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

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2001

OR

For the Transition period from                              to                             

Commission File No. 333-76055

UNITED INDUSTRIES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o.

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10K. (N/A)

        The aggregate market value of the voting and non-voting common stock held by non-affiliates is not determinable because there is no established public market for the Registrant's common stock.

        As of February 28, 2002, the Registrant had 27,721,000 Class A Voting and 27,721,000 Class B Non-Voting shares of Common stock outstanding and 37,600 Non-Voting shares of Class A Preferred stock outstanding.

        Documents Incorporated by Reference: None

PART I

ITEM 1. BUSINESS

General

        United Industries Corporation (the "Company") is the leading manufacturer and marketer of value-oriented products for the consumer lawn and garden care and insect control markets in the United States. The Company offers one of the broadest lines in the industry under a variety of brand names including Spectracide®, Spectracide Terminate™, Hot Shot®, Cutter®, Peters®, Real Kill® and No-Pest®, and as of December 2001, Sta-Green®, Vigoro®, Bandini® and Best®. The Company's "value" and "opening price point" brands generally compete with higher priced premium brands.

        In fiscal 2001, the Company generated net sales, net income and EBITDA of $273.3 million, $6.7 million and $58.2 million, respectively.

Industry Overview

        Retail sales of consumer lawn and garden pesticides and household insecticides in the United States totaled approximately $2.7 billion in 2001. The Company believes that the industry will continue to grow at approximately 4% over the next several years due to favorable demographic and economic trends. Approximately 67% of households in the United States, or 68 million households, participate in some form of lawn and garden care activity. Moreover, 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. As the baby boom generation ages, this segment is expected to grow at a rate more than twice that of the total population. The Company believes that this demographic trend is likely to increase the number of lawn and garden care product users and will contribute to continued growth of the industry.

Competitive Strengths

        Leading Value-Oriented Brands.    The Company is the leading manufacturer and marketer of value- oriented products for the consumer lawn and garden care and insect control markets in the United States. The Company's value and opening price point brands have driven a shift in the industry by offering innovative products comparable or superior in quality to premium brands at lower prices. As a result, the Company's products have developed significant brand awareness and customer loyalty.

        Strong Relationships With Leading Retailers.    The Company has developed "strong relationships" with a number of leading national retailers in the fastest growing retail channels. The Company's three largest customers, Home Depot, Lowes and Wal*Mart, each hold significant positions in the lawn and garden care market and have together opened approximately 1,400 net new stores over the last five years. As a result, the Company has been able to significantly increase sales as these retailers have added new stores and captured market share.

        Large Direct Sales Force.    The Company has one of the largest direct sales forces in the industry, with approximately 450 sales representatives dedicated to merchandising the Company's products. Each representative typically visits each store on a weekly basis to merchandise shelf space, collect inventory data, record orders and educate in-store personnel about the Company's products. This process facilitates real time marketing, re-ordering and pricing decisions, helping to maximize store-level profitability. In addition, the Company's sales force helps to identify emerging trends and develop products to meet consumers' needs. The Company also supports the Spectracide Terminate™ product through employing a seasonal in-store sales force of approximately 200 people.

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Business Strategy

        The Company plans to capitalize on its strengths and the favorable industry trends to enhance its leadership position in value and opening price point brands by implementing the following key elements of its business strategy:

        Enhance Value Brand Position.    The Company plans to maintain focus on building its leading value brands for the consumer lawn and garden pesticide and household insecticide markets. The Company's strategy is to provide innovative products of comparable or superior quality to competitors at a lower price to appeal to those consumers who are looking for a better value.

        Strong Relationships with Leading Retailers.    The Company believes that its strong value brand position coupled with its operational expertise will allow the Company to work with leading national retailers to develop opening price point brands. The Company currently manufactures and markets the opening price point brands for leading retailers such as Ace, Dollar General, Home Depot, Kmart and Lowes.

