 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 and Uncertainties**

***Seasonalityand Dependence Upon Weather Conditions.*****  **Our business is highly seasonalbecause our products are used primarily in the spring and summer seasons. Forthe past three years, approximately 71% of our net sales have occurred in thefirst and second quarters, resulting in higher net revenues and results ofoperations during those quarters. Our working capital needs, andcorrespondingly our borrowings, begin to peak at the beginning of the secondquarter. If cash on hand is insufficient to cover payments due on our seniorsubordinated notes and we are unable to draw on our senior credit facility orobtain other financing, this seasonality could adversely affect our ability tomake interest payments.

In addition, weather conditions in North America havea significant impact on the timing of sales in the spring selling season andour overall annual sales. Periods of dry, hot weather can decrease insecticidesales, while periods of cold, wet weather can slow sales of herbicides andfertilizers. In addition, an abnormally cold spring throughout North Americacould adversely affect both fertilizer and pesticide sales and therefore ourfinancial results. If weather conditions during the first and second quartersare not conducive to lawn and gardening activities, they may have an adverseeffect our consolidated financial position, results of operations or cashflows. For example, we experienced a late winter and cool, wet springconditions in the first quarter of 2003 that delayed the start of the lawn andgarden season, whereas the weather in the first quarter of 2004 was generallymore mild and dry throughout North America.

***Competitionand Industry Trends.*****  **Each of our segments operates in highly competitivemarkets and competes against a number of national and regional brands. Webelieve the principal factors by which we compete are product quality andperformance, value, brand strength and marketing. In some instances, we competeagainst companies with potentially fewer regulatory burdens, easier access tofinancing, greater personnel resources, greater brand name recognition orlarger research and development departments. 

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Increasing consolidationin the consumer lawn and garden industry may provide additional benefits tocertain of our competitors, either through access to financing, resources orefficiencies of scale.

Our principal North American competitors for ourConsumer Lawn and Garden and Consumer Household segments include: The ScottsCompany, which markets lawn and garden products under the Scotts®,Ortho®, Roundup®, Green Cross®, Miracle-Gro®and Hyponex® 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 markets products under the Combat®brand name; and Bayer A.G., which markets lawn and garden products under theBayer AdvancedTM brand name. In our Fertilizer Technology and Other segment, wecompete against a diverse group of companies.

With the growing trend towards retail tradeconsolidation, we are increasingly dependent upon key retailers whosebargaining strength is growing. Our top three customers, The Home Depot, Lowe’sand Wal*Mart, together accounted for approximately 76% of our second quarter2004 net sales and approximately 47% of our outstanding accounts receivable asof June 30, 2004. To the extent such concentration continues to occur, ournet sales and operating income may be increasingly sensitive to a deteriorationin the financial condition of, or other adverse developments involving ourrelationships with, one or more of our retailer customers. Our business hasbeen, and may continue to be, negatively affected by changes in the policiesand practices of our retailer customers, such as de-stocking and otherinventory management initiatives, limitations on access to shelf space, pricingand credit term demands and other conditions. In addition, as a result of thedesire of retailers to more closely manage inventory levels, there is a growingtrend among them to make purchases on a “just-in-time” basis. This requires usto shorten 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 financing requirements.

***AnnualProduct Line Reviews.*****  **Each year, primarily during the third and fourthquarters, we undertake a series of meetings with a number of our retailers toreview 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 to expandour presence at these retailers and increase our share of the markets in whichwe compete, each year we encounter intense competition from our competitors. Ifwe are unsuccessful in repeating or increasing our current year productofferings, it could adversely affect our consolidated financial position,results of operations or cash flows.

As we completed all of our annual product line reviewsin 2003 for the 2004 season, individual retailers provided  both positive and negative indicationsregarding certain elements of our programs. One large retailer indicated itwould not be selling certain types of our outdoor insecticide products at itsstores due to an arrangement with another vendor. However, the same retailerindicated it would add a number of our other SKUs to its 2004 offerings, whichhas resulted in the recovery of a significant portion of the lost sales but atlower margins. Conversely, other large retailers indicated their interest inincreasing the number of our products and advertising and merchandising supportfor those products in their 2004 offerings which are anticipated to more thanoffset the lost sales previously described.

