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TABLE OF CONTENTS

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

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2003

OR

For the transition period from                               to                              

Commission File Number: 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

        As of May 8, 2003, the registrant had 33,188,000 Class A voting and 33,188,000 Class B nonvoting shares of common stock outstanding and 37,600 Class A nonvoting shares of preferred stock outstanding.

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

UNITED INDUSTRIES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
PERIOD ENDED MARCH 31, 2003

TABLE OF CONTENTS

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

        This Quarterly Report contains forward-looking statements. These statements are subject to a number of risks and uncertainties, many of which are beyond our control. All statements other than statements of historical facts included in this Quarterly Report, including statements regarding our strategy, future operations, financial position, estimated revenues, projected costs, projections, plans and objectives of management, are forward-looking statements. As may be used in this Quarterly Report, the words "will," "believe," "plan," "may," "strategies," "goals," "anticipate," "intend," "estimate," "expect," "project" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date they were made. We do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that our plans, intentions and expectations reflected in or suggested by any forward-looking statements we make in this Quarterly Report are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved.

        Our actual results could differ significantly from the results discussed in any forward-looking statements contained in this Quarterly Report. Factors that could cause or contribute to such differences include the risks set forth in our Annual Report on Form 10-K including, but not limited to, the following:

•

general economic and business conditions;



•

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



•

weather conditions;



•

our ability to repay our indebtedness or meet other obligations;



•

industry trends and competition;



•

our ability to manage rapid growth and the integration of acquisitions;



•

public perception regarding the safety of our products;



•

governmental regulations;



•

terrorist attacks or acts of war;



•

cost and availability of raw materials;



•

changes in our business strategy or development plans;



•

our ability to recruit and retain quality personnel; and



•

availability, terms and deployment of capital resources.


TRADEMARKS

        Spectracide®, Spectracide Triazicide™, Spectracide Terminate®, Hot Shot®, Garden Safe™, Schultz®, Expert Gardener®, Rid-a-Bug®, Bag-a-Bug®, Real-Kill®, No-Pest®, Repel®, Gro Best®, Vigoro®, Sta-Green® and Bandini® are our trademarks and trade names. We also license certain Cutter® trademarks from Bayer A.G. and certain Peters® and Peters Professional® trademarks from The Scotts Company. Other trademarks and trade names used in this Quarterly Report are the property of their respective owners.

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

(Unaudited)

See accompanying notes to consolidated financial statements.

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UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

5

UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

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UNITED INDUSTRIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except where indicated)

(Unaudited)

Note 1—Description of Business and Basis of Presentation

        Operating as Spectrum Brands, United Industries Corporation (the Company) manufactures and markets one of the broadest lines of pesticides in the industry, including herbicides and indoor and outdoor insecticides, as well as insect repellents, fertilizers, growing media and soils under a variety of brand names. The Company's value brands are targeted toward consumers who want products and packaging that are comparable or superior to, and at lower prices than, premium price brands, while its opening price point brands are designed for cost conscious consumers who want quality products. The Company's products are marketed to mass merchandisers, home improvement centers, hardware chains, nurseries and garden centers.

        As described further in Note 12, the Company's operations are divided into three business segments: Lawn and Garden, Household and Contract. The Company's lawn and garden brands include, among others, Spectracide®, Garden Safe®, Real-Kill® and No-Pest® in the controls category, as well as Sta-Green®, Vigoro®, Schultz® and Bandini® brands in the lawn and garden fertilizer and growing media categories. The Company's household brands include, among others, Hot Shot®, Cutter® and Repel®. The Contract segment represents non-core products and includes various compounds and chemicals such as, among others, charcoal, water purification tablets, first-aid kits, barbeque sauce, fish attractant, cleaning solutions and automotive products.