        Maximize Category Profitability for Retailers.    The Company focuses on maximizing retailers' profitability in selling the Company's products by being a low-cost provider and leveraging the Company's one-step distribution. The Company is a low-cost provider as a result of its high level of vertical integration and patented water-based aerosol technology. The Company has a one-step distribution process through its approximately 450 person exclusive direct sales force, one of the largest in the industry.

        Leverage Distribution Network.    The Company continually seeks to capitalize on its strong distribution network and relationships with retailers. The Company has increased its sales and improved operating leverage by supplying complementary product lines to retailers. The Company adds new products either through new product development or by acquiring product lines. The Company's new product development strategy has been to introduce innovative products that have superior performance, easy-to-understand packaging and value pricing. New products generate additional sales and generally provide higher margins to the Company and its retailers. The Company's brand acquisition strategy has been to selectively acquire product lines that can benefit from the Company's strong distribution network, product development expertise and other competitive strengths. Acquired product lines such as Peters® and Cutter® have experienced rapid growth upon integration into the Company's distribution network. Similarly, the Company expects that recently acquired product lines such as Sta-Green®, Vigoro®, Bandini® and Best® will experience rapid growth upon integration into the Company's distribution network.

The Company's History

        The Company was founded in 1969 and initially focused on metal works and anchor and bolt production. In 1973, the Company acquired Spray Chem, a contract manufacturer of liquid and aerosol insecticides and herbicides. In 1985, the Company acquired Real-Kill® and entered into the manufacture and distribution of branded products. In 1988, the Company formed its core businesses through the acquisition of certain assets of various businesses of Chesebrough-Ponds, a subsidiary of Unilever plc. The acquired brands included Spectracide®, Hot Shot®, Rid-a-Bug®, Bag-a-Bug® and No-Pest®. The acquisition of these brands expanded the Company's products to include a wide array of value-oriented indoor and outdoor pesticides. In 1994, the Company acquired assets relating to Cutter® from Miles, Inc. In 1995, the Company acquired assets from Alljack Company and Celex Corporation, including certain licensing rights and certain manufacturing rights of Kmart's opening price point brands. During December of 2001, the Company acquired the consumer lawn and garden fertilizer brands Vigoro®, Sta-Green® and Bandini®, and licensing rights to the Best® line of fertilizer products.

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These brands, formerly owned by Pursell Industries, Inc. complement the Company's consumer lawn, garden and insect control products.

        On January 20, 1999, pursuant to a Recapitalization Agreement with UIC Holdings, L.L.C., which is owned by Thomas H. Lee Equity Fund IV, L.P., the Company was recapitalized (the "Recapitalization") in a transaction in which: (i) UIC Holdings, L.L.C. purchased common stock from the Company's existing stockholders for approximately $254.7 million; (ii) the Company's senior managers purchased common stock from the Company's existing stockholders for approximately $5.7 million; and (iii) the Company used the net proceeds of a Senior Subordinated Facility (which was subsequently refinanced by the issuance of new notes) and borrowings under a Senior Credit Facility to redeem a portion of the common stock held by the Company's existing stockholders. Following the Recapitalization, UIC Holdings, L.L.C. owned approximately 91.9% of the Company's issued and outstanding common stock, the existing stockholders retained approximately 6.0% and the Company's senior managers owned approximately 2.1%. The total transaction value of the Recapitalization was approximately $652.0 million, including related fees and expenses, and the implied total equity value following the Recapitalization was approximately $277.0 million. In December 1999, however, the Company recorded a $7.2 million charge to equity to finalize costs associated with the Recapitalization, increasing the total transaction value to $659.2 million.

Products

        The Company manufactures and markets one of the broadest lines of pesticides in its industry, including herbicides and indoor and outdoor insecticides, as well as insect repellents and fertilizers, under a variety of brand names. The Company's value brands are targeted toward consumers who want products and packaging that are comparable or superior to premium brands, at lower prices, while the Company's opening price point brands are designed for consumers who want quality products and packaging and are extremely cost conscious. The following is a description of each of the Company's major products.

