UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington,
D.C. 20549 FORM 10-Q (Mark One) x
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR
  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For
the quarterly period ended September 30, 2003 OR o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR
  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For
the transition period from to Commission
File Number: 333-76055  
 UNITED INDUSTRIES CORPORATION (Exact name of registrant
as specified in its charter) Delaware
  
  43-1025604(State or other jurisdiction of
  
  (I.R.S. Employerincorporation or organization)
  
  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)
  Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yesx No o Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Act). Yeso  No x. As of November 13, 2003, the registrant had
33,202,731 Class A voting and 33,202,731 Class B nonvoting shares of
common stock outstanding and 37,600 Class A nonvoting shares of preferred
stock outstanding.


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UNITED INDUSTRIES
CORPORATION
QUARTERLY REPORT ON FORM 10-Q
PERIOD ENDED SEPTEMBER 30, 2003 TABLE
OF CONTENTS PagePART I.
  FINANCIAL INFORMATIONItem
  1. Financial Statements (Unaudited)Consolidated Balance Sheets
  as of September 30, 2003 and 2002 and December 31, 2002
  4Consolidated Statements of
  Operations and Comprehensive Income for the Three and Nine Months Ended
  September 30, 2003 and 2002
  5Consolidated Statements of Cash
  Flows for the Nine Months Ended September 30, 2003 and 2002
  6Notes to Consolidated Financial
  Statements
  7Item 2. Managements Discussion and
  Analysis of Financial Condition and Results of Operations
  28Item 3. Quantitative and
  Qualitative Disclosures About Market Risk
  45Item 4. Controls and Procedures
  47PART II. OTHER INFORMATIONItem 1. Legal Proceedings
  48Item 6. Exhibits and Reports on
  Form 8-K
  48Signatures
  49Exhibit Index
  50  2


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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report contains forward-looking
statements. These statements are subject to a number of risks and
uncertainties, many of which are beyond our control. All statements other than
statements of historical facts included in this Quarterly Report, including
statements regarding our strategy, future operations or financial position,
estimated revenues, projected costs, projections, plans and objectives of
management, are forward-looking statements. As may be used in this Quarterly
Report, the words will, believe, plan, may, strategies, goals, anticipate,
indicate, intend, estimate, expect, project and similar expressions
are intended to identify forward-looking statements, although not all
forward-looking statements contain such identifying words. All forward-looking
statements apply only as of the date they were disclosed and are based on our
expectations at that time. We do not undertake any obligation to update or revise
publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. Although we believe that our plans,
intentions and expectations reflected in or suggested by any forward-looking
statements we make in this Quarterly Report are reasonable, we can give no
assurance that such plans, intentions or expectations will be achieved. Our
actual results could differ significantly from the results discussed in any
forward-looking statements contained in this Quarterly Report. Factors that
could cause or contribute to such differences include, without limitation, the
following: ·general
economic and business conditions; ·the
loss or bankruptcy of major customers, suppliers or parties with whom we have a
strategic relationship; ·the
loss of a significant amount of products purchased by major customers; ·weather
conditions and/or historical seasonality; ·our
ability to repay our indebtedness or meet other obligations; ·industry
trends and competition; ·our
ability to manage rapid growth and the integration of acquisitions; ·our
ability to successfully implement our enterprise resource planning, or ERP,
system; ·public
perception regarding the safety of our products; ·governmental
regulations; ·terrorist
attacks or acts of war; ·cost
and availability of raw materials; ·changes
in our business strategy or development plans; ·our
ability to recruit and retain quality personnel; ·availability,
terms and deployment of capital resources; and ·the other risks described in
our filings with the SEC, including our Annual Report on Form 10-K. TRADEMARKS Spectracide®, Spectracide Triazicide,
Spectracide Terminate®, Hot Shot®, Garden Safe, Schultz®,
Rid-a-Bug®, Bag-a-Bug®, Real-Kill®, No-Pest®,
Repel®, Gro Best®, Vigoro®, Sta-Green®
and Bandini® are our trademarks and trade names. We also license
certain Cutter® trademarks from Bayer A.G. and certain Peters®
and Peters Professional® trademarks from The Scotts Company. Other
trademarks and trade names used in this Quarterly Report are the property of
their respective owners. 3


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PART I. FINANCIAL
INFORMATIONItem 1. Financial Statements UNITED INDUSTRIES
CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(Unaudited) September 30,
  
  December 31,2003
  
  2002
  
  2002ASSETSCurrent assets:Cash and cash equivalents
  
  $
  44,122
  
  $
  47,174
  
  
  $
  10,318Accounts receivable, less
  reserves of $3,926 and $4,513 at September 30, 2003 and 2002,
  respectively, and $3,171 at December 31, 2002
  
  56,464
  
  56,112
  
  
  23,321Inventories
  
  67,570
  
  44,000
  
  
  87,762Prepaid expenses and
  other current assets
  
  10,058
  
  6,307
  
  
  11,350Total current assets
  
  178,214
  
  153,593
  
  
  132,751Equipment and leasehold
  improvements, net
  
  34,360
  
  27,785
  
  
  34,218Deferred tax asset
  
  86,266
  
  101,045
  
  
  105,141Goodwill and intangible
  assets, net
  
  96,918
  
  82,724
  
  
  100,868Other assets, net
  
  10,243
  
  12,815
  
  
  13,025Total assets
  
  $
  406,001
  
  $
  377,962
  
  
  $
  386,003LIABILITIES
  AND STOCKHOLDERS DEFICITCurrent liabilities:Current maturities of
  long-term debt and capital lease obligation
  
  $
  1,341
  
  $
  9,530
  
  
  $
  9,665Accounts payable
  
  15,861
  
  21,878
  
  
  27,063Accrued expenses
  
  59,454
  
  52,842
  
  
  45,221Total current liabilities
  
  76,656
  
  84,250
  
  
  81,949Long-term debt, net of
  current maturities
  
  388,096
  
  371,230
  
  
  391,493Capital lease obligation,
  net of current maturities
  
  3,333
  
  3,892
  
  
  3,778Other liabilities
  
  3,199
  
  4,644
  
  
  5,019Total liabilities
  
  471,284
  
  464,016
  
  
  482,239Commitments and contingenciesStockholders deficit:Preferred stock (37,600
  shares of $0.01 par value Class A issued and outstanding, 40,000 shares
  authorized)
  
  
  
  
  
  
  Common stock (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 September 30,
  2003; 33.1 million shares of each issued and outstanding and 37.6 million
  shares of each authorized at September 30, 2002; 33.1 million shares of
  each issued and outstanding and 43.6 million shares of each authorized at
  December 31, 2002)
  
  665
  
  664
  
  
  664Treasury stock
  
  (96
  )
  
  
  
  Warrants and options
  
  11,745
  
  11,888
  
  
  11,745Additional paid-in
  capital
  
  210,806
  
  206,827
  
  
  210,480Accumulated deficit
  
  (259,233
  )
  (273,622
  )
  
  (287,592
  )Common stock subscription
  receivable
  
  (23,363
  )
  (26,071
  )
  
  (25,761
  )Common stock repurchase
  option
  
  (2,636
  )
  (2,636
  )
  
  (2,636
  )Common stock held in
  grantor trust
  
  (2,847
  )
  (2,700
  )
  
  (2,700
  )Loans to executive
  officer
  
  (324
  )
  (404
  )
  
  (404
  )Accumulated other
  comprehensive loss
  
  
  
  
  
  
  (32
  )Total stockholders
  deficit
  
  (65,283
  )
  (86,054
  )
  
  (96,236
  )Total liabilities and stockholders deficit
  
  $
  406,001
  
  $
  377,962
  
  
  $
  386,003  See accompanying notes to consolidated financial statements. 4


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UNITED
INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited) Three Months Ended
  September 30,
  
  Nine Months Ended
  September 30,2003
  
  2002
  
  2003
  
  2002CONSOLIDATED STATEMENTS OF
  OPERATIONS:Net sales before
  promotion expense
  
  $
  112,439
  
  $
  111,372
  
  $
  528,400
  
  $
  471,392Promotion expense
  
  8,420
  
  10,695
  
  39,566
  
  39,188Net sales
  
  104,019
  
  100,677
  
  488,834
  
  432,204Operating costs
  and expenses:Cost of goods sold
  
  64,750
  
  65,209
  
  297,302
  
  274,683Selling, general and administrative expenses
  
  32,195
  
  27,567
  
  109,099
  
  87,143Total operating costs and expenses
  
  96,945
  
  92,776
  
  406,401
  
  361,826Operating income
  
  7,074
  
  7,901
  
  82,433
  
  70,378Interest expense,
  net
  
  8,605
  
  7,386
  
  27,625
  
  24,591Income (loss)
  before income tax expense (benefit)
  
  (1,531
  )
  515
  
  54,808
  
  45,787Income tax
  expense (benefit)
  
  (698
  )
  98
  
  20,827
  
  8,788Net income (loss)
  
  $
  (833
  )
  $
  417
  
  $
  33,981
  
  $
  36,999Preferred stock
  dividends
  
  $
  1,952
  
  $
  1,188
  
  $
  5,622
  
  $
  4,656Net income (loss)
  available to common stockholders
  
  $
  (2,785
  )
  $
  (771
  )
  $
  28,359
  
  $
  32,343CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME:Net income (loss)
  
  $
  (833
  )
  $
  417
  
  $
  33,981
  
  $
  36,999Other comprehensive
  income, net of tax:Gain on interest rate swaps
  
  
  
  
  
  
  
  415Gain on derivative hedging instruments
  
  3
  
  
  
  489
  
  Comprehensive income
  (loss)
  
  $
  (830
  )
  $
  417
  
  $
  34,470
  
  $
  37,414  See accompanying notes to
consolidated financial statements. 5


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UNITED INDUSTRIES
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited) Nine Months Ended
  September 30,2003
  
  2002Cash flows from operating activities:Net income
  
  $
  33,981
  
  $
  36,999Adjustments to reconcile net income to net cash flows
  from operating activities:Depreciation and
  amortization
  
  9,735
  
  8,131Amortization and
  write-off of deferred financing fees
  
  4,747
  
  1,977Deferred income tax
  expense
  
  18,875
  
  8,788Changes in operating assets and liabilities, net of
  effects from acquisition and disposition:Accounts receivable
  
  (34,670
  )
  (7,898
  )Inventories
  
  18,271
  
  18,113Prepaid expenses and
  other current assets
  
  1,280
  
  1,214Other assets
  
  (1,622
  )
  665Accounts payable
  
  (10,968
  )
  (10,865
  )Accrued expenses
  
  8,086
  
  10,546Other operating
  activities, net
  
  (703
  )
  387Net cash flows from
  operating activities
  
  47,012
  
  68,057Cash flows from investing activities:Purchases of equipment
  and leasehold improvements
  
  (6,724
  )
  (3,190
  )Payments for Schultz
  merger, net of cash acquired
  
  
  
  (38,300
  )Proceeds from sale of WPC
  product lines
  
  4,204
  
  Net cash flows used in
  investing activities
  
  (2,520
  )
  (41,490
  )Cash flows from financing activities:Proceeds from issuance of
  senior subordinated notes
  
  86,275
  
  Proceeds from additional
  term debt
  
  
  
  65,000Proceeds from borrowings
  on revolver
  
  40,000
  
  Proceeds from issuance of
  common stock
  
  84
  
  17,500Payments received for
  common stock subscription receivable
  
  2,863
  
  1,250Payments received on
  loans to executive officer
  
  80
  
  Repayment of borrowings
  on term debt
  
  (98,127
  )
  (28,914
  )Repayment of borrowings
  on revolver
  
  (40,000
  )
  (23,450
  )Payments for capital
  lease obligation
  
  (445
  )
  (414
  )Payments for debt
  issuance costs
  
  (2,924
  )
  (3,239
  )Change in cash overdraft
  
  1,506
  
  (7,126
  )Net cash flows from (used
  in) financing activities
  
  (10,688
  )
  20,607Net increase in cash and
  cash equivalents
  
  33,804
  
  47,174Cash and cash
  equivalents, beginning of period
  
  10,318
  
  Cash and cash
  equivalents, end of period
  
  $
  44,122
  
  $
  47,174Noncash financing activities:Preferred stock dividends
  accrued
  
  $
  5,622
  
  $
  4,656Common stock issued in
  Schultz merger
  
  $
  
  
  $
  6,000Common stock issued
  related to Bayer agreements
  
  $
  
  
  $
  30,720Debt assumed in Schultz merger
  
  $
  
  
  $
  20,662  See accompanying notes to consolidated financial statements. 6


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UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except where indicated) (Unaudited) Note 1Description
of Business and Basis of Presentation Operating as Spectrum Brands, 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 insect repellents, fertilizers, growing media and soils under a
variety of brand names. The Companys national value and retail exclusive
brands are targeted toward consumers who want products and packaging that are
comparable or superior to, and at lower prices than, premium price brands,
while certain of its other brands are designed for cost conscious consumers who
want quality products. The Companys products are marketed to mass
merchandisers, home improvement centers, hardware chains, nurseries and garden
centers. As described further in Note 12, the Companys
operations are divided into three business segments: Lawn and Garden, Household
and Contract. The Companys lawn and garden brands include, among others,
Spectracide®, Garden Safe®, Real-Kill® and
No-Pest® in the controls category, as well as Sta-Green®,
Vigoro®, Schultz® and Bandini® brands in the
lawn and garden fertilizer and growing media categories. The Companys
household brands include, among others, Hot Shot®, Cutter®
and Repel®. The Contract segment represents non-core products and
includes various compounds and chemicals such as, among others, cleaning
solutions and automotive products. The accompanying consolidated financial statements
include the accounts and balances of the Company and its wholly owned
subsidiaries. All material intercompany transactions have been eliminated in
consolidation. The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the rules and
regulations of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures typically included in the Companys Annual
Report on Form 10-K have been condensed or omitted for this report. As
such, this report should be read in conjunction with the consolidated financial
statements and accompanying notes in the Companys Annual Report on Form 10-K,
as amended, for the year ended December 31, 2002. Certain amounts in the
2002 consolidated financial statements included herein have been reclassified
to conform with the 2003 presentation, including the reclassification of cash
overdrafts from operating activities to financing activities in the accompanying
consolidated statement of cash flows for the nine months ended September 30,
2002. The accompanying
consolidated financial statements are unaudited. In the opinion of management,
such statements include all adjustments, which consist of only normal recurring
adjustments, necessary for a fair presentation of the results for the periods
presented. Interim results are not necessarily indicative of results for a full
year. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates. 7 UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except where indicated) (Unaudited) Note 2Stock-Based
Compensation The Company
accounts for stock options issued to employees using the intrinsic value method
in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees and applies the disclosure provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation, and SFAS No. 148, Accounting for
Stock-Based CompensationTransition and Disclosure, an amendment of FASB
Statement No. 123. Under APB No. 25 and related interpretations,
compensation expense is recognized using the intrinsic value method for the
difference between the exercise price of the options and the estimated fair
value of the Companys common stock on the date of grant. SFAS No. 123
requires pro forma disclosure of the impact on earnings as if the Company
determined stock-based compensation expense using the fair value method. The
following table presents net income (loss), as reported, stock-based
compensation expense that would have been recorded using the fair value method
and pro forma net income (loss) that would have been reported had the fair
value method been applied: Three Months Ended
  September 30,
  
  Nine Months Ended
  September 30,2003
  
  2002
  
  2003
  
  2002Net income
  (loss), as reported
  
  $
  (833
  )
  $
  417
  
  $
  33,981
  
  $
  36,999Stock-based
  compensation expense using the fair value method, net of tax
  
  368
  
  1,233
  
  1,088
  
  2,098Pro forma net income
  (loss)
  
  $
  (1,201
  )
  $
  (816
  )
  $
  32,893
  
  $
  34,901  During the second quarter
of 2003, 90,000 stock options were exercised at a price of $2.00 per share (not
in thousands). In connection with this transaction, the related stockholder
surrendered 9,569 shares each of Class A and Class B common stock to
the Company, valued at less than $0.1 million in the aggregate based on
the estimated fair value per share as determined by the Companys Board of Directors
on the date of surrender, to satisfy income tax withholding requirements. The
Company recorded the transaction as treasury stock which is presented as a
reduction of stockholders equity in the accompanying consolidated balance
sheet as of September 30, 2003. Note 3Inventories Inventories
consist of the following: September 30,
  
  December 31,2003
  
  2002
  
  2002Raw materials
  
  $
  24,607
  
  $
  16,153
  
  
  $
  27,853Finished goods
  
  48,883
  
  32,242
  
  
  65,750Allowance for
  obsolete and slow-moving inventory
  
  (5,920
  )
  (4,395
  )
  
  (5,841
  )Total
  inventories, net
  
  $
  67,570
  
  $
  44,000
  
  
  $
  87,762  8 UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except where indicated) (Unaudited) Note 4Equipment
and Leasehold Improvements Equipment
and leasehold improvements consist of the following: September 30,
  