        The accompanying consolidated financial statements include the accounts and balances of the Company and its wholly owned subsidiaries. All material intercompany transactions have been eliminated in consolidation. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures typically included in the Company's Annual Report on Form 10-K have been condensed or omitted for this report. As such, this report should be read in conjunction with the consolidated financial statements and accompanying notes in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. Certain amounts in the 2002 consolidated financial statements included herein have been reclassified to conform with the 2003 presentation. In addition, the Company has reclassified its borrowing on cash overdrafts from operating activities to financing activities in the accompanying consolidated statements of cash flows.

        The accompanying consolidated financial statements are unaudited. In the opinion of management, such statements include all adjustments, which consist of only normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. Interim results are not necessarily indicative of results for a full year. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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Note 2—Inventories

        Inventories consist of the following:

Note 3—Equipment and Leasehold Improvements

        Equipment and leasehold improvements consist of the following:

        During the three months ended March 31, 2003, the Company disposed of equipment with a historical cost of $10.3 million related to a manufacturing facility previously closed during 2002. No gain or loss was recognized in connection with the disposal as the equipment was fully depreciated.

        For the three months ended March 31, 2003 and 2002 and the year ended December 31, 2002, depreciation expense was $1.8 million, $2.2 million and $7.3 million, respectively. As of March 31, 2003 and 2002 and December 31, 2002, the cost of the aircraft held under capital lease was $5.3 million and related accumulated amortization was $3.5 million, $2.3 million, and $3.2 million respectively.

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Note 4—Goodwill and Intangible Assets

        Goodwill and intangible assets consist of the following:

        On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and broadens the criteria for recording intangible assets separately from goodwill. SFAS No. 142, among other things, eliminates the amortization of goodwill and indefinite-lived intangible assets and requires them to be tested for impairment at least annually. During 2002, both at adoption and at the end of the year, the Company performed an impairment analysis of its goodwill. No impairment charges resulted from these analyses. Prospectively, the Company will test goodwill for impairment annually, or more frequently as warranted by events or changes in circumstances. For the year ended December 31, 2002, goodwill recorded in connection with acquisitions was $3.3 million. No amounts were recorded for goodwill during the three months ended March 31, 2003 or 2002.

        Intangible assets include patents, trade names and other intangible assets, which are valued at acquisition through independent appraisals, where material, or using other valuation methods. Intangible assets are amortized using the straight-line method over periods ranging from 4 to 40 years. The useful lives of intangible assets were not revised as a result of the adoption of SFAS No. 142.

        During the three months ended March 31, 2003, the Company obtained the final report of an independent third party valuation of the assets acquired and liabilities assumed in its merger with Schultz Company in May 2002. The valuation report indicated the full value of the purchase price should be allocated to trade names and customer relationships obtained in the merger with no value ascribed to goodwill. As a result, the Company reclassified $19.7 million from goodwill to intangible

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assets and is amortizing customer relationships using the straight-line method over the remaining useful life, four years. The following table presents the reclassification described:

        For the three months ended March 31, 2003 and 2002 and the year ended December 31, 2002, aggregate amortization expense related to intangible assets was $0.4 million, $0.1 million and $2.9 million, respectively. The following table presents estimated amortization expense for intangible assets during each of the next five years:

Note 5—Other Assets

        Other assets consist of the following:

        In connection with its issuance of 9⁷/8% Series C senior subordinated notes in March 2003 (see Note 8), the Company recorded $2.2 million of deferred financing fees which are being amortized over the term of the notes through April 1, 2009. In connection with the repayment of a portion of its

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outstanding obligations under the Senior Credit Facility in March 2003 using proceeds from the issuance of such notes, the Company recorded a write-off of $1.3 million of previously deferred financing fees which is reflected in interest expense in the accompanying consolidated statement of operations for the three months ended March 31, 2003.