***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 anticipate that one or more potential acquisitionopportunities, including those that could be material, may become available inthe 

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near future. If andwhen appropriate acquisition opportunities become available, we intend topursue them actively. Further, acquisitions involve a number of special risks,including but not limited to:

·                    failureof the acquired business to achieve expected results;

·                    diversionof management’s attention;

·                    failureto retain key personnel or customers of the acquired business;

·                    additionalfinancing that, if available, could increase leverage;

·                    successorliability, including with respect to environmental matters;

·                    thehigh cost and expenses of completing acquisitions and risks associated withunanticipated events or liabilities; and

·                    failureto successfully integrate our acquired businesses into our internal controlstructure.

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

We expect to face competition for acquisitioncandidates, which may limit the number of opportunities and may lead to higheracquisition prices. We cannot assure you that we will be able to identify,acquire or manage profitably additional businesses or to integrate successfullyany acquired businesses into our existing business without substantial costs,delays or other operations or financial difficulties. In future acquisitions,we also could incur additional indebtedness or pay consideration in excess offair value, which could have a material adverse effect on our business and ourconsolidated financial position, results of operations and cash flows.

***SubstantialIndebtedness.******  ***We have a significant amount of debt.As of June 30, 2004, our total debt, excluding capital lease obligations,was $617.4 million. As of June 30, 2004, we had unused availability underthe revolving portion of our new senior credit facility of $121.1 million. Oursubstantial indebtedness could have important consequences.

For example, itcould:

·                    makeit more difficult for us to satisfy our obligations under outstandingindebtedness and otherwise;

·                    increaseour vulnerability to general adverse economic and industry conditions,including interest rate increases because a substantial portion of ourborrowings are and will continue to be at variable rates of interest;

·                    requireus to dedicate a substantial portion of cash flows from operating activities topayments on obligations under outstanding indebtedness and otherwise, whichwould reduce the cash flows available to fund working capital, capitalexpenditures, advertising, research and development efforts and other generalcorporate expenses;

·                    limitour flexibility in planning for, or reacting to, changes in our business, theindustry in which we operate and the economy at large;

·                    placeus at a competitive disadvantage compared to our competitors that haveproportionately less debt; and

·                    limitour ability to borrow additional funds in the future, if needed, on reasonableterms.

Our ability to make payments on and to refinance anyfuture indebtedness and to fund planned capital expenditures and acquisitionswill depend on our ability to generate cash in the future. This, to some 

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extent, is subject togeneral economic, weather, financial, competitive, legislative, regulatory andother 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.

***Environmentaland Regulatory 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 $0.2 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 June 30, 2004and 2003 and December 31, 2003, we believe we were substantially incompliance with applicable environmental and regulatory requirements.

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**ITEM 3.**   QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

**Interest Rates and Raw Materials Prices**

In the normal course of business, we are exposed tofluctuations in interest rates and raw materials prices. We have establishedpolicies and procedures that govern the management of these exposures throughthe use of derivative hedging instruments, including swap agreements. Ourobjective in managing our exposure to such fluctuations is to decrease thevolatility of earnings and cash flows associated with changes in interest ratesand certain raw materials prices. To achieve this objective, we periodicallyenter into swap agreements with values that change in the opposite direction ofanticipated cash flows. Derivative instruments related to forecasted transactionsare considered to hedge future cash flows, and the effective portion of anygains or losses is included in accumulated other comprehensive income untilearnings are affected by the variability of cash flows. Any remaining gain orloss is recognized currently in results of operations.