  December 31,2003
  
  2002
  
  2002Machinery and
  equipment
  
  $
  35,613
  
  $
  36,137
  
  
  $
  39,609Office furniture,
  equipment and capitalized software
  
  28,622
  
  19,768
  
  
  26,299Transportation
  equipment
  
  6,435
  
  6,245
  
  
  6,313Leasehold
  improvements
  
  3,163
  
  8,645
  
  
  9,512Land and buildings
  
  114
  
  
  
  
  1,09973,947
  
  70,795
  
  
  82,832Accumulated
  depreciation and amortization
  
  (39,587
  )
  (43,010
  )
  
  (48,614
  )Total equipment
  and leasehold improvements, net
  
  $
  34,360
  
  $
  27,785
  
  
  $
  34,218  During the first quarter of 2003, the Company recorded
a write-off of leasehold improvements related to leased office space that was
exited in 2003 and disposed of certain equipment related to a manufacturing
facility previously closed during 2002 with an aggregate gross historical cost
of $10.3 million. No gain or loss was recognized in connection with the
write-off and disposal as the assets were fully depreciated. For the three months ended
September 30, 2003 and 2002 and the year ended December 31, 2002,
depreciation expense was $1.8 million, $2.3 million and
$7.3 million, respectively. For the nine months ended September 30,
2003 and 2002, depreciation expense was $5.2 million and
$6.7 million, respectively. As of September 30, 2003 and 2002 and December 31,
2002, the cost of transportation equipment held under capital lease was
$5.3 million and related accumulated amortization was $4.1 million,
$2.9 million, and $3.2 million, respectively. Note 5Goodwill
and Intangible Assets Goodwill
and intangible assets consist of the following: September 30, 2003
  
  September 30, 2002
  
  December 31, 2002Amortization
  Period
  
  Gross
  Carrying
  Value
  
  Accumulated
  Amortization
  
  Net
  Carrying
  Value
  
  Gross
  Carrying
  Value
  
  Accumulated
  Amortization
  
  Net
  Carrying
  Value
  
  Gross
  Carrying
  Value
  
  Accumulated
  Amortization
  
  Net
  Carrying
  ValueIntangible assets:Trade names
  
  
  20-40
  
  
  $
  61,548
  
  
  $
  (2,558
  )
  
  $
  58,990
  
  $
  52,994
  
  
  $
  (1,413
  )
  
  $
  51,581
  
  $
  64,025
  
  
  $
  (1,918
  )
  
  $
  62,107Customer relationships
  
  
  5-10
  
  
  31,196
  
  
  (4,527
  )
  
  26,669
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Supply agreement
  
  
  7
  
  
  5,694
  
  
  (1,043
  )
  
  4,651
  
  5,694
  
  
  
  
  
  5,694
  
  5,694
  
  
  (894
  )
  
  4,800Other intangible assets
  
  
  25
  
  
  604
  
  
  (172
  )
  
  432
  
  
  
  
  
  
  
  
  
  5,401
  
  
  (52
  )
  
  5,349Total intangible assets
  
  
  
  
  
  $
  99,042
  
  
  $
  (8,300
  )
  
  90,742
  
  $
  58,688
  
  
  $
  (1,413
  )
  
  57,275
  
  $
  75,120
  
  
  $
  (2,864
  )
  
  72,256Goodwill
  
  
  
  
  
  
  
  
  
  
  
  6,176
  
  
  
  
  
  
  
  25,449
  
  
  
  
  
  
  
  28,612Total goodwill and intangible assets, net
  
  
  
  
  
  
  
  
  
  
  
  $
  96,918
  
  
  
  
  
  
  
  $
  82,724
  
  
  
  
  
  
  
  $
  100,868  9 UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except where indicated) (Unaudited) Note 5Goodwill
and Intangible Assets (Continued) On January 1,
2002, the Company adopted SFAS No. 141, Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting and broadens the criteria for recording
intangible assets separately from goodwill. SFAS No. 142, among other
things, eliminates the amortization of goodwill and indefinite-lived intangible
assets and requires them to be tested for impairment at least annually. During
2002, both at adoption and at the end of the year, the Company performed an
impairment analysis of its goodwill. No impairment charges resulted from these
analyses. Prospectively, the Company tests goodwill for impairment annually, or
more frequently as warranted by events or changes in circumstances. During the
year ended December 31, 2002, after giving effect to the purchase price
reallocations described below and a $1.6 million post-acquisition adjustment,
total goodwill in the amount of $1.9 million was recorded in connection
with acquisitions. No amounts were recorded for goodwill during the three or
nine months ended September 30, 2003. Intangible assets include trade names, customer
relationships, a supply agreement and other intangible assets, which are valued
at acquisition through independent appraisals, where material, or using other
valuation methods. Intangible assets are amortized using the straight-line
method over periods ranging from 5 to 40 years. The useful lives of
intangible assets were not revised as a result of the adoption of SFAS No. 142. During the first quarter of 2003, the Company obtained
the final report from an independent third party valuation firm of the assets
acquired and liabilities assumed in its merger with Schultz Company (Schultz)
in May 2002. The valuation report indicated the full value of the purchase
price should be allocated to trade names, customer relationships and other
identifiable intangible assets obtained in the merger with no value ascribed to
goodwill. As a result, the Company reclassified $19.8 million from
goodwill and $4.8 million from other intangible assets to customer
relationships and is amortizing the customer relationships intangible asset
using the straight-line method over four years, the remaining useful life as of
the reclassification date. In addition, during the second quarter of 2003, the
Company recorded a write-off of $0.7 million for inventory acquired in the
merger with Schultz that has since been determined to be excessive. The
write-off was recorded as an adjustment to the allocation of purchase price to
intangible assets. During the third quarter of 2003, the Company obtained
the preliminary report from an independent third party valuation firm of the
assets acquired and liabilities assumed in its acquisition of WPC Brands, Inc.
(WPC Brands) in December 2002. The valuation report indicated the purchase
price should be allocated to trade names and customer relationships obtained in
the acquisition with $2.2 million ascribed to goodwill. As a result, the
Company reclassified $4.8 million from trade names and $2.6 million
from goodwill to customer relationships and certain other tangible assets. The
Company is amortizing the customer relationships intangible asset using the
straight-line method over the remaining useful lives which range from six to
ten years. During May 2003, the Company consummated the sale
of all of the non-core product lines acquired in its acquisition of WPC Brands.
The product lines sold include, among others, water purification tablets,
first-aid kits and fish attractant products. Total assets and operating results
associated with the product lines sold were not significant to the Companys
consolidated financial position or results of operations. No 10 UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except where indicated) (Unaudited) Note 5Goodwill
and Intangible Assets (Continued) gain or loss was recorded as the sale price was
approximately equal to the net book value of the assets and liabilities
included in the sale. The
following table presents the reclassifications and reallocations described: Other
  
  Goodwill by SegmentTrade
  
  Customer
  
  Supply
  
  Intangible
  
  Lawn &
  
  House-Names
  
  Relationships
  
  Agreement
  
  Assets
  
  Garden
  
  hold
  
  Contract
  
  TotalGoodwill and
  intangible assets at December 31, 2002
  
  $
  64,025
  
  
  $
  
  
  
  
  $
  5,694
  
  
  
  $
  5,401
  
  
  $
  21,146
  
  $
  6,496
  
  
  $
  970
  
  
  $
  103,732Purchase price reallocation for Schultz
  
  2,317
  
  
  24,896
  
  
  
  
  
  
  
  (4,797
  )
  
  (15,021
  )
  (3,970
  )
  
  (783
  )
  
  2,642Purchase price
  reallocation for WPC Brands
  
  (4,794
  )
  
  6,300
  
  
  
  
  
  
  
  
  
  
  (1,967
  )
  (605
  )
  
  (90
  )
  
  (1,156
  )Goodwill and
  intangible assets at September 30, 2003
  
  61,548
  
  
  31,196
  
  
  
  5,694
  
  
  
  604
  
  
  $
  4,158
  
  $
  1,921
  
  
  $
  97
  
  
  105,218Accumulated amortization
  
  (2,558
  )
  
  (4,527
  )
  
  
  (1,043
  )
  
  
  (172
  )
  
  
  
  
  
  
  
  
  
  (8,300
  )Goodwill and intangible
  assets, net at September 30, 2003
  
  $
  58,990
  
  
  $
  26,669
  
  
  
  $
  4,651
  
  
  
  $
  432
  
  
  
  
  
  
  
  
  
  
  $
  96,918  For
the three months ended September 30, 2003 and 2002 and the year ended December 31,
2002, aggregate amortization expense related to intangible assets was $2.0
million, $0.3 million and $2.9 million, respectively. For the nine
months ended September 30, 2003 and 2002, aggregate amortization expense
related to intangible assets was $4.5 million and $1.0 million,
respectively. The following table presents estimated amortization expense for
intangible assets during each of the next five years: Year
  
  
  
  AmountRemainder of 2003
  
  $
  2,3332004
  
  9,1642005
  
  9,0822006
  
  9,0122007
  
  3,958  The Companys unaudited consolidated results of
operations on a pro forma basis, as if the merger of Schultz and the
acquisition of WPC Brands had occurred on January 1, 2002, include net
sales of $507.4 million and net income of $39.3 million for the nine
months ended September 30, 2002. This unaudited pro forma financial
information does not purport to be indicative of the consolidated results of operations
that would have been achieved had these transactions been completed as of the
assumed date or which may be obtained in the future. 11


---

UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except where indicated) (Unaudited) Note 6Other
Assets Other
assets consist of the following: September 30,
  
  December 31,2003
  
  2002
  
  2002Deferred
  financing fees
  
  $
  23,394
  
  $
  20,922
  
  
  $
  22,432Accumulated
  amortization
  
  (14,146
  )
  (9,079
  )
  
  (10,382
  )Deferred financing fees, net
  
  9,248
  
  11,843
  
  
  12,050Other
  
  995
  
  972
  
  
  975Total other
  assets, net
  
  $
  10,243
  
  $
  12,815
  
  
  $
  13,025  In connection with its
issuance of 97¤8%
Series C senior subordinated notes in March 2003 and subsequent
exchange for 97¤8%
Series D senior subordinated notes in July 2003 (see Note 9), the
Company recorded $2.2 million of deferred financing fees which are being
amortized over the term of the notes through April 1, 2009. In connection
with the repayment of a portion of its outstanding obligations under the Senior
Credit Facility in March 2003, using proceeds from the issuance of such
notes, the Company recorded a write-off of $1.3 million of previously
deferred financing fees. In connection with the prepayments on Term Loan B of
$23.3 million in June 2003 and $20.0 million in September 2003,
the Company recorded a write-off of $0.5 million of previously deferred
financing fees. All of these charges are included in interest expense in the
accompanying consolidated statements of operations for the three and nine
months ended September 30, 2003, as applicable. Note 7Accrued
Expenses Accrued expenses consist of the following: September 30,
  
  December 31,2003
  
  2002
  
  2002Advertising and
  promotions
  
  $
  21,862
  
  $
  26,112
  
  
  $
  16,401Facilities
  rationalization
  
  477
  
  2,682
  
  
  1,563Interest
  
  12,404
  
  7,406
  
  
  3,777Cash overdraft
  
  
  
  
  
  
  1,506Noncompete
  agreement
  
  350
  
  1,625
  
  
  1,770Preferred stock
  dividends
  
  15,082
  
  7,268
  
  
  9,492Salaries and
  benefits
  
  3,997
  
  2,906
  
  
  4,357Severance costs
  
  258
  
  878
  
  
  869Freight
  
  1,082
  
  1,337
  
  
  441Other
  
  3,942
  
  2,628
  
  
  5,045Total accrued
  expenses
  
  $
  59,454
  
  $
  52,842
  
  
  $
  45,221  12 UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except where indicated) (Unaudited) Note 8Charge
for Facilities and Organizational Rationalization During the fourth
quarter of 2001, the Company recorded a charge of $8.5 million, which
included $5.6 million related to facilities and organizational
rationalization which primarily affected the Companys Lawn and Garden segment
results, $2.7 million of inventory obsolescence recorded in cost of goods
sold and $0.2 million of various costs recorded in selling, general and
administrative expenses. In connection therewith, 85 employees were terminated
and provided severance benefits. Approximately $3.5 million of costs
associated with the facilities and organizational rationalization, which
related primarily to facility exit costs and resultant duplicate rent payments
in 2002, were incurred by December 31, 2002. Amounts remaining in the
facilities and organizational rationalization accrual as of September 30,
2003, and charged against the accrual during the nine months ended September 30,
2003, primarily represent costs associated with the restoration of leased
facilities to their original condition, duplicate rent payments and severance costs
which are anticipated to be incurred by the end of 2003. The
following table presents amounts charged against the facilities and
organizational rationalization accrual: Facilities
  
  Severance
  
  TotalRationalization
  
  Costs
  
  CostsBalance at December 31,
  2002
  
  
  $
  1,563
  
  
  
  $
  379
  
  
  $
  1,942Charges against the accrual
  
  
  (1,086
  )
  
  
  (290
  )
  
  (1,376
  )Balance at
  September 30, 2003
  
  
  $
  477
  
  
  
  $
  89
  
  
  $
  566  Note 9Long-term
Debt Long-term
debt, excluding capital lease obligation, consists of the following: September 30,
  
  December 31,2003
  
  2002
  
  2002Senior Credit Facility:Term Loan A
  
  $
  
  
  $
  32,285
  
  
  $
  28,250Term Loan B
  
  152,767
  
  198,040
  
  
  222,465Revolving Credit Facility
  
  
  
  
  
  
  Senior Subordinated
  Notes:97¤8%
  Series B Senior Subordinated Notes
  
  3,100
  
  150,000
  
  
  150,00097¤8%
  Series D Senior Subordinated Notes,including unamortized premium of $1.1 million
  
  233,026
  
  
  
  
  388,893
  
  380,325
  
  
  400,715Less current
  maturities and short-term borrowings
  
  (797
  )
  (9,095
  )
  