Note 6—Accrued Expenses

        Accrued expenses consist of the following:

Note 7—Charge for Facilities and Organization Rationalization

        During the fourth quarter of 2001, the Company recorded a charge of $8.5 million, which included $5.6 million related to facilities and organizational rationalization which primarily affected the Company's Lawn and Garden segment results, $2.7 million of inventory obsolescence recorded in cost of goods sold and $0.2 million of miscellaneous costs recorded in selling, general and administrative expenses. In connection therewith, 85 employees were terminated and provided severance benefits. Approximately $3.5 million of costs associated with the facilities and organizational rationalization, which related primarily to facility exit costs and resultant duplicate rent payments in 2002, were incurred by December 31, 2002. Amounts remaining in the facilities and organizational rationalization accrual as of March 31, 2003 primarily represent costs associated with the restoration of leased facilities to their original condition and duplicate rent payments which are expected to be incurred by the end of 2003.

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        The following table presents amounts charged against the facilities and organizational rationalization accrual:

Note 8—Long-term Debt

        Long-term debt, excluding capital lease obligation, consists of the following:

Senior Credit Facility

        The Senior Credit Facility, as amended as of March 14, 2003, was provided by Bank of America, N.A. (formerly known as NationsBank, N.A.), Morgan Stanley Senior Funding, Inc. and Canadian Imperial Bank of Commerce and consists of (1) a $90.0 million revolving credit facility (the Revolving Credit Facility); (2) a $75.0 million term loan facility (Term Loan A); and (3) a $240.0 million term loan facility (Term Loan B). The Revolving Credit Facility and Term Loan A mature on January 20, 2005 and Term Loan B matures on January 20, 2006. The Revolving Credit Facility is subject to a clean-down period during which the aggregate amount outstanding under the Revolving Credit Facility shall not exceed $10.0 million for 30 consecutive days during the period between August 1 and November 30 in each calendar year. As of March 31, 2003 and 2002, $10.1 million and $58.4 million were outstanding under the Revolving Credit Facility, respectively. As of December 31, 2002, the clean-down period had been completed and no amounts were outstanding under the Revolving Credit Facility. There were no compensating balance requirements during each of the periods presented.

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        On March 14, 2003, the Senior Credit Facility was amended to permit the issuance of 9⁷/8% Series C senior subordinated notes due 2009 (the Series C Notes) and 9⁷/8% Series D senior subordinated notes due 2009 (the Series D Notes). The Company intends to offer the Series D Notes in 2003 in exchange for outstanding Series B Notes and Series C Notes. This amendment did not change any existing covenants of the Senior Credit Facility.

        The principal amount of Term Loan A was to be repaid in 24 consecutive quarterly installments commencing June 30, 1999 with a final installment due January 20, 2005. However, in connection with the issuance of the Series C Notes, as described below, the Company used a portion of the proceeds to repay the outstanding balance under Term Loan A. The principal amount of Term Loan B is to be repaid in 28 consecutive quarterly installments commencing June 30, 1999 with a final installment due January 20, 2006. The Company used a portion of the proceeds from the issuance of the Series C Notes to repay $25.9 million of the balance under Term Loan B.

        The Senior Credit Facility agreement contains restrictive affirmative, negative and financial covenants. Affirmative and negative covenants place restrictions on, among other things, levels of investments, indebtedness, insurance, capital expenditures and dividend payments. The financial covenants require the maintenance of certain financial ratios at defined levels. As of and during the three months ended March 31, 2003 and 2002 and the year ended December 31, 2002, the Company was in compliance with all covenants. While the Company does not anticipate an event of non-compliance in the foreseeable future, the effect of non-compliance would require the Company to request a waiver or an amendment to the Senior Credit Facility. Amending the Senior Credit Facility could result in changes to the Company's borrowing capacity or its effective interest rates. Under the agreements, interest rates on the Revolving Credit Facility, Term Loan A and Term Loan B range from 1.50% to 4.00% above LIBOR, depending on certain financial ratios. LIBOR was 1.29% as of March 31, 2003, 2.03% as of March 31, 2002 and 1.38% as of December 31, 2002. Unused commitments under the Revolving Credit Facility are subject to a 0.5% annual commitment fee. The interest rate of Term Loan A was 5.41% and 4.67% as of March 31, 2002 and December 31, 2002, respectively. The interest rate of Term Loan B was 5.31% and 5.91% as of March 31, 2003 and 2002, respectively, and 5.42% as of December 31, 2002.

