UNITED INDUSTRIES CORP Quarterly Report (10-Q) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ...

The following is an excerpt from a 10-Q SEC Filing, filed by UNITED INDUSTRIES CORP on 8/16/2004.

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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 included elsewhere in this Quarterly Report. Future results could differ materially from those discussed below for many reasons, including the risks described under the heading "Certain Trends and Uncertainties" in this section and elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2003.

Overview and Management Report

Operating as Spectrum Brands and Nu-Gro, 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 North America. 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 value brands are targeted toward consumers who want products and packaging that are comparable or superior to, and at lower prices than, premium-priced brands, while our opening price point brands are designed for cost-conscious consumers who want quality products. Our products are marketed to mass merchandisers, home improvement centers, hardware, grocery and drug chains, nurseries and garden centers. Our three largest customers are The Home Depot, Lowe's and Wal*Mart, which are leading retailers in our larger segments.

We compete in the $2.9 billion consumer lawn and garden and $1.0 billion insect control retail markets in the United States and the $335.0 million lawn and garden market in Canada. We believe a key growth factor in the lawn and garden retail market is the aging of the United States population, as consumers over the age of forty-five represent the largest segment of lawn and garden care product users and typically have more leisure time and higher levels of discretionary income than the general population. We also believe the growth in the home improvement center and mass merchandiser channels has increased the popularity of do-it-yourself activities, including lawn and garden projects.

As of June 30, 2004, we reported our operating results using three reportable segments, as follows:

† Consumer Lawn and Garden (63% of second quarter 2004 net sales).This segment primarily consists of dry granular lawn fertilizers, lawn fertilizer combination 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, Schultz, Vigoro, Sta-Green, Real-Kill, Wilson, So-Green, Greenleaf and Earth Green brands.

† Consumer Household (30% of second quarter 2004 net sales).This segment represents household insecticides and insect repellents that allow consumers to repel insects and maintain pest-free households. This segment includes our Hot Shot, Cutter and Repel brands, as well as a number of private label and other products.

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

The basis of our segmentation has been modified since March 31, 2004 to accommodate the acquisition of Nu-Gro. Changes to segments previously reported include the addition of Nu-Gro's consumer lawn and garden brands and products to our existing Lawn and Garden segment to form the new Consumer Lawn and Garden segment, as well as the addition of Nu-Gro's fertilizer technology brands and other products to our existing Contract segment to form the new Fertilizer Technology and Other segment.

The name of our existing Household segment was changed to Consumer Household. No reclassification of the 2003 segment information was necessary for comparability between the periods presented herein.

We believe that our historical financial condition and results of operations are not necessarily accurate indicators of future results because of variability in our product listings at customers, our historical lack of long-term supply contracts with most customers and because of certain significant past events. Those events include merger, acquisition, strategic and equity and debt financing transactions over the last several years. Furthermore, our sales are seasonal in nature and are susceptible to weather conditions that vary from year to year.

Critical Accounting Policies

While all of the significant accounting policies described in the notes to our consolidated financial statements are important, 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 the 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 we believe 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. We recognize revenue when title and risk of loss transfer to the customer. 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 memo 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 returns were $3.6 million for the three months ended June 30, 2004 and $3.2 million for the three months ended June 30, 2003. Sales reductions related to returns were $6.3 million for the six months ended June 30, 2004 and $7.1 million for the six months ended June 30, 2003. The increase in the second quarter of 2004 was driven primarily by higher sales and the mix of products sold during the first quarter of 2004. Amounts included in the accounts receivable reserves for product returns were $3.4 million as of June 30, 2004, $2.9 million as of June 30, 2003 and $1.4 million as of December 31, 2003.

Inventories. We report inventories 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 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 require adjustment. The allowance for obsolete or slow-moving inventory increased $1.7 million since the first quarter of 2004 and $1.0 million since December 31, 2003. The allowance for obsolete or slow-moving inventory was $6.6 million as of June 30, 2004, $6.4 million as of June 30, 2003 and $5.6 million as of December 31, 2003.

Promotion Expense. Promotion expense, including cooperative programs with customers, is recorded as a reduction of gross sales. In addition, advertising costs are incurred irrespective of promotions. Such costs are included in selling, general and administrative expenses in our consolidated statements of operations. We advertise and promote our products through national and regional media. Products are also advertised and promoted through cooperative programs with retailers. Advertising and promotion costs are expensed as incurred, although costs incurred during interim periods are generally expensed ratably in relation to revenues. Management develops 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 them 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.

Income Taxes. We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial 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 the amount of any valuation allowance to apply against deferred tax assets. We will establish a valuation allowance if we determine that it is more likely than not that some portion or all of our deferred tax assets will not be realized and include any changes to such valuation allowance in our consolidated statements of operations as income tax expense or benefit, as appropriate.

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

Although we believe it is more likely than not that we will utilize our deferred tax assets, we can provide no assurance of this, as our ability to utilize such assets is contingent upon our ability to generate sufficient taxable income in the future. We will continue to assess the realizability of the deferred tax assets based upon actual and forecasted operating results. If we conclude it is not more likely than not that we will realize the benefit of our deferred tax assets, we may have to establish a valuation allowance and, accordingly, record a charge to income tax expense.