  (9,222
  )Total long-term
  debt, net of current maturities
  
  $
  388,096
  
  $
  371,230
  
  
  $
  391,493  13 UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except where indicated) (Unaudited) Note 9Long-term
Debt (Continued) Senior Credit
Facility The Senior Credit Facility, as amended as of March 14,
2003, is provided by Bank of America, N.A., Morgan Stanley Senior Funding, Inc.
and Canadian Imperial Bank of Commerce and consists of (1) a
$90.0 million revolving credit facility (the Revolving Credit Facility); (2) a
$75.0 million term loan facility (Term Loan A); and (3) a
$240.0 million term loan facility (Term Loan B). The Revolving Credit
Facility and Term Loan A mature on January 20, 2005 and Term Loan B
matures on January 20, 2006. The Revolving Credit Facility is subject to a
clean-down period during which the aggregate amount outstanding under the
Revolving Credit Facility shall not exceed $10.0 million for 30
consecutive days during the period between August 1 and November 30
in each calendar year. As of September 30, 2003 and December 31,
2002, the clean-down period had been completed and no amounts were outstanding
under the Revolving Credit Facility. There were no compensating balance
requirements during each of the periods presented. The amendment to the Senior Credit Facility dated March 14,
2003 permitted the issuance of 97¤8% Series C
senior subordinated notes due 2009 (the Series C Notes) and 97¤8% Series D
senior subordinated notes due 2009 (the Series D Notes). The Company
issued the Series C Notes in March 2003 and offered the Series D
Notes in June and July 2003 in exchange for outstanding Series B
Notes and Series C Notes. This amendment did not change any other existing
covenants of the Senior Credit Facility. The principal amount of Term Loan A was to be repaid
in 24 consecutive quarterly installments commencing June 30, 1999 with a
final installment due January 20, 2005. However, in connection with the
issuance of the Series C Notes, as described below, the Company used a
portion of the proceeds to repay the outstanding balance under Term Loan A. The
principal amount of Term Loan B is to be repaid in 28 consecutive quarterly
installments commencing June 30, 1999 with a final installment due January 20,
2006. The Company used a portion of the proceeds from the issuance of the Series C
Notes to repay $25.9 million of the balance under Term Loan B. The Senior Credit Facility agreement contains
restrictive affirmative, negative and financial covenants. Affirmative and
negative covenants place restrictions on, among other things, levels of
investments, indebtedness, insurance, capital expenditures and dividend
payments. The financial covenants require the maintenance of certain financial
ratios at defined levels. As of and during the nine months ended September 30,
2003 and 2002 and the year ended December 31, 2002, the Company was in
compliance with all covenants. While the Company does not anticipate an event
of non-compliance in the foreseeable future, such an event would require the
Company to request a waiver or an amendment to the Senior Credit Facility.
Amending the Senior Credit Facility could result in changes to the Companys
borrowing capacity or its effective interest rates. Under the agreements,
interest rates on the Revolving Credit Facility, Term Loan A and Term Loan B
range from 1.50% to 4.00% above LIBOR, depending on certain financial ratios.
LIBOR was 1.16% as of September 30, 2003, 1.81% as of September 30,
2002 and 1.38% as of December 31, 2002. Unused commitments under the
Revolving Credit Facility are subject to a 0.5% annual commitment fee. The
interest rate of Term Loan A was 4.67% as of December 31, 2002. The
interest rate of Term Loan B was 5.11% and 6.93% as of September 30, 2003
and 2002, respectively, and 5.42% as of December 31, 2002. 14 UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except where indicated) (Unaudited) Note 9Long-term Debt (Continued) The Senior Credit Facility
may be prepaid in whole or in part at any time without premium or penalty.
During the nine months ended September 30, 2003, the Company made
principal payments of $28.3 million to fully repay Term Loan A and
$69.2 million on Term Loan B, which primarily represent optional principal
prepayments. In connection with these prepayments, the Company recorded
write-offs totaling $1.8 million in previously deferred financing fees
which are included in interest expense in the accompanying consolidated
statement of operations for the nine months ended September 30, 2003. For
the year ended December 31, 2002, the Company made principal payments of
$11.0 million on Term Loan A and $2.0 million on Term Loan B,
which included optional principal prepayments of $6.3 million on Term Loan
A and $1.1 million on Term Loan B. The optional prepayments in the nine
months ended September 30, 2003 were made to remain several quarterly
payments ahead of the regular payment schedule. Under the Senior Credit
Facility, each prepayment may be applied to the next principal repayment
installments. The Company remains several principal payments ahead of schedule
on Term Loan B and intends to pay a full year of principal installments in 2003
in accordance with the terms of the Senior Credit Facility. The carrying amount of the
Companys obligations under the Senior Credit Facility approximates fair value
because the interest rates are based on floating interest rates identified by
reference to market rates. 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 accrues at a rate of 97¤8%
per annum, payable semi-annually on April 1 and October 1. As further
described below, as of September 30, 2003, $3.1 million of the Series B
Notes were outstanding. In March 2003, the
Company issued $85.0 million in aggregate principal amount of 97¤8%
Series C Notes due April 1, 2009 in a private placement. Gross
proceeds from the issuance were $86.3 million and included a premium of
$1.275 million which was being amortized over the term of the Series C
Notes using the effective interest method. Interest on the Series C Notes
accrued at a rate of 97¤8%
per annum, payable semi-annually on April 1 and October 1. Net
proceeds of $84.1 million were used to repay $30.0 million of the
Revolving Credit Facility, fully repay $28.3 million outstanding under
Term Loan A and repay $25.9 million outstanding under Term Loan B. The Series C
Notes were issued with terms substantially similar to the Series B Notes.
In connection with its issuance of the Series C Notes, the Company
recorded $2.2 million of deferred financing fees which are being amortized
over the term of the Series C Notes. As further described below, as of September 30,
2003, there were no Series C Notes outstanding. In May 2003, the Company registered $85.0 million
in aggregate principal amount of 97¤8% Series D
Notes (collectively with the Series B Notes and Series C Notes, the
Senior Subordinated Notes), with terms substantially similar to the Series B
Notes and the Series C Notes, with the U.S. Securities and Exchange
Commission and offered to exchange the Series D Notes for up to 100% of
the Series B Notes and Series C Notes. The exchange offering closed
in July 2003, resulting in $85.0 million, or 100%, of the Series C
Notes being exchanged and $146.9 million, or 98%, of the Series B
Notes being exchanged. As of September 30, 2003, $3.1 million of the Series B
Notes and $233.0 million of the Series D Notes were outstanding. 15 UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except where indicated) (Unaudited) Note 9Long-term Debt (Continued) The
Companys indentures governing all of the outstanding Senior Subordinated Notes
contain a number of significant covenants that could restrict the Companys
ability to: ·incur
more debt; ·pay
dividends or make other distributions; ·issue
stock of subsidiaries; ·make
investments; ·repurchase
stock; ·create
subsidiaries; ·create
liens; ·enter
into transactions with affiliates; ·enter
into sale and leaseback transactions; ·merge
or consolidate; and ·transfer
and sell assets. The ability to comply with these provisions may be
affected by events beyond the Companys control. The breach of any of these
covenants will result in a default under the applicable debt agreement or
instrument and could trigger acceleration of repayment under the applicable
agreements. Any default under the Companys indentures governing the Senior
Subordinated Notes might adversely affect the Companys growth, financial
condition, results of operations and the ability to make payments on the Senior
Subordinated Notes or meet other obligations. The fair value of the Senior Subordinated Notes was
$243.2 million and $149.6 million as of September 30, 2003 and
2002, respectively, and $151.5 million as of December 31, 2002, based
on their quoted market price on such dates. In accordance with the indentures
governing the Senior Subordinated Notes, the Senior Subordinated Notes are
unconditionally and jointly and severally guaranteed by the Companys wholly
owned subsidiaries (see Note 14). Aggregate
future principal payments of long-term debt, excluding unamortized premium and
capital lease obligation, as of September 30, 2003 are as follows: Year
  
  
  
  AmountRemainder of 2003
  
  $
  2004
  
  1,1942005
  
  113,7802006
  
  37,7932007
  
  Thereafter
  
  235,000$
  387,767  16


---

UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except where indicated) (Unaudited) Note 10Contingencies In the normal course of business, the Company is a
party to certain guarantees and financial instruments with off-balance sheet
risk, such as standby letters of credit and indemnifications, which are not
reflected in the accompanying consolidated balance sheets. As of September 30,
2003 and 2002 and December 31, 2002, the Company had $2.5 million,
$1.3 million and $1.9 million, respectively, in standby letters of
credit pledged as collateral to support the lease of its primary distribution
facility in St. Louis, a United States customs bond, certain product purchases,
various workers compensation obligations and transportation equipment. These
agreements mature at various dates through July 2004 and may be renewed as
circumstances warrant. Such financial instruments are valued based on the
amount of exposure under the instruments and the likelihood of performance
being required. In the Companys past experience, no claims have been made
against these financial instruments nor does management expect any losses to
result from them. The Company is the lessee under a number of equipment
and property leases, as described above. It is common in such commercial lease
transactions for the Company to agree to indemnify the lessor for the value of
the property or equipment 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 leased property would be covered by insurance, subject to
deductible amounts. The Company has entered into certain derivative
hedging instruments and other commitments to purchase granular urea during 2003
(see Note 11). The Company is involved
from time to time in routine legal matters and other claims incidental to its
business. When it appears probable in managements judgment that the Company
will incur monetary damages or other costs in connection with such claims and
proceedings, and such costs can be reasonably estimated, liabilities are
recorded in the consolidated financial statements and charges are recorded
against earnings. Management believes that it is remote the resolution of such
routine matters and other incidental claims, taking into account established
reserves and insurance, will have a material adverse impact on the Companys
consolidated financial position, results of operations or liquidity. Note 11Accounting
for Derivative Instruments and Hedging Activities In the normal course of business, the Company is
exposed to fluctuations in interest rates and raw materials prices. The Company
has established policies and procedures that govern the management of these
exposures through the use of derivative hedging instruments, including swap
agreements. The Companys objective in managing its exposure to such
fluctuations is to decrease the volatility of earnings and cash flows
associated with changes in interest rates and certain raw materials prices. To
achieve this objective, the Company periodically enters into swap agreements
with values that change in the opposite direction of anticipated cash flows.
The Company considers the financial stability and credit standing of its
counter parties for such agreements. Derivative instruments related to
forecasted raw materials purchases are considered to hedge future cash flows, and
the effective portion of any gain or loss is included in accumulated other
comprehensive income until earnings are affected by the variability of cash
flows. Any remaining gain or loss is recognized currently in earnings. 17 UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except where indicated) (Unaudited) Note 11Accounting
for Derivative Instruments and Hedging Activities (Continued) While management expects these instruments and
agreements to manage the Companys exposure to such price fluctuations, no
assurance can be provided that the instruments will be effective in fully
mitigating exposure to these risks, nor can assurance be provided that the
Company will be successful in passing on pricing increases to its customers. The Company has formally documented, designated and
assessed the effectiveness of transactions that receive hedge accounting
treatment. The cash flows of the derivative instruments are expected to be
highly effective in achieving offsetting cash flows attributable to
fluctuations in the cash flows of the hedged risk. Changes in the fair value of
agreements designated as derivative hedging instruments are reported as either
an asset or liability in the accompanying consolidated balance sheets with the
associated unrealized gain or loss reflected in accumulated other comprehensive
income. Any amounts included in accumulated other comprehensive income are
subsequently reclassified into cost of goods sold or interest expense, as
applicable, in the same period in which the underlying hedged transactions
affect earnings. As of December 31, 2002, an unrealized loss of less than $0.1 million
related to derivative instruments designated as cash flow hedges was recorded
in accumulated other comprehensive income. No such instruments were outstanding
at September 30, 2003 or 2002. If it becomes probable that a forecasted transaction will
no longer occur, any gain or loss in accumulated other comprehensive income
will be recognized in earnings. The Company has not incurred any gains or
losses for hedge ineffectiveness or due to excluding a portion of the value
from measuring effectiveness. The Company does not enter into derivatives or
other hedging arrangements for trading or speculative purposes. For the nine months ended September 30,
2003, the Company reclassified $1.4 million from accumulated other
comprehensive income into cost of goods sold representing a gain on raw
materials derivative hedging instruments. No such amounts were recorded during
the nine months ended September 30, 2002 or year ended December 31,
2002. Note 12Segment
Information During the third quarter of 2002, the Company began
reporting its operating results using three reportable segments: Lawn and
Garden, Household and Contract. Segments were established primarily by product
type which represents the basis upon which management, including the CEO who is
the chief operating decision maker of the Company, reviews and assesses the
Companys financial performance. The Lawn and Garden segment primarily consists
of dry, granular slow-release lawn fertilizers, lawn fertilizer combination and
lawn control products, herbicides, water-soluble and 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 chains, nurseries and garden
centers. This segment includes, among others, the Companys Spectracide, Garden
Safe, Schultz, Vigoro, Sta-Green, Bandini, Real-Kill and No-Pest brands. The Household segment represents household
insecticides and insect repellents that allow consumers to achieve and maintain
a pest-free household and repel insects. The Household segment includes the
Companys Hot Shot, Cutter and Repel brands, as well as a number of private
label and other products. 18 UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except where indicated) (Unaudited) Note 12Segment
Information (Continued) The Contract segment represents mainly non-core
products, some of which are private label, and includes various compounds and
chemicals such as, among others, cleaning solutions and automotive products. The
table which follows presents certain financial segment information in
accordance with SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, for the three and nine months ended September 30,
2003 and 2002. The accounting policies of the reportable segments are the same
as those described in the summary of significant polices in Note 1 to the
consolidated financial statements included in the Companys Annual Report on Form 10-K/A
for the year ended December 31, 2002, as applicable. The segment financial
information presented includes comparative periods prepared on a basis
consistent with the current year presentation. Three Months Ended
  September 30,
  
  Nine Months Ended
  September 30,2003
  
  2002
  
  2003
  
  2002Net sales:Lawn and Garden
  
  $
  70,216
  
  $
  64,465
  
  $
  358,086
  
  $
  319,044Household
  
  32,563
  
  29,406
  
  121,151
  
  98,057Contract
  
  1,240
  
  6,806
  
  9,597
  
  15,103Total net sales
  
  $
  104,019
  
  $
  100,677
  
  $
  488,834
  
  $
  432,204Operating income (loss):Lawn and Garden
  
  $
  474
  
  $
  1,372
  
  $
  51,066
  
  $
  42,381Household
  
  6,765
  
  5,963
  
  31,186
  
  26,813Contract
  
  (165
  )
  566
  
  181
  
  1,184Total operating income
  
  $
  7,074
  
  $
  7,901
  
  $
  82,433
  
  $
  70,378Operating margin:Lawn and Garden
  
  0.7
  %
  2.1
  %
  14.3
  %
  13.3
  %Household
  
  20.8
  %
  20.3
  %
  25.7
  %
  27.3
  %Contract
  
  -13.3
  %
  8.3
  %
  1.9
  %
  7.8
  %Total operating
  margin
  
  6.8
  %
  7.8
  %
  16.9
  %
  16.3
  %  Operating income represents earnings before net
interest expense and income tax expense. Operating income is the measure of
profitability used by management to assess the Companys financial performance.
Operating margin represents operating income as a percentage of net sales. The majority of the Companys sales are conducted with
customers in the United States. The Companys international sales comprise less
than 2% of total net sales. In addition, no single item comprises more than 10%
of the Companys net sales. For the three months ended September 30, 2003
and 2002, the Companys three largest customers were responsible for 75% and
72% of net sales, respectively. For the nine months ended September 30,
2003 and 2002, the Companys three largest customers were responsible for 71%
and 69% of net sales, respectively. As the Companys assets
support production across all segments, they are managed on an entity-wide
basis at the corporate level and are not recorded or analyzed by segment.
However, goodwill has been 19 UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except where indicated) (Unaudited) Note 12Segment
Information (Continued) allocated to each segment based on the percentage of
sales represented by product lines acquired in the Companys merger with
Schultz and acquisition of WPC Brands in 2002. Substantially all of the Companys
assets are located in the United States. Note 13Shipping
and Handling Costs Certain shipping and
handling costs are included in selling, general and administrative expenses in
the accompanying consolidated statements of operations. These costs primarily
consist of personnel and other general and administrative costs associated with
the Companys distribution facilities, and to a lesser extent, some costs related
to the shipment of goods between the Companys facilities. For the three months
ended September 30, 2003 and 2002 and the year ended December 31,
2002, these costs were $5.0 million, $5.1 million and
$15.7 million, respectively. For the nine months ended September 30,
2003 and 2002, these costs were $17.2 million and $12.2 million,
respectively. The remaining shipping and handling costs comprise those costs
associated with shipping goods to customers and receiving supplies from vendors
and are included in cost of goods sold in the accompanying consolidated
statements of operations. Note 14Financial
Information for Subsidiary Guarantors The Companys Senior Subordinated Notes are
unconditionally and jointly and severally guaranteed by all of the Companys
existing subsidiaries. The Companys subsidiaries are 100% owned by the
Company. The consolidating financial information below is presented as of and
for the three and nine months ended September 30, 2003 and 2002 and has
been prepared in accordance with the requirements for presentation of such
information. The Company believes that separate financial statements concerning
each guarantor subsidiary would not be material to investors and that the
information presented herein provides sufficient detail to determine the nature
of the aggregate financial position, results of operations and cash flows of
the guarantor subsidiaries. The Companys investment in subsidiaries is accounted
for using the equity method of accounting. Earnings of the subsidiaries are reflected
in the respective investment accounts of the parent company accordingly. The
investments in subsidiaries and all intercompany balances and transactions have
been eliminated. Various assumptions and estimates were used to establish the
financial statements of such subsidiaries for the information presented herein. 20


---

UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except where indicated) (Unaudited) Note 14Financial
Information for Subsidiary Guarantors (Continued) UNITED
INDUSTRIES CORPORATION
BALANCE SHEET
AS OF SEPTEMBER 30, 2003
(unaudited) SubsidiaryParent
  
  Guarantors
  
  Eliminations
  
  ConsolidatedASSETSCurrent assets:Cash and cash equivalents
  
  $
  43,382
  
  
  $
  740
  
  
  
  $
  
  
  
  
  $
  44,122Accounts receivable, net
  
  53,946
  
  
  2,518
  
  
  
  
  
  
  
  56,464Inventories
  
  34,783
  
  
  32,787
  
  
  
  
  
  
  
  67,570Prepaid expenses and
  other current assets
  
  9,751
  
  
  307
  
  
  
  
  
  
  
  10,058Total current assets
  
  141,862
  
  
  36,352
  
  
  
  
  
  
  
  178,214Equipment and leasehold
  improvements, net
  
  29,618
  
  
  4,742
  
  
  
  
  
  
  
  34,360Investment in
  subsidiaries
  
  25,499
  
  
  
  
  
  
  (25,499
  )
  
  
  Intercompany assets
  
  67,693
  
  
  5,938
  
  
  
  (73,631
  )
  
  
  Deferred tax asset
  
  85,840
  
  
  426
  
  
  
  
  
  
  
  86,266Goodwill and intangible
  assets, net
  
  46,475
  
  
  50,443
  
  
  
  
  
  
  
  96,918Other assets, net
  
  9,522
  
  
  721
  
  
  
  
  
  
  
  10,243Total assets
  
  $
  406,509
  
  
  $
  98,622
  
  
  
  $
  (99,130
  )
  
  
  $
  406,001LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Current maturities of
  long-term debt and capital lease
  obligation
  
  $
  1,341
  
  
  $
  
  
  
  
  $
  
  
  
  
  $
  1,341Accounts payable
  
  12,295
  
  
  3,566
  
  
  
  
  
  
  
  15,861Accrued expenses
  
  57,590
  
  
  1,864
  
  
  
  
  
  
  
  59,454Total current liabilities
  
  71,226
  
  
  5,430
  
  
  
  
  
  
  
  76,656Long-term debt, net of
  current maturities
  
  388,096
  
  
  
  
  
  
  
  
  
  
  388,096Capital lease obligation,
  net of current maturities
  
  3,333
  
  
  
  
  
  
  
  
  
  
  3,333Other liabilities
  
  3,199
  
  
  
  
  
  
  
  
  
  
  3,199Intercompany liabilities
  
  5,938
  
  
  67,693
  
  
  