        The Senior Credit Facility may be prepaid in whole or in part at any time without premium or penalty. During the three months ended March 31, 2003, the Company made principal payments of $28.3 million to fully repay Term Loan A and $25.9 million on Term Loan B, both of which represent optional principal prepayments. In connection with these prepayments, the Company recorded a write-off of $1.3 million of previously deferred financing fees which is reflected in interest expense in the accompanying consolidated statement of operations for the three months ended March 31, 2003. For the year ended December 31, 2002, the Company made principal payments of $11.0 million on Term Loan A and $2.0 million on Term Loan B, which included optional principal prepayments of $6.3 million on Term Loan A and $1.1 million on Term Loan B. The optional prepayments in the three months ended March 31, 2002 were made to remain two quarterly payments ahead of the regular payment schedule. Under the Senior Credit Facility agreement, each prepayment may be applied to the next principal repayment installments. The Company remains two principal payments ahead of schedule

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on Term Loan B and intends to pay a full year of principal installments in 2003 in accordance with the terms of the Senior Credit Facility.

        The carrying amount of the Company's obligations under the Senior Credit Facility approximates fair value because the interest rates are based on floating interest rates identified by reference to market rates.

Senior Subordinated Notes

        In March 2003, the Company issued in a private placement $85.0 million in aggregate principal amount of 9⁷/8% Series C senior subordinated notes due April 1, 2009 (the Series C Notes). Gross proceeds from the issuance were $86.3 million and included a premium of $1.3 million which is being amortized over the term of the Series C Notes using the effective interest method. Interest on the Series C Notes accrues at a rate of 9⁷/8% per annum, payable semi-annually on April 1 and October 1. Net proceeds of $84.1 million were used to repay $30.0 million of the Revolving Credit Facility, fully repay $28.3 million outstanding under Term Loan A and repay $25.9 million outstanding under Term Loan B. The Series C Notes were issued with terms substantially similar to the Series B Notes. In connection with its issuance of the Series C Notes, the Company recorded $2.2 million of deferred financing fees which are being amortized over the term of the Series C Notes. As of March 31, 2003, $85.0 million of the Series C Notes were outstanding.

        In November 1999, the Company issued $150.0 million in aggregate principal amount of 9⁷/8% Series B senior subordinated notes (the Series B Notes and, collectively with the Series C Notes, the Senior Subordinated Notes) due April 1, 2009. Interest accrues at a rate of 9⁷/8% per annum, payable semi-annually on April 1 and October 1.

        The Company's indentures governing the Senior Subordinated Notes contain a number of significant covenants that could adversely impact the Company's business. In particular, the indentures limit the Company's ability to:

•

incur more debt;



•

pay dividends or make other distributions;



•

issue stock of subsidiaries;



•

make investments;



•

repurchase stock;



•

create subsidiaries;



•

create liens;



•

enter into transactions with affiliates;



•

enter into sale and leaseback transactions;



•

merge or consolidate; and

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•

transfer and sell assets.

        Furthermore, in accordance with the indentures governing the Senior Subordinated Notes, the Senior Subordinated Notes are unconditionally and jointly and severally guaranteed by the Company's subsidiaries (see Note 15), which are 100% owned by the Company. The indentures also require the Company to maintain specified financial ratios and meet certain financial tests. The ability to comply with these provisions may be affected by events beyond the Company's control. The breach of any of these covenants will result in a default under the applicable debt agreement or instrument and could trigger acceleration of the debt under the applicable agreements. Any default under the Company's indentures governing the Senior Subordinated Notes might adversely affect the Company's growth, financial condition and results of operations and the ability to make payments on the Senior Subordinated Notes or meet other obligations.