Value Brands (81% of 2001 net sales)

        The Company sells a broad line of value brands marketed under such names as Spectracide®, Spectracide Terminate™, Hot Shot®, Cutter®, Peters®, Vigoro®, Sta-Green® and Best®. Below is a description of each of the Company's value brands:

        Spectracide®.    The Spectracide® product line primarily consists of outdoor insect control products and herbicides, but it also includes indoor insect control products, specialty items such as plant disease control and rose care products, and regional products such as fire ant killer and Japanese beetle traps.

        Spectracide Terminate™.    Introduced in 1998, Spectracide Terminate™ is the first ever do-it-yourself consumer termite killing system. The product is based on professional bait stake technology and comes in 20 and 40 stake packages to meet the needs of a wide range of property sizes.

        Hot Shot®.    The Hot Shot® product line consists of household insecticides, including items such as roach and ant killers, flying insect killers, foggers, wasp and hornet killers, flea control products, and roach and ant baits.

        Cutter®.    The Cutter® product line provides protection for the entire family, ranging from area repellent citronella candles to products designed especially for use on children and the outdoorsman. The Company has repositioned Cutter® as a value brand and increased its distribution.

        Peters®.    Peters® is a water-soluble fertilizer available in all-purpose formulations as well as specialty formulations for lawns, roses, tomatoes, orchids and azaleas.

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        Vigoro®.    Vigoro has a broad line of lawn and garden fertilizers. The product was established in 1924 and has been sold exclusively to The Home Depot since 1996. The product gives premium performance at a value price. The brandname was acquired from Pursell Industries, Inc. on December 17, 2001.

        Sta-Green®.    Sta-Green has a complete line of lawn and garden fertilizers and value-added soils. The product was established in 1904 and has primarily been sold to Lowe's since 1996. The product gives premium performance at a value price. The brandname was acquired from Pursell Industries, Inc. on December 17, 2001.

        Best®.    Best is a regional brand of lawn and garden fertilizers. The product is licensed from J.R. Simplot and has strong brand recognition with independent retailers on the West Coast. The product gives premium performance at a value price. The license for the product was acquired from Pursell Industries, Inc. on December 17, 2001.

        Other Value Brands and Bandini®.    The Company also manufactures and markets regional value brands such as Rid-a-Bug® and Bag-a-Bug®. Real-Kill®, marketed as a Spanish-labeled product throughout the Caribbean, has become the leading brand of household insecticides in Puerto Rico. The Company also manufactures private label products for hardware co-operatives and other retailers and produce under contracts, pesticides and other chemicals for other customers. Bandini®, is a regional brand of lawn and garden fertilizers and soils. The product has strong brand recognition in California with regional listings with The Home Depot and Lowe's. The product is positioned as a premium product with premium pricing. The brand was acquired from Pursell Industries, Inc. on December 17, 2001.

Opening Price Point Brands (19% of 2001 net sales)

        An important aspect of the Company's growth over the past few years has been the Company's introduction of opening price point brands at home improvement centers, mass merchandisers, hardware stores and other outlets. By introducing these products, the Company has effectively acquired shelf space at the expense of its competitors by displacing premium brands and lower quality regional brands. The Company's strategic retail partners have also benefited from the Company's introduction of opening price point brands through streamlined logistics, better inventory control and higher margins. Below is a description of each of the Company's opening price point brands.

        Real-Kill®.    In 1997, the Company repositioned Real-Kill®, by re-launching the brand exclusively at Home Depot as its opening price point brand. The brand consists of indoor and outdoor pesticides, and rodenticides.

        No-Pest®.    In late 1997, the Company introduced No-Pest® exclusively at Lowes Companies as its opening price point brand. The brand consists of indoor and outdoor pesticides.

        Kgro®.    In late 1995, the Company acquired the manufacturing operations, that produce the Kmart owned opening price point brand, Kgro®. This brand consists of indoor and outdoor pesticides and soluble fertilizers. During the third quarter of 2000, Kmart notified the Company that the contract to manufacture Kgro® would not be renewed. However, as a result of acquiring brand names from Pursell Industries, the Company is now a private label manufacturer of Kgro® lawn and garden fertilizers. Pursell Industries, Inc. had been a Kmart supplier for ten years.