Goodwill, Intangible and Other Long-Lived Assets. We have acquired intangible assets or made acquisitions in the past that resulted in the recording of goodwill or intangible assets. Under generally accepted accounting principles in effect prior to 2002, goodwill and intangible assets were amortized over their estimated useful lives, and were tested periodically to determine if they were recoverable from their cash flows on an undiscounted basis over their useful lives.

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

Recent Events

Acquisition of United Pet Group, Inc. On June 14, 2004, we and our wholly-owned subsidiary entered into a definitive agreement to complete a merger of the subsidiary with and into United Pet Group, Inc., or UPG, a privately owned manufacturer and marketer of premium branded pet supplies. UPG's stockholders approved the transaction on June 16, 2004 and we completed the merger on July 30, 2004 for cash consideration of $360.0 million. The transaction was financed with $250.0 million of proceeds from our new senior credit facility, as amended (see financing activities in this section), including $75.0 million under a second lien facility, $70.0 million of proceeds from the issuance of 5.8 million shares each of our Class A and Class B common stock to affiliates of Thomas H. Lee Partners, our largest stockholder, Banc of America Securities LLC and certain UPG stockholders and the remainder from our cash balances. The transaction will be accounted for as an acquisition and, accordingly, the results of operations of UPG will be included in our results of operations from July 30, 2004, the date of acquisition. We are currently in the process of obtaining an independent third-party valuation of assets acquired and liabilities assumed for

purchase price allocation purposes and expect the valuation to be completed during the fourth quarter of 2004.

Acquisition of The Nu-Gro Corporation. On April 30, 2004, we completed the acquisition of all of the outstanding common shares of The Nu-Gro Corporation, or Nu-Gro, a lawn and garden products company then incorporated under the laws of Ontario, Canada. As a result of the acquisition, Nu-Gro and its subsidiaries became our wholly-owned subsidiaries. The total purchase price included cash consideration of $146.4 million, including $5.0 million of related acquisition costs, and the assumption of $26.7 million of outstanding debt, which we immediately repaid at closing. The transaction was financed with proceeds from our new senior credit facility (see financing activities in this section). The acquisition was executed to expand our reach throughout North America, broaden our product offerings and customer base, vertically integrate certain of our operations, including gaining access to advanced fertilizer technologies, and to achieve economies of scale and synergistic efficiencies.

The transaction was accounted for using the purchase method of accounting and, accordingly, the results of operations have been included in our consolidated financial statements included elsewhere in this Quarterly Report from April 30, 2004, the date of acquisition. The purchase price was allocated to assets acquired and liabilities assumed based on estimated fair values. We preliminarily allocated $66.4 million of the purchase price to intangible assets and $40.5 million to goodwill for consideration paid in excess of the fair value of net assets acquired, which is not deductible for tax purposes. The acquired intangible assets consist primarily of trade names, which are currently being amortized using the straight-line method over periods ranging from fifteen to thirty years, and to customer relationships, which are currently being amortized using the straight-line method over periods ranging from five to ten years. In addition, we increased the value of inventory acquired from Nu-Gro by $6.1 million to reflect estimated fair value on the date of acquisition, which is currently being recorded as cost of goods sold commensurate with related subsequent sales activity during 2004. For the three months ended June 30, 2004, amortization expense associated with such write-up of inventory to estimated fair value of $5.2 million was recorded in cost of goods sold.

The purchase price allocation is based on preliminary information, which is subject to adjustment upon obtaining the final report of an independent third-party valuation firm. We are currently in the process of obtaining such report and expect the final purchase price allocation to be completed during the third quarter of 2004. While the final purchase price allocation may differ significantly from the preliminary allocation provided herein, we believe any adjustments resulting from the final allocation will not have a material impact on our consolidated results of operations or financial position.

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

agreement also allows us to make voluntary prepayments, in whole or in part, at any time without premium or penalty.

The new senior credit facility agreement contains affirmative, negative and financial covenants that are more favorable than those of the prior senior credit facility. The negative covenants place restrictions on, among other things, levels of investments, indebtedness, capital expenditures and dividend payments that we may make or incur. The financial covenants require the maintenance of certain financial ratios at defined levels. Under the new senior credit facility agreement, interest rates on the new revolving credit facility can range from 1.75% to 2.50% plus LIBOR, or from 0.75% to 1.50% plus a base rate, subject to adjustment and depending on certain financial ratios. As of April 30, 2004, the term loans were subject to interest rates equal to 2.50% plus LIBOR or 1.50% plus a base rate, as provided in the new senior credit facility agreement. The interest rate applicable to our outstanding borrowings was 3.84% as of June 30, 2004, 5.32% as of June 30, 2003 and 5.12% as of December 31, 2003. Unused commitments under the new revolving credit facility are subject to a 0.5% annual commitment fee. Unused availability under the new revolving credit facility was $121.1 million as of June 30, 2004 which is reflective of $3.9 million of standby letters of credit pledged as collateral. The new senior credit facility is secured by substantially all of our properties and assets and substantially all of the properties and assets of our current and future domestic subsidiaries.