  (73,631
  )
  
  
  Total liabilities
  
  471,792
  
  
  73,123
  
  
  
  (73,631
  )
  
  
  471,284Commitments and contingenciesStockholders equity (deficit):Preferred stock
  
  
  
  
  
  
  
  
  
  
  
  
  Common stock
  
  665
  
  
  
  
  
  
  
  
  
  
  665Treasury stock
  
  (96
  )
  
  
  
  
  
  
  
  
  
  (96
  )Warrants and options
  
  11,745
  
  
  
  
  
  
  
  
  
  
  11,745Investment from parent
  
  
  
  
  23,708
  
  
  
  (23,708
  )
  
  
  Additional paid-in
  capital
  
  210,806
  
  
  
  
  
  
  
  
  
  
  210,806Accumulated deficit
  
  (259,233
  )
  
  1,791
  
  
  
  (1,791
  )
  
  
  (259,233
  )Common stock subscription
  receivable
  
  (23,363
  )
  
  
  
  
  
  
  
  
  
  (23,363
  )Common stock repurchase
  option
  
  (2,636
  )
  
  
  
  
  
  
  
  
  
  (2,636
  )Common stock held in
  grantor trust
  
  (2,847
  )
  
  
  
  
  
  
  
  
  
  (2,847
  )Loans to executive
  officer
  
  (324
  )
  
  
  
  
  
  
  
  
  
  (324
  )Total stockholders
  equity (deficit)
  
  (65,283
  )
  
  25,499
  
  
  
  (25,499
  )
  
  
  (65,283
  )Total liabilities and stockholders equity (deficit)
  
  $
  406,509
  
  
  $
  98,622
  
  
  
  $
  (99,130
  )
  
  
  $
  406,001  21


---

UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except where indicated) (Unaudited) Note 14Financial
Information for Subsidiary Guarantors (Continued) UNITED
INDUSTRIES CORPORATION
BALANCE SHEET
AS OF SEPTEMBER 30, 2002
(unaudited) SubsidiaryParent
  
  Guarantor
  
  Eliminations
  
  ConsolidatedASSETSCurrent assets:Cash and cash equivalents
  
  $
  47,174
  
  
  $
  
  
  
  
  $
  
  
  
  
  $
  47,174Accounts receivable, net
  
  49,114
  
  
  6,998
  
  
  
  
  
  
  
  56,112Inventories
  
  32,399
  
  
  11,601
  
  
  
  
  
  
  
  44,000Prepaid expenses and
  other current assets
  
  5,814
  
  
  493
  
  
  
  
  
  
  
  6,307Total current assets
  
  134,501
  
  
  19,092
  
  
  
  
  
  
  
  153,593Equipment and leasehold
  improvements, net
  
  24,391
  
  
  3,394
  
  
  
  
  
  
  
  27,785Investment in
  subsidiaries
  
  1,421
  
  
  
  
  
  
  (1,421
  )
  
  
  Intercompany assets
  
  48,803
  
  
  
  
  
  
  (48,803
  )
  
  
  Deferred tax asset
  
  100,688
  
  
  357
  
  
  
  
  
  
  
  101,045Goodwill and intangible
  assets, net
  
  43,395
  
  
  39,329
  
  
  
  
  
  
  
  82,724Other assets, net
  
  12,480
  
  
  335
  
  
  
  
  
  
  
  12,815Total assets
  
  $
  365,679
  
  
  $
  62,507
  
  
  
  $
  (50,224
  )
  
  
  $
  377,962LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Current maturities of
  long-term debt and capital lease obligation
  
  $
  9,530
  
  
  $
  
  
  
  
  $
  
  
  
  
  $
  9,530Accounts payable
  
  16,240
  
  
  5,638
  
  
  
  
  
  
  
  21,878Accrued expenses
  
  50,167
  
  
  2,675
  
  
  
  
  
  
  
  52,842Total current liabilities
  
  75,937
  
  
  8,313
  
  
  
  
  
  
  
  84,250Long-term debt, net of
  current maturities
  
  371,230
  
  
  
  
  
  
  
  
  
  
  371,230Capital lease obligation,
  net of current maturities
  
  3,892
  
  
  
  
  
  
  
  
  
  
  3,892Other liabilities
  
  674
  
  
  3,970
  
  
  
  
  
  
  
  4,644Intercompany liabilities
  
  
  
  
  48,803
  
  
  
  (48,803
  )
  
  
  Total liabilities
  
  451,733
  
  
  61,086
  
  
  
  (48,803
  )
  
  
  464,016Commitments and contingenciesStockholders equity (deficit):Preferred stock
  
  
  
  
  
  
  
  
  
  
  
  
  Common stock
  
  664
  
  
  
  
  
  
  
  
  
  
  664Warrants and options
  
  11,888
  
  
  
  
  
  
  
  
  
  
  11,888Investment from parent
  
  
  
  
  981
  
  
  
  (981
  )
  
  
  Additional paid-in
  capital
  
  206,827
  
  
  
  
  
  
  
  
  
  
  206,827Accumulated deficit
  
  (273,622
  )
  
  440
  
  
  
  (440
  )
  
  
  (273,622
  )Common stock subscription
  receivable
  
  (26,071
  )
  
  
  
  
  
  
  
  
  
  (26,071
  )Common stock repurchase
  option
  
  (2,636
  )
  
  
  
  
  
  
  
  
  
  (2,636
  )Common stock held in
  grantor trust
  
  (2,700
  )
  
  
  
  
  
  
  
  
  
  (2,700
  )Loans to executive
  officer
  
  (404
  )
  
  
  
  
  
  
  
  
  
  (404
  )Total stockholders
  equity (deficit)
  
  (86,054
  )
  
  1,421
  
  
  
  (1,421
  )
  
  
  (86,054
  )Total liabilities and stockholders equity (deficit)
  
  $
  365,679
  
  
  $
  62,507
  
  
  
  $
  (50,224
  )
  
  
  $
  377,962  22


---

UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except where indicated) (Unaudited) Note 14Financial
Information for Subsidiary Guarantors (Continued) UNITED INDUSTRIES
CORPORATION
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003(unaudited) SubsidiaryParent
  
  Guarantors
  
  Eliminations
  
  ConsolidatedNet sales before
  promotion expense
  
  $
  102,169
  
  
  $
  25,186
  
  
  
  $
  (14,916
  )
  
  
  $
  112,439Promotion expense
  
  7,864
  
  
  556
  
  
  
  
  
  
  
  8,420Net sales
  
  94,305
  
  
  24,630
  
  
  
  (14,916
  )
  
  
  104,019Operating costs and
  expenses:Cost of goods sold
  
  56,989
  
  
  24,471
  
  
  
  (16,710
  )
  
  
  64,750Selling, general and administrative expenses
  
  27,682
  
  
  2,719
  
  
  
  1,794
  
  
  
  32,195Equity (income) loss in subsidiaries
  
  1,677
  
  
  
  
  
  
  (1,677
  )
  
  
  Total operating costs and expenses
  
  86,348
  
  
  27,190
  
  
  
  (16,593
  )
  
  
  96,945Operating income
  (loss)
  
  7,957
  
  
  (2,560
  )
  
  
  1,677
  
  
  
  7,074Interest expense,
  net
  
  8,464
  
  
  141
  
  
  
  
  
  
  
  8,605Income (loss)
  before income tax expense (benefit)
  
  (507
  )
  
  (2,701
  )
  
  
  1,677
  
  
  
  (1,531
  )Income tax
  expense (benefit)
  
  326
  
  
  (1,024
  )
  
  
  
  
  
  
  (698
  )Net income (loss)
  
  $
  (833
  )
  
  $
  (1,677
  )
  
  
  $
  1,677
  
  
  
  $
  (833
  )  UNITED
INDUSTRIES CORPORATION
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002(unaudited) SubsidiaryParent
  
  Guarantor
  
  Eliminations
  
  ConsolidatedNet sales before
  promotion expense
  
  $
  96,097
  
  
  $
  15,275
  
  
  
  $
  
  
  
  
  $
  111,372Promotion expense
  
  10,017
  
  
  678
  
  
  
  
  
  
  
  10,695Net sales
  
  86,080
  
  
  14,597
  
  
  
  
  
  
  
  100,677Operating costs and
  expenses:Cost of goods sold
  
  52,946
  
  
  12,263
  
  
  
  
  
  
  
  65,209Selling, general and administrative expenses
  
  24,896
  
  
  2,671
  
  
  
  
  
  
  
  27,567Equity (income) loss in subsidiaries
  
  248
  
  
  
  
  
  
  (248
  )
  
  
  Total operating costs and expenses
  
  78,090
  
  
  14,934
  
  
  
  (248
  )
  
  
  92,776Operating income
  (loss)
  
  7,990
  
  
  (337
  )
  
  
  248
  
  
  
  7,901Interest expense,
  net
  
  7,386
  
  
  
  
  
  
  
  
  
  
  7,386Income (loss)
  before income tax expense
  
  604
  
  
  (337
  )
  
  
  248
  
  
  
  515Income tax
  expense (benefit)
  
  187
  
  
  (89
  )
  
  
  
  
  
  
  98Net income (loss)
  
  $
  417
  
  
  $
  (248
  )
  
  
  $
  248
  
  
  
  $
  417  23


---

UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except where indicated) (Unaudited) Note 14Financial
Information for Subsidiary Guarantors (Continued) UNITED
INDUSTRIES CORPORATION
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(unaudited) SubsidiaryParent
  
  Guarantors
  
  Eliminations
  
  ConsolidatedNet sales before
  promotion expense
  
  $
  440,691
  
  
  $
  177,457
  
  
  
  $
  (89,748
  )
  
  
  $
  528,400Promotion expense
  
  36,173
  
  
  3,393
  
  
  
  
  
  
  
  39,566Net sales
  
  404,518
  
  
  174,064
  
  
  
  (89,748
  )
  
  
  488,834Operating costs and
  expenses:Cost of goods sold
  
  232,263
  
  
  152,234
  
  
  
  (87,195
  )
  
  
  297,302Selling, general and administrative expenses
  
  95,623
  
  
  16,029
  
  
  
  (2,553
  )
  
  
  109,099Equity (income) loss in subsidiaries
  
  (3,331
  )
  
  
  
  
  
  3,331
  
  
  
  Total operating costs and expenses
  
  324,555
  
  
  168,263
  
  
  
  (86,417
  )
  
  
  406,401Operating income
  (loss)
  
  79,963
  
  
  5,801
  
  
  
  (3,331
  )
  
  
  82,433Interest expense,
  net
  
  27,197
  
  
  428
  
  
  
  
  
  
  
  27,625Income (loss)
  before income tax expense
  
  52,766
  
  
  5,373
  
  
  
  (3,331
  )
  
  
  54,808Income tax
  expense
  
  18,785
  
  
  2,042
  
  
  
  
  
  
  
  20,827Net income (loss)
  
  $
  33,981
  
  
  $
  3,331
  
  
  
  $
  (3,331
  )
  
  
  $
  33,981  UNITED
INDUSTRIES CORPORATION
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(unaudited) SubsidiaryParent
  
  Guarantor
  
  Eliminations
  
  ConsolidatedNet sales before
  promotion expense
  
  $
  435,219
  
  
  $
  36,173
  
  
  
  $
  
  
  
  
  $
  471,392Promotion expense
  
  37,844
  
  
  1,344
  
  
  
  
  
  
  
  39,188Net sales
  
  397,375
  
  
  34,829
  
  
  
  
  
  
  
  432,204Operating costs and
  expenses:Cost of goods sold
  
  246,010
  
  
  28,673
  
  
  
  
  
  
  
  274,683Selling, general and administrative expenses
  
  81,541
  
  
  5,602
  
  
  
  
  
  
  
  87,143Equity (income) loss in subsidiaries
  
  (440
  )
  
  
  
  
  
  440
  
  
  
  Total operating costs and expenses
  
  327,111
  
  
  34,275
  
  
  
  440
  
  
  
  361,826Operating income
  (loss)
  
  70,264
  
  
  554
  
  
  
  (440
  )
  
  
  70,378Interest expense,
  net
  
  24,582
  
  
  9
  
  
  
  
  
  
  
  24,591Income (loss)
  before income tax expense
  
  45,682
  
  
  545
  
  
  
  (440
  )
  
  
  45,787Income tax
  expense
  
  8,683
  
  
  105
  
  
  
  
  
  
  
  8,788Net income (loss)
  
  $
  36,999
  
  
  $
  440
  
  
  
  $
  (440
  )
  
  
  $
  36,999  24


---

UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except where indicated) (Unaudited) Note 14Financial
Information for Subsidiary Guarantors (Continued) UNITED
INDUSTRIES CORPORATION
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(unaudited) SubsidiaryParent
  
  Guarantors
  
  Eliminations
  
  ConsolidatedCash flows from operating activities:Net income (loss)
  
  $
  33,981
  
  
  $
  3,331
  
  
  
  $
  (3,331
  )
  
  
  $
  33,981Adjustments to reconcile net income (loss) to net
  cash flows from operating activities:Depreciation and
  amortization
  
  3,945
  
  
  5,790
  
  
  
  
  
  
  
  9,735Amortization of deferred
  financing fees
  
  4,747
  
  
  
  
  
  
  
  
  
  
  4,747Deferred income tax
  expense
  
  18,518
  
  
  357
  
  
  
  
  
  
  
  18,875Equity (income) loss in
  subsidiaries
  
  (3,331
  )
  
  
  
  
  
  3,331
  
  
  
  Changes in operating assets and liabilities, net of
  effects from disposition:Accounts receivable
  
  52,750
  
  
  2,312
  
  
  
  (89,748
  )
  
  
  (34,686
  )Inventories
  
  (76,221
  )
  
  7,297
  
  
  
  87,195
  
  
  
  18,271Prepaid expenses and
  other current assets
  
  (218
  )
  
  1,498
  
  
  
  
  
  
  
  1,280Other assets
  
  (3,871
  )
  
  3,222
  
  
  
  
  
  
  
  (649
  )Accounts payable
  
  1,349
  
  
  (12,167
  )
  
  
  
  
  
  
  (10,818
  )Accrued expenses
  
  12,131
  
  
  (4,012
  )
  
  
  
  
  
  
  8,119Other operating
  activities, net
  
  (4,978
  )
  
  582
  
  
  
  2,553
  
  
  
  (1,843
  )Net cash flows from
  operating activities
  
  38,802
  
  
  8,210
  
  
  
  
  
  
  
  47,012Cash flows from investing activities:Purchases of equipment
  and leasehold improvements
  
  (6,724
  )
  
  
  
  
  
  
  
  
  
  (6,724
  )Proceeds from sale of WPC
  product lines
  
  4,204
  
  
  
  
  
  
  
  
  
  
  4,204Net cash flows used in
  investing activities
  
  (2,520
  )
  
  
  
  
  
  
  
  
  
  (2,520
  )Cash flows from financing activities:Proceeds from issuance of
  senior subordinated notes
  
  86,275
  
  
  
  
  
  
  
  
  
  
  86,275Proceeds from borrowings
  on revolver
  
  40,000
  
  
  
  
  
  
  
  
  
  
  40,000Proceeds from issuance of
  common stock
  
  84
  
  
  
  
  
  
  
  
  
  
  84Payments received for
  common stock subscription receivable
  
  2,863
  
  
  
  
  
  
  
  
  
  
  2,863Payments received on
  loans to executive officer
  
  80
  
  
  
  
  
  
  
  
  
  
  80Repayment of borrowings
  on revolver and other debt
  
  (138,572
  )
  
  
  
  
  
  
  
  
  
  (138,572
  )Payments for debt
  issuance costs
  
  (2,924
  )
  
  
  
  
  
  
  
  
  
  (2,924
  )Change in cash overdraft
  
  1,506
  
  
  
  
  
  
  
  
  
  
  1,506Other financing and
  intercompany activities
  
  7,597
  
  
  (7,597
  )
  
  
  
  
  
  
  Net cash flows from (used
  in) financing
  activities
  
  (3,091
  )
  
  (7,597
  )
  
  
  
  
  
  
  (10,688
  )Net increase in cash and
  cash equivalents
  
  33,191
  
  
  613
  
  
  
  
  
  
  
  33,804Cash and cash
  equivalents, beginning of period
  
  10,191
  
  
  127
  
  
  
  
  
  
  
  10,318Cash and cash equivalents, end of period
  
  $
  43,382
  
  
  $
  740
  
  
  
  $
  
  
  
  
  $
  44,122  25


---

UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except where indicated) (Unaudited) Note 14Financial
Information for Subsidiary Guarantors (Continued) UNITED
INDUSTRIES CORPORATION
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(unaudited) SubsidiaryParent
  
  Guarantor
  
  Eliminations
  
  ConsolidatedCash flows from operating
  activities:Net income (loss)
  
  $
  36,999
  
  
  $
  440
  
  
  
  $
  (440
  )
  
  
  $
  36,999Adjustments to
  reconcile net income (loss) to net cash flows from (used in) operating
  activities:Depreciation and amortization
  
  7,587
  
  
  544
  
  
  
  
  
  
  
  8,131Amortization of deferred financing fees
  
  1,977
  
  
  