        Other Fertilizer Brands.    All-American® is a commodity "Large bag, field grade", opening price point fertilizer that offers "One-stop-shopping" for retailers. Parker® is a commodity fertilizer that is positioned between All-American and Bandini on price and has value-added timed-release nitrogen feature. These brands were acquired from Pursell Industries, Inc. on December 17, 2001.

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Customers

        The Company sells its products through all major retail channels, including home improvement centers, mass merchandisers, hardware stores, grocery and drug stores, wholesale clubs and garden centers. The Company is heavily dependent on Home Depot, Wal*Mart and Lowes for a substantial portion of its sales. These three customers collectively accounted for approximately 64%, 59%, and 56% of net sales for 2001, 2000, and 1999, respectively.

        The Company manufactures and supplies products to hundreds of customers representing more than 70,000 retail stores across the United States and in select locations in Canada, Puerto Rico and the Caribbean. The Company's leadership position in the home improvement center and mass merchandiser channels is a key element of its past and future success. Industry wide, category sales continue to shift to the home improvement center and mass merchandiser channels. Sales are seasonal, as approximately 75% of shipments will occur in the first two quarters of the fiscal year. For this reason, net revenue and results of operations are stronger from January to June.

Backlog

        The Company does not believe that backlog is a meaningful and material indicator of sales that can be expected for any period. All of the Company's backlog is expected to be filled within 12 months, but there can be no assurance that the backlog at any point in time will translate into sales in any particular subsequent period. The Company believes that the amount of its backlog at year-end is not material.

Sales and Marketing

        The Company conducts sales activities through its exclusive direct sales force, which consists of approximately 425 market sales managers and merchandisers and 25 area sales managers. Market sales managers typically visit accounts on a weekly basis to merchandise shelves and collect inventory data. The data collected includes real-time information on SKUs, inventory levels and sales by market sales managers and customers and is used to develop promotional campaigns and merchandising plans that maximize store level sales and profitability. This process facilitates real-time marketing, re-ordering and pricing decisions. In addition, the Company supports the Spectracide Terminate™ product through employing a seasonal in-store sales force of approximately 200 people.

        The Company's marketing department leads the new product development process and develops consumer support plans to help drive sales through the Company's strong distribution network. To promote the Company's products to consumers, the Company advertises on regional television, radio and print media, develops consumer promotions and engages in market research efforts.

Research and Development

        In 2001, 2000 and 1999, the Company spent $2.4, $1.0 and $1.0 million, respectively, on research and development. The Company's research and development department has developed over 100 new products since 1996.

Raw Materials and Suppliers

        The key elements of the Company's products are various specialty chemicals as well as packaging materials. The Company obtains raw materials from various suppliers, which the Company currently considers to be adequate. No single vendor is considered to be essential to the Company's operations, and the Company has never experienced a significant interruption of supply. All of the Company's lawn fertilizer products are supplied by Pursell Indusries, Inc. Several of the Company's agreements with

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suppliers provide for price adjustments. In addition, some of the Company's agreements with suppliers provide for exclusivity rights, subject to minimum purchase requirements.

Competition

        The Company operates in a highly competitive market and competes against a number of national and regional brands. The Company's principal national competitors include: The Scotts Company, which markets products under the Ortho®, Roundup® and Miracle-Gro® brand names and their full line of lawn and garden fertilizers and soils; Lesco, Inc., which markets products under the names Lesco®, Lesco Products®, Aim Lawn & Garden Products®, Professional Turf Products®, Scenic Green®, TruGreen®, Chemlawn® and Barefoot; S.C. Johnson & Son, Inc., which markets products under the Raid® and OFF!® brand names; Bayer A.G., which markets products under Bayer®; and The Clorox Company, which markets products under the Combat® and Black Flag® brand names.