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

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

Repurchase of Preferred Stock. In conjunction with the financing activities described above, on April 30, 2004, we repurchased all 37,600 shares of our outstanding Class A nonvoting preferred stock for $57.6 million, including $19.9 million for all accrued dividends thereon. Such repurchase resulted in a decline in additional paid-in capital of $37.7 million.

Customer Agreement. On February 12, 2004, our largest customer and we executed a licensing, manufacturing and supply agreement. Under the agreement, we will license certain of our trademarks and be the exclusive manufacturer and supplier for certain products branded with such trademarks from January 1, 2004, the effective date of the agreement, through December 31, 2008 or such later date as is specified in the agreement. Provided the customer achieves certain required minimum purchase volumes and other conditions during such period, and the manufacturing and supply portion of the agreement is extended for an additional three-year period as specified in the agreement, we will assign the trademarks to the customer not earlier than May 1, 2009, but otherwise within thirty days after the date upon which such required minimum purchase volumes are achieved. The carrying value of such trademarks as of February 12, 2004 was approximately $16.0 million. If the customer fails to achieve the required minimum purchase volumes or meet other certain conditions, assignment may occur at a later date, if certain conditions are met. In addition, as a result of executing the agreement, we have modified

the trademarks' initial amortization period of forty years and will record amortization in a manner consistent with projected sales activity over five years, because we believe the customer will achieve all required conditions by May 2009. The modification of the amortization period will result in additional annual amortization expense of approximately $2.7 million in the year ended December 31, 2004.

Bayer Transactions. On June 14, 2002, we consummated a transaction with Bayer Corporation and Bayer Advanced, L.L.C. (together referred to herein as Bayer) which allows us to gain access to certain Bayer active ingredient technologies through a Supply Agreement and to perform certain merchandising services for Bayer through an In-Store Service Agreement. In consideration for the Supply and In-Store Service Agreements, and in exchange for the promissory notes previously issued to Bayer by U.S. Fertilizer, we issued to Bayer 3,072,000 shares of Class A voting common stock valued at $15.4 million and 3,072,000 shares of Class B nonvoting common stock valued at $15.4 million (collectively representing approximately 9.3% of our fully-diluted common stock) and recorded $0.4 million of related issuance costs. We reserved for the entire face value of the promissory notes due from U.S. Fertilizer, as we did not believe the notes were collectible and an independent third party valuation did not ascribe any significant value to them. The independent third party valuation also indicated that value should be ascribed to the repurchase option which is reflected in stockholders' equity (deficit) in the consolidated balance sheets as of June 30, 2003 and December 31, 2003 included elsewhere in this Quarterly Report.

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

The value of the Supply Agreement has been and is being amortized to cost of goods sold over the period in which its economic benefits are expected to be utilized which was initially anticipated to be over a three to five-year period. We have been amortizing the obligation associated with the In-Store Service Agreement to revenues over the seven-year life of the agreement, the period in which its obligations were originally expected to be fulfilled. However, in December 2002, we and Bayer amended the In-Store Service Agreement to reduce the scope of services provided by approximately 80%. As a result, we reduced our obligation under the In-Store Service Agreement accordingly and reclassified $3.6 million to additional paid-in capital to reflect the increase in value of the In-Store Service Agreement.

On October 22, 2003, we gave notice to Bayer regarding the termination of the In-Store Service Agreement, as amended. Upon termination, which became effective on December 21, 2003, we were relieved of our obligation to perform merchandising services for Bayer. Accordingly, the remaining liability of $0.7 million on the date of termination was fully written off and recorded in selling, general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2003 included elsewhere in this Quarterly Report.

Following the termination of the In-Store Service Agreement, on December 22, 2003, we exercised our option to repurchase all outstanding common stock previously issued to Bayer. Bayer disputed our interpretation of a related agreement (the Exchange Agreement) as to the calculation of the repurchase price. As a result, we and Bayer entered negotiations to determine an agreed upon repurchase price based on equations included in the Exchange Agreement and other factors. We commenced an arbitration proceeding against Bayer to resolve the dispute on January 30, 2004. However, we reached a negotiated settlement of the dispute with Bayer on February 23, 2004, pursuant to which Bayer agreed to deliver all of its shares of our common stock to us in exchange for a cash payment of $1.5 million, cancellation of $22.5 million in remaining payments required to be made in connection with the common stock subscription receivable and forgiveness of interest related to such payments of $0.3 million.

We recorded treasury stock of $24.4 million, based on the consideration given to Bayer, and reduced the common stock subscription receivable by $22.5 million, the remaining balance on the date of repurchase. We also reversed the common stock repurchase option of $2.6 million as a result of its exercise and recorded a corresponding amount to additional paid-in capital. As a result of this transaction, we and Bayer agreed that the Exchange Agreement and In-Store Service Agreement are fully terminated, with the exception of certain provisions contained therein that expressly survive termination, and that the Supply Agreement shall remain in full force and effect according to its terms. Under the terms of the Supply Agreement, any remaining balance at January 30, 2009 is unconditionally and immediately payable to us by Bayer regardless of whether or not we purchase any ingredients under the Supply Agreement. As of June 30, 2004, the remaining balance of the Supply Agreement, net of amortization and excluding accrued interest, was $4.7 million.