  
  
  
  
  
  
  
  1,977Deferred income tax expense
  
  8,788
  
  
  
  
  
  
  
  
  
  
  8,788Equity (income) loss in subsidiaries
  
  (440
  )
  
  
  
  
  
  440
  
  
  
  Changes in
  operating assets and liabilities, net of effects from acquisition:Accounts receivable
  
  (27,529
  )
  
  19,631
  
  
  
  
  
  
  
  (7,898
  )Inventories
  
  16,693
  
  
  1,420
  
  
  
  
  
  
  
  18,113Prepaid expenses and other current assets
  
  677
  
  
  537
  
  
  
  
  
  
  
  1,214Other assets
  
  38,626
  
  
  (37,961
  )
  
  
  
  
  
  
  665Accounts payable
  
  (94
  )
  
  (10,771
  )
  
  
  
  
  
  
  (10,865
  )Accrued expenses
  
  31,925
  
  
  (21,379
  )
  
  
  
  
  
  
  10,546Other operating activities, net
  
  (15
  )
  
  402
  
  
  
  
  
  
  
  387Net cash flows from (used in) operating
  activities
  
  115,194
  
  
  (47,137
  )
  
  
  
  
  
  
  68,057Cash flows from
  investing activities:Purchases of equipment and leasehold improvements
  
  (2,641
  )
  
  (549
  )
  
  
  
  
  
  
  (3,190
  )Payments for Schultz acquisition, net of cash
  acquired
  
  (38,300
  )
  
  
  
  
  
  
  
  
  
  (38,300
  )Net cash flows used in investing activities
  
  (40,941
  )
  
  (549
  )
  
  
  
  
  
  
  (41,490
  )Cash flows from
  financing activities:Proceeds from additional debt
  
  65,000
  
  
  
  
  
  
  
  
  
  
  65,000Proceeds from issuance of common stock
  
  17,500
  
  
  
  
  
  
  
  
  
  
  17,500Repayment of borrowings on revolver and other debt
  
  (52,778
  )
  
  
  
  
  
  
  
  
  
  (52,778
  )Payments received for common stock subscription
  receivable
  
  1,250
  
  
  
  
  
  
  
  
  
  
  1,250Payments for debt issuance costs
  
  (3,239
  )
  
  
  
  
  
  
  
  
  
  (3,239
  )Repayment on cash overdraft
  
  (7,126
  )
  
  
  
  
  
  
  
  
  
  (7,126
  )Other financing and intercompany activities
  
  (47,686
  )
  
  47,686
  
  
  
  
  
  
  
  Net cash flows from (used in) financing activities
  
  (27,079
  )
  
  47,686
  
  
  
  
  
  
  
  20,607Net increase in
  cash and cash equivalents
  
  47,174
  
  
  
  
  
  
  
  
  
  
  47,174Cash and cash
  equivalents, beginning of period
  
  
  
  
  
  
  
  
  
  
  
  
  Cash and cash
  equivalents, end of period
  
  $
  47,174
  
  
  $
  
  
  
  
  $
  
  
  
  
  $
  47,174  26 UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except where indicated) (Unaudited)  Note 15Recently
Issued Accounting Standards In April 2003, the Financial Accounting Standards
Board (FASB) issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. SFAS No. 149 is
effective for contracts entered into or modified after September 30, 2003
and for hedging relationships designated after September 30, 2003. The
provisions of this Statement that relate to Statement 133 implementation issues
that have been effective for fiscal quarters that began prior to June 15,
2003, should continue to be applied in accordance with their respective
effective dates. The adoption of SFAS No. 149 will not have a material
impact on the Companys consolidated financial statements. In May 2003, the FASB
issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This statement establishes
standards for the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity and requires
the classification of such financial instruments as a liability (or an asset in
certain circumstances). Many of those instruments were previously permitted to
be classified as equity. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and is otherwise effective at
the beginning of the first interim period beginning after June 15, 2003,
except for mandatorily redeemable financial instruments of nonpublic entities.
The adoption of SFAS No. 150 will not have a material impact on the
Companys consolidated financial statements. Note 16Subsequent
Event On October 22, 2003, the Company gave notice regarding
the termination of the In-Store Services Agreement, as amended (the Agreement),
between it and Bayer Corporation and Bayer Advanced, L.L.C. (together referred
to herein as Bayer). Upon termination of the Agreement, which will become
effective in December 2003, the Company will no longer be obligated to perform
certain merchandising services for Bayer. Accordingly, the Companys remaining
liability, which totaled approximately $0.7 million as of September 30,
2003, will be fully amortized in the fourth quarter of 2003 and reflected in
other income in the consolidated statement of operations. Also following
termination of the Agreement, the Company will have 365 days to exercise an
option to repurchase all of its stock previously issued to Bayer. 27


---

Item 2.Managements
Discussion and Analysis of Financial Condition and Results of Operations The discussion and
analysis of our consolidated financial condition and results of operations
included herein should be read in conjunction with our historical financial
information included in the consolidated financial statements and the related
notes thereto contained elsewhere in this Quarterly Report. Future results
could differ materially from those discussed below for many reasons, including
the risks discussed elsewhere in this Quarterly Report and in our Annual Report
filed on Form 10-K, as amended, for the year ended December 31, 2002. Overview Operating as
Spectrum Brands, we are majority owned by UIC Holdings, L.L.C. and are the
leading manufacturer and marketer of value-oriented products for the consumer
lawn and garden care and insect control markets in the United States. Under a
variety of brand names, we manufacture and market one of the broadest lines of
products in the industry, including herbicides and indoor and outdoor
insecticides, as well as insect repellents, fertilizers, growing media and
soils. Our operations are divided into three business segments: Lawn and
Garden, Household and Contract. We believe that the key growth factors for the
$2.8 billion consumer lawn and garden and $0.9 billion household
insecticide and repellents markets in the United States include: ·the
aging of the United States population because consumers over the age of
forty-five represent the largest segment of lawn and garden care product users
and typically enjoy more leisure time and higher levels of discretionary income
than the general population; ·growth
in the home improvement center and mass merchandiser channels; and ·shifting
consumer preferences toward value-oriented products. We do not believe that our
historical financial condition and results of operations are accurate
indicators of future results because of certain significant past events. Those
events include merger and acquisition activities, strategic transactions and
equity and debt financing transactions over the last several years.
Furthermore, our sales are highly seasonal in nature and are susceptible to
weather conditions that vary from year to year. For more information, see the
section entitled Certain Trends and Uncertainties which follows. Critical Accounting
Policies While all of the
significant accounting policies are important to our consolidated financial
statements, some of these policies may be viewed as being critical. Such
policies are those that are both most important to the portrayal of our
financial condition and require our most difficult, subjective or complex
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
our consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. We base our estimates and assumptions on
historical experience and various other factors that are believed to be
reasonable under the circumstances. Actual results could differ from these
estimates and assumptions. We believe our most critical accounting policies are
as follows: Revenue Recognition.Net
sales represent gross sales less any applicable customer discounts from list
price, customer sales returns and promotion expense through cooperative
programs with our customers. The provision for customer returns is based on
historical sales returns and analysis of credit memos and other relevant
information. If the historical or other data used to develop these estimates do
not properly reflect future returns, net sales may require adjustment. Sales
reductions related to customer returns were $3.5 million for the three
months ended September 30, 2003, $2.3 million for the three months
ended September 30, 2002, $10.6 million for the nine months ended September 30,
2003 and $4.5 million for the 28 nine
months ended September 30, 2002. Amounts included in accounts receivable
reserves for sales returns were $2.7 million as of September 30,
2003, $3.3 million as of September 30, 2002 and $2.0 million as
of December 31, 2002. Inventories.Inventories
are reported at the lower of cost or market. Cost is determined using a
standard costing system that approximates the first-in, first-out method and
includes raw materials, direct labor and overhead. An allowance for potentially
obsolete or slow-moving inventory is recorded based on our analysis of
inventory levels and future sales forecasts. In the event that our estimates of
future usage and sales differ from actual results, the allowance for obsolete
or slow-moving inventory may be adjusted. Amounts recorded for potentially
obsolete or slow-moving inventory were decreased by $0.5 million for the
three months ended September 30, 2003, reduced by $0.2 million for
the three months ended September 30, 2002, increased by $0.1 million
for the nine months ended September 30, 2003 and increased by
$1.7 million for the nine months ended September 30, 2002. The
allowance for potentially obsolete or slow-moving inventory was
$5.9 million as of September 30, 2003, $4.4 million as of September 30,
2002 and $5.8 million as of December 31, 2002. Promotion Expense.We
advertise and promote our products through cooperative programs with our
customers. Advertising and promotion costs are expensed as incurred, although
costs incurred during interim periods are generally expensed ratably in
relation to revenues. We develop an estimate of the amount of costs that have
been incurred by the retailers under our cooperative programs based on an
analysis of specific programs offered to retailers and historical information.
Actual costs incurred may differ significantly from our estimates if factors
such as the level of participation and success of the retailers programs or
other conditions differ from our expectations. Promotion expense, including
cooperative programs with customers, is recorded as a reduction of sales and
was $8.4 million for the three months ended September 30, 2003,
$10.7 million for the three months ended September 30, 2002,
$39.6 million for the nine months ended September 30, 2003 and
$39.2 million for the nine months ended September 30, 2002. Accrued
advertising and promotion expense was $21.9 million as of September 30,
2003, $26.1 million as of September 30, 2002 and $16.4 million
as of December 31, 2002. In addition, we advertise and promote our
products through national and regional media separately from promotions with
customers. These costs are included in selling, general and administrative
expenses in our consolidated statements of operations and were
$2.8 million for the three months ended September 30, 2003,
$1.0 million for the three months ended September 30, 2002,
$10.7 million for the nine months ended September 30, 2003 and
$3.9 million for the nine months ended September 30, 2002. Income Taxes.Income
taxes are accounted for under the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial reporting basis
and the tax basis of assets and liabilities at enacted tax rates expected to be
in effect when such amounts are recovered or settled. Judgment is required to
determine income tax expense, deferred tax assets, and any related valuation
allowance, and deferred tax liabilities. We have recorded a valuation allowance
of $104.1 million as of September 30, 2003 due to uncertainties
related to the ability to utilize some of the deferred tax assets, primarily
consisting of certain net operating loss carryforwards that were generated in
1999 through 2002 and deductible goodwill recorded in connection with our
recapitalization in 1999. The valuation allowance is based on our estimates of
future taxable income by jurisdiction in which the deferred tax assets will be
recoverable. We generated net operating
losses for tax purposes for each of the years 1999 through 2002. Our current
estimates indicate that we might possibly generate taxable income for 2003. If
we achieve such results, 2003 would be the first year that taxable income would
be generated since our recapitalization in 1999. In conjunction with the
development of our budget for 2004 and beyond, which will occur during the
fourth quarter of 2003, we may determine the valuation allowance will need to
be reduced or eliminated. Any adjustment to the valuation allowance could
materially impact our consolidated financial position and 29 results
of operations by significantly increasing total assets, stockholders equity,
income tax benefit and net income. In addition, beginning in 2003 our effective
tax rate is 38%, absent any reduction of the valuation allowance that may
occur, as previously described. Despite the increase in our effective tax rate
from 19% in 2002, approximately 95% of our income tax expense is deferred,
requiring no significant cash payments for the foreseeable future. Goodwill and Other Intangible Assets.We
have acquired intangible assets or made acquisitions in the past that resulted
in the recording of goodwill and other intangible assets, including our merger
with Schultz Company in May 2002 and our acquisition of WPC Brands, Inc.
in December 2002. Effective in 2002, goodwill is no longer amortized and
is subject to impairment testing at least annually. We evaluate the
recoverability of long-lived assets, including goodwill and other intangible
assets, for impairment when events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Such events or changes
in circumstances could include, among others, such factors as changes in
technological advances, fluctuations in the fair value of such assets and
adverse changes in relationships with customers and vendors. If a review
indicates that the carrying value of goodwill and other intangible assets are
not recoverable, the carrying values of such assets are reduced to their
estimated fair value, thereby resulting in the recognition of an impairment
loss. Recent DevelopmentsStrategic
Relationship with Bayer On October 22, 2003,
we gave notice regarding the termination of the In-Store Services Agreement, as
amended (the Agreement), between us and Bayer Corporation and Bayer Advanced,
L.L.C. (together referred to herein as Bayer). Upon termination of the
Agreement, which will become effective in December 2003, we will no longer be
obligated to perform certain merchandising services for Bayer. Accordingly, our
remaining liability, which totaled approximately $0.7 million as of September 30,
2003, will be fully amortized in the fourth quarter of 2003 and reflected in
other income in the consolidated statement of operations. Also following
termination of the Agreement, we will have 365 days to exercise an option to
repurchase all of our stock previously issued to Bayer. Results of
Operations During the third
quarter of 2002, we began reporting operating results using three reportable
segments, as follows: ·Lawn and Garden(67.5% of third quarter 2003 net sales and 64.0% of
third quarter 2002 net sales). This segment includes dry, granular
slow-release lawn fertilizers, lawn fertilizer combined with lawn control
products, herbicides, water-soluble and controlled-release garden and indoor
plant foods, plant care products, potting soils and other growing media
products, and insecticide products. This segment includes, among others, our
Spectracide, Garden Safe, Real-Kill, No-Pest, Sta-Green, Vigoro, Schultz and
Bandini brands. ·Household(31.3% of third quarter 2003 net sales and 29.2% of
third quarter 2002 net sales). This segment includes household
insecticides and insect repellents that allow consumers to repel insects and
maintain a pest-free household. This segment includes our Hot Shot, Cutter and
Repel brands, as well as a number of private label and other products. ·Contract(1.2% of third quarter 2003 net sales and 6.8% of
third quarter 2002 net sales). This segment represents mainly
non-core products, some of which are private label, and includes various
compounds and chemicals such as, among others, cleaning solutions and
automotive products. All prior year results and discussion which follow
reflect the segments described above. 30


---

Three Months Ended September 30,
2003 Compared to Three Months Ended September 30, 2002 The
following table presents amounts and the percentages of net sales that items in
the accompanying consolidated statements of operations constitute for the
periods presented: Three Months Ended September 30,2003
  
  2002Net sales by segment:Lawn and Garden
  
  $
  70,216
  
  67.5
  %
  $
  64,465
  
  64.0
  %Household
  
  32,563
  
  31.3
  %
  29,406
  
  29.2
  %Contract
  
  1,240
  
  1.2
  %
  6,806
  
  6.8
  %Total net sales
  
  104,019
  
  100.0
  %
  100,677
  
  100.0
  %Operating costs and
  expenses:Cost of goods sold
  
  64,750
  
  62.2
  %
  65,209
  
  64.8
  %Selling, general and administrative expenses
  
  32,195
  
  31.0
  %
  27,567
  
  27.4
  %Total operating costs and expenses
  
  96,945
  
  93.2
  %
  92,776
  
  92.2
  %Operating income (loss)
  by segment:Lawn and Garden
  
  474
  
  0.5
  %
  1,372
  
  1.4
  %Household
  
  6,765
  
  6.4
  %
  5,963
  
  5.9
  %Contract
  
  (165
  )
  -0.1
  %
  566
  
  0.5
  %Total operating income
  
  7,074
  
  6.8
  %
  7,901
  
  7.8
  %Interest expense,
  net
  
  8,605
  
  8.3
  %
  7,386
  
  7.3
  %Income (loss)
  before income tax expense (benefit)
  
  (1,531
  )
  -1.5
  %
  515
  
  0.5
  %Income tax
  expense (benefit)
  
  (698
  )
  -0.7
  %
  98
  
  0.1
  %Net income (loss)
  