We formally document, designate and assess theeffectiveness of any transactions that receive hedge accounting treatment. Thecash flows of derivative hedging instruments we enter into are generallyexpected to be highly effective in achieving offsetting cash flows attributableto fluctuations in the cash flows of the hedged risk. Changes in the fair valueof agreements designated as derivative hedging instruments are reported aseither an asset or liability in the accompanying consolidated balance sheetswith the associated unrealized gains or losses reflected in accumulated othercomprehensive income. As of June 30, 2004, we had no outstandingderivative hedging instruments. As of June 30, 2003, we had one derivativehedging instrument, with a maturity date in July 2003, designated as ahedge against the purchase of granular urea for a contract value upon the dateof execution of $0.4 million. Such derivative hedging instrument had anunrealized gain of less than $0.1 million as of June 30, 2003 which isincluded in accumulated other comprehensive income in the accompanyingconsolidated balance sheet as of such date. Although derivative hedginginstruments were used throughout 2004 and 2003, no such instruments were outstandingas of June 30, 2004 or December 31, 2003. The amounts recorded inaccumulated other comprehensive income are subsequently reclassified into costof goods sold in the same period in which the underlying hedged transactionsaffect earnings. Such amounts reclassified into cost of goods sold included anet loss of $0.2 million for the three and six months ended June 30, 2004,a net gain of $1.2 million for the three months ended June 30, 2003 and anet gain of $1.4 million for the six months ended June 30, 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 gains or losses for hedge ineffectivenessor due to excluding a portion of the value from measuring effectiveness. Wehave not generally entered into derivatives or other hedging arrangements fortrading 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 such price fluctuations, noassurance can be provided that such instruments will be effective in fullymitigating exposure to these risks, nor can assurance be provided that we willbe successful in passing on pricing increases to our customers.

**Market Risk Sensitive Instruments**

Asdescribed further under the heading, “Liquidity and Capital Resources,” of Part I,Item 2, “Management’s Discussion and Analysis of Financial Condition andResults of Operations,” much of our debt is variable-rate debt and is subjectto fluctuation in interest rates.

Thefollowing table summarizes information about our debt instruments, excludingunamortized premium of $1.0 million on fixed rate debt, as of June 30,2004, that are sensitive to changes in interest 

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rates. The table presents future principal cash flowsand related weighted-average interest rates by expected maturity dates, whichare based on implied forward rates in the yield curve at June 30, 2004(dollars in thousands):
| ** **            | ** ** | **Remainder** | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **There-** | ** ** | ** ** | ** ** | **Fair**  | ** ** |
|-----------------------|------------|---------------|------------|------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-----------|------------|
| **Description**       | ** ** | ** **    | ** ** | **of 2004** | ** ** | **2005**   | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008**   | ** ** | **After**  | ** ** | **Total** | ** ** | **Value** | ** ** |
| Long-term debt:       |       |          |       |             |       |       |       |       |       |       |       |       |       |       |       |      |       |   |   |
| Fixed-rate debt       |       |          | $          | —           |       |       | $          | —     |       | $          | —     |       | $          | —     |       | $         | —     |   | $ | 232,903 |   | $ | 232,903 |   | $ | 241,055 |   |
| Average interest rate |       |          | —     |             |       | —     |       | —     |       | —     |       | —     |       | 9.875      | %          | 9.875     | %          |   |   |
| Variable-rate  debt   |       |          | $          | 3,175            |       |       | $          | 6,351      |       | $          | 6,351      |       | $          | 6,351      |       | $         | 6,351      |   | $ | 373,471 |   | $ | 402,050 |   | $ | 402,050 |   |
|                       |            |               |            |                  |            |            |            |            |            |            |            |            |            |            |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

An increase in ourweighted average variable borrowing rates of 1% would have resulted in anincrease to annual interest expense of approximately $2.8 million for the sixmonths ended June 30, 2004 and $2.0 million for the six months ended June 30,2003.

**ExchangeRate Risk**

The functional currencyfor the majority of our operations is the U.S. dollar. With theacquisition of Nu-Gro, we have become subject to foreign currency translationgains and losses, as the Canadian dollar is the functional currency of Nu-Gro’sCanadian subsidiaries. For translation of the Canadian subsidiaries’ financialstatements, assets and liabilities are translated at the year-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(deficit). Transaction gains or losses on intercompany balances with Nu-Grothat are designated as foreign currency transactions are recorded monthly inselling, general and administrative expenses in the consolidated statement ofoperations. Foreign currency transactions are recorded at the exchange rateprevailing on the transaction date.