Based on the independent third party valuation as of June 14, 2002, the original transaction date, we assigned a fair value of $30.7 million to the transaction components recorded in connection with the common stock issued to Bayer. The following table presents the values of these components as of June 30, 2004 and 2003 and December 31, 2003 based on such valuation and as a result of the activities and transactions previously described, net of amortization and excluding accrued interest:

June 30, December 31, Description 2004 2003 2003 Common stock subscription receivable $ - $ 24,177 $ 22,534 Supply Agreement 4,710 5,694 5,314 Repurchase option - 2,636 2,636 In-Store Service Agreement - (729 ) - $ 4,710 $ 31,778 $ 30,484

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

Results of Operations

All prior year results and discussion which follow reflect the segments previously described in this Quarterly Report.

Three Months Ended June 30, 2004 Compared to the Three Months Ended June 30, 2003

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

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 $33.8 million, or 16.4%, to $239.8 million for the three months ended June 30, 2004 from $206.0 million for the three months ended June 30, 2003. The increase was primarily due to our acquisition of Nu-Gro, as well as stronger sales of Consumer Household products compared to 2003. This increase was partially offset by a decline in sales of outdoor pesticides at one key retailer and a decline in sales of various lawn and garden products during the three months ended June 30, 2004.

Net sales in the Consumer Lawn and Garden segment increased $10.2 million, or 7.2%, to $152.5 million for the three months ended June 30, 2004 from $142.3 million for the three months ended June 30, 2003. Net sales of this segment increased primarily due to our acquisition of Nu-Gro, which contributed $17.9 million to the increase, and an increase in sales of various fertilizer products, partially offset by a decline in sales of outdoor pesticides at one key retailer and other growing media products. Net sales in the Consumer Household segment increased $10.1 million, or 16.6%, to $71.1 million for the three months ended June 30, 2004 from $61.0 million for the three months ended June 30, 2003. Net sales of this segment increased primarily due to an increase in sales of various indoor insecticide products and insect repellent products. Net sales in the Fertilizer Technology and Other segment increased $13.6 million to $16.3 million for the three months ended June 30, 2004 from $2.7 million for the three months ended June 30, 2003. Net sales of this segment increased primarily due to our acquisition of Nu-Gro, which

contributed $15.2 million to the increase, partially offset by the cessation of sales of certain non-core products in the second quarter of 2003.

Gross Profit. Gross profit increased $1.8 million, or 2.2%, to $84.0 million for the three months ended June 30, 2004 from $82.2 million for the three months ended June 30, 2003. The increase in gross profit was primarily due to our acquisition of Nu-Gro, increased sales of insecticide and insect repellent products in our Consumer Household segment and our continuing ability to achieve operational efficiencies from the merger and acquisition transactions we consummated in 2002. Such increase was partially offset by noncash amortization of the write-up of inventory acquired from Nu-Gro to estimated fair value through cost of goods sold, increased raw materials prices of certain products, including various commodities, the prices of which are driven substantially by increased energy costs, and higher freight costs. As a percentage of net sales, gross profit decreased to 35.0% for the three months ended June 30, 2004 from 39.9% for the three months ended June 30, 2003. The decrease in gross profit as a percentage of net sales was primarily due the factors previously described and the mix of product sales resulting from a decline in sales of outdoor pesticides at one key retailer.

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

Operating Income. As a result of the factors previously described, operating income decreased $10.1 million, or 22.8%, to $34.2 million for the three months ended June 30, 2004 from $44.3 million for the three months ended June 30, 2003. As a percentage of net sales, operating income decreased to 14.3% for the three months ended June 30, 2004 from 21.5% for the three months ended June 30, 2003.

Operating income in the Consumer Lawn and Garden segment decreased $11.2 million, or 42.9%, to $14.9 million for the three months ended June 30, 2004 from $26.1 million for the three months ended June 30, 2003. Operating income of this segment decreased primarily due to noncash amortization expense resulting from the write-up of inventory and intangible assets acquired from Nu-Gro to estimated fair value, higher raw materials costs for certain of our fertilizer products driven substantially by increased energy costs, increased freight and distribution costs and a decline in sales of certain lawn and garden products, including outdoor pesticides at one key retailer. Operating income in the Consumer Household segment increased $1.6 million, or 9.0%, to $19.4 million for the three months ended June 30, 2004 from $17.8 million for the three months ended June 30, 2003. Operating income of this segment increased primarily due to increased sales of insecticide and insect repellent products, partially offset by increased freight and distribution costs. Operating income in the Fertilizer Technology and Other segment decreased to an operating loss of $0.2 million for the three months ended June 30, 2004 from operating income of $0.4 million for the three months ended June 30, 2003. Operating income of this segment decreased primarily due to noncash amortization expense and increased operating costs resulting from our acquisition of Nu-Gro, as previously described.

Interest Expense. Interest expense increased $1.6 million, or 15.5%, to $11.9 million for the three months ended June 30, 2004 from $10.3 million for the three months ended June 30, 2003. The increase in interest expense was primarily due to additional borrowings to finance our acquisition of Nu-Gro and the write-off of $1.7 million of previously deferred financing fees recorded in connection with our repayment of obligations outstanding under our senior credit facility in effect prior to April 30, 2004, partially offset by a general decline in interest rates in 2004 compared to 2003.