  $
  (833
  )
  -0.8
  %
  $
  417
  
  0.4
  %  Net Sales.Net
sales represent gross sales less any applicable customer discounts from list
price, customer sales returns and promotion expense through cooperative
programs with our customers. Net sales increased $3.3 million, or 3.3%, to
$104.0 million for the three months ended September 30, 2003 from $100.7 million
for the three months ended September 30, 2002. The increase, related to
our Lawn and Garden and Household segments, as well as the change in our sales
mix by segment, were primarily due to expanded sales of existing and new
product lines described further below and our acquisition of WPC Brands in December 2002,
which contributed $6.0 million to the increase in total net sales. This
increase was partially offset by a decline in charcoal sales in the Contract
segment of $6.1 million due to our cessation of charcoal distribution and
a decline in sales of certain existing products in the Household segment during
the three months ended September 30, 2003. Net sales in the Lawn and
Garden segment increased $5.7 million, or 8.8%, to $70.2 million for
the three months ended September 30, 2003 from $64.5 million for the three
months ended September 30, 2002. Net sales of this segment increased
primarily due to increased sales of our Spectracide products, offset partially
by retailers maintaining lower inventory levels compared to 2002. Net sales in
the Household segment increased $3.2 million, or 10.9%, to
$32.6 million for the three months ended September 30, 2003 from
$29.4 million for the three months ended September 30, 2002. Net
sales of this segment increased primarily due to higher repellent sales
resulting from our acquisition of WPC Brands and higher volume of existing and
certain new Cutter products, partially offset by a decline in sales of certain
insecticide products. Net sales in the Contract segment decreased
$5.6 million, or 82.4%, to $1.2 million for the three months ended September 30,
2003 from $6.8 million for the three months ended September 30, 2002.
Net sales of this segment decreased primarily due to our cessation of charcoal
sales, partially offset by increased sales of certain other products. 31 Gross Profit.Gross
profit increased $3.8 million, or 10.7%, to $39.3 million for the
three months ended September 30, 2003 from $35.5 million for the
three months ended September 30, 2002. The increase in gross profit was
primarily due to increased sales volume, coupled with improved margins
resulting from favorable fertilizer manufacturing costs related to our purchase
of certain fertilizer production assets from U.S. Fertilizer, Inc. (formerly
known as Pursell Industries, Inc.) in October 2002, partially offset
by unfavorable costs of granular urea used to produce fertilizer. As a
percentage of net sales, gross profit increased to 37.8% for the three months
ended September 30, 2003 from 35.2% for the three months ended September 30,
2002. The increase in gross profit as a percentage of net sales was primarily
due to improved margins on fertilizer products, as previously described,
increased sales of higher margin products in our Lawn and Garden and Household
segments and our ability to achieve operational efficiencies from the strategic
transactions consummated in 2002. Selling, General and Administrative Expenses.Selling,
general and administrative expenses include all costs associated with the
selling and distribution of products, product registrations and administrative
functions such as finance, information systems and human resources. Selling,
general and administrative expenses increased $4.6 million, or 16.7%, to
$32.2 million for the three months ended September 30, 2003 from
$27.6 million for the three months ended September 30, 2002. The
increase was primarily due to increased media and advertising spending,
incremental operating expenses resulting from our acquisition of WPC Brands and
additional non-manufacturing costs associated with fertilizer being produced
internally rather than being purchased. Throughout most of 2002, we purchased
fertilizer from a third party and recorded the purchases in cost of goods sold.
In October 2002, we acquired equipment and facilities to produce
fertilizer internally so we began recording the non-manufacturing costs
associated with those activities in selling, general and administrative
expenses. As a percentage of net sales, selling, general and administrative
expenses increased to 31.0% for the three months ended September 30, 2003
from 27.4% for the three months ended September 30, 2002. The increase was
primarily due to the shifting of fertilizer expenses previously described. Operating Income.As
a result of the factors previously described, operating income decreased
$0.8 million, or 10.1%, to $7.1 million for the three months ended September 30,
2003 from $7.9 million for the three months ended September 30, 2002.
As a percentage of net sales, operating income decreased to 6.8% for the three
months ended September 30, 2003 from 7.8% for the three months ended September 30,
2002. The decrease was primarily in our Lawn and Garden segment due to
increased selling, general and administrative expenses in the third quarter of
2003. Operating income in the
Lawn and Garden segment decreased $0.9 million, or 64.3%, to
$0.5 million for the three months ended September 30, 2003 from
$1.4 million for the three months ended September 30, 2002. Operating
income of this segment decreased primarily due to higher selling, general and
administrative expenses, driven primarily by increased media and advertising
spending. Operating income in the Household segment increased
$0.8 million, or 13.3%, to $6.8 million for the three months ended September 30,
2003 from $6.0 million for the three months ended September 30, 2002.
Operating income of this segment increased primarily due to increased sales of
repellent products. Operating income in the Contract segment decreased
$0.7 million, or 116.7%, to a loss of $0.2 million for the three
months ended September 30, 2003 from $0.6 million for the three
months ended September 30, 2002. Operating income of this segment
decreased primarily due to increased operating costs, our cessation of charcoal
sales and increased sales of certain lower margin products. Interest Expense, Net.Net
interest expense increased $1.2 million, or 16.2%, to $8.6 million
for the three months ended September 30, 2003 from $7.4 million for
the three months ended September 30, 2002. The increase in net interest
expense was due to the higher interest rate on $85.0 million in aggregate
principal amount of 97/8% Series C senior
subordinated notes issued in March 2003, the proceeds of which were used
to repay a portion of the amounts then outstanding under our senior credit
facility which bears 32 interest
at rates lower than the senior subordinated notes. The increase was also due to
a write-off of deferred financing fees totaling $0.2 million recorded in
connection with our repayment of $20.0 million of the obligations outstanding
under Term Loan B of our senior credit facility during the three months ended September 30,
2003 and an increase in our average debt outstanding during 2003, which
resulted from additional borrowings under our senior credit facility to finance
our acquisition of WPC Brands. However, this increase was partially offset by a
decrease of interest rates under the terms of our senior credit facility, a
general decline in variable borrowing rates and $0.5 million of interest
income recognized for payments received on the common stock subscription
receivable from Bayer Corporation. Income Tax Expense.Our effective
income tax rate was 46% for the three months ended September 30, 2003 and
19% for the three months ended September 30, 2002. This increase is
primarily the result of no adjustment being recorded to the valuation
allowance, combined with adjustments totaling $0.1 million to revise certain
tax estimates, during the three months ended September 30, 2003 compared
to the three months ended September 30, 2002. Nine Months Ended September 30,
2003 Compared to Nine Months Ended September 30, 2002 The
following table presents amounts and the percentages of net sales that items in
the accompanying consolidated statements of operations constitute for the
periods presented: Nine Months Ended September 30,2003
  