Intellectual Property

        The Company operates and owns a substantial number of trademarks and tradenames including the following: Spectracide®, Spectracide Terminate™, Spectracide Pro®, Hot Shot®, Rid-a-Bug®, Bag-a-Bug®, Real-Kill®, No-Pest®, Shootout®, Gro Best®, Vigoro®, Sta-Green® and Bandini®, as well as the licensing rights to the Best® line of fertilizer products. The Company also licenses the Cutter® trademark and other members of the Cutter® family of trademarks from Bayer Corporation and the Peters® and Peters Professional® trademarks from The Scotts Company. These licenses are, in effect, perpetual and exclusive.

Employees

        As of December 31, 2001, the Company had approximately 800 full-time employees. Approximately 200 of the Company's employees are covered by collective bargaining agreements, which expire in August 2002, with Finishers, Maintenance Painters, Industrial and Allied Workers Local Union 980, AFL-CIO.

Environmental Matters

        The Company is subject to federal, state, local and foreign laws and regulations governing environmental matters. The Company's manufacturing operations are subject to requirements regulating air emissions, wastewater discharge, waste management and cleanup of contamination. Based on assessments conducted by independent environmental consultants the Company believes that it is in material compliance with these requirements and has no material environmental liabilities. The Company may be subject to fines or penalties if the Company fails to comply with these environmental laws and regulations. The Company does not anticipate any material capital expenditures for environmental controls in 2002.

        The Company's pesticide products must be reviewed and registered by the U.S. Environmental Protection Agency (EPA) and similar state agencies or, in foreign jurisdictions, by foreign agencies, before they can be marketed. The Company devotes substantial resources to maintaining compliance with these registration requirements. If the Company fails to comply, however, registration of the affected pesticide could be suspended or canceled, and the Company could be subject to fines or penalties. Additionally, the EPA is in the process of re-registering all pesticides and is requiring manufacturers to supply the EPA with additional data regarding their pesticides. Where possible, the Company is working with trade associations and suppliers to reduce the Company's cost of developing this data.

        The Company's fertilizer products must be reviewed and registered by each state prior to sale. The states typically check the weight of the product and the accuracy of the analysis statement on the

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packaging. Other consumer products the Company markets are subject to the safety requirements of the Consumer Product Safety Commission. If the Company fails to comply with any of these requirements, the Company could be suspended or prohibited from marketing the affected product.

Financial Information about Industry and Geographic Segments

        For detailed information concerning the Company's industry and geographic segments, reference is made to Note 19 of the Financial Statements included elsewhere in the Annual Report on Form 10-K.

ITEM 2. PROPERTIES

        The Company has three manufacturing facilities located in Vinita Park, Missouri and one manufacturing facility in Plymouth, Michigan. Four types of product categories are manufactured at these facilities: aerosols, liquids, baits and water-soluble fertilizers. The typical manufacturing process consists of four stages: batch, fill, label and pack. The Company currently produces over 300 SKUs through the Company's aerosol production lines, three liquid production lines, bait line and two water-soluble fertilizer production lines. The Company's production lines are flexible and can operate at a variety of filling speeds and produce multiple shipping configurations. The Company often uses outside manufacturers for the production of granular insecticides, fertilizers and candles.

        The Company has distribution centers located in Bridgeton, Vinita Park and Overland, Missouri; Allentown, Pennsylvania; Gainesville, Georgia; and Ontario, California. During December of 2001, the Company commenced with a consolidation of three local warehouses to the one located in Bridgeton, Missouri. The consolidation project should result in cost savings to the Company. The Company recorded a $3.7 million charge during the fourth quarter of 2001, primarily attributable to facility exit costs related to the warehouse consolidation project, of which the majority of the costs will represent duplicate rent payments in 2002. This project is expected to have a two to three year payback.

        In management's opinion, the current facilities generally are well maintained and provide adequate production capacity for future operations. However, management continues to evaluate the need to reposition the Company's portfolio of businesses and facilities to meet the needs of the changing markets it serves.

        The Company's manufacturing and distribution facilities are primarily leased under long-term operating leases with renewal options.

ITEM 3. LEGAL PROCEEDINGS

        The Company is involved in litigation and arbitration proceedings in the normal course of business. When it appears probable in management's judgment that the Company will incur monetary damages or other costs in connection with claims and proceedings, and such costs can be reasonably estimated appropriate liabilities are recorded in the financial statements and charges are made against earnings.