Income Tax Expense. Income tax expense decreased due to the decline in income before income taxes and also due to the adjustment of deferred tax liabilities associated with certain assets acquired. As a result, our effective tax rate was 22.5% for the three months ended June 30, 2004 compared to 38.1% for the three months ended June 30, 2003.

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

Six Months Ended June 30, 2004 Compared to the Six Months Ended June 30, 2003

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:

Six Months Ended June 30, 2004 2003

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

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

Net sales in the Consumer Lawn and Garden segment increased $15.1 million, or 5.2%, to $303.0 million for the six months ended June 30, 2004 from $287.9 million for the six months ended June 30, 2003. Net sales of this segment increased primarily due to our acquisition of Nu-Gro, which contributed $17.9 million to the increase, and an increase in sales of various fertilizer products, partially offset by a decline in sales of outdoor pesticides at one key retailer and other growing media products. Net sales in the Consumer Household segment increased $13.7 million, or 15.5%, to $102.3 million for the six months ended June 30, 2004 from $88.6 million for the six months ended June 30, 2003. Net sales of this segment increased primarily due to an increase in sales of various indoor insecticide products and insect repellent products. Net sales in the Fertilizer Technology and Other segment increased $8.8 million, or 104.8%, to $17.2 million for the six months ended June 30, 2004 from $8.4 million for the six months ended June 30, 2003. Net sales of this segment increased primarily due to our acquisition of Nu-Gro, which contributed $15.2 million to the increase, partially offset by the cessation of sales of charcoal and non-core WPC products in the second quarter of 2003.

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

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

Operating Income. As a result of the factors previously described, operating income decreased $9.5 million, or 13.0%, to $63.5 million for the six months ended June 30, 2004 from $73.0 million for the six months ended June 30, 2003. As a percentage of net sales, operating income decreased to 15.0% for the six months ended June 30, 2004 from 19.0% for the six months ended June 30, 2003.

Operating income in the Consumer Lawn and Garden segment decreased $12.8 million, or 26.6%, to $35.4 million for the six months ended June 30, 2004 from $48.2 million for the six months ended June 30, 2003. Operating income of this segment decreased primarily due to noncash amortization expense resulting from the write-up of inventory and intangible assets acquired from Nu-Gro to estimated fair value, higher raw materials costs for certain of our fertilizer products driven substantially by increased energy costs, increased freight and distribution costs and a decline in sales of certain lawn and garden

products, including outdoor pesticides at one key retailer. Operating income in the Consumer Household segment increased $4.1 million, or 16.8%, to $28.5 million for the six months ended June 30, 2004 from $24.4 million for the six months ended June 30, 2003. Operating income of this segment increased primarily due to increased sales of insecticide and insect repellent products, partially offset by increased freight and distribution costs. Operating income in the Fertilizer Technology and Other segment decreased to an operating loss of $0.4 million for the six months ended June 30, 2004 from operating income of $0.3 million for the six months ended June 30, 2003. Operating income of this segment decreased primarily due to noncash amortization expense and increased operating costs resulting from our acquisition of Nu-Gro, as previously described.

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

Income Tax Expense. Income tax expense decreased due to the decline in income before income taxes and also due to the adjustment of deferred tax liabilities associated with certain assets acquired. As a result, our effective tax rate was 29.8% for the six months ended June 30, 2004 compared to 39.9% for the six months ended June 30, 2003.

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

Liquidity and Capital Resources

Our principal liquidity requirements are for working capital, capital expenditures and debt service under our senior credit facility and our 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. In addition to the Nu-Gro and UPG acquisitions described in more detail under the heading "Recent Events" in this section, we are regularly engaged in acquisition discussions with a number of other sellers although we cannot guarantee that any acquisitions will be consummated. If we do consummate any acquisitions, such transactions 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 our senior subordinated notes and amounts outstanding under our senior credit facility at maturity without requiring additional financing. Our ability to meet debt service 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.

Operating Activities. Operating activities provided net cash of $17.7 million for the six months ended June 30, 2004 compared to using net cash of $13.9 million for the six months ended June 30, 2003. The increase in net cash from operating activities was primarily due to a smaller increase in accounts receivable of $27.5 million and a greater increase in accrued expenses of $24.5 million in 2004 than in 2003, net of the effects of the Nu-Gro acquisition. Including the impact of the Nu-Gro acquisition, accounts receivable

increased $131.3 million during the six months ended June 30, 2004, as the Company reached its peak selling season in the second quarter of 2004. The acquisition of Nu-Gro contributed $53.6 million to the increase in accounts receivable as of the acquisition date and contributed $33.1 million in net sales during May and June 2004. The increase in net cash provided by operating activities was partially offset by an $18.3 million decline in accounts payable as our productions season begins to slow down, despite the $31.3 million addition to accounts payable from the Nu-Gro acquisition. 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. Accounts receivable and accounts payable generally build substantially in the first half of the year, in line with increasing sales as the season begins. These balances generally decline over the latter part of the year as the lawn and garden season winds down.