        The fair value of the Senior Subordinated Notes was $243.2 million and $147.8 million as of March 31, 2003 and 2002, respectively, and $151.5 million as of December 31, 2002, based on their quoted market price on such dates. The Senior Subordinated Notes are unconditionally and jointly and severally guaranteed by all of the Company's existing subsidiaries.

        The Company is in the process of registering the Series D Notes, with terms substantially similar to the Series B Notes and the Series C Notes, with the U.S. Securities Exchange Commission. As soon as practicable after the registration statement becomes effective, the Company intends to offer to exchange its Series D Notes for up to 100% of its Series B Notes and Series C Notes.

        Aggregate future principal payments of long-term debt, excluding capital lease obligation, as of March 31, 2003 are as follows:

Note 9—Commitments

        The Company leases several of its operating facilities from Rex Realty, Inc., a company owned by stockholders and operated by a former executive and past member of the Board of Directors of the Company. The operating leases expire at various dates through December 31, 2010. The Company has options to terminate the leases on an annual basis by giving advance notice of at least one year. The Company leases a portion of its operating facilities from the same company under a sublease agreement expiring on December 31, 2005 with minimum annual rentals of $0.7 million. The Company has two five-year options to renew this lease, beginning January 1, 2006.

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        The Company is obligated under additional operating leases for other operations and the use of warehouse space. The leases expire at various dates through December 31, 2015. Five of the leases provide for as many as five options to renew for five years each.

        In March 2000, the Company entered into a capital lease agreement for $5.3 million for its aircraft. The Company is obligated to make monthly payments of $0.1 million, with a balloon payment of $3.2 million in February 2005. The Company has the option of purchasing the aircraft following the expiration of the lease agreement for a nominal amount.

        The following table presents future minimum payments due under operating and capital leases as of March 31, 2003:

Note 10—Contingencies

        In the normal course of business, the Company is a party to certain guarantees and financial instruments with off-balance sheet risk, such as standby letters of credit and indemnifications, which are not reflected in the accompanying consolidated balance sheets. As of March 31, 2003 and 2002 and December 31, 2002, the Company had $2.2 million, $1.3 million and $1.9 million, respectively, in standby letters of credit pledged as collateral to support the lease of its primary distribution facility in St. Louis, a United States customs bond, certain product purchases, various workers' compensation obligations and the aircraft. These agreements mature at various dates through May 2004 and may be renewed as circumstances warrant. Such financial instruments are valued based on the amount of exposure under the instruments and the likelihood of performance being required. In the Company's past experience, no claims have been made against these financial instruments nor does management expect any losses to result from them.

        The Company is the lessee under a number of equipment and property leases, as described above. It is common in such commercial lease transactions for the Company to agree to indemnify the lessor for the value of the property or equipment leased should it be damaged during the course of the

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Company's operations. The Company expects that any losses that may occur with respect to the leased property would be covered by insurance, subject to deductible amounts.

        The Company has entered into certain derivative hedging instruments and other commitments to purchase granular urea during its peak production season in 2003. See Note 11 for information regarding these commitments.

        The Company is involved from time to time in routine legal matters and other claims incidental to its business. When it appears probable in management's judgment that the Company will incur monetary damages or other costs in connection with such claims and proceedings, and such costs can be reasonably estimated, liabilities are recorded in the consolidated financial statements and charges are recorded against earnings. Management believes that it is remote the resolution of such routine matters and other incidental claims, taking into account established reserves and insurance, will have a material adverse impact on the Company's consolidated financial position, results of operations or liquidity.