        Management believes the possibility of a material adverse effect on the Company's financial position, results of operations and cash flows from the claims and proceedings described above is remote.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        On December 17, 2001, the holders of a majority of the issued and outstanding shares of the Company's capital stock entitled to vote, in lieu of a special meeting of the stockholders of the

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Company, approved an amendment to the Company's Restated Certificate of Incorporation by written consent. The Company's Restated Certificate of Incorporation was amended to:

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Create 22,600 shares of $0.01 par value Class A Preferred Stock to be sold to UIC Holdings, L.L.C. for $1,000 per share. Dividends on the shares of Class A Preferred Stock accrue at 15% of their liquidation value. The liquidation value of any share of Class A Preferred Stock is equal to $1,000. Dividends to the extent not paid on December 31 of each year shall be cumulative. As of December 31, 2001 the total number of shares of Class A Preferred Stock outstanding is 22,600 and the cumulative dividend payable is $0.1 million.



•

Increase the Company's total authorized Class A Voting Common Stock from 34,100,000 to 37,600,000 shares to accommodate the Company's granting of Stock Purchase Warrants to UIC Holdings, L.L.C., which will receive a 10-year option to purchase up to 3,150,000 shares of Class A Voting Common Stock at $3.25 per share.



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Increase the Company's total authorized Class B Non-Voting Common Stock from 34,100,000 to 37,600,000 shares to accommodate the Company's granting of Stock Purchase Warrants to UIC Holdings, L.L.C., which will receive a 10-year option to purchase up to 3,150,000 shares of Class B Non-Voting Common Stock at $3.25 per share.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The Company does not have publicly held common stock. The Company does not pay dividends on common stock, nor does it intend to pay any dividends in the future. In addition, the Company's Senior Credit Facility includes a limitation on the Company's ability to pay dividends on common stock.

        On December 17, 2001, the Company issued 22,600 shares of $0.01 par value Class A Preferred Stock to UIC Holdings, L.L.C. for cash consideration of $22,350,000. The Company issued the 22,600 shares of Class A Preferred Stock to UIC Holdings, L.LC. pursuant to the exemption set forth in Rule 506 under the Securities Act of 1933. In addition, the Company issued Stock Purchase Warrants to UIC Holdings, L.L.C. for a 10-year option to purchase up to 3,150,000 shares of Class A Voting Common Stock at $3.25 per share and Stock Purchase Warrants to UIC Holdings, L.L.C. for a 10-year option to purchase up to 3,150,000 shares of Class B Non-Voting Common Stock at $3.25 per share.

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ITEM 6. SELECTED FINANCIAL DATA

        The selected historical financial data for the fiscal years ended December 31, 2001, 2000 and 1999 have been derived from audited financial statements included elsewhere in this report. The historical financial data for the years ended December 31, 1999, 1998, 1997 and 1996 have been derived from audited financial statements, which do not appear in this report. When you read this selected historical financial data, it is important that you read along with it the financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations," all of which are included in this report.

(1)

EBITDA represents income from continuing operations before interest expense, income tax expense, depreciation and amortization, facilities and organizational rationalization charge, Dursban charge, recapitalization transaction fees, change of control bonuses, severance charges and non-recurring litigation charges. During 2001, the Company incurred an $8,500 charge for facilities and organizational rationalization. During 2000, the Company incurred an $8,000 charge for Dursban related expenses. During 1999, the Company incurred charges of $10,690 for recapitalization transaction fees, $8,645 for change of control bonuses and $2,446 for severance charges. For 1999 and 1998, the Company incurred charges of $1,647 and $2,321 for non-recurring litigation charges, respectively. The Company has included information concerning EBITDA because the Company believes certain investors use it as one measure of a company's historical ability to fund operations and meet its financial obligations. EBITDA is not intended to represent cash flow from operations as defined by accounting principles generally accepted in the United States of America and should not be used as an alternative to operating income or income from continuing operations as an indicator of the Company's operating performance or cash flow as a measure of

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liquidity. In addition, the Company's definition of EBITDA may not be comparable to that reported by other companies. EBITDA is calculated as follows:

(a)

Does not reflect the elimination of stockholder salaries and certain fringe benefits that were in effect prior to the recapitalization and were reflective of the private ownership structure that existed prior to the Recapitalization, offset by the salary and fringe benefit structure that was implemented with the Recapitalization. The net effect of these related party transaction amounts would be to increase income from continuing operations by $7,740, $3,061 and $3,847 for the years ended 1998, 1997 and 1996.