Investing Activities. Investing activities used net cash flows of $150.5 million for the six months ended June 30, 2004 compared to net cash provided of nearly $1.0 million for the six months ended June 30, 2003. The increase in net cash flows used in investing activities was due to cash paid for the acquisition of Nu-Gro of $146.4 million, including transaction costs of $5.0 million, and a $3.4 million increase in capital expenditures in 2004 compared to 2003. Capital expenditures relate primarily to the construction of additional capacity for production and distribution, the development and implementation of our ERP system and the enhancement of certain of our existing facilities. Cash used for capital expenditures was $6.8 million for the six months June 30, 2004 and $3.4 million for the six months June 30, 2003. The increase in capital expenditures from 2003 to 2004 was primarily related to increased construction costs to expand our production and distribution capacity. We expect to spend approximately $17.1 million on capital expenditures in 2004, exclusive of expenditures on capital leases.

Financing Activities. Financing activities provided net cash flows of $133.3 million for the six months ended June 30, 2004 compared to $13.6 million for the six months ended June 30, 2003. The increase in net cash flows provided by financing activities was primarily due to borrowings, net of repayments, of $201.9 million in 2004 compared to borrowings, net of repayments, of $8.2 million in 2003. The increase was partially offset, primarily due to payments of $57.6 million to repurchase all of our outstanding shares of preferred stock, including dividends accrued thereon of $19.9 million, and an increase in debt issuance costs of $7.0 million in 2004 compared to 2003 related to our new senior credit facility effective as of April 30, 2004.

Historically, we have utilized internally generated funds and borrowings under credit facilities to meet ongoing working capital and capital expenditure requirements. As a result of increased borrowings over the past several years, 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. We had unused availability under our revolving credit facility of $121.1 million as of June 30, 2004, $88.3 million as of June 30, 2003 and $87.3 million as of December 31, 2003.

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

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

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

The prior senior credit facility agreement contained affirmative, negative and financial covenants. Affirmative and negative covenants placed restrictions on, among other things, levels of investments, indebtedness, insurance, capital expenditures and dividend payments. The financial covenants required the maintenance of certain financial ratios at defined levels. As of and during the six months ended June 30, 2004 and 2003 and year ended December 31, 2003, as applicable, we were in compliance with all covenants. Under the prior senior credit facility agreement, interest rates on the revolving credit facility and Term Loan B ranged from 1.50% to 4.00% plus LIBOR, or other base rate as provided in the prior senior credit facility agreement, depending on certain financial ratios. LIBOR was 1.12% as of June 30, 2003 and 1.16% as of December 31, 2003. The interest rate applicable to Term Loan B was 5.32% as of June 30, 2003 and 5.12% as of December 31, 2003. Unused commitments under the revolving credit facility were subject to a 0.5% annual commitment fee.

The prior senior credit facility agreement allowed us to make prepayments in whole or in part at any time without premium or penalty. During the six months ended June 30, 2004, we made principal payments of $152.4 million to fully repay Term Loan B, which primarily represented optional principal prepayments. During the six months ended June 30, 2003, we made principal payments of $28.3 million to fully repay Term Loan A and $49.2 million on Term Loan B, which primarily represented optional principal prepayments. During the year ended December 31, 2003, we made principal payments of $28.3 million to fully repay Term Loan A and $69.6 million on Term Loan B, which primarily represented optional principal prepayments. The optional principal prepayments were made from operating cash flows and proceeds from the new senior credit facility described below and allowed us to remain several quarterly payments ahead of the regular payment schedule. In connection with these prepayments, we recorded write-offs totaling $1.7 million and $0.3 million in previously deferred financing fees which were included in interest expense in our consolidated statement of operations for the three months ended June 30, 2004 and 2003, respectively, and $1.7 million and $1.6 million for the six months ended June 30, 2004 and 2003, respectively.

The prior senior credit facility was secured by substantially all of our properties and assets and by substantially all of the properties and assets of our current domestic subsidiaries. The carrying amount of our obligations under the prior senior credit facility approximated fair value because the interest rates were based on floating interest rates identified by reference to market rates.

New Senior Credit Facility in Effect as of April 30, 2004. In conjunction with the closing of the acquisition of Nu-Gro, on April 30, 2004, we entered into a new $510.0 million senior credit facility with Bank of America, N.A., Banc of America Securities LLC, Citigroup Global Markets, Inc., Citicorp North America, Inc. and certain other lenders to retire the indebtedness under our prior senior credit facility and execute a new senior credit facility at more favorable rates, to provide funds for the Nu-Gro acquisition, to repurchase all of our outstanding preferred stock, along with accrued but unpaid dividends thereon, and for general working capital purposes. The new senior credit facility consists of (1) a $125.0 million U.S. dollar denominated revolving credit facility; (2) a $335.0 million U.S. dollar denominated term loan facility; and (3) a Canadian dollar denominated term loan facility valued at U.S. $50.0 million. Subject to

the terms of the new senior credit facility agreement, the revolving loan portion of the new senior credit facility matures on April 30, 2010, and the term loan obligations under the new senior credit facility mature on April 30, 2011. The term loan obligations are to be repaid in 28 consecutive quarterly installments commencing on June 30, 2004, with a final installment due on March 31, 2011. All of the loan obligations are subject to mandatory prepayment upon certain events, including sales of certain assets, issuances of indebtedness or equity or from excess cash flow. The new senior credit facility agreement also allows us to make voluntary prepayments, in whole or in part, at any time without premium or penalty.