Note 11—Accounting for Derivative Instruments and Hedging Activities

        In the normal course of business, the Company is exposed to fluctuations in interest rates and raw materials prices. The Company has established policies and procedures that govern the management of these exposures through the use of derivative hedging instruments, including swap agreements. The Company's objective in managing its exposure to such fluctuations is to decrease the volatility of earnings and cash flows associated with changes in interest rates and certain raw materials prices. To achieve this objective, the Company periodically enters into swap agreements with values that change in the opposite direction of anticipated cash flows. Derivative instruments related to forecasted transactions are considered to hedge future cash flows, and the effective portion of any gains or losses is included in accumulated other comprehensive income until earnings are affected by the variability of cash flows. Any remaining gain or loss is recognized currently in earnings.

        As of March 31, 2003, with nearly 60% of its annual urea purchases completed, the Company had hedged 6%, and had purchase agreements to effectively fix an additional 4%, of its remaining 2003 urea purchases. The contract price of the Company's derivative hedging instruments as of March 31, 2003, intended to fix the price of forecasted urea prices through April 2003, was $137 per ton (not in thousands). The average purchase price of the Company's purchase agreements as of March 31, 2003 was approximately $200 per ton (not in thousands). While management expects these instruments and agreements to manage the Company's exposure to such price fluctuations, no assurance can be provided that the instruments will be effective in fully mitigating exposure to these risks, nor can assurance be provided that the Company will be successful in passing on pricing increases to its customers.

        The Company has formally documented, designated and assessed the effectiveness of transactions that receive hedge accounting treatment. The cash flows of the derivative instruments are expected to be highly effective in achieving offsetting cash flows attributable to fluctuations in the cash flows of the hedged risk. Changes in the fair value of agreements designated as derivative hedging instruments are reported as either an asset or liability in the accompanying consolidated balance sheets with the

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associated unrealized gains or losses reflected in accumulated other comprehensive income. As of March 31, 2003 and December 31, 2002, an unrealized gain of $0.4 million and an unrealized loss of less than $0.1 million, respectively, related to derivative instruments designated as cash flow hedges were recorded in accumulated other comprehensive income. The amounts in accumulated other comprehensive income are subsequently reclassified into cost of goods sold in the same period in which the underlying hedged transactions affect earnings.

        If it becomes probable that a forecasted transaction will no longer occur, any gains or losses in accumulated other comprehensive income will be recognized in earnings. The Company has not incurred any gains or losses for hedge ineffectiveness or due to excluding a portion of the value from measuring effectiveness. The Company does not enter into derivatives or other hedging arrangements for trading or speculative purposes.

        As of March 31, 2003, one derivative hedging agreement contract was outstanding, which matured on April 24, 2003, for 5,000 tons of urea with a contract price of $137 per ton (not in thousands). The contract value upon the effective contract date was $0.7 million while the contract value at March 31, 2003 was $0.9 million resulting in a gain recorded in accumulated other comprehensive income of $0.2 million as of March 31, 2003.

        For the three months ended March 31, 2003, the Company reclassified $0.2 million from accumulated other comprehensive income into cost of goods sold representing a gain on raw materials derivative hedging instruments. No such amounts were recorded during the three months ended March 31, 2002 or year ended December 31, 2002.

Note 12—Segment Information

        During the third quarter of 2002, the Company began reporting its operating results using three reportable segments: Lawn and Garden, Household and Contract. Segments were established primarily by product type which represents the basis upon which management, including the CEO who is the chief operating decision maker of the Company, reviews and assesses the Company's financial performance. The Lawn and Garden segment primarily consists of dry, granular slow-release lawn fertilizers, lawn fertilizer combination and lawn control products, herbicides, water-soluble and controlled-release garden and indoor plant foods, plant care products, potting soils and other growing media products and insecticide products. Products are marketed to mass merchandisers, home improvement centers, hardware chains, nurseries and garden centers. This segment includes, among others, the Company's Spectracide, Garden Safe, Schultz, Vigoro, Sta-Green, Bandini, Real-Kill, and No-Pest brands.