  2002Net sales by segment:Lawn and Garden
  
  $
  358,086
  
  73.2
  %
  $
  319,044
  
  73.8
  %Household
  
  121,151
  
  24.8
  %
  98,057
  
  22.7
  %Contract
  
  9,597
  
  2.0
  %
  15,103
  
  3.5
  %Total net sales
  
  488,834
  
  100.0
  %
  432,204
  
  100.0
  %Operating costs and
  expenses:Cost of goods sold
  
  297,302
  
  60.8
  %
  274,683
  
  63.6
  %Selling, general and administrative expenses
  
  109,099
  
  22.3
  %
  87,143
  
  20.1
  %Total operating costs and expenses
  
  406,401
  
  83.1
  %
  361,826
  
  83.7
  %Operating income by segment:Lawn and Garden
  
  51,066
  
  10.5
  %
  42,381
  
  9.8
  %Household
  
  31,186
  
  6.4
  %
  26,813
  
  6.2
  %Contract
  
  181
  
  0.0
  %
  1,184
  
  0.3
  %Total operating income
  
  82,433
  
  16.9
  %
  70,378
  
  16.3
  %Interest expense,
  net
  
  27,625
  
  5.7
  %
  24,591
  
  5.7
  %Income before
  income tax expense
  
  54,808
  
  11.2
  %
  45,787
  
  10.6
  %Income tax
  expense
  
  20,827
  
  4.3
  %
  8,788
  
  2.0
  %Net income
  
  $
  33,981
  
  6.9
  %
  $
  36,999
  
  8.6
  %  33


---

Net Sales.Net sales
represent gross sales less any applicable customer discounts from list price,
customer sales returns and promotion expense through cooperative programs with
our customers. Net sales increased $56.6 million, or 13.1%, to
$488.8 million for the nine months ended September 30, 2003 from
$432.2 million for the nine months ended September 30, 2002. The
increase, related to our Lawn and Garden and Household segments, as well as the
change in our sales mix by segment, were primarily due to our expanded product
lines resulting from our merger with Schultz in May 2002, which
contributed $43.4 million to the increase in total net sales, our
acquisition of WPC Brands in December 2002, which contributed
$15.5 million to the increase in total net sales, and an increase in net
sales of specific product lines described further below. This increase was
partially offset by a decline in charcoal sales in the Contract segment of
$9.4 million due to our cessation of charcoal distribution, a decline in
sales due to the sale of the non-core product lines acquired in our acquisition
of WPC Brands and an increase in promotion expense during the nine months ended
September 30, 2003. Net sales in the Lawn and
Garden segment increased $39.1 million, or 12.3%, to $358.1 million
for the nine months ended September 30, 2003 from $319.0 million for
the nine months ended September 30, 2002. Net sales of this segment
increased primarily due to our merger with Schultz and increased sales of our
Spectracide products, partially offset by retailers maintaining lower inventory
levels and lower sales of certain other products in the Lawn and Garden segment
resulting from cooler and wetter weather conditions the first half of 2003
compared to 2002. Net sales in the Household segment increased $23.1 million,
or 23.5%, to $121.2 million for the nine months ended September 30,
2003 from $98.1 million for the nine months ended September 30, 2002.
Net sales of this segment increased primarily due to higher repellent sales
resulting from our acquisition of WPC Brands and higher volume of existing and
certain new Cutter products, partially offset by a decline in sales of certain
insecticide products. Net sales in the Contract segment decreased
$5.5 million, or 36.4%, to $9.6 million for the nine months ended September 30,
2003 from $15.1 million for the nine months ended September 30, 2002.
Net sales of this segment decreased due to the decline in and cessation of
charcoal sales and the sale of the non-core product lines acquired in our acquisition
of WPC Brands, partially offset by increased sales due to our merger with
Schultz and acquisition of WPC Brands. Gross Profit.Gross profit
increased $34.0 million, or 21.6%, to $191.5 million for the nine
months ended September 30, 2003 from $157.5 million for the nine
months ended September 30, 2002. The increase in gross profit was
primarily due to increased sales volume, coupled with improved margins
resulting from favorable fertilizer manufacturing costs related to our purchase
of certain fertilizer production assets from U.S. Fertilizer in October 2002,
partially offset by unfavorable costs of granular urea used to produce fertilizer.
The increase in gross profit was partially offset by $1.3 million in
amortization of the purchase accounting inventory write-up related to the WPC
Brands acquisition. As a percentage of net sales, gross profit increased to
39.2% for the nine months ended September 30, 2003 from 36.4% for the nine
months ended September 30, 2002. The increase in gross profit as a
percentage of net sales was primarily due to improved margins on fertilizer
products, as previously described, increased sales of higher margin products in
our Lawn and Garden and Household segments and our ability to achieve
operational efficiencies from the strategic transactions consummated in 2002. Selling, General and Administrative Expenses.Selling,
general and administrative expenses include all costs associated with the
selling and distribution of products, product registrations and administrative
functions such as finance, information systems and human resources. Selling,
general and administrative expenses increased $22.0 million, or 25.3%, to
$109.1 million for the nine months ended September 30, 2003 from
$87.1 million for the nine months ended September 30, 2002. The
increase was primarily due to increased media and advertising spending,
incremental operating expenses resulting from our merger with Schultz and
acquisition of WPC Brands and additional non-manufacturing costs associated
with fertilizer being produced internally rather than being purchased.
Throughout most of 2002, we purchased fertilizer from a third party and
recorded the purchases in cost of goods sold. In October 2002, we acquired 34 equipment and
facilities to produce fertilizer internally so we began recording the
non-manufacturing costs associated with those activities in selling, general
and administrative expenses. As a percentage of net sales, selling, general and
administrative expenses increased to 22.3% for the nine months ended September 30,
2003 from 20.1% for the nine months ended September 30, 2002. The increase
was primarily due to the shifting of fertilizer expenses previously described. Operating Income.As a result of
the factors previously described, operating income increased
$12.0 million, or 17.0%, to $82.4 million for the nine months ended September 30,
2003 from $70.4 million for the nine months ended September 30, 2002.
As a percentage of net sales, operating income increased to 16.9% for the nine
months ended September 30, 2003 from 16.3% for the nine months ended September 30,
2002. The increase was primarily in our Lawn and Garden segment due to
additional sales of our fertilizer brands and our merger with Schultz, with a
lesser corresponding increase in operating costs and expenses, and in our
Household segment due to increased sales of higher margin products in 2003. Operating income in the
Lawn and Garden segment increased $8.7 million, or 20.5%, to
$51.1 million for the nine months ended September 30, 2003 from
$42.4 million for the nine months ended September 30, 2002. Operating
income of this segment increased primarily due to the addition of sales
resulting from the Schultz merger and strong sales growth of our Spectracide
products, partially offset by higher selling, general and administrative
expenses, driven primarily by increased media and advertising spending.
Operating income in the Household segment increased $4.4 million, or
16.4%, to $31.2 million for the nine months ended September 30, 2003
from $26.8 million for the nine months ended September 30, 2002.
Operating income of this segment increased primarily due to increased sales of
repellent products, offset partially by the amortization of the purchase
accounting inventory write-up related to the WPC Brands acquisition of
$1.3 million. Operating income in the Contract segment decreased
$1.0 million, or 83.3%, to $0.2 million for the nine months ended September 30,
2003 from $1.2 million for the nine months ended September 30, 2002.
Operating income of this segment decreased primarily due to increased operating
costs, the decline in and cessation of charcoal sales and increased sales of
certain lower margin products. Interest Expense, Net.Net interest
expense increased $3.0 million, or 12.2%, to $27.6 million for the
nine months ended September 30, 2003 from $24.6 million for the nine
months ended September 30, 2002. The increase in net interest expense was
due to the higher interest rate on $85.0 million in aggregate principal amount
of 97/8% Series C senior
subordinated notes issued in March 2003, the proceeds of which were used
to repay a portion of the amounts then outstanding under our senior credit
facility which bears interest at rates lower than the senior subordinated notes.
The increase was also due to write-offs of deferred financing fees totaling
$1.8 million recorded in connection with our repayment of a portion of the
obligations outstanding under our senior credit facility during the nine months
ended September 30, 2003 and an increase in our average debt outstanding
during 2003 than in 2002, which resulted from additional borrowings under our
senior credit facility to finance our merger with Schultz and the acquisition
of WPC Brands. The increase was partially offset by the effects of two
unfavorable interest rate swaps terminated in 2002, a decrease of interest
rates under the terms of our senior credit facility, a general decline in
variable borrowing rates and $1.5 million of interest income recognized
for payments received on the common stock subscription receivable from Bayer. Income Tax Expense.Our effective
income tax rate was 38% for the nine months ended September 30, 2003 and
19% for the nine months ended September 30, 2002. This increase is
primarily the result of no adjustment being recorded to the valuation allowance
during the nine months ended September 30, 2003 compared to the nine
months ended September 30, 2002. 35 Liquidity and Capital
Resources Our
principal liquidity requirements are for working capital, capital expenditures
and debt service under the senior credit facility and senior subordinated
notes. We believe that cash flows from operations, together with available
borrowings under our revolving credit facility, will be adequate to meet the
anticipated requirements for working capital, capital expenditures and
scheduled principal and interest payments for the foreseeable future. We are
regularly engaged in acquisition discussions with a number of companies,
although we have no definitive agreements at this time and we cannot guarantee
that any acquisitions will be consummated. If we do consummate any
acquisitions, it could be material to our business and require us to incur
additional debt under our revolving credit facility or otherwise. We cannot ensure that sufficient cash flows will be
generated from operations to repay the senior subordinated notes and amounts
outstanding under the senior credit facility at maturity without requiring
additional financing. Our ability to meet debt service and clean-down
obligations and reduce debt will be dependent on our future performance, which
in turn, will be subject to general economic and weather conditions and to
financial, business and other factors, including factors beyond our control.
Because a portion of our debt bears interest at floating rates, our financial
condition is and will continue to be affected by changes in prevailing interest
rates as described in the section entitled Financing Activities. Operating
Activities Operating activities provided cash of
$47.0 million for the nine months ended September 30, 2003 compared
to providing cash of $68.1 million for the nine months ended September 30,
2002. Cash provided by operations was lower in the nine months ended September 30,
2003 primarily because of the significant increase in accounts receivable in
2003 compared to 2002, net of the effects of our merger with Schultz. The
seasonal nature of our operations generally requires cash to fund significant
increases in working capital, primarily accounts receivable and inventories,
during the first half of the year. These assets build substantially in the
first half of the year as the season begins, in line with increasing sales, and
generally decline throughout the last half of the year as the lawn and garden
season comes to a close. Our inventory levels were $23.6 million higher as of September 30,
2003 compared to September 30, 2002 as a result of our acquisition of
equipment and facilities to produce fertilizer internally, our acquisition of
WPC Brands and pressure by retailers to manage and reduce their own inventory
levels. We have assessed the adequacy of our allowance for potentially obsolete
or slow moving inventory and, having recorded write-offs and adjustments where
necessary, plan to reduce our inventory levels in the normal sales cycles of
the fourth quarter of 2003 and first half of 2004. Investing
Activities Investing activities used cash of $2.5 million
for the nine months ended September 30, 2003 compared to cash used of
$41.5 million for the nine months ended September 30, 2002. The
decrease in cash used in investing activities was due to $38.3 million in
payments for our merger with Schultz occurring in 2002, while no acquisitions
were completed during the nine months ended September 30, 2003. The
decrease was also attributed to the receipt of $4.2 million in proceeds
from the sale of certain non-core product lines in 2003 while there were no
dispositions in 2002. The decrease was partially offset by a $3.5 million
increase in purchases of equipment and leasehold improvements for the nine
months ended September 30, 2003 compared to the nine months ended September 30,
2002. Capital expenditures increased in line with higher projected spending on
machinery, equipment and technology systems during the nine months ended September 30,
2003. Sale of Non-Core
Product Lines.During May 2003, we consummated
the sale of all of the non-core product lines acquired in our acquisition of
WPC Brands in December 2002. The product lines sold include, among others,
water purification tablets, first-aid kits and fish attractant products. Total
assets and operating results associated with the product lines sold were not
significant to our consolidated financial position or results of operations. No
gain or loss was recorded as the sale price was approximately equal to the net
book value of the assets and liabilities sold. 36 Capital
Expenditures.Capital expenditures relate primarily
to the construction of additional capacity for production and distribution, the
development and implementation of our enterprise resource planning, or ERP,
system and the enhancement of certain of our existing facilities. Cash used for
capital expenditures was $6.7 million for the nine months ended September 30,
2003 and $3.2 million for the nine months ended September 30, 2002.
The increase in capital expenditures in 2003 from 2002 is primarily related to
additional costs recorded for the development of our ERP system. Financing
Activities Financing
activities used cash of $10.7 million for the nine months ended September 30,
2003 compared to providing cash of $20.6 million for the nine months ended
September 30, 2002. The decrease in cash from financing activities was
primarily due to the repayment of $98.1 million in borrowings under our senior
credit facility, excluding the revolving credit facility, substantially offset
by proceeds of $86.3 million from the issuance of 97/8% Series C senior
subordinated notes, which were subsequently exchanged for 97/8% Series D senior
subordinated notes. As a result of these activities, as of September 30,
2003, we had cash on hand of $44.1 million and no borrowings outstanding
under our revolving credit facility. As we have completed our peak production
season, we do not expect the need to use our revolving credit facility to fund
operations for the remainder of the year, absent any acquisition related
activities which may or may not necessitate such use. Historically,
we have utilized internally generated funds, borrowings, and the issuance of
equity to meet ongoing working capital and capital expenditure requirements. As
a result of our recapitalization in 1999 and increased borrowings, we have
significantly increased cash requirements for debt service relating to our
senior subordinated notes and senior credit facility. We will rely on
internally generated funds and, to the extent necessary, borrowings under our
revolving credit facility to meet liquidity needs. Long-term debt, excluding
current maturities, short-term borrowings and a capital lease obligation,
totaled $388.1 million as of September 30, 2003, $371.2 million
as of September 30, 2002 and $391.5 million as of December 31,
2002. This debt was comprised of senior subordinated notes of
$236.1 million as of September 30, 2003 and $150.0 million as of
September 30, 2002 and December 31, 2002, and borrowings under our
senior credit facility of $152.0 million as of September 30, 2003,
$221.1 million as of September 30, 2002 and $241.5 million as of
December 31, 2002. The weighted average rate on borrowings under our
senior credit facility was 5.11% as of September 30, 2003, 6.77% as of September 30,
2002 and 5.34% as of December 31, 2002. The weighted average rate on the
senior subordinated notes was 9.875% as of the end of each of these periods,
resulting in a blended weighted average rate of 8.00% as of September 30,
2003, 7.99% as of September 30, 2002 and 7.03% as of December 31,
2002. The fair value of our total fixed-rate debt was $243.2 million as of
September 30, 2003, $149.6 million as of September 30, 2002 and
$151.5 million as of December 31, 2002. The fair value of
variable-rate debt, including current maturities and short-term borrowings,
approximated the carrying value of $152.8 million as of September 30,
2003, $230.3 million as of September 30, 2002 and $250.7 million
as of December 31, 2002. The fair values of fixed-rate debt and
variable-rate debt are based on quoted market prices. As of September 30,
2003, we had unused availability of $87.5 million under our revolving
credit facility. We did not repurchase any common shares for treasury
in 2002 or thus far in 2003. However, we did receive 9,569 shares each of Class A
and Class B common stock which were placed in treasury, with an aggregate
value of less than $0.1 million based on the estimated fair value per share as
determined by our Board of Directors, to satisfy income tax withholding
requirements for stock options exercised. We have not paid dividends on our
common stock in the past nor do we currently expect to pay dividends on such
shares in the foreseeable future. We anticipate that cash will be retained and
reinvested to support the growth of our business or to repay indebtedness. The
payment of future dividends, if any, on common stock will be determined by our
Board of Directors in light of any conditions then existing, including, but not
limited to, our earnings, cash flows, financial condition, capital requirements,
restrictions in financing agreements, business conditions and other factors. In
addition, our senior credit facility and senior subordinated notes currently
limit our ability to pay dividends. 37 Senior Credit Facility.Our senior
credit facility, as amended as of March 14, 2003, was provided by Bank of
America, N.A., Morgan Stanley Senior Funding, Inc. and Canadian Imperial
Bank of Commerce and consists of (1) a $90.0 million revolving credit
facility; (2) a $75.0 million term loan facility (Term Loan A); and (3) a
$240.0 million term loan facility (Term Loan B). The revolving credit
facility and Term Loan A mature on January 20, 2005 and Term Loan B
matures on January 20, 2006. The revolving credit facility is subject to a
clean-down period during which the aggregate amount outstanding under the
revolving credit facility shall not exceed $10.0 million for 30
consecutive days during the period between August 1 and November 30
in each calendar year. As of September 30, 2003 and December 31,
2002, the clean-down period had been completed and no amounts were outstanding
under the revolving credit facility. There were no compensating balance
requirements during each of the periods presented. The
amendment to the senior credit facility dated March 14, 2003 permitted the
offering of 97/8% Series C senior
subordinated notes due 2009 (the Series C Notes) and 97/8% Series D senior subordinated
notes due 2009 (the Series D Notes). We issued the Series C Notes in March 2003
and offered the Series D Notes in June and July 2003 in exchange
for outstanding Series B Notes and Series C Notes. This amendment did
not change any other existing covenants of the senior credit facility. The
principal amount of Term Loan A was to be repaid in 24 consecutive quarterly
installments commencing June 30, 1999 with a final installment due January 20,
2005. However, in connection with the issuance of the Series C Notes, as
described below, we used a portion of the proceeds to repay the outstanding
balance under Term Loan A. The principal amount of Term Loan B is to be repaid
in 28 consecutive quarterly installments commencing June 30, 1999 with a
final installment due January 20, 2006. We used a portion of the proceeds
from the issuance of the Series C Notes to repay $25.9 million of the
outstanding balance under Term Loan B. The
senior credit facility agreement contains restrictive affirmative, negative and
financial covenants. Affirmative and negative covenants place restrictions on,
among other things, levels of investments, indebtedness, insurance, capital
expenditures and dividend payments. The financial covenants require the
maintenance of certain financial ratios at defined levels. As of and during the
nine months ended September 30, 2003 and 2002 and the year ended December 31,
2002, we were in compliance with all covenants. While we do not anticipate an
event of non-compliance in the foreseeable future, such an event would require
us to request a waiver or an amendment to the senior credit facility. Amending
the senior credit facility could result in changes to our borrowing capacity or
its effective interest rates. Under the agreements, interest rates on the
revolving credit facility, Term Loan A and Term Loan B range from 1.50% to
4.00% above LIBOR, depending on certain financial ratios. LIBOR was 1.16% as of
September 30, 2003, 1.81% as of September 30, 2002 and 1.38% as of December 31,
2002. Unused commitments under the revolving credit facility are subject to a
0.5% annual commitment fee. The interest rate of Term Loan A was 4.67% as of December 31,
2002. The interest rate of Term Loan B was 5.11% as of September 30, 2003,
6.93% as of September 30, 2002 and 5.42% as of December 31, 2002. The
senior credit facility may be prepaid in whole or in part at any time without
premium or penalty. During the nine months ended September 30, 2003, we
made principal payments of $28.3 million to fully repay Term Loan A and
$69.2 million on Term Loan B, which primarily represent optional principal
prepayments. In connection with these prepayments, we recorded write-offs
totaling $1.8 million in previously deferred financing fees which are
included in interest expense in the accompanying consolidated statements of
operations for the nine months ended September 30, 2003. For the year
ended December 31, 2002, we made principal payments of $11.0 million
on Term Loan A and $2.0 million on Term Loan B, which included optional
principal prepayments of $6.3 million on Term Loan A and $1.1 million
on Term Loan B. The optional prepayments in the nine months ended September 30,
2003 were made to remain several quarterly payments ahead of the regular
payment schedule. Under the senior credit facility, each prepayment may be
applied to the next principal repayment installments. We remain several
principal payments ahead of schedule on Term Loan B and intend to pay a full
year of principal installments in 2003 in accordance with the terms of the
senior credit facility. 38 The carrying amount of our obligations under the
senior credit facility approximates fair value because the interest rates are
based on floating interest rates identified by reference to market rates. 97/8%
Series B Senior Subordinated Notes.In November 1999,
we issued $150.0 million in aggregate principal amount of 97/8% Series B senior
subordinated notes due April 1, 2009 (the Series B Notes). Interest
accrues on the Series B Notes at a rate of 97/8% per annum, payable
semi-annually on April 1 and October 1. As further described below,
as of September 30, 2003, $3.1 million of the Series B Notes were
outstanding. 97/8%
Series C Senior Subordinated Notes.In March 2003,
we issued $85.0 million in aggregate principal amount of 97/8% Series C Notes due April 1,
2009 in a private placement. Gross proceeds from the issuance were
$86.3 million and included a premium of $1.275 million which was
being amortized over the term of the Series C Notes using the effective
interest method. Interest on the Series C Notes accrued at a rate of 97/8% per annum, payable
semi-annually on April 1 and October 1. Net proceeds of
$84.1 million were used to repay $30.0 million of the revolving
credit facility, fully repay $28.3 million outstanding under Term Loan A
and repay $25.9 million outstanding under Term Loan B. The Series C
Notes were issued with terms substantially similar to the Series B Notes.
In connection with the issuance of the Series C Notes, we recorded
$2.2 million of deferred financing fees which are being amortized over the
term of the Series C Notes. As further described below, as of September 30,
2003, there were no Series C Notes outstanding. 97/8%
Series D Senior Subordinated Notes.In May 2003,
we registered $85.0 million in aggregate principal amount of 97/8% Series D Notes
(collectively with the Series B Notes and Series C Notes, the senior
subordinated notes), with terms substantially similar to the Series B
Notes and the Series C Notes, with the U.S. Securities and Exchange
Commission and have offered to exchange the Series D Notes for up to 100%
of the Series B Notes and Series C Notes. The exchange offering
closed in July 2003, resulting in $85.0 million, or 100%, of the Series C
Notes being exchanged and $146.9 million, or 98%, of the Series B
Notes being exchanged. As of September 30, 2003, $3.1 million of the Series B
Notes and $233.0 million of the Series D Notes were outstanding. Our indentures governing all of the outstanding senior
subordinated notes contain a number of significant covenants that could
restrict our ability to: ·incur more debt; ·pay dividends or make other
distributions; ·issue stock of
subsidiaries; ·make investments; ·repurchase stock; ·create subsidiaries; ·create liens; ·enter into transactions
with affiliates; ·enter into sale and
leaseback transactions; ·merge or consolidate; and ·transfer and sell assets. 39


---

The ability to comply with these provisions may be
affected by events beyond our control. The breach of any of these covenants
will result in a default under the applicable debt agreement or instrument and
could trigger acceleration of repayment under the applicable agreements. Any
default under our indentures governing the senior subordinated notes might
adversely affect our growth, financial condition, results of operations and the
ability to make payments on the senior subordinated notes or meet other obligations. The fair value of the
senior subordinated notes was $243.2 million as of September 30,
2003, $149.6 million as of September 30, 2003 and $151.5 million
as of December 31, 2002, based on their quoted market price on such dates.
In accordance with the indentures governing the senior subordinated notes, the
senior subordinated notes are unconditionally and jointly and severally
guaranteed by our wholly owned subsidiaries. Contractual Cash Obligations The
following table presents the aggregate amount of future cash outflows of our
contractual cash obligations as of September 30, 2003, excluding amounts
due for interest on outstanding indebtedness (dollars in thousands): Obligations due in:Contractual Cash Obligations
  
  
  
  Total
  
  Less Than
  1 Year(1)
  
  1 - 3
  Years
  
  4 - 5
  Years
  
  After 5
  YearsSenior credit
  facility
  
  $
  152,767
  
  
  $
  
  
  
  $
  152,767
  
  $
  
  
  $
  Senior
  subordinated notes
  
  235,000
  
  
  
  
  
  
  
  
  
  235,000Capital lease
  
  3,877
  
  
  217
  
  
  3,660
  
  
  
  Operating leases
  
  64,234
  
  
  2,228
  
  
  23,332
  
  10,801
  
  27,873Tolling agreement
  with U.S. Fertilizer(2)
  
  34,119
  
  
  2,209
  
  
  25,528
  
  6,382
  
  Services
  agreements(3)
  