The new senior credit facility agreement contains affirmative, negative and financial covenants that are more favorable than those of the prior senior credit facility. The negative covenants place restrictions on, among other things, levels of investments, indebtedness, capital expenditures and dividend payments that we may make or incur. The financial covenants require the maintenance of certain financial ratios at defined levels. Under the new senior credit facility agreement, interest rates on the new revolving credit facility can range from 1.75% to 2.50% plus LIBOR, or from 0.75% to 1.50% plus a base rate, subject to adjustment and depending on certain financial ratios. As of June 30, 2004, the term loans were subject to interest rates equal to 2.50% plus LIBOR or 1.50% plus a base rate, as provided in the new senior credit facility agreement. The interest rate applicable to our outstanding borrowings was 3.84% as of June 30, 2004, 5.32% as of June 30, 2003 and 5.12% as of December 31, 2003. Unused commitments under the new revolving credit facility are subject to a 0.5% annual commitment fee. Unused availability under the new revolving credit facility was $121.1 million as of June 30, 2004 which is reflective of $3.9 million of standby letters of credit pledged as collateral. The new senior credit facility is secured by substantially all of our properties and assets and substantially all of the properties and assets of our current and future domestic subsidiaries.

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 accrued on the Series B Notes at a rate of 97†8% per annum, payable semi-annually on April 1 and October 1.

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

97†8% Series D Senior Subordinated Notes. In May 2003, we registered $235.0 million in aggregate principal amount of 97†8% Series D senior subordinated notes (the Series D Notes and collectively with the Series B Notes and Series C Notes, the senior subordinated notes), with terms substantially similar to the Series B Notes and 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. On April 14, 2004, we repurchased all of the remaining Series B Notes outstanding, along with accrued interest and repurchase premium of 4.938%, for $3.3 million. As of June 30, 2004, $232.9 million of the Series D Notes were outstanding and no Series B Notes or Series C Notes were outstanding.

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

Our agreements that govern the new senior credit facility and the senior subordinated notes contain a number of significant covenants that could restrict or limit our ability to:

† incur more debt;

† pay dividends, subject to financial ratios and other conditions;

† make other distributions;

† issue stock of subsidiaries;

† make investments;

† repurchase stock;

† create subsidiaries;

† create liens;

† enter into transactions with affiliates;

† merge or consolidate; and

† transfer and sell assets.

The ability to comply with these provisions may 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 such agreements might adversely affect our growth, financial condition, results of operations and the ability to make payments on indebtedness or meet other obligations. As of and during the six months ended June 30, 2004 and 2003 and year ended December 31, 2003, we were in compliance with all covenants under the prior senior credit facility, the new senior credit facility and the senior subordinated notes in effect as of such dates.

Common Stock Transactions. In connection with our transaction with Bayer in June 2002, we issued 3,072,000 shares of Class A voting common stock valued at $15.4 million and 3,072,000 shares of Class B nonvoting common stock valued at $15.4 million and recorded $0.4 million of related issuance costs. We

repurchased these shares in February 2004. See more detail included under the heading "Recent Events" in this section.

Issuance of Common Stock. In conjunction with our acquisition of UPG on July 30, 2004, we issued 5.8 million shares each of Class A and Class B common stock for proceeds of $70.0 million.

Repurchase of Preferred Stock. In conjunction with our refinancing on April 30, 2004, we repurchased all 37,600 shares of outstanding Class A nonvoting preferred stock for $57.6 million, including $19.9 million for all accrued dividends thereon. Such repurchase resulting in a decline in additional paid in capital of $37.7 million.

Contractual Obligations

The following table presents the aggregate amount of future cash outflows of our contractual obligations as of June 30, 2004, except as otherwise noted, excluding future amounts due for interest on outstanding indebtedness:

Obligations due in:
Less Than 1 - 3 4 - 5 After 5 Contractual Obligations Total 1 Year Years Years Years Senior credit facility $ 384,543 $ 1,928 $ 11,566 $ 7,710 $ 363,339 97†8% Series D senior subordinated notes(1) 231,900 - - - 231,900 Capital leases 4,426 228 1,371 914 1,913 Operating leases 58,889 4,885 23,199 11,948 18,857 Purchase obligations(2) 46,414 29,258 14,846 2,310 - Professional services agreement(3) 4,128 378 2,250 1,500 - Total contractual obligations $ 730,300 $ 36,677 $ 53,232 $ 24,382 $ 616,009

(1) Excludes $1.0 million of unamortized premium.

(2) Represents unconditional purchase obligations for goods and services not presented elsewhere in the table.

(3) Includes monthly payments of $62,500 for management and other consulting services provided under a professional services agreement by affiliates of Thomas H. Lee Partners, L.P., which indirectly owns UIC Holdings, L.L.C., our majority owner. The professional services agreement automatically extends for successive one-year periods beginning January 20 of each year, unless notice is given as provided in the agreement.

We lease several of our operating facilities from Rex Realty, Inc., a company owned by certain of our stockholders 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. Management believes that the terms of these leases approximate fair value. Rent expense under these leases was $0.3 million for the three months ended June 30, 2004, $0.3 million for the three months ended June 30, 2003, $0.6 million for the six months ended June 30, 2004 and $0.6 million for the six months ended June 30, 2003.

We are obligated under additional operating leases for other operations and the use of warehouse space. The leases expire at various dates through January 31, 2015. Five of the leases provide for as many as five options to renew for five years each. Aggregate rent expense under these leases was $1.7 million for

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

Guarantees and Off-Balance Sheet Risk

In the normal course of business, we are a party to certain guarantees and financial instruments with off-balance sheet risk, such as standby letters of credit and indemnifications, which are not reflected in our consolidated balance sheets. We had $3.9 million as of June 30, 2004, $1.7 million as of June 30, 2003 and $2.7 million as of December 31, 2003 in standby letters of credit pledged as collateral to support the lease of our primary distribution facility in St. Louis, a U.S. customs bond, certain product purchases, various workers' compensation obligations and transportation equipment. These agreements mature at various dates through May 2005 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 the exposure to material losses resulting therefrom to be anything other than remote. As a result, we determined such agreements do not have significant value and have not recorded any related amounts in our consolidated financial statements.

We are the lessee under a number of equipment and property leases, as described previously. 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 such indemnifications do not have significant value and have not recorded any related amounts in our consolidated financial statements for such remote loss exposure.

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 71% 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 effect our consolidated financial position, results of operations or cash flows. For example, we experienced a late winter and cool, wet spring conditions in the first quarter of 2003 that delayed the start of the lawn and garden season, whereas the weather in the first quarter of 2004 was generally more mild and dry throughout North America.

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 potentially fewer regulatory burdens, easier access to financing, greater personnel resources, greater brand name recognition or larger research and development departments.

Increasing consolidation in the consumer lawn and garden industry may provide additional benefits to certain of our competitors, either through access to financing, resources or efficiencies of scale.

Our principal North American competitors for our Consumer Lawn and Garden and Consumer Household segments include: The Scotts Company, which markets lawn and garden products under the Scotts®, Ortho®, Roundup®, Green Cross®, Miracle-Gro®and Hyponex® brand names; S.C. Johnson & Son, Inc., which markets insecticide and repellent products under the Raid® and OFF!® brand names; Central Garden & Pet Company, which markets insecticide and garden products under the Grant's®, Maxide®, AMDRO®, IMAGE® and Pennington Seed® 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 Fertilizer Technology and Other 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 76% of our second quarter 2004 net sales and approximately 47% of our outstanding accounts receivable as of June 30, 2004. 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 de-stocking 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.

Annual Product Line Reviews. Each year, primarily during the third and fourth quarters, we undertake a series of meetings with a number of our 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 completed all of our annual product line reviews in 2003 for the 2004 season, individual retailers provided both positive and negative indications regarding certain elements of our programs. One large retailer indicated it would not be selling certain types of our outdoor insecticide products at its stores due to an arrangement with another vendor. However, the same retailer indicated it would add a number of our other SKUs to its 2004 offerings, which has resulted in the recovery of a significant portion of the lost sales but at lower margins. Conversely, other large retailers 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 more than offset the lost sales previously described.

Acquisition Strategy. We have completed a number of acquisitions and strategic transactions since 2001 and intend to grow through the acquisition of additional businesses. In addition to the Nu-Gro and UPG acquisitions described in more detail under the heading "Recent Events" in this section, we are regularly engaged in acquisition discussions with a number of other 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.

Substantial Indebtedness. We have a significant amount of debt. As of June 30, 2004, our total debt, excluding capital lease obligations, was $617.4 million. As of June 30, 2004, we had unused availability under the revolving portion of our new senior credit facility of $121.1 million. Our substantial indebtedness could have important consequences.

For example, it could:

† make it more difficult for us to satisfy our obligations under outstanding indebtedness and otherwise;

† increase our vulnerability to general adverse economic and industry conditions, including interest rate increases because a substantial portion of our borrowings are and will continue to be at variable rates of interest;

† require us to dedicate a substantial portion of cash flows from operating activities to payments on obligations under outstanding indebtedness and otherwise, which would reduce the cash flows available to fund working capital, capital expenditures, advertising, research and development efforts and other general corporate expenses;

† limit our flexibility in planning for, or reacting to, changes in our business, the industry in which we operate and the economy at large;

† place us at a competitive disadvantage compared to our competitors that have proportionately less debt; and

† limit our ability to borrow additional funds in the future, if needed, on reasonable terms.

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

extent, is subject to general economic, weather, financial, competitive, legislative, regulatory and other factors that are beyond our control.

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

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, or EPA, and, in many cases, similar state agencies before they can be manufactured or sold. In Canada, all products containing pesticides must be registered with the Pest Management Regulatory Agency and, in many cases, similar federal/provincial 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 Dursban, an active ingredient we used in our lawn and garden products. This had a material effect on our financial position, results of operations and 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 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 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 June 30, 2004 and 2003 and December 31, 2003, we believe we were substantially in compliance with applicable environmental and regulatory requirements.