        The Household segment represents household insecticides and insect repellents that allow consumers to achieve and maintain a pest-free household and repel insects. The Household segment includes the Company's Hot Shot, Cutter and Repel brands, as well as a number of private label and other products.

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        The Contract segment represents mainly non-core products, some of which are private label, and includes various compounds and chemicals such as, among others, charcoal, water purification tablets, first-aid kits, barbeque sauce, fish attractant, cleaning solutions and automotive products.

        The following table presents certain financial segment information in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," for the three months ended March 31, 2003 and 2002. The accounting policies of the reportable segments are the same as those described in the summary of significant polices in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002, as applicable. The segment financial information presented includes comparative periods prepared on a basis consistent with the current year presentation.

        Operating income represents earnings before net interest expense and income tax expense. Operating income is the measure of profitability used by management to assess the Company's financial performance. Operating margin represents operating income as a percentage of net sales.

        The majority of the Company's sales are conducted with customers in the United States. The Company's international sales comprise less than 1% of total net sales. In addition, no single item comprises more than 10% of the Company's net sales. For the three months ended March 31, 2003 and 2002, the Company's three largest customers were responsible for 68% and 69% of net sales, respectively.

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        As the Company's assets support production across all segments, they are managed on an entity-wide basis at the corporate level and are not recorded or analyzed by segment. Substantially all of the Company's assets are located in the United States.

Note 13—Shipping and Handling Costs

        Certain shipping and handling costs are included in selling, general and administrative expenses in the accompanying consolidated statements of operations. These costs primarily consist of personnel and other general and administrative costs associated with the Company's distribution facilities, and to a lesser extent, some costs related to the shipment of goods between the Company's facilities. For the three months ended March 31, 2003 and 2002 and the year ended December 31, 2002, these costs were $6.1 million, $3.8 million and $15.7 million, respectively. The remaining shipping and handling costs comprise those costs associated with shipping goods to customers and receiving supplies from vendors and are included in cost of goods sold in the accompanying consolidated statements of operations.

Note 14—Stock-Based Compensation

        The Company accounts for stock options issued to employees in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" and applies the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123." Under APB No. 25 and related interpretations, compensation expense is recognized using the intrinsic value method for the difference between the exercise price of the options and the estimated fair value of the Company's common stock on the date of grant.

        SFAS No. 123 requires pro forma disclosure of the impact on earnings as if the Company determined stock-based compensation expense using the fair value method. The following table presents net income, as reported, using the intrinsic value method, stock-based compensation included therein, stock-based compensation expense that would have been recorded using the fair value method and pro forma net income that would have been reported had the fair value method been applied:

Note 15—Financial Information for Subsidiary Guarantors

        The Company's Senior Subordinated Notes are unconditionally and jointly and severally guaranteed by all of the Company's existing subsidiaries. The Company's subsidiaries are 100% owned

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by the Company. The condensed consolidating financial information below is presented as of and for the three months ended March 31, 2003 and has been prepared in accordance with the requirements for presentation of such information. The Company did not have any subsidiaries as of or during the three months ended March 31, 2002. The Company believes that separate financial statements concerning the guarantor subsidiaries would not be material to investors and that the information presented herein provides sufficient detail to determine the nature of the aggregate financial position, results of operations and cash flows of the guarantor subsidiaries.

        The Company's investment in subsidiaries is accounted for using the equity method of accounting. Earnings of the subsidiaries are reflected in the respective investment accounts of the parent company accordingly. The investments in subsidiaries and all intercompany balances and transactions have been eliminated. Beginning January 1, 2003, in connection with the integration of its merged and acquired companies, the Company began accounting for the operating results of certain subsidiaries on a combined basis with the parent company. Various assumptions and estimates were used to establish the financial statements of such subsidiaries for the information presented herein.

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Balance Sheet