(b)

As of December 31, 1999, the Company recorded $31,312 in fees and expenses associated with the Recapitalization. Fees and expenses that were specifically identified as relating to the issuance of debt were capitalized and will be amortized over the life of the debt as interest expense. The fees and expenses that were specifically identified as relating to the equity transactions were charged directly to equity. Other transaction fees were allocated between debt and Recapitalization transaction fees expense based on United's estimate of the effort spent in the activity, giving rise to the fee or expense.

(c)

During 1999, the Company recorded various charges as follows: (i) change of control bonuses paid to certain members of senior management amounting to $8,645; (ii) $2,446 of severance charges incurred as a result of the President and Chief Executive Officer and Senior Vice President, Sales terminating their employment with the Company; and (iii) $1,500 of non-recurring litigation charges to primarily reserve for the expected cost of an adverse judgement on a counterclaim filed by defendants in the case of United Industries Corporation vs. John Allman, Craig Jackman et al. This case was settled in July 1999. In 1998, the Company recorded non-recurring litigation charges of $2,321 related to two separate lawsuits. In March 1998, a judgment was entered against the Company, in a lawsuit filed by the spouse of a former employee claiming benefits from a United-owned key man life insurance policy. The Company recorded a charge of $1,200 for this case in the first quarter of 1998 and an additional $147 in the fourth quarter of 1999. The Company also incurred costs pertaining to certain litigation concerning the advertising of the Company's Spectracide Terminate™ product for which a settlement was negotiated. Costs related to this case amounted to $1,121.

(d)

During 2000, the U.S. Environmental Protection Agency and manufacturers of chlorpyrifos (the active ingredient in Dursban pesticidal products) entered into a voluntary agreement that provides for withdrawal of virtually all residential uses of Dursban. Manufacturing of new Dursban products intended for residential use ceased by December 1, 2000, and formulators could no longer sell such products to retailers after February 1, 2001. Retailers were no longer be able to sell Dursban products after December 31, 2001. The Company assessed the potential financial impact of the Dursban agreement on its operations. A charge of $8,000 was recorded in September of 2000 for costs associated with this agreement. The Company has replacement chemicals for Dursban, which are currently being used in production of new pesticidal products.

(e)

During 2001, the Company recorded a charge related to rationalizing facilities, organization and a significant product line. $2,700 of the charge was recorded in cost of goods sold.

(2)

Capital expenditures for 2001, 2000 and 1999, exclude capital lease obligations of $0, $5,344 and $9,215 respectively.

(3)

For purposes of this calculation, earnings are defined as income before provision for income taxes and discontinued operations plus fixed charges. Fixed charges include interest expense on all indebtedness (including amortization of deferred financing costs) and the portion of operating lease rental expense which management believes is representative of the interest factor of rent expense (approximately one-third of rent expense).

(4)

Working capital is defined as current assets (excluding cash and cash equivalents) less current liabilities (excluding short-term debt and current portion of long-term debt).

(5)

The Company advanced its strategic plan for growth in the consumer lawn and garden category by acquiring leading consumer fertilizer brands VIGORO®, STA-GREEN® and BANDINI®, as well as acquiring licensing rights to the BEST® line of fertilizer products on December 17, 2001. The cost of the acquisition was $37,500 and is the primary reason for the increase in total assets from December 2000.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

        Certain statements contained herein constitute "forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended." All statements other than statements of historical facts included in this report regarding the Company's financial position, business strategy, budgets and plans and objectives of management for future operations are forward-looking statements. Although the management of the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results to be materially different from those contemplated or projected, forecasted, estimated or budgeted in or expressed or implied by such forward-looking statements. Such factors include, among others, the risks set forth under Item 7A of this report as well as the following: general economic and business conditions; governmental regulations; industry trends; the loss of major customers or suppliers; cost and availability of raw materials; changes in business strategy or development plans; availability and quality of management; and availability, terms and deployment of capital.