  4,288
  
  
  188
  
  
  2,600
  
  1,500
  
  Total contractual
  cash obligations
  
  $
  494,285
  
  
  $
  4,842
  
  
  $
  207,887
  
  $
  18,683
  
  $
  262,873  
 (1)Represents
amounts due during the remainder of 2003. Amounts due beyond 2003 represent
full calendar year obligations. (2)Represents
fixed monthly payments of $0.7 million through September 30, 2007 for
the purchase of fertilizer products from U.S. Fertilizer. (3)Includes monthly
payments of $62,500 for management and other consulting services provided by
affiliates of Thomas H. Lee Partners, L.P., which owns UIC Holdings, L.L.C.,
our majority stockholder. The associated professional services agreement
automatically extends for successive one-year periods beginning January 20th
of each year, unless notice is given as provided in the agreement. Also
includes $0.4 million due in 2004 pursuant to a consulting agreement. We lease several of our operating facilities from Rex
Realty, Inc., a company owned by certain stockholders of our company and
operated by a former executive and past member of our Board of Directors. The
operating leases expire at various dates through December 31, 2010. We
have options to terminate the leases on an annual basis by giving advance
notice of at least one year. We lease a portion of our operating facilities
from the same company under a sublease agreement expiring on December 31,
2005 with minimum annual rentals of $0.7 million. We have two five-year
options to renew this lease, beginning January 1, 2006. We are obligated under additional operating leases for
other operations and the use of warehouse space. The leases expire at various
dates through December 31, 2015. Five of the leases provide for as many as
five options to renew for five years each. 40 In March 2000, we
entered into a capital lease agreement for $5.3 million for certain of our
transportation equipment. We are obligated to make monthly payments of
$0.1 million, with a balloon payment of $3.2 million due in February 2005.
We have the option of purchasing the transportation equipment following the
expiration of the lease agreement for a nominal amount. Guarantees and Off-Balance Sheet Risk In the normal course of business, we are a party to
certain guarantees and financial instruments with off-balance sheet risk, such
as standby letters of credit and indemnifications, which are not reflected in
the accompanying consolidated balance sheets. We had $2.5 million at September 30,
2003, $1.3 million at September 30, 2002 and $1.9 million at December 31,
2002, in standby letters of credit pledged as collateral to support the lease
of our primary distribution facility in St. Louis, a United States customs
bond, certain product purchases, various workers compensation obligations and
transportation equipment. These agreements mature at various dates through July 2004
and may be renewed as circumstances warrant. Such financial instruments are
valued based on the amount of exposure under the instruments and the likelihood
of performance being required. In our past experience, no claims have been made
against these financial instruments nor do we expect any losses to result from
them. As a result, we determined the fair value of such instruments to be zero
and have not recorded any related amounts in our consolidated financial
statements. We are the lessee under a
number of equipment and property leases. It is common in such commercial lease
transactions for us to agree to indemnify the lessor for the value of the
property or equipment leased should it be damaged during the course of our
operations. We expect that any losses that may occur with respect to the leased
property would be covered by insurance, subject to deductible amounts. As a
result, we determined the fair value of such instruments to be zero and have
not recorded any related amounts in our consolidated financial statements. Certain Trends and Uncertainties Seasonality and Dependence Upon Weather Conditions Our business is highly seasonal because our products
are used primarily in the spring and summer seasons. For the past three years,
approximately 69% of our net sales have occurred in the first and second
quarters, resulting in higher net revenues and results of operations during
those quarters. Our working capital needs, and correspondingly our borrowings,
begin to peak at the beginning of the second quarter. If cash on hand is
insufficient to cover payments due on our senior subordinated notes and we are
unable to draw on our senior credit facility or obtain other financing, this
seasonality could adversely affect our ability to make interest payments. In addition, weather
conditions in North America have a significant impact on the timing of sales in
the spring selling season and our overall annual sales. Periods of dry, hot
weather can decrease insecticide sales, while periods of cold, wet weather can
slow sales of herbicides and fertilizers. In addition, an abnormally cold
spring throughout North America could adversely affect both fertilizer and
pesticide sales and therefore our financial results. If weather conditions
during the first and second quarters are not conducive to lawn and gardening
activities, they may have an adverse affect our consolidated financial
position, results of operations or cash flows. Competition and Industry Trends Each of our
segments operates in highly competitive markets and competes against a number
of national and regional brands. We believe the principal factors by which we
compete are product quality and performance, value, brand strength and
marketing. In some instances, we compete against companies with fewer
regulatory burdens, easier access to financing, greater personnel resources,
greater brand name 41 recognition or larger
research departments. Increasing consolidation in the consumer lawn and garden
care industry may provide additional benefits to certain of our competitors,
either through access to financing, resources or efficiencies of scale. Our principal national competitors for our Lawn and
Garden and Household segments include: The Scotts Company, which markets lawn
and garden products under the Scotts®, Ortho®, Roundup®,
Miracle-Gro® and Hyponex® brand names; S.C. Johnson &
Son, Inc., which markets insecticide and repellent products under the Raid®
and OFF!® brand names; Central Garden & Pet Company, which
markets insecticide and garden products under the AMDRO® and IMAGE®
brand names; The Clorox Company, which markets products under the Combat®
brand name; and Bayer A.G., which markets lawn and garden products under the
Bayer Advanced brand name. In our Contract segment, we compete against a
diverse group of companies. With the growing trend towards
retail trade consolidation, we are increasingly dependent upon key retailers
whose bargaining strength is growing. Our top three customers, The Home Depot,
Lowes and Wal*Mart, together accounted for approximately 74% of our 2002 net
sales and approximately 62% of our outstanding accounts receivable as of December 31,
2002. To the extent such concentration continues to occur, our net sales and
operating income may be increasingly sensitive to a deterioration in the
financial condition of, or other adverse developments involving our
relationships with, one or more of our retailer customers. Our business has
been, and may continue to be, negatively affected by changes in the policies
and practices of our retailer customers, such as destocking and other inventory
management initiatives, limitations on access to shelf space, pricing and
credit term demands and other conditions. In addition, as a result of the
desire of retailers to more closely manage inventory levels, there is a growing
trend among them to make purchases on a just-in-time basis. This requires us
to shorten our lead-time for production in certain cases and more closely
anticipate demand, which could in the future require the carrying of additional
inventories and increase our working capital and related financing
requirements. Environmental and Regulatory Considerations Local, state, federal and foreign laws and regulations
relating to environmental, health and safety matters affect us in several ways.
In the United States, all products containing pesticides must be registered
with the United States Environmental Protection Agency (EPA) and, in many
cases, similar state agencies before they can be manufactured or sold. The
inability to obtain or the cancellation of any registration could have an
adverse effect on our business. The severity of the effect would depend on which
products were involved, whether another product could be substituted and
whether our competitors were similarly affected. We attempt to anticipate
regulatory developments and maintain registrations of, and access to,
substitute chemicals. We may not always be able to avoid these risks. The Food Quality Protection Act establishes a standard
for food-use pesticides, which is that a reasonable certainty of no harm will
result from the cumulative effect of pesticide exposures. Under the Act, the
EPA is evaluating the cumulative effects from dietary and non-dietary exposures
to pesticides. The pesticides in our products continue to be evaluated by the
EPA as part of this exposure. It is possible that the EPA or a third party
active ingredient registrant may decide that a pesticide we use in our products
will be limited or made unavailable to us. For example, in 2000, Dow
AgroSciences L.L.C., an active ingredient registrant, voluntarily agreed to a
withdrawal of virtually all residential uses of chlorpyrifos, an active
ingredient we used in our lawn and garden products under the name Dursban until
January 2001. This had a material effect on our financial position,
results of operations or cash flows in 2001. We cannot predict the outcome or
the severity of the effect of the EPAs continuing evaluations of active
ingredients used in our products. In addition to the regulations already described,
local, state, federal and foreign agencies regulate the disposal, handling and
storage of hazardous substances and hazardous waste, air and water discharges
from our facilities and the remediation of contamination. If we do not fully
comply with environmental 42 regulations, or if a
release of hazardous substances occurs at or from one of our facilities, we may
be subject to penalties and/or held liable for the costs of remedying the
condition. We do not anticipate incurring material capital
expenditures for environmental control facilities during the remaining three
months of 2003 or during 2004. We currently estimate that the costs associated
with compliance with environmental, health and safety regulations could total
approximately $0.2 million annually for the next several years. The
adequacy of our anticipated future expenditures is based on our operating in
substantial compliance with applicable environmental and public health laws and
regulations and the assumption that there are not significant conditions of
potential contamination that are unknown to us. If there is a significant
change in the facts and circumstances surrounding this assumption, or if we are
found not to be in substantial compliance with applicable environmental public
health laws and regulations, it could have a material impact on future
environmental capital expenditures and other environmental expenses and our
consolidated financial position, results of operations or cash flows. As of September 30,
2003 and 2002, and December 31, 2002, we believe we were substantially in
compliance with applicable environmental and regulatory requirements. Information Systems Implementation With the rapid growth we
have experienced in the past and expect in the future, we are aware of the
potential that such growth may strain our ability to manage our business and
strain our operational and financial resources and accounting controls. Accordingly,
we have invested substantial time, money and resources in implementing an ERP
system to accommodate and assist in managing such growth. As we believe is the case in most system changes,
the development and implementation of these systems will likely necessitate
some changes in operating policies and procedures and the related internal
control over financial reporting and their method of application. However,
throughout this process, there have been no significant changes that have
materially adversely affected, or are reasonably likely to materially adversely
affect, ouroperational and financial resources and accounting controls.If the implementation of the ERP system
is not successful or does not result in the benefits we anticipate, it could
adversely affect our consolidated financial position, results of operations or
cash flows. Annual Product Line Reviews During the third and fourth quarters of each year, we
undertake a series of meetings with a number of our largest retailers to review
business activities for the following year. Discussions at these meetings
address details including, but not limited to, product lines we wish to sell,
product lines they intend to purchase, advertising and promotion programs,
retail service activities and customer satisfaction. While we strive to present
creative and compelling products, plans and promotions in order to expand our
presence at these retailers and increase our share of the markets in which we
compete, each year we encounter intense competition from our competitors. If we
are unsuccessful in repeating or increasing our current year product offerings,
it could adversely affect our consolidated financial position, results of
operations or cash flows. As we have nearly
completed all of our annual product line reviews in 2003 for the 2004 season,
we have received both positive and negative indications from individual
retailers regarding certain elements of our programs. One large retailer has
indicated it will not be selling certain types of our products at its stores
due to an arrangement with another vendor. However, the same retailer will add
a number of our other SKUs to its 2004 offerings, which are expected to result
in the recovery of a significant portion of the lost sales but at lower margins.
Conversely, other large retailers have indicated their interest in increasing
the number of our products and advertising and merchandising support for those
products in their 2004 offerings which are anticipated to substantially offset
the lost sales previously described. 43 Retail Service Personnel In previous years we have
utilized an in-store sales force to facilitate, among other things, regionally
appropriate, real time marketing and promotional decisions, helping us to
maximize store-level sales and profitability for categories which have a high
degree of sensitivity to local weather patterns. As our larger retailers are
moving toward centralized planning, purchasing and inventory management
strategies, we have reorganized certain of our activities and in-store
personnel to create retail service teams to accommodate these industry changes.
The reorganization did not result in significant costs to our business and
represents a shift to using more seasonal and temporary employees during our
peak season. Our centralized customer focused platform teams will continue to
facilitate regionally appropriate marketing and promotional efforts, while at
the store-level, our retail service teams will focus on executing corporate
merchandising strategies along with direct in-store consumer selling for each retailer.
We believe these changes will enhance our customer service levels at certain of
our retailers as they represent a change to our retail service model. Acquisition Strategy We have completed a number of acquisitions and
strategic transactions since 2001 and intend to grow through the acquisition of
additional businesses. We are regularly engaged in acquisition discussions with
a number of sellers and anticipate that one or more potential acquisition
opportunities, including those that could be material, may become available in
the near future. If and when appropriate acquisition opportunities become
available, we intend to pursue them actively. Further, acquisitions involve a
number of special risks, including but not limited to: ·failure of the acquired
business to achieve expected results; ·diversion of managements
attention; ·failure to retain key
personnel or customers of the acquired business; ·additional financing that,
if available, could increase leverage; ·successor liability,
including with respect to environmental matters; ·the high cost and expenses
of completing acquisitions and risks associated with unanticipated events or
liabilities; and ·failure to successfully
integrate our acquired businesses into our internal control structure. These risks could have a material adverse effect on
our business and our consolidated financial position, results of operations and
cash flows. We expect to face
competition for acquisition candidates, which may limit the number of
opportunities and may lead to higher acquisition prices. We cannot assure you
that we will be able to identify, acquire, or manage profitably additional
businesses or to integrate successfully any 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 of fair value, which could have a
material adverse effect on our business and our consolidated financial
position, results of operations and cash flows. Recently Issued
Accounting Standards In April 2003, the Financial Accounting Standards
Board (FASB) issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No. 133, 44 Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 149 is effective for
contracts entered into or modified after September 30, 2003 and for
hedging relationships designated after September 30, 2003. The provisions
of this Statement that relate to Statement 133 implementation issues that have
been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. The adoption of SFAS No. 149 will not have a material impact on our
consolidated financial statements. In May 2003, the FASB
issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This statement establishes
standards for the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity and requires
the classification of such financial instruments as a liability (or an asset in
certain circumstances). Many of those instruments were previously permitted to
be classified as equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003 and is otherwise
effective at the beginning of the first interim period beginning after June 15,
2003, except for mandatorily redeemable financial instruments of nonpublic
entities. The adoption of SFAS No. 150 will not have a material impact on
our consolidated financial statements. Item 3.Quantitative
and Qualitative Disclosures About Market Risks Raw Material Prices In the normal course of business, we are exposed to
fluctuations in raw materials prices. We have established policies and
procedures that govern the management of this exposure through the use of
derivative hedging instruments, including swap agreements. Our objective in
managing our exposure to such fluctuations is to decrease the volatility of
earnings and cash flows associated with changes in certain raw materials
prices. To achieve this objective, we periodically enter into swap agreements
with values that change in the opposite direction of anticipated cash flows. We
consider the financial stability and credit standing of our counter parties for
such agreements. Nonperformance by the counter parties is not anticipated nor
would it be likely to have a material adverse effect on our consolidated
financial position or results of operations. Derivative instruments related to
forecasted raw materials purchases are considered to hedge future cash flows,
and the effective portion of any gain or loss is included in accumulated other
comprehensive income until earnings are affected by the variability of cash
flows. Any remaining gain or loss is recognized currently in earnings. While we expect these instruments and agreements to
manage our exposure to such price fluctuations, no assurance can be provided
that the instruments will be effective in fully mitigating exposure to these
risks, nor can assurance be provided that in passing on pricing increases to
our customers. We have formally documented, designated and assessed
the effectiveness of transactions that receive hedge accounting treatment. The
cash flows of the derivative instruments are expected to be highly effective in
achieving offsetting cash flows attributable to fluctuations in the cash flows
of the hedged risk. Changes in the fair value of agreements designated as
derivative hedging instruments are reported as either an asset or liability in
the accompanying consolidated balance sheets with the associated unrealized
gain or loss reflected in accumulated other comprehensive income. Any amounts
included in accumulated other comprehensive income are subsequently
reclassified into cost of goods sold or interest expense, as applicable, in the
same period in which the underlying hedged transactions affect earnings. As of December 31,
2002, an unrealized loss of less than $0.1 million related to derivative
instruments designated as cash flow hedges was recorded in accumulated other
comprehensive income. No such instruments were outstanding at September 30,
2003 or 2002. If it becomes probable that a forecasted transaction
will no longer occur, any gain or loss in accumulated other comprehensive
income will be recognized in earnings. We have not incurred any gains 45 or losses for hedge
ineffectiveness or due to excluding a portion of the value from measuring
effectiveness. We do not enter into derivatives or other hedging arrangements
for trading or speculative purposes. For the nine months ended September 30,
2003, we reclassified $1.4 million from accumulated other comprehensive
income into cost of goods sold representing a gain on raw materials derivative
hedging instruments. No such amounts were recorded during the nine months ended
September 30, 2002 or year ended December 31, 2002. Interest Rates We are exposed to various market risks, including
fluctuations in interest rates. As such, our policy is to manage interest costs
using a mix of fixed and variable rate debt. To achieve this objective, we may
periodically enter into swap agreements with values that change in the opposite
direction of anticipated cash flows. As of September 30, 2003, we did not
have any interest rate agreements. Long-term debt, excluding current maturities,
short-term borrowings and a capital lease obligation, totaled
$388.1 million as of September 30, 2003, $371.2 million as of September 30,
2002 and $391.5 million as of December 31, 2002. This debt was
comprised of senior subordinated notes of $236.1 million as of September 30,
2003 and $150.0 million as of September 30, 2002 and December 31,
2002, and borrowings under our senior credit facility of $152.0 million as
of September 30, 2003, $221.2 million as of September 30, 2002
and $241.5 million as of December 31, 2002. The weighted average rate
on borrowings under our senior credit facility was 5.11% as of September 30,
2003, 6.77% as of September 30, 2002 and 5.34% as of December 31,
2002. The weighted average rate on the senior subordinated notes was 9.875% as
of the end of each of these periods, resulting in a blended weighted average
rate of 8.00% as of September 30, 2003, 7.99% as of September 30,
2002 and 7.03% as of December 31, 2002. The fair value of our total
fixed-rate debt was $243.2 million as of September 30, 2003,
$149.6 million as of September 30, 2002 and $151.5 million as of
December 31, 2002. The fair value of variable-rate debt, including current
maturities and short-term borrowings, approximated the carrying value of
$152.8 million as of September 30, 2003, $230.3 million as of September 30,
2002 and $250.7 million as of December 31, 2002. The fair values of
fixed-rate debt and variable-rate debt are based on quoted market prices. The
following table summarizes information about our debt instruments that are
sensitive to changes in interest rates as of September 30, 2003. The table
presents future principal cash flows and related weighted-average interest
rates by expected maturity dates. Weighted average variable rates are based on
implied forward rates in the yield curve at September 30, 2003 (dollars in
thousands): Description
  
  
  
  Remainder
  of 2003
  
  2004
  
  2005
  
  2006
  
  2007
  
  There-
  After
  
  Total
  
  Fair
  ValueFixed rate debt
  
  
  $
  
  
  
  $
  
  
  $
  
  
  $
  
  
  $
  
  
  $
  236,126
  
  $
  236,126
  
  $
  243,210Average interest
  rate
  
  
  
  
  
  
  
  
  
  
  
  
  
  9.875
  %
  9.875
  %Variable rate debt
  
  
  $
  
  
  
  $
  1,194
  
  $
  113,780
  
  $
  37,793
  
  $
  
  
  $
  
  
  $
  152,767
  
  $
  152,767Average interest rate
  
  
  4.96
  %
  
  5.03
  %
  5.21
  %
  5.61
  %
  
  
    Exchange Rates International sales during
the three and nine months ended September 30, 2003 and 2002 and the year
ended December 31, 2002 comprised less than 1% of total net sales. We do
not use derivative instruments to hedge foreign currency exposures as
substantially all of our foreign currency transactions are denominated in U.S.
dollars. 46 Item 4.Controls
and Procedures Evaluation of
Disclosure Controls and Procedures Our chief executive
officer and our chief financial officer, after evaluating the effectiveness of
our disclosure controls and procedures (as defined in the Securities Exchange
Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the
period covered by this report, have concluded that as of such date, our
disclosure controls and procedures are effective in bringing to their attention
on a timely basis material information relating to us and our consolidated
subsidiaries required to be included in our periodic filings under the Exchange
Act. Internal Control
Over Financial Reporting Since 2001, we have been in the process of developing
an enterprise resource planning, or ERP, system on a company wide basis. As we
believe is the case in most system changes, the development and eventual
implementation of these systems will likely necessitate some changes in
operating policies and procedures and the related internal control over
financial reporting and their method of application. However, throughout this
process and during the third quarter 2003, there has been no change in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting. 47


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PART II.OTHER
INFORMATION Item 1.Legal
Proceedings We are involved from time
to time in routine legal matters and other claims incidental to the business.
When it appears probable in managements judgment that we will incur monetary
damages or other costs in connection with such claims and proceedings, and such
costs can be reasonably estimated, liabilities are recorded in the consolidated
financial statements and charges are recorded against earnings. We believe that
the resolution of such routine matters and other incidental claims, taking into
account established reserves and insurance, will not have a material adverse
impact on our consolidated financial position or results of operations. Item 6.
Exhibits and Reports on Form 8-K (a)Exhibits The exhibit index is on page 50. (b)Reports
on Form 8-K On August 7, 2003, we furnished a Current Report
on Form 8-K under Item 12 to announce our earnings for the three and six
months ended June 30, 2003. 48


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SIGNATURES Pursuant
to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, United Industries Corporation has duly caused this
Quarterly Report to be signed on its behalf by the undersigned, thereunto duly
authorized. UNITED INDUSTRIES CORPORATION,RegistrantDated: November 13,
  2003
  
  By:
  
  /s/ Daniel J. JohnstonName:
  
  Daniel J. JohnstonTitle:
  
  Executive Vice President, Chief Financial Officer
  and Director (Principal Financial Officer and Principal Accounting Officer)  49


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EXHIBIT INDEX Exhibit
  Number
  
  Exhibit Description31.1
  
  Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief
  Executive Officer31.2
  
  Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief
  Financial Officer32.1
  
  Section 1350 Certifications   50


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