The recent weakening ofthe U.S. dollar compared to the Canadian dollar positively impacted ourpurchase price of Nu-Gro between the date we signed the definitive agreementand the date of closing, as well as the net sales and operating income of itssubsidiaries since the date of acquisition. We are also subject to foreignexchange transaction exposure when our Canadian businesses purchase inventoryin U.S. dollars. We do not currently enter into foreign exchange forwardcontracts to mitigate foreign exchange rate risk.

**InflationRisk**

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.**   CONTROLSAND PROCEDURES.

**Evaluation of Disclosure 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 15d-15(e)) as of the endof the period covered by this report, have concluded that as of such date, ourdisclosure controls and procedures are effective in bringing to their attentionon a timely basis material information relating to us and our consolidatedsubsidiaries required to be included in our periodic filings under the ExchangeAct.

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**Internal Control Over Financial Reporting**

Since 2001, we have been in the process of developingan enterprise resource planning, or ERP, system on a company-wide basis. As webelieve is the case in most system changes, the development and eventualimplementation of these systems has necessitated some changes in operatingpolicies and procedures and the related internal controls and their method ofapplication. We believe that throughout this process, we have maintainedinternal accounting control systems that are adequate to provide reasonableassurance that assets are safeguarded from loss or unauthorized use, and whichproduce adequate records for preparation of financial information. Accordingly,there were no changes in our internal control over financial reporting thatoccurred during the most recent fiscal quarter that have materially affected,or are reasonably likely to materially affect, our internal control overfinancial reporting.

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**PART II. OTHER INFORMATION**

**ITEM 1.**   LEGALPROCEEDINGS.

We are involved from timeto time in routine legal matters and other claims incidental to the business.When it appears probably 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, taking intoaccount established reserves and insurance, will not have a material adverseimpact on our consolidated financial position or results of operations.

**ITEM 6.**   EXHIBITS AND REPORTSON FORM 8-K.

a.                 The Exhibit Indexbegins on page 61.

b.                Reports on Form 8-K.

On April 30, 2004, we filed a Current Report on Form 8-Kunder Item 2 to announce the closing of our acquisition of The Nu-GroCorporation, the closing of our new senior credit facility and the repurchaseof all of our outstanding shares of Class A nonvoting preferred stock.

On May 14, 2004, we furnished a Current Report onForm 8-K under Item 12 to announce our earnings for the quarterended March 31, 2004.

On June 15, 2004, we filed a Current Report on Form 8-Kunder Item 5 to announce our execution of a definitive agreement to acquireUnited Pet Group, Inc.

On July 9, 2004, we filed an amended CurrentReport on Form 8-K/A to file the required financial information inconnection with the acquisition of The Nu-Gro Corporation.

On July 13, 2004, we filed a Current Report on Form 8-Kunder Items 9 and 12 to announce our financing plan for the merger with UnitedPet Group, Inc. and preliminary second quarter year-to-date operatingresults.

On August 2, 2004, we filed a Current Report on Form 8-Kunder Item 2 to announce the closing of our merger with United Pet Group, Inc.and the amendment to our senior credit facility.

On August 6, 2004, we furnished a Current Reporton Form 8-K under Item 12 to announce our earnings for the quarterended June 30, 2004.

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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: August 16, 2004 |                          |   |

 

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**EXHIBIT INDEX**
| Exhibit  Number | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                   |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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.*                                                                                                                                                                                 |
| 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) |
| 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 U.S. 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)          Previouslyfiled as an Exhibit to the Registrant’s Form 10-K filed on April 14,2001 and incorporated by reference herein.

(3)       Previouslyfiled as an Exhibit to the Registrant’s Form 10-K filed on March 20,2003 and incorporated by reference herein.

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

*                    Filedor furnished herewith.

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