Overview

        The Company is the leading manufacturer and marketer of value-oriented branded products for the consumer lawn and garden pesticide and household insecticide markets in the United States. The Company manufactures and markets one of the broadest lines of pesticides in the industry, including herbicides and indoor and outdoor insecticides, as well as insect repellents and fertilizers, under a variety of brand names. The Company believes that the key drivers of growth for the $2.7 billion consumer lawn and garden pesticide and household insecticide retail markets include: (a) the aging of the United States population; (b) growth in the home improvement center and mass merchandiser channels; and (c) shifting consumers' preferences toward value-oriented branded products.

        The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the historical financial information included in the audited financial statements and the related notes to the audited financial statements.

Critical Accounting Policies

        The Company's significant accounting policies are described in Note 1 to the consolidated financial statements included in Item 14 of this Form 10-K. Note that the preparation of this Annual Report on Form 10-K requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. The Company believes that the most critical accounting policies include revenue recognition, inventories, promotion expense and income taxes.

Revenue recognition

        Net sales are gross sales of products sold to customers in accordance with the shipping terms applicable to each sale less any customer discounts from list price and customer returns and less promotion expense of products through cooperative programs with retailers. The Company's provision for customer returns is based on historical sales returns, analysis of credit memo data and other known

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factors. If the historical data the Company uses to calculate these estimates does not properly reflect future returns, revenue could be overstated.

Inventories

        Inventories are stated at the lower of cost or market, with cost being determined using the first-in, first-out method. Cost includes raw materials, direct labor and overhead. Provision for potentially oblolete or slow-moving finished goods and raw materials are made based on management's analysis of inventory levels and future sales forecasts. In the event that our estimates of future usage and sales differ from actual results, we may need to establish an additional provision for obsolete or slow-moving finished goods and raw materials.

Promotion expense

        The Company advertises and promotes its products through national and regional media. Products are also advertised and promoted through cooperative programs with retailers. The Company expenses advertising and promotion costs as incurred, although costs incurred during interim periods are generally expenses ratably in relation to revenues. Significant management judgment is required to estimate the amount of costs under our cooperative programs that has been incurred by the retailers. Actual costs incurred by the Company may differ significantly from our estimates if factors such as the level of participation and success of the retailers' programs or other conditions differ from our expectations.

Income taxes

        In conjunction with the Recapitalization, the Company converted from an "S" corporation to a "C" corporation. As a "C" corporation, the Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are recovered or settled. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $112.3 million as of December 31, 2001, due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily consisting of certain net operating losses carried forward and deductible goodwill created in conjunction with the Company's Recapitalization. The valuation allowance is based on our estimates of taxable income by jurisdiction in which our deferred tax assets will be recoverable. In the event that actual results differ from those estimates or we adjust these estimates in future periods we may need to establish an additional valuation allowance or reduce our current valuation allowance, which could materially impact our financial position and results of operations.

Results of Operations

        The following discussion regarding results of operations refers to net sales, cost of goods sold, advertising and promotion expense and selling and general and administrative expenses, which the Company defines as follows:

•

Net sales are gross sales of products sold to customers in accordance with the shipping terms applicable to each sale less any customer discounts from list price and customer returns and less promotion expense of products through cooperative programs with retailers.



•

Cost of goods sold includes active and inert ingredients, container and packaging material costs as well as direct labor, outside labor, manufacturing overhead and freight.

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•

Selling and general and administrative expenses include all costs associated with the selling and distribution of product, product registrations and administrative functions such as finance, information systems and human resources.

        The following table sets forth the percentage relationship of certain items in the Company's Statements of Operations to net sales for fiscal 2001, 2000 and 1999: