US INDUSTRIES INC /DE - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
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FORM 10-K

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2001
OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 1-14557
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U.S. INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

DELAWARE 22-3568449
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)

101 WOOD AVENUE SOUTH 08830
ISELIN, NEW JERSEY (Zip Code)
(Address of principal executive
offices)

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(732) 767-0700
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None
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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 ninety days: Yes /X/ No / /

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 10-K. / /

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 31, 2001 (based on the last reported sale price of
such stock on the New York Stock Exchange on such date) was approximately
$185,626,752.

As of December 31, 2001, the registrant had 74,309,368 shares of Common
Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant's definitive proxy statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934 in connection with the
annual meeting of stockholders of the registrant to be held on March 21, 2002
are incorporated by reference into Part III of this Report.

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TABLE OF CONTENTS

DISCLOSURE CONCERNING FORWARD-LOOKING STATEMENTS

In December 1995, the Private Securities Litigation Reform Act of 1995 (the
"Act") was enacted by the United States Congress. The Act, as amended, contains
certain amendments to the Securities Act of 1933 and the Securities Exchange Act
of 1934. These amendments provide protection from liability in private lawsuits
for "forward-looking" statements made by public companies. The Company takes
advantage of the "safe harbor" provisions of the Act.

The Company's Annual Report on Form 10-K, including the Letter of the
Chairman and Chief Executive Officer included in the Annual Report to
Stockholders, contains both historical information and other information that
may be used to infer future performance. Examples of historical information
include the Company's annual financial statements and the commentary on past
performance contained in the MD&A. While the Company has specifically identified
certain information as being forward-looking in the context of its presentation,
the Company cautions the reader that, with the exception of information that is
clearly historical, all the information contained in this Annual Report on
Form 10-K and the letter of the Chairman and Chief Executive Officer included in
the Annual Report to Stockholders should be considered to be "forward-looking
statements" as referred to in the Act. Without limitation, when it uses the
words "believe," "estimate," "plan," "expect," "intend," "anticipate,"
"continue," "project," "probably," "should," and similar expressions, the
Company intends to clearly express that the information deals with possible
future events and is forward-looking in nature.

Forward-looking information involves risks and uncertainties. This
information is based on various factors and assumptions about future events that
may or may not actually come true. As a result, the Company's operations and
financial results in the future could differ substantially from those the
Company has discussed in the forward-looking statements in this Annual Report
and other documents that have been filed with the Securities and Exchange
Commission. In particular, various economic and competitive factors, including
those outside the Company's control, such as availability of acquisition
financing for purchasers of businesses under the Company's disposal plan,
interest rates, foreign currency exchange rates, instability in domestic and
foreign financial markets, consumer spending patterns, energy costs and
availability, freight costs, availability of consumer and commercial credit,
adverse weather, levels of residential and commercial construction, and changes
in raw material costs, could cause the Company's actual results in future years
to differ materially from those expressed in any forward-looking statement. In
addition, the Company's future results are subject to uncertainties relating to
the Company's ability to consummate its business strategy, including the sale of
assets, and realizing market synergies and cost savings from the integration of
its acquired businesses. All subsequent written and oral forward-looking
statements attributable to the Company are expressly qualified in their entirety
by the foregoing factors.

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PART I

ITEM 1. BUSINESS

GENERAL

U.S. Industries, Inc., together with its subsidiaries (the "Company"), is
one of the leading bath and plumbing products businesses in North America. Its
Bath & Plumbing segment manufactures and distributes a full line of bath and
plumbing products and vacuum cleaners under the brand names JACUZZI, ELJER,
ZURN, SUNDANCE SPAS and RAINBOW. The Company operates on a 52- or 53-week fiscal
year ending on the Saturday closest to September 30.

The Company was originally formed in May 1995, when USI Atlantic, Inc. ("USI
Atlantic"), a Company predecessor then known as U.S. Industries, Inc., was
spun-off from Hanson PLC ("Hanson") with 34 diverse businesses, a substantial
amount of surplus real estate and other assets and significant indebtedness (the
"Spin-off"). The Company immediately commenced a program to reduce leverage and
focus its operations through dispositions of non-strategic assets.

In a merger transaction completed in June 1998, the Company acquired, as a
wholly-owned subsidiary, Zurn Industries, Inc. ("Zurn"), creating a leader in
the manufacturing and sale of bath and plumbing products in North America when
combined with the Jacuzzi businesses. The Company's Bath & Plumbing segment has
made several other strategic acquisitions, acquiring the assets of Gatsby
Spas, Inc. ("Gatsby Spas") and Sundance Manufacturing Inc. ("Sundance Spas"),
manufacturers and distributors of spas, and the stock of Spring Ram Corporation
PLC ("Spring Ram"), a leading manufacturer of acrylic baths, shower enclosures,
shower trays, sanitary ware, stainless steel sinks, molded kitchen sinks and
other bathroom fixtures in the United Kingdom. The Company also sold certain
assets of its water resource business, its fire protection business and its
European HVAC business, in September 1999, January 2000 and November 2000,
respectively.

Jacuzzi is a leading worldwide manufacturer and distributor of whirlpool
bath products, spas, shower systems, non-jetted baths, swimming pool equipment
and water systems products. Jacuzzi acquired Sundance Spas and Gatsby Spas to
increase its market position in the spa market. Eljer is a leading North
American manufacturer of complementary vitreous china and cast iron plumbing and
faucets. Zurn's products include drains, flush valves, pressure-reducing and
- -regulating valves, plastic pipes and other behind-the-wall plumbing products.
The Company's objective has been to combine acquired businesses to realize
marketing synergies and cost savings and capitalize on domestic and
international growth opportunities, including product extensions and expansion
into new markets. The Company's bath and plumbing products are sold in North
America through wholesale distributors and home centers, and in certain
international markets, including Europe, South America, the Middle East and
Asia.

The Company has experienced some seasonality in its Jacuzzi and Zurn
businesses. Sales of several Jacuzzi products such as spas and swimming pool
equipment are sensitive to weather conditions and tend to experience a
significant decrease in sales during the fall and winter months (predominantly
the first and second fiscal quarters). Sales of Jacuzzi and Zurn are also
affected when weather affects outside construction and installation.

On August 15, 2001, contemporaneously with the restructuring of the
Company's debt, the Company reacquired the 75% equity interest in Rexair Inc.
("Rexair") originally sold to SILLC Holdings, LLC ("Strategic") in March 2000.
Rexair is a leading manufacturer of premium vacuum cleaner systems. Its RAINBOW
vacuum cleaners collect dirt particles by means of a water filtration and
separator system. Rexair distributes the RAINBOW and its accessories through a
network of independent authorized distributors and subdistributors. Sales to
consumers are made through in-home demonstrations by sales representatives and
are typically arranged by referrals from other consumers. In fiscal 2001, 2000
and 1999, sales in the United States and Canada accounted for approximately 51%,

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48% and 47%, respectively, of Rexair's total unit sales. The remaining sales
were spread over a number of foreign markets, with significant sales made in
Portugal. In the domestic market, the vacuum cleaner industry is mature and
highly competitive. Rexair also experiences competition in recruiting its
distributors. In addition, its distributors experience competition in recruiting
and retaining sales representatives. The Company estimates that over 60% of the
purchases of Rexair products in the United States are financed either by
independent consumer finance companies or, to a lesser extent, by the
independent distributors. The inability to maintain or increase its independent
distribution network or the unavailability of consumer credit could have a
material adverse effect on Rexair's business, financial condition and results of
operations.

One of the Company's customers accounts for 14%, 10% and 5% of sales from
continuing operations in fiscal 2001, 2000 and 1999, respectively.

DIVERSIFIED

In March 2000, the Company disposed of a majority equity interest in its
Diversified segment. Diversified manufactured a wide range of consumer,
precision engineered and automotive interior products. A comprehensive
discussion of this disposition can be found under RESULTS OF OPERATIONS--
ACQUISITION AND DISPOSITION OF COMPANIES AND DISCONTINUED OPERATIONS.

DISCONTINUED OPERATIONS

On December 28, 2001 the Board of Directors approved a formal Disposal Plan
for five businesses in connection with the Company's obligation to pay debt
amortization as set forth in the restructured debt agreements. In connection
with the Disposal Plan, the Company incurred a charge of $232.6 million, which
represented the difference between the historical net carrying value and the
estimated net realizable value of the five businesses, Ames True Temper,
Spear & Jackson, Lighting Corporation of America, SiTeco Lighting and the
Selkirk Group. The Disposal Plan calls for the sale of the five businesses over
the next 12 months. The net assets of the discontinued operations are included
in net assets held for sale in all periods presented. The operating results of
these businesses are included in discontinued operations in all periods
presented. The discontinued operations generated sales and operating income
(losses) of $1,346.1 million and $(57.9) million in 2001, $1,419.8 million and
$3.9 million in 2000 and $1,346.7 million and $95.7 million in 1999.

Ames True Temper is a leading manufacturer of non-powered lawn and garden
tools and industrial hand and striking tools in North America. Ames primarily
sells its products under the brand names AMES, TRUE TEMPER, EAGLE,
WOODINGS-VERONA and GARANT and, to a lesser extent, under private labels. Ames'
product lines include lawn, garden, and agricultural tools, snow shovels and
other winter tools, as well as wheeled goods and garden hose reels. The Company
entered into an agreement to sell Ames True Temper on December 24, 2001 for
approximately $165 million in cash. The sale, which is subject to the completion
of financing and other customary closing conditions, is currently expected to
close in January 2002.

Spear & Jackson is a leading manufacturer and distributor of a broad line of
hand tools, lawn and garden tools, industrial saws, industrial magnets and
metrology tools in the United Kingdom. Products sold under the brand names
SPEAR & JACKSON, NEILL TOOLS, ECLIPSE MAGNETICS and BOWERS include garden and
agricultural tools, contractor hand tools, industrial cutting tools, industrial
magnets and industrial calibration instruments.

Lighting Corporation of America and SiTeco Lighting (collectively
"Lighting") manufacture and distribute indoor and outdoor lighting fixtures for
markets in North America and Europe.

Lighting competes as a full-line supplier in the commercial/industrial
market. Its outdoor lighting products are sold under the KIM, SPAULDING,
MOLDCAST, ARCHITECTURAL AREA LIGHTING and SITECO brand

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names. These products include street, area, parking garage and landscape
lighting. Outdoor lighting products are sold to electrical distributors,
national accounts and utility companies. Indoor commercial/ industrial lighting
products, which are sold under the COLUMBIA, PRESCOLITE, SIEMENS, DUAL LITE and
SITECO brand names through electrical distributors and national accounts,
include incandescent and compact fluorescent, down light fixtures, emergency and
exit lighting, and other fluorescent lighting fixtures.

Lighting is one of the largest residential lighting manufacturers in North
America, principally selling under the PROGRESS brand name. Residential lighting
products are sold to home centers, lighting showrooms and electrical
distributors, who sell to builders, electrical contractors and consumers.

The Selkirk Group is comprised of subsidiaries involved in the manufacture
and distribution of grilles, registers, chimneys, gas vents and other venting
products to the North American HVAC (heating, venting and air conditioning)
markets.

SHARE REPURCHASE

During 1999 and 2000, the Company's Board of Directors authorized share
repurchase programs aggregating $350 million. As of September 30, 2001, the
Company had repurchased 21.8 million shares of its common stock for treasury for
$331.8 million under these programs. During June 2000, in a separate transaction
authorized and undertaken outside the existing share repurchase program, the
Company repurchased 3,685,520 shares which represented all of its common stock
held by the former owners of Spear & Jackson for $44.2 million. The share
repurchase programs have been terminated.

COMPETITION

The Company competes in mature and highly competitive industries on the
basis of brand identification, quality, price, marketing and distribution. In
some industries, certain competitors have greater financial strength, market
share or product breadth in a given market than the Company.

BACKLOG ORDERS

The Company's backlogs, believed to be firm, were $54.7 million and
$62.6 million as of September 30, 2001 and 2000, respectively. These amounts
exclude backlogs for discontinued operations.

EXPORT AND INTERNATIONAL OPERATIONS

Certain of the Company's domestic businesses generate revenue from export
sales and/or revenue from operations conducted outside the United States. Export
sales amounted to 4%, 9% and 13% of total revenues in fiscal 2001, 2000 and
1999, respectively, principally reflecting sales by Rexair to foreign
distributors of Rainbow products in numerous countries, and sales by Garden
State Tanning to Japanese automobile manufacturers prior to their March 24, 2000
disposal. Revenue from foreign operations amounted to 27%, 27% and 19% of total
revenues in fiscal 2001, 2000 and 1999, respectively, principally reflecting
certain Jacuzzi operations. Identifiable assets of foreign operations
represented approximately 21%, 26% and 26% of total identifiable assets
(excluding net assets held for sale) at September 30, 2001, 2000 and 1999,
respectively. Foreign identifiable assets principally reflect certain assets of
the Jacuzzi operations.

The Company's export sales and foreign manufacturing and sourcing are
subject to certain risks including currency fluctuation, transportation delays,
political and economic instability, restrictions on the transfer of funds, the
imposition of duties, tariffs and import and export controls and changes in
governmental policies. The Company has numerous sourcing relationships with
companies in the Far East.

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EMPLOYEES

As of September 30, 2001, the Company's continuing operations and
discontinued operations had approximately 6,800 employees and 9,600 employees,
respectively, totaling approximately 16,400 employees. Approximately 22% and 43%
of continuing operations and discontinued operations employees, respectively,
were represented by unions. The Company believes that the relations of its
operating subsidiaries with employees and unions are satisfactory.

GOVERNMENTAL REGULATION

The Company's operating units are subject to numerous federal, state and
local laws and regulations concerning such matters as zoning, health and safety
and protection of the environment. The Company believes that its operating units
are currently operating in substantial compliance with, or under approved
variances from, various federal, state and local laws and regulations.

Certain present and former operating sites, or portions thereof, currently
or previously owned and/or leased by current or former operating units of the
Company are the subject of investigations, monitoring or remediation under the
federal Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA" or "Superfund"), the federal Resource Conservation and Recovery
Act or comparable state statutes or agreements with third parties. These
proceedings are in various stages ranging from initial investigations to active
settlement negotiations to implementation of the clean-up or remediation of
sites. No information currently available reasonably suggests that projected
expenditures associated with these proceedings, whether for any single site or
for those in the aggregate, will have a material adverse effect on the Company's
financial condition, results of operations or cash flows.

A number of present and former operating units of the Company have been
named as Potentially Responsible Parties ("PRPs") at 17 Superfund sites under
CERCLA or comparable state statutes in a number of federal and state
proceedings. In each of these matters the operating unit of the Company is
working with the governmental agencies involved and other PRPs to address
environmental claims in a responsible and appropriate manner. Under CERCLA and
other similar statutes, any generator of hazardous waste sent to a hazardous
waste disposal site is potentially responsible for the clean-up, remediation and
response costs required for such site in the event the site is not properly
closed by its owner or operator, irrespective of the amount of waste which the
generator sent to the site. No information currently available reasonably
suggests that projected expenditures associated with these proceedings, whether
for any single site or for those in the aggregate, will have a material adverse
effect on the Company's financial condition, results of operations or cash
flows.

From time to time, the Company may receive notices of violation or may be
denied its applications for certain licenses or permits on the basis that the
practices of the operating unit are not consistent with regulations or
ordinances. In some cases, the relevant operating unit may seek to meet with the
agency to determine mutually acceptable methods of modifying or eliminating the
practice in question. The Company believes that its operating units will comply
with the applicable regulations and ordinances in a manner which will not have a
material adverse effect on its financial condition, results of operations or
cash flows.

The Company's subsidiaries have made capital and maintenance expenditures
over time to comply with zoning, water, air and solid and hazardous waste
regulations. While the amount of expenditures in future years will depend on
legal and technological developments which cannot be predicted at this time,
these expenditures may progressively increase if regulations become more
stringent. Future costs for compliance cannot be predicted with precision and
there can be no certainty with respect to any costs the Company may be forced to
incur in connection with historical on-site or off-site waste disposal. No
information currently available reasonably suggests that these expenditures will
have a material adverse effect on the Company's financial condition, results of
operations or cash flows. Laws

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and regulations protecting the environment may in certain circumstances impose
"strict liability", rendering a person liable for environmental damage without
regard to negligence or fault on the part of such person.

At September 30, 2001, the Company had accrued approximately $11.2 million
for various environmental related liabilities of which the Company is aware. The
Company believes that the range of liability which is reasonable for such
matters is between approximately $6.1 million and $16.7 million. The Company
cannot predict whether future developments in laws and regulations concerning
environmental protection or unanticipated enforcement actions, particularly with
respect to environmental standards, will require material capital expenditures
or otherwise affect its financial condition, results of operations or cash flows
in a materially adverse manner, or whether its operating units will be
successful in meeting future demands of regulatory agencies in a manner which
will not have a material adverse effect on the Company's financial condition,
results of operations or cash flows.

PATENTS AND TRADEMARKS

The Company's subsidiaries have numerous United States and foreign patents,
patent applications, registered trademarks and trade names, and licenses, that
relate to various businesses. The Company believes that certain of the
trademarks and trade names are of material importance to the businesses to which
they relate and may be of material importance to the Company as a whole. None of
the material trademarks or trade names are of limited duration. Although
protection of the Company's patents and related technologies are important
components of its business strategy, none of the individual patents is material
to the Company.

This Report references trademarks of the Company such as JACUZZI, ZURN,
ELJER, SUNDANCE and RAINBOW, as well as other trade names and product names.

EXECUTIVE OFFICERS

The executive officers of the Company are as follows (ages shown as of
September 30, 2001):

DAVID H. CLARKE, 60, has served as Chairman of the Board and Chief Executive
Officer of the Company since the Spin-off of USI from Hanson. Mr. Clarke was
Vice Chairman of Hanson from 1993 until the Spin-off, Deputy Chairman and Chief
Executive Officer of Hanson Industries, the U.S. arm of Hanson, from 1992 until
the Spin-off and a Director of Hanson from 1989 until May 1996. Mr. Clarke is a
director of Fiduciary Trust International, a subsidiary of Franklin Mutual, a
company engaged in investment management and administration of assets for
individuals.

JAMES O'LEARY, 38, has served as Executive Vice President since
September 1, 1999 and was Senior Vice President and Chief Financial Officer from
June 1998 to September 1999. He has also served as Chief Executive Officer of
the Company's Lighting segment since September 2000. He served as

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Corporate Controller of the Company from the Spin-off from Hanson until
June 1998 and was elected as a Vice President in January 1996. Mr. O'Leary
serves as a director of the Company and Strategic.

STEVEN C. BARRE, 41, has served as Senior Vice President, General Counsel
and Secretary since September 2001. From April 2000 to September 2001, he served
as Vice President, General Counsel and Secretary. Prior to that date, Mr. Barre
served as Associate General Counsel beginning with the Spin-off from Hanson in
1995.

DOROTHY E. SANDER, 48, has served as Senior Vice President--Administration
since June 1998. Previously she had served as Vice President--Administration of
the Company since the Spin-off from Hanson. She is a member of the Board of
Directors of The Feminist Press, the Advisory Board of the Bank of New York and
the Board of Editors of "HR-Law and Practice" magazine.

ALLAN D. WEINGARTEN, 63, has served as Senior Vice President and Chief
Financial Officer since January 2001 when he joined the Company. Mr. Weingarten
was previously a senior partner with the accounting firm of Ernst & Young, where
he spent his entire 34-year career. Subsequent to his retirement from Ernst &
Young in 1995, Mr. Weingarten was a business consultant and private investor.
Mr. Weingarten is a director of Programmers Paradise, Inc. and AXS-One, Inc.

DIANA E. BURTON, 56, has served as Vice President--Investor Relations of the
Company since the Spin-off from Hanson.

R. BRUCE CLITHERO, 48, has served as Treasurer since February 2001.
Previously he served as Director of Treasury and Risk Management for Oxbow
Corporation. Oxbow Corporation is a privately held company which manages a
diverse array of businesses, including several in the energy-related field.

FRANCISCO V. PUNAL, 42, joined the Company as Vice President--Finance on
January 2, 2001. Mr. Punal was previously with Vitas Healthcare Corporation
where he was Vice President and Controller from 1997 to 2000. Prior to that,
Mr. Punal served as Director of Finance. Vitas Healthcare Corporation is a
privately held healthcare provider.

NICOLA ROSSI, 35, has served as Corporate Controller since April 1, 2000 and
was Assistant Corporate Controller from June 1999. Previously, he was Director
of Corporate Accounting for the Great Atlantic & Pacific Tea Company, Inc. from
November 1995 through May 1999.

ALAN SCHUTZMAN, 45, has served as Vice President and Associate General
Counsel since September, 2001. Mr. Schutzman served as Associate General Counsel
from January 1, 2001 until September, 2001. From July 1996 to December 2000, he
served as Vice President and General Counsel of various operating subsidiaries,
including Ames True Temper and Keller Ladders, Inc.

ITEM 2. PROPERTIES

The Company's continuing operations own 36 and lease 58 properties, none of
which has value that is significant in relation to the Company's assets as a
whole.

ITEM 3. LEGAL PROCEEDINGS

The Company and its subsidiaries are parties to legal proceedings that are
considered to be either ordinary, routine litigation incidental to the business
of present and former operations or immaterial to the Company's financial
condition, results of operations or cash flows. For information concerning
environmental proceedings, see BUSINESS--GOVERNMENTAL REGULATION.

Certain of the Company's subsidiaries are defendants or plaintiffs in
lawsuits that have arisen in the normal course of business. While certain of
these matters involve substantial amounts, it is management's opinion, based on
the advice of counsel, that the ultimate resolution of such litigation

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and environmental matters will not have a material adverse effect on the
Company's financial condition, results of operations or cash flows.

In June 1998, the Company acquired Zurn Industries, Inc. ("Zurn"). Zurn is a
wholly-owned subsidiary of the Company. Zurn, along with many other companies,
is a codefendant in numerous asbestos related lawsuits pending in the United
States. Plaintiffs claims against Zurn allege personal injuries allegedly caused
by exposure to asbestos used in industrial boilers formerly manufactured by
Zurn. As reported by numerous other asbestos defendants, there has been a
significant increase in the number of asbestos suits filed over the past several
years. Zurn has also experienced an increase in the number of suits filed
against it in the last fiscal year. As of September 30, 2001, the number of
asbestos claims pending against Zurn was approximately 52,000.

Since Zurn received its first asbestos claim in the 1980's, Zurn has settled
or otherwise disposed of approximately 35,000 asbestos claims. Zurn's insurers
have paid all settlement costs relating to these claims in an aggregate amount
that has not eroded the available insurance coverage by a material amount.
Defense costs are currently being paid by Zurn's insurers without eroding the
coverage amounts of its insurance policies.

Zurn estimates that its potential liability for asbestos claims pending
against it and for claims estimated to be filed over a 10 year period (i.e.,
through 2011) is approximately $107 million. This estimate is based on its view
of the current and anticipated number of asbestos claims, the timing and amounts
of asbestos payments and the status of ongoing litigation, defense strategies
and settlement initiatives. However, there are inherent uncertainties involved
in estimating both the number of future asbestos claims as well as future
settlement costs, and the actual liability could exceed Zurn's estimate due to
changes in facts and circumstances after the date of the estimate. Further,
while there is presently no reasonable basis for estimating Zurn's asbestos
liability beyond 2011, such liability may continue beyond 2011, and such
liability could be substantial.

Zurn's available insurance to cover its potential asbestos liability is
between approximately $318 million and $380 million. Zurn believes, based on its
experience in defending the claims and the amount of insurance coverage
available, that it has sufficient insurance to cover the pending and reasonably
estimable future claims. This conclusion was reached after considering the
insurance payments made to date by Zurn's insurance carriers, existing insurance
policies, and the advice of insurance coverage counsel with respect to
applicable insurance coverage law relating to the terms and conditions of those
policies. After review of the foregoing with Zurn and its consultants, the
Company believes that the resolution of Zurn's pending and reasonably estimable
asbestos claims will not have a material adverse effect on the Company's
financial condition, results of operations or cash flows.

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

The Company did not submit any matter to a vote of its security holders
during the fourth quarter of fiscal 2001.

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PART II

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

(a) Market Information.

The Company's common stock is traded on the NYSE under the symbol USI. The
following table sets forth, for the fiscal periods indicated, the high and low
closing sales price per share of common stock as reported by the NYSE.

(b) Holders.

As of December 31, 2001, there were 19,889 record holders of common stock.
The closing price per share of common stock as reported by the NYSE on such date
was $2.56.

(c) Dividends.

Prior to March 2001, the Company's Board of Directors adopted a cash
dividend policy under which the Company paid cash quarterly dividends of $0.05
per share of common stock as listed below. In March 2001, the Board of Directors
indefinitely suspended the Company's quarterly payment of dividends.
Furthermore, the Restructured Facilities (see NOTE 7 of the Company's notes to
consolidated financial statements) executed on August 15, 2001 includes a
restriction on the payment of any dividends.

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ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth the consolidated historical selected
financial data of the Company. All prior year information has been restated to
reflect the reclassification of discontinued operations (see NOTE 5 to the
Company's consolidated financial statements) and the adoption of EITF No. 00-10
in fiscal 2001 (see NOTE 3 to the Company's consolidated financial statements).

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(1) The operating income for fiscal 1999 and 1998 includes $6.8 and $2.4
million, respectively, of equity losses from the Company's investment in
United Pacific Industries ("UPI"). These losses include charges associated
with impairments of UPI and its subsidiaries of $5.5 and $4.0 million in
fiscal 1999 and 1998, respectively.

(2) Fiscal 2001 includes non-recurring after-tax charges of $176.7 million to
1) recognize goodwill impairment charges ($100.2 million), 2) write-down the
carrying value of the Strategic Notes to net realizable value
($45.1 million), 3) pay advisory and other related fees associated with the
debt restructuring ($6.7 million), 4) write off deferred transaction costs
related to the original sale of Rexair in March 2000 ($17.4 million),
5) pay professional fees associated with the previously planned Spin-off of
the LCA Group ($4.6 million) and 6) eliminate certain product lines
($2.7 million).

(3) Fiscal 2000 includes non-recurring after-tax charges of $64.9 million to
1) close the former Zurn corporate office ($8.0 million), 2) eliminate
certain products lines, write-down inventory and other related costs at the
U.S. Brass operations ($14.1 million) and 3) recognize goodwill and asset
impairments at the European HVAC operations ($42.8 million). Fiscal 2000
also includes net after-tax credits of $24.4 million primarily related to
the gain on the sale of the Diversified businesses, the gains on the sale of
Strategic Notes and additional equity interest and costs written

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off related to the abandoned sale of the Lighting segment. In addition,
fiscal 2000 includes a $20.0 million reversal of tax contingencies related
to the demerger from Hanson PLC.

(4) Fiscal 1999 includes $2.3 million after-tax of unusual costs in conjunction
with severance for certain senior executives, and net after-tax costs of
$4.7 million primarily for the closure of a manufacturing facility and the
elimination of product lines. Fiscal 1999 also includes a $6.2 million tax
benefit from the resolution of prior years' tax issues.

(5) Fiscal 1998 includes non-recurring and unusual after-tax charges of
$128.2 million of merger, restructuring and other costs, $7.0 million to
write-off interest rate protection agreements, $34.1 million to discontinue
a business and $5.0 million associated with the refinancing of Zurn's
outstanding indebtedness.

(6) Cash dividends exclude dividends declared and paid by Zurn prior to the
Merger.

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

RESULTS OF OPERATIONS

On December 28, 2001, the Company's Board of Directors adopted a formal
Disposal Plan to dispose of five businesses in connection with the Company's
obligation to pay debt amortization. The businesses include the following:

Ames True Temper and Spear & Jackson, which were included in the Lawn &
Garden segment in prior years.

Lighting Corporation of America and SiTeco Lighting, which represented
the entire Lighting segment in prior years.

Selkirk North America, which was included in the Bath & Plumbing segment
in prior years.

The results of all five businesses are classified as discontinued and are
excluded from the discussion of the Company's continuing operating results and
are discussed separately under ACQUISITION AND DISPOSITION OF
BUSINESSES--DISCONTINUED OPERATIONS.

On March 24, 2000, the Company completed the disposition of a majority
equity interest in its Diversified segment. Since then, the Company has
accounted for the retained interest in its Diversified segment under the equity
method of accounting.

- ------------------------
(1) Operating income (loss) for fiscal 2001 includes restructuring, impairment
and other unusual costs of $105.0 million (see NOTE 6 to the consolidated
financial statements).

11

(2) Operating income (loss) for fiscal 2000 includes restructuring, impairment
and other unusual costs of $79.7 million (see NOTE 6 to the consolidated
financial statements).

(3) Operating income (loss) for fiscal 1999 includes non-recurring charges of
$4.6 million (see NOTE 6 to the consolidated financial statements).

(4) Operating income (loss) for fiscal 1999 includes $6.8 million of equity
losses from the Company's investment in UPI. These losses include a charge
associated with an impairment of UPI and its subsidiaries of $5.5 million.
Fiscal 1999 also includes net restructuring costs and unusual charges of
$7.7 million (see NOTE 6 to the consolidated financial statements).

OVERALL

The Company's overall sales decreased 36% in 2001 when compared to 2000. The
2001 results were impacted by the disposals of the Company's Diversified
businesses in March 2000, its fire protection business in January 2000 and its
European HVAC business in November 2000, as well as the Company's decision to
exit certain unprofitable Bath & Plumbing product lines during 2000. The
European HVAC and fire protection businesses were both included in the Company's
Bath & Plumbing segment. The remaining sales decrease of 9% was attributable to
the weaker economy, inventory reduction programs instituted by major customers,
inclement weather and unfavorable fluctuations in currency exchange rates.

Overall sales in 2000 decreased 19% from 1999. This resulted from the
disposal of the Company's Diversified and fire protection businesses as well as
the Company's decision to exit certain unprofitable Bath & Plumbing product
lines during 2000. The decrease was partially offset by a full year's
contribution to sales from Spring Ram and Gatsby Spas, which were acquired
during 1999 for its Bath & Plumbing segment.

The Company's operating income (loss) for 2001, 2000 and 1999 included
goodwill impairment, restructuring, and net other non-recurring charges of
$105.0 million, $79.7 million, and $12.3 million, respectively (see NOTE 6 to
the Company's consolidated financial statements). Excluding these unusual
charges, operating income decreased $81.4 million (50%) in fiscal 2001 and
$56.1 million (26%) in 2000 when compared to the comparable prior year periods.
The disposal of the Diversified businesses and the decrease in sales experienced
by the Bath & Plumbing segment adversely affected operating income in 2001.
Operating results at the Bath & Plumbing segment were also affected by increased
freight and energy costs and an increase in unabsorbed overhead due to lower
production levels. Operating income decreased in 2000 because of the lost
contribution of disposed businesses and discontinued product lines. Operating
income in 2000 was also affected by unfavorable fluctuations in currency
exchange rates and decreased profitability of the Eljer and European HVAC
operations of the Bath & Plumbing segment. These decreases were partially offset
by a full year's profit contribution from businesses acquired in 1999 by the
Bath & Plumbing segment (see NOTE 4 to the consolidated financial statements).

BATH & PLUMBING

Sales in the Bath & Plumbing segment decreased 15% in 2001 compared to 2000.
The decrease was partially attributable to the disposal of the segments's fire
protection and European HVAC businesses and the discontinuance of certain
unprofitable product lines at U.S. Brass. The European HVAC and fire protection
businesses provided the Company with $63.8 million of sales in 2000 while only
contributing $4.2 million of sales in 2001 prior to their disposal. The
discontinued product lines generated $45.6 million in sales in 2000 compared to
only $9.8 million in 2001 prior to their discontinuance. The remaining decrease
in sales for 2001 was primarily the result of the continuing economic downturn,
inventory reduction programs instituted by major customers, inclement weather in
the segments major markets and increased energy costs, which have softened
consumer interest in purchasing spas. The majority of the sales decline in 2001
was in the domestic bath and spa businesses,

12

which accounted for $93.2 million of the overall sales decrease in 2001.
Overseas operations were impacted by unfavorable currency exchange rates, which
accounted for approximately $23.7 million of the sales decrease in 2001.

The 3% increase in sales in 2000 over 1999 was primarily attributable to the
full year inclusion of Spring Ram and Gatsby Spas, acquired in July and June of
1999, respectively, and an increase in domestic bath and spa sales. This was
partially offset by the lost contribution from the disposal of the fire
protection businesses and unfavorable fluctuations in currency exchange rates.

Operating income (loss) includes goodwill impairment, restructuring and
other non-recurring charges of $105.0 million, $79.7 million and $4.6 million
for 2001, 2000 and 1999, respectively. For 2001, these charges consisted of
goodwill impairment charges of $100.2 million, and non-recurring charges of
$4.8 million related to the discontinuance of the unprofitable product lines at
U.S. Brass. The 2000 charges include restructuring charges of $13.1 million
related to the closure of the former Zurn corporate office and goodwill and
property, plant and equipment impairment charges as well as restructuring
charges related to the European HVAC and U.S. Brass operations totaling
$45.8 million and $20.8 million, respectively. The charges in 1999 relate to
severance paid to a senior executive. Excluding these charges, operating income
decreased by $36.7 million (26%) in 2001 and increased $1.7 million (1%) in 2000
from their comparable prior year periods. The decrease in 2001 was primarily due
to the decrease in sales discussed above, increased freight and energy costs,
and an increase in unabsorbed overhead due to lower production levels. The
increase in operating income in 2000 was largely due to the increase in sales
discussed above, offset by profit shortfalls within the Eljer and European HVAC
businesses, lost contribution from disposed businesses, and unfavorable
fluctuations in the currency exchange rates.

DIVERSIFIED

The Diversified results for fiscal 2000 were comprised of approximately six
months of operations through the disposal date of March 24, 2000, as compared to
the prior year results which included a full twelve months of operations. Fiscal
1999 operating income includes restructuring and other related charges of
$7.7 million. The fiscal 1999 charges include (i) losses, closure and inventory
and other related costs from exiting an unprofitable window operation and
(ii) severance, impairment and other charges from the closure of a manufacturing
facility which produced infant's and children's footwear. The fiscal 1999
charges are partially offset by favorable adjustments to restructuring, asset
impairment and other net related charges established in fiscal 1998 at the
Company's vacuum cleaner and textile operations.

CORPORATE EXPENSES

Corporate expenses have increased in 2001 in comparison to the prior year
because of less pension income and an increase in compensation expense. Also,
the Company partially offset corporate expenses through fiscal 2000 with the
amortization of a non-compete agreement. The Company amortized $2.2 million per
year in connection with this agreement. The pension plans were reorganized in
2000 resulting in a $2.7 million reduction in pension income allocable to the
corporate office in 2001. Compensation expenses increased in 2001 because of
additional staff added in anticipation of a previously planned spin-off of
several of the Company's subsidiaries (collectively known as the "LCA Group").
Corporate expenses for fiscal 1999 include $2.0 million of costs incurred in
conjunction with an abandoned spin-off of its Diversified operations. Excluding
the above-mentioned charge, corporate expenses for 2000 remained relatively flat
when compared to 1999.

13

INTEREST INCOME AND EXPENSE

Interest expense increased $3.5 million in fiscal 2001 compared to fiscal
2000. This is largely the result of the higher borrowing rates incurred in
connection with an amendment of the Company's Revolving Facilities in
February 2001, higher borrowing rates under the new Restructured Credit
Agreement executed on August 15, 2001, and the assumption of Rexair's
$172.5 million debt on August 15, 2001 (see LIQUIDITY AND CAPITAL RESOURCES).
Interest expense is expected to decrease in 2002 as the Company makes the
permanent debt reductions required under the Restructured Facilities. Interest
expense increased by $5.8 million in fiscal 2000 over fiscal 1999 because of
higher average levels of outstanding debt coupled with higher average interest
rates. The increase in debt levels was primarily attributable to the Company's
share repurchase program, partially offset by proceeds from the sale of a
majority equity interest in its Diversified segment.

Interest income increased by $8.5 million in fiscal 2001 and $12.6 million
in fiscal 2000 when compared with the respective prior years. The increase in
interest income for both years is largely due to the interest earned on the
senior notes received from Strategic as part of the sale of the Company's
Diversified businesses in March 2000 (see ACQUISITION AND DISPOSITION OF
BUSINESSES). Interest on these notes totaled $22.5 million in 2001 and
$12.7 million in 2000.

OTHER

GAIN ON SALE OF DIVERSIFIED BUSINESSES

The Company recorded a gain of $39.3 million on the sale of its Diversified
businesses in fiscal 2000 (see ACQUISITION AND DISPOSITION OF BUSINESSES).

EQUITY (LOSSES) EARNINGS IN INVESTEES

The Company recorded equity losses related to its investment in Strategic
and Rexair of $1.4 million in 2001, compared to equity earnings of $3.1 million
in 2000. As a result of the Rexair acquisition on August 15, 2001, the Company
now owns 100% of Rexair (see ACQUISITION AND DISPOSITION OF BUSINESSES).

OTHER EXPENSE (INCOME), NET

Other expense (income), net, was an expense of $97.2 million and
$4.7 million for 2001 and 2000, respectively, compared to income of
$13.5 million in 1999. Fiscal 2001 included $45.1 million in impairment charges
related to the Strategic Notes, $6.7 million in advisory and other related costs
associated with the Company's debt restructuring, $17.4 million in deferred
transaction costs related to the original sale of Rexair in March 2000, and
$8.1 million of professional fees related to the Company's previously planned
spin-off of the LCA Group. These charges are discussed in more detail in
IMPAIRMENT, RESTRUCTURING AND OTHER NON-RECURRING CHARGES. In addition, 2001
includes $16.9 of expenses associated with the amendments to the revolving
facilities and $4.3 million related to the Company's ladder operations disposed
of in October 1999. Expenses for 2000 include $5.7 million in charges related to
the ladder operations and $0.9 million in charges related to the abandoned sale
of the Lighting segment, partially offset by $3.2 million in gains on the sale
of excess real estate. The income recorded in 1999 relates primarily to
$14.4 million of real estate gains.

TAXES

The effective tax rates for continuing operations for 2001, 2000 and 1999
were 2.9%, 26.9% and 34.6%, respectively. For 2001, the difference between the
U.S. statutory rate and the Company's effective tax rate arose principally as a
result of the non-deductibility of a portion of the goodwill impairments and
non-recurring charges recorded during the year, as well as a valuation allowance
for

14

deferred tax assets. The 2000 tax provision includes a $20.0 million benefit
from the reversal of tax contingencies established when the Company spun-off
from Hanson PLC and excludes a tax benefit associated with the write-off of
goodwill related to the Company's European HVAC business. The fiscal 1999
provision for income taxes includes a $6.2 million benefit relating to the
settlement of certain tax issues. Excluding the items noted above for 2001, the
Company would have recorded a small pre-tax loss and a tax provision
attributable to state taxes and non-deductible amortization of goodwill.
Excluding the 2000 and 1999 items noted above, the effective tax rates would
have been approximately 39% for both years.

IMPAIRMENT, RESTRUCTURING AND OTHER NON-RECURRING CHARGES

GOODWILL IMPAIRMENT CHARGES

Operating results at a number of the Company's subsidiaries declined during
2001. In the third quarter of 2001, the Company evaluated the recoverability of
the goodwill of these subsidiaries in accordance with its accounting policy (see
NOTE 3 to the Company's consolidated financial statements). This evaluation
indicated that the carrying value of the goodwill of certain of its subsidiaries
was impaired. As a result, the Company recorded goodwill impairment charges
totaling $100.2 million in the Bath & Plumbing segment.

In fiscal 2000, the Company conducted a strategic review of certain
operations in the Bath & Plumbing segment. Upon completion of its review, the
Company decided to dispose of its European HVAC operations and to exit three
product lines at its U.S. Brass operations. In reaching this decision, the
Company considered the profitability of these operations, the fact that the
Company was not a market leader in these businesses and the fact that
significant investment would be required in order to make these businesses
competitive with no assurance of a reasonable return on such investment. As a
result of this decision, the Company recorded goodwill impairment charges
totaling $24.1 million related to its European HVAC operations and $1.4 million
related to its U.S. Brass operations. Other non-recurring charges recorded in
conjunction with this decision are discussed below.

RESTRUCTURING AND OTHER NON-RECURRING CHARGES

In September 2000, the Company's Bath & Plumbing segment announced to its
employees and to the marketplace that U.S. Brass was exiting its Valley line of
faucets, Eastman line of connectors and Sanitary Dash line of under-the-sink
pipes. Accordingly, in 2000, the Company recorded restructuring and other
non-recurring charges of $19.4 million, which consists of severance and
commitment costs of $3.4 million (recorded as restructuring costs) and inventory
related charges of $16.0 million ($13.9 million recorded in cost of goods sold
and $2.1 million recorded in selling, general and administrative expenses). The
Company also recorded other non-recurring charges of $4.8 million in 2001
(recorded in cost of goods sold) consisting primarily of accelerated
depreciation on machinery that was used to complete the remaining in-process
inventory. The Company's decision to exit these three product lines required the
closure of two manufacturing facilities in Abilene and Plano, Texas and the
termination of approximately 335 employees.

The Company recorded restructuring and other non-recurring charges of
$21.7 million in 2000 related to its decision to dispose of its European HVAC
operations (see GOODWILL IMPAIRMENT CHARGES). These charges consisted of
$18.2 million in fixed asset impairments and $3.5 million in inventory-related
charges (recorded in cost of goods sold). The European HVAC operation was
subsequently sold in November 2000 (see DISPOSITION OF BUSINESSES AND
DISCONTINUED OPERATIONS).

In January 2000, a decision was made to close the former Zurn corporate
office in Dallas, Texas which resulted in the termination of 30 employees. The
Company recorded a restructuring charge in fiscal 2000 of $13.1 million relating
to this decision, which included severance costs of $1.9 million, lease costs of
$9.1 million for a lease expiring November 2007, and write-offs of $2.1 million
relating to

15

leasehold improvements and other fixed assets. During fiscal 1999, the Company
recorded other non-recurring charges of $4.6 million related to the severance of
a senior executive.

DIVERSIFIED

During fiscal 1999, the Company expanded its 1998 restructuring plan related
to its footwear operations by closing a second domestic manufacturing facility.
The closure of the second facility was completed by June 1999, with production
being outsourced to offshore vendors. As a result, the Company recorded
restructuring charges of $1.7 million primarily for the costs of terminating 110
employees and the write-off of impaired fixed assets. Furthermore, the Company
recorded other non-recurring charges for inventory obsolescence totaling
$0.9 million, which were recorded in cost of goods sold. The restructuring
charges resulting from the closure of the Company's footwear facility were
offset somewhat by a $1.0 million reduction in severance reserves that were
originally set up in 1998 for the Company's vacuum cleaner and textile
operations. Voluntary departures prior to final termination resulted in
severance payments that were lower than previously estimated. The Company
subsequently sold its footwear, vacuum cleaner and textile operations (see
DISPOSITION OF BUSINESSES AND DISCONTINUED OPERATIONS). Also during fiscal 1999,
the Company's Diversified segment incurred $6.1 million in charges and losses
related to the closure of an unprofitable window operation.

The principal components of impairment and restructuring charges recorded
for continuing operations are:

OTHER

In 2001, the Company incurred $8.1 million in professional fees associated
with the previously planned spin-off of the LCA Group; recorded charges of
$45.1 million to reflect the Strategic Notes at their net realizable value;
expensed $17.4 million in deferred transaction costs previously incurred as part
of the original sale of Rexair; and incurred $6.7 million in advisory and other
related costs associated with the Company's debt restructuring executed on
August 15, 2001. The Company is pursuing the sale of the Strategic Notes
together with its equity interest in Strategic at an amount expected to
approximate the September 30, 2001 carrying value. In 2000, the Company recorded
$0.9 million in charges related to the abandoned sale of the LCA Group. All of
these costs have been classified as "Other expenses" in the Company's
consolidated statements of operations. In 2000, the Company also recorded a
$39.3 million gain on the sale of its Diversified businesses (see NOTE 4 to the
Company's consolidated financial statements).

16

As of September 30, 2001, the Company has remaining accruals of
$7.1 million for restructuring costs. The activity in the restructuring
liability accounts by cost category is as follows:

Approximately $2.0 million of the reserves are included in the balance sheet
caption "Accrued expenses and other current liabilities," while the remaining
$5.1 million are recorded in the balance sheet caption "Other liabilities." The
Company expects the remaining accruals to be paid with cash over the periods
provided by the severance and lease agreements of one and six years,
respectively.

ACQUISITION AND DISPOSITION OF BUSINESSES AND DISCONTINUED OPERATIONS

ACQUISITIONS OF BUSINESSES

Contemporaneously with the closing of its debt restructuring on August 15,
2001 (see NOTE 7 to the Company's consolidated financial statements), the
Company reacquired the 75% equity interest in Rexair, previously sold to
Strategic as part of the Diversified transactions in March 2000. The purchase
consideration included the return to Strategic of $27.4 million in face value of
Strategic's senior notes and the assumption of borrowings outstanding under
Rexair's $200 million credit facility (See DISPOSITIONS OF BUSINESSES below). In
connection with the reacquisition, the Company reduced the reacquired basis in
Rexair by the amount of its previously deferred gain and reclassified its
retained 25% share of Rexair's net liabilities from other long-term liabilities.
The allocation of the purchase consideration, including the deferred gain and
the carrying value of the retained liabilities, to the assets acquired and
liabilities assumed resulted in goodwill and other intangible assets of
approximately $68.9 million, the majority of which have indefinite lives and
will not be amortized. In addition, the Company expensed $17.4 million of
deferred transaction costs associated with the March 2000 sale of Rexair. The
results of Rexair have been included in the Bath & Plumbing segment since it was
reacquired. The Company accounted for Rexair under the equity method of
accounting during the time period from March 24, 2000 until August 15, 2001 when
the Company held only a 25% interest.

In June 2000, upon expiration of the contingency period related to the
December 1997 acquisition of Spear & Jackson, the Company made additional cash
payments totaling $71.4 million to the former owners of Spear & Jackson. The
Company was required to pay $36.0 million because the Company's stock price fell
below a guaranteed minimum as defined in the acquisition agreement. This amount
was recorded as an adjustment to paid in capital as it was based upon the market
price of the Company's stock. The remaining $35.4 million payment was made in
satisfaction of additional contingent consideration based on other criteria set
forth in the purchase agreement. This amount was recorded as additional goodwill
as it was made in satisfaction of contingent consideration based on other
criteria set

17

forth in the purchase agreement. Spear & Jackson is included in the Disposal
Plan (see NOTE 5 to the consolidated financial statements).

In July 1999, the Company acquired Spring Ram for approximately
$133.6 million in cash, plus the assumption of $21.3 million in debt, resulting
in goodwill of approximately $110.0 million. Spring Ram, located in Leeds,
England, is a manufacturer of bathroom products. The results of Spring Ram are
included in the Bath & Plumbing segment.

In June 1999, the Company purchased the assets of Gatsby for approximately
$17.0 million in cash, resulting in goodwill of $9.6 million. Gatsby
manufactures and distributes spas. The results of Gatsby are included in the
Bath & Plumbing segment.

DISPOSITIONS OF BUSINESSES

In November 2000, the Company sold its European HVAC business for proceeds
of $7.5 million, which approximated its carrying value.

On March 24, 2000, the Company disposed of a majority equity interest in its
Diversified segment in two separate transactions. In the first transaction, the
Company disposed of the following subsidiaries: Atech Turbine Components, Inc.;
Bearing Inspection, Inc.; BiltBest Products, Inc.; EJ Footwear Corp. (including
Georgia Boot Inc. and Lehigh Safety Shoe Co.); Garden State Tanning Inc.;
Huron Inc.; Jade Holdings Pte Ltd (including Jade Technologies Singapore Ltd and
FSM Europe B.V.); Leon Plastics Inc.; Native Textiles Inc. and SCF
Industries, Inc. The Company received gross cash proceeds of approximately
$203.4 million, retained a preferred equity interest in the buyer, Strategic,
having a stated value of approximately $19.5 million, retained a common equity
interest in Strategic of 17.7% and received approximately $209.0 million
aggregate principal amount of 12% (12.5% effective August 18, 2000) senior notes
(the "Strategic Notes") due 2007. In addition, Strategic assumed approximately
$7.9 million of existing bank debt. As a result of its disposal of the
Diversified businesses, the Company recorded a pre-tax gain of $38.4 million.

In the second transaction, Rexair sold newly issued shares to Strategic
representing, after issuance, 75% of the equity interest in Rexair. The Company
received approximately $195.0 million in cash and retained a 25% direct equity
interest in Rexair. In addition, the Company guaranteed Rexair's $200 million
credit facility. In connection with the Rexair transaction, the Company recorded
a liability of $82.2 million, related to its retained 25% share of Rexair's net
liabilities and a deferred gain, which, together with the deferral of the
related transaction costs, was to be deferred until the release of the Company's
guarantee of Rexair's credit facility. On August 15, 2001, the Company
reacquired Rexair from Strategic in exchange for $27.4 million in face value of
the Strategic Notes. Accordingly, the deferred transaction costs were expensed
in full at such date, and the deferred gain as well as the Company's retained
25% share of Rexair's net liabilities reduced the reacquired basis in Rexair
(See ACQUISITIONS OF BUSINESSES above).

In August 2000, the Company sold $25.0 million of the Strategic Notes,
approximately $1.8 million of the stated value of its preferred equity interest
in Strategic and approximately 1.9% of its common equity interest in Strategic.
This transaction resulted in a pre-tax gain of $0.9 million. At September 30,
2001, the Company held a preferred equity interest in Strategic having a stated
value of approximately $18 million, a 15.8% common equity interest and Strategic
Notes with a face value of $156.9 million. The Company is pursuing the sale of
the Strategic Notes together with its equity interest in Strategic at an amount
expected to approximate the September 30, 2001 carrying value.

In the second quarter of fiscal 2000, the Company sold its fire protection
businesses. The cash consideration paid for these businesses totaled
approximately $23.0 million, which approximated their carrying value.

18

During the first quarter of fiscal 2000, the Company disposed of assets
relating to its ladder operations and the infant and children footwear
operation. The total proceeds of these separate transactions were
$18.0 million, which approximated their carrying values. The Company has
retained certain product liabilities of the ladder operations.

In September 1999, the Company sold the assets of the water resource
construction business for approximately $11.1 million, which approximated book
value.

DISCONTINUED OPERATIONS

On December 28, 2001, the Board of Directors approved a formal Disposal Plan
for five businesses in connection with the Company's obligation to pay debt
amortization as set forth in the Restructured Facilities (See NOTE 7 to the
Company's Consolidated Financial Statements). In connection with the Disposal
Plan, the Company incurred a charge of $232.6 million, which represented the
difference between the historical net carrying value and the estimated net
realizable value of the five businesses, Ames True Temper, Selkirk, Lighting
Corporation of America, Spear & Jackson and SiTeco Lighting. The Disposal Plan
calls for the sale of the five businesses over the next 12 months. The net
assets of the discontinued businesses are included in net assets held for sale
for all periods presented.

Summarized results of discontinued operations are as follows:

Included in the net losses are goodwill impairment charges totaling
$121.4 million and $84.0 million in fiscal 2001 and 2000, respectively. These
goodwill impairment charges resulted from an evaluation of the recoverability of
goodwill performed by the Company in accordance with its accounting policy (see
NOTE 3 to the Company's consolidated financial statements). The impairment
charges were recorded as part of continuing operations before the approval of
the Disposal Plan. The charges were reclassified into discontinued operations
after the approval of the Disposal Plan.

Sales at Lighting Corporation of America and SiTeco Lighting (collectively
"Lighting") decreased $50.1 million in 2001 compared to 2000, and increased
$8.3 million in 2000 compared to 1999. The decrease in 2001 Lighting sales
related to the discontinuance of certain unprofitable product lines in 2000
combined with lower volume sales at the commercial and institutional indoor
businesses. Operating income for Lighting decreased $6.3 million in 2001
compared to 2000 and $3.7 million in 2000 compared to 1999. The decrease in 2001
is mainly the result of a goodwill impairment charge of $14.5 million.

Ames True Temper sales increased $6.9 million in 2001 compared to 2000 and
increased $55.0 million in 2000 compared to 1999. The increase in 2001 related
to higher snow tools sales while the increase in 2000 resulted from the full
year inclusion of the True Temper acquisition in March 1999. Ames True Temper
reported an operating loss of $29.0 million in 2001 as compared to operating
income of $34.3 million in 2000. The operating loss in 2001 is the result of a
goodwill impairment charge of $39.6 million combined with restructuring and
other start-up costs related to the new master distribution center.

19

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of liquidity and capital resources are cash
and cash equivalents, cash provided from operations and available borrowings
under the Company's Restructured Facilities (as defined below and in NOTE 4 to
the Company's consolidated financial statements).

Net cash provided by (used in) operating activities of continuing operations
was $24.9 million, $(64.3) million and $109.6 million in 2001, 2000 and 1999,
respectively. The improvement in 2001 was principally realized through
implementing liquidity management actions, primarily directed at accounts
receivable, inventories and accounts payable. This improvement was partially
offset by decreased operating profits as discussed in the Results of Operations
section. Also contributing to the improvement over 2000 was the fact that the
Diversified businesses were net cash users during 2000. The Diversified
businesses are seasonal in nature. They were divested in March 2000 just as they
were starting their seasonal change from net cash users to cash generators. In
addition, the Company experienced increased working capital requirements at its
Bath & Plumbing segment in 2000 to support sales growth. Fiscal 1999 results
reflect a full year's contribution from the Diversified segment's operations, as
well as cash provided from certain acquisitions in the second half of 1999. The
Company has experienced some seasonality in its Jacuzzi and Zurn businesses.
Sales of several Jacuzzi products such as spas and swimming pool equipment are
sensitive to weather conditions and tend to experience a significant decrease in
sales during the fall and winter months (predominantly the first and second
fiscal quarters). Sales of Jacuzzi and Zurn are also affected when weather
affects outside construction and installation.

Net cash provided by discontinued operations of $67.2 million for 2001
relates mainly to the implementation of the liquidity management actions
described above. Cash provided by discontinued operations of $28.8 million in
fiscal 2000 was the result of income generated from Lighting and Ames True
Temper, partially offset by increased working capital requirements at Ames True
Temper due to a planned move into a new distribution center. Cash provided by
discontinued operations of $87.8 million in fiscal 1999 is mainly the result of
income generated from Lighting and Ames True Temper and reduced working capital
requirements at Ertl.

Net cash used in investing activities was $7.4 million in 2001, compared to
net cash provided of $322.0 million in 2000 and net cash used of $227.7 million
in 1999. Net cash used by investing activities in 2001 consisted of $22.9
million for capital expenditures, partially offset by cash proceeds of
$7.5 million received from the sale of the European HVAC operations and $8.7
million from the sale of excess real estate and fixed assets. Net cash provided
by investing activities in 2000 primarily consisted of cash proceeds of
$402.2 million received from the sale of a majority equity interest in the
Diversified businesses and the sale of the fire protection, children's footwear
and ladder operations, $24.3 million received from the sale of Strategic Notes
and $6.7 million from the sale of excess real estate and property, plant and
equipment. This increase in cash was partially offset by $33.1 million required
for capital expenditures and $71.4 million for the Spear & Jackson contingency
payment (see NOTE 4 to the Company's consolidated financial statements). The net
cash used by investing activities in fiscal 1999 consisted primarily of
$334.6 million for acquisitions and $58.6 million for capital expenditures,
partially offset by proceeds of $131.9 million from the sales of Ertl, certain
assets of the power system and the water resources construction businesses and
$32.5 million in proceeds from the sale of excess real estate and property,
plant and equipment.

The Company used net cash of $35.1 million and $307.5 million for financing
activities in fiscal 2001 and 2000, respectively, compared to generating cash of
$53.0 million in fiscal 1999. Financing activities for fiscal 2001 include net
proceeds from long-term debt and notes of $16.3 million, offset by dividend
payments of $7.7 million and $43.1 million of cash used to purchase the
Company's common stock for treasury. The fiscal 2000 amount primarily consists
of net repayments of long-term debt and notes of $151.7 million, $143.4 million
of cash used to purchase the Company's common stock for

20

treasury and dividend payments of $16.8 million. The cash for the repayments of
long term debt and treasury stock repurchases was generated by the proceeds from
the sale of the Company's Diversified businesses discussed earlier. The fiscal
1999 amount includes proceeds from long-term debt and notes in excess of
repayments of $279.2 million, offset by dividend payments of $19.1 million, the
payment of $22.0 million to settle an interest rate protection agreement (see
NOTE 7 of the Company's consolidated financial statements) and the purchase of
$189.5 million of the Company's common stock for treasury.

During October 1999, the Company entered into equity instrument contracts to
purchase 2.8 million shares of its common stock. These contracts were settled
during 2001 for $43.1 million. During 1999 and 2000, the Company's Board of
Directors authorized share repurchase programs aggregating $350.0 million. As of
September 30, 2001, the Company had repurchased $331.8 million of its common
stock for treasury under these programs, of which $43.1 million, $99.2 million
and $189.5 million was purchased in 2001, 2000, and 1999, respectively. During
June 2000, in a separate transaction authorized and undertaken outside the
existing share repurchase program, the Company repurchased all of its common
stock held by the former owners of Spear & Jackson for $44.2 million. The
repurchase program has been suspended indefinitely, as the Restructured
Facilities entered into on August 15, 2001 (as discussed below) contains
restrictions on the purchase of Company stock, dividends and other restrictive
payments. In March 2001, the Company's Board of Directors indefinitely suspended
the Company's quarterly payment of dividends.

Total stockholders' equity decreased $554.1 million in fiscal 2001
principally due to the net loss of $524.6 million, $43.1 million in purchases of
the Company's common stock for treasury, and dividends declared of
$7.7 million.

During fiscal 2001, the Company paid approximately $4.9 million related to
its restructuring plans announced in prior years and expects an additional $2.0
million to be paid in the next 12 months. There have been no material changes in
the nature or costs of the restructurings.

In October 1998, USI and USI American Holdings, Inc. ("USIAH"), issued
$250.0 million aggregate principal amount of Senior Notes due October 15, 2003,
which bear interest at 7.125%, payable semiannually ("7.125% Notes"). The net
cash proceeds were $247.7 million after transaction fees and discounts. A
supplemental indenture was later executed adding USI Global Corporation ("USI
Global"), a wholly owned subsidiary of USI, as a co-obligor under the 7.125%
Notes.

In fiscal 1997, USIAH issued $125.0 million aggregate principal amount of
Senior Notes due December 1, 2006, which bear interest at 7.25%, payable
semiannually ("7.25% Notes"). The net cash proceeds were $123.0 million after
transaction fees and discounts. Supplemental indentures were later executed
adding USI and USI Global as a co-obligors with USIAH under the 7.25% Notes.

The 7.25% Notes and the 7.125% Notes (collectively, the "Senior Notes") are
guaranteed by USI Atlantic. The Senior Notes are redeemable at the option of the
Company, in whole or in part, at a redemption price equal to the greater of
(i) 100% of the principal amount to be redeemed or (ii) the sum of the present
values of the remaining scheduled payments of principal and interest on the
Senior Notes to be redeemed, discounted at a rate based on the yield to maturity
of the comparable U.S. Government securities plus a spread (10 basis points for
the 7.25% Notes and 50 basis points for the 7.125% Notes) plus, in each case,
accrued interest to the date of redemption. Certain restrictions on dividends
and the purchase of common stock for treasury contained in the indenture for the
7.25% Notes were eliminated in August 1998 based upon the Company's credit
rating at that time. The 7.125% Notes were issued without such restriction;
however, the Restructured Facilities (discussed below) contain restrictions on
dividends as well as the purchase of common stock for treasury. The security
interests granted to the holders of the Senior Notes as a result of the
Restructured Facilities are discussed in more detail below.

21

During fiscal 2000 and 2001 the Company had a commercial paper program,
supported by its $300 million 364-day credit facility (the "Credit Facility").
The commercial paper program was suspended during 2001 and the Company began
borrowing under the Credit Facility. The Credit Facility was scheduled to expire
on October 26, 2001, but was terminated on August 15, 2001 as part of the debt
restructuring. The Company also had a five-year revolving line of credit
providing for borrowings in both U.S. dollars and foreign currencies and letters
of credit, which had original availability of $750 million (the "Credit
Agreement"). The Credit Agreement, which was permanently reduced over time to an
availability of $500 million, was scheduled to terminate on December 12, 2001.
The Credit Facility and Credit Agreement (together, the "Revolving Facilities")
were restructured on August 15, 2001 into an amended credit facility providing
for, among other things, an increase in availability to $830 million and an
extension of the final maturity of the debt through November 30, 2002 (see
below).

Prior to the restructuring of its debt, the Company obtained from its
lenders waivers of non-compliance with certain covenants contained in the
Revolving Facilities. These covenants have since been replaced by those
contained in the restructured debt agreement. In addition, although the
Revolving Facilities were previously unsecured, the lenders of the Revolving
Facilities were granted on April 30, 2001 security interests in substantially
all of the assets of the Company and its domestic subsidiaries, including shares
of the Company's domestic subsidiaries and 65% of the shares of certain of the
Company's foreign subsidiaries. As a result of having the Revolving Facilities
secured, the Rexair guarantee referred to below became secured with certain
assets. In addition, the Company's Senior Notes also became equally and ratably
secured with the Revolving Facilities and the Rexair Guaranty with respect to
the assets of the Company and its subsidiaries that are subject to the covenant
restrictions under the Senior Notes. The covenants contained in the indentures
under which the Senior Notes were issued apply to the Company and any domestic
subsidiary that is a "significant subsidiary" (within the meaning of
rule 1-02(w) (the "Rule") of Regulation S-X promulgated under the Securities and
Exchange Act of 1934 or any successor provision). In accordance with the Rule,
the determination that a subsidiary is a "significant subsidiary" is made on a
consolidated basis, taking into account such subsidiary and all of its
consolidated subsidiaries. Those subsidiaries identified as significant
subsidiaries at October 1, 2001 include USI Atlantic Corp., USI American
Holdings, Inc., USI Global Corp., JUSI Holdings, Inc., Jacuzzi Inc., Ames True
Temper, Inc., LCA Group Inc., Zurn Industries, Inc., Eljer Plumbingware, Inc.
and Selkirk, Inc. After considering the equal and ratable security interest of
the Senior Notes, seperate financial statements for USI Atlantic Corp., USI
American Holdings, Inc., USI Global Corp., and JUSI Holdings, Inc., are included
elsewhere in this annual report. A significant subsidiary may itself have one or
more subsidiaries that, when looked at on a consolidated basis, do not
constitute "significant subsidiaries" under the Rule. As a result, these
subsidiaries, on a stand-alone basis, are not subject to the covenant
restrictions under the Senior Notes, and no portion of the proceeds of assets
sales completed by these subsidiaries would be allocable to the Senior Notes.

In connection with the Company's sale to Strategic in March 2000 of a
majority interest in Rexair, the Company guaranteed Rexair's $200 million credit
facility. This guarantee required the Company to maintain certain credit rating
levels. In response to a downgrade of its credit ratings in March 2001, the
Company obtained waivers of the ratings default from Rexair's lenders while it
pursued the reacquisition of Rexair from Strategic and the restructuring of its
debt. On August 15, 2001, the Company completed the reacquisition of Rexair as
described below.

On August 15, 2001, the Company finalized a comprehensive restructuring of
its bank debt and the bank debt of Rexair, which was reacquired from Strategic
on the same date. The amended facilities (including the Rexair Credit Facility,
the "Restructured Facilities") extend the final maturity date of the Company's
debt under the Revolving Facilities to November 30, 2002, which coincides with
the final maturity of the amended Rexair Credit Facility. The Restructured
Facilities provide for an increase in availability under the five-year Credit
Agreement from $500 million to $830 million, the termination of the
multi-currency borrowing feature under the five-year Credit Agreement, the
elimination of the

22

364-day Credit Facility and scheduled permanent reductions of the Company's
senior debt (a combination of the Restructured Facilities, Senior Notes and
other defined obligations) during the term of the Restructured Facilities. The
required cumulative permanent principal reductions of the Company's senior debt
are scheduled at $75 million, $200 million, $450 million and $600 million during
the periods ending December 31, 2001; March 31, 2002; June 30, 2002; and
October 15, 2002, respectively. On December 21, 2001, the Company obtained a
waiver (the "December 2001 Waiver") from its lenders under the Restructured
Facilities that permitted the Company to satisfy the remaining balance of the
December 31, 2001 $75 million reduction through a permanent reduction of the
unfunded commitments under the Restructured Facilities, to the extent not
satisfied through cash flow or asset sale proceeds. Under the terms of the
waiver, if the Company completes any asset sales between January 1 and
February 28 of 2002, the permanent reduction resulting from any such asset sales
will be reduced by the amount of the unfunded commitment (approximately
$58 million) used to satisfy the December 31, 2001 amortization. The
Restructured Facilities mature November 30, 2002.

Contemporaneously with the closing of the debt restructuring, the Company
reacquired the remaining 75% equity interest in Rexair, the manufacturer of
"Rainbow" vacuum cleaners, from Strategic. The Company returned to Strategic
$27 million of the $184 million in face value of the Strategic Notes as part of
the transaction. Effective August 15, 2001, the Company began including the
results of Rexair in its consolidated results of operations. The Company's
guarantee of the Rexair Credit Facility remains in place. While still owned by
Strategic, Rexair recorded sales of $109.5 million and $94.2 million and
operating income before management fees and divisional overhead of
$28.8 million and $24.3 million for the year ended September 30, 2000 and period
ended August 15, 2001, respectively. Included in the Company's consolidated
results for fiscal 2001 are sales of $13.3 million and operating income of $3.0
million related to Rexair.

The Restructured Facilities require that the Company and Rexair maintain
minimum monthly EBITDA, as defined; comply with maximum monthly capital
expenditure limits; maintain minimum availability (as defined) under the 5-year
Credit Facility of no less than $25 million and comply with other customary
affirmative and negative covenants. In addition, the amended Rexair Credit
Facility, which provides a term loan of $175 million and availability under a
revolver of $20 million (after being permanently reduced by $5 million on
August 15, 2001), requires that excess cash generated by Rexair be segregated
from excess cash generated by the remainder of the Company's operations and used
only to reduce the debt outstanding on the Rexair Credit Facility. Rexair's
availability under its revolver will be permanently reduced by another
$5 million on May 31, 2002. In connection with its term loan, Rexair has made or
will be required to make principal payments of $2.2 million each in
December 2001 and March 2002 and $4.4 million each in June 2002 and
September 2002. Such payments are credited towards the scheduled permanent
reductions of the Company's senior debt. The Senior Notes and the Restructured
Facilities contain cross-default and cross-acceleration provisions.

The Restructured Facilities provide for increasing interest rates over the
remaining term. The spread over London Interbank Offered Rate ("LIBOR") was 275
basis points until December 31, 2001, after which the spread increases by 50
basis points each quarter thereafter. The Restructured Facilities also provide
for several fees, including an unused commitment fee of 0.50% and a facing fee
on all outstanding letters of credit of 0.25% per annum. At the Company's
option, up to 0.50% of the interest rate applicable to borrowings under the
Restructured Facilities may be paid through the issuance of notes.

The security interests that were granted to the lenders of the Revolving
Facilities on April 30, 2001 remain in place under the debt restructuring, as do
the arrangements to equally and ratably secure the Rexair Guaranty and to
equally and ratably secure the Senior Notes with certain assets. In addition,
certain domestic and foreign subsidiaries of the Company that are not subject to
the Senior Notes' covenant restrictions have guaranteed the Restructured
Facilities. Under the Restructured Facilities, the

23

Company also agreed to provide the lenders with security interests in the shares
and assets of certain of the Company's foreign subsidiaries.

Under the Restructured Facilities, substantially all assets sale proceeds
are required to be applied to reduce the Company's funded and unfunded senior
debt, on a pro rata basis. The senior debt includes the Senior Notes in those
cases when the Company or any subsidiary subject to the Senior Notes' covenants
completes an asset sale. Proceeds allocable to the Senior Notes and other
defined obligations are required to be deposited in cash collateral accounts for
the benefit of the relevant holders; any claims of the lenders of the
Restructured Facilities to amounts on deposit in the cash collateral accounts
are subordinated to the claims of the relevant holders, including the payment in
full of their Senior Notes and other obligations. Any reductions of senior debt
with asset sale proceeds are credited dollar-for-dollar towards the scheduled
permanent reductions.

The Company expects to satisfy operating liquidity needs through operating
cash flow. However, it will have to sell a substantial amount of its assets and
restructure or refinance its debt to satisfy the required cumulative permanent
reductions.

On December 28, 2001, the Board of Directors approved a formal Disposal Plan
for five businesses in order to meet the scheduled reductions. The five
businesses, Ames True Temper, Selkirk, Lighting Corporation of America, Spear &
Jackson and SiTeco Lighting, have an estimated net realizable value of
$491.6 million. The Disposal Plan calls for the sale of the five businesses over
the next 12 months. The net assets of the discontinued businesses are included
in net assets held for sale in all periods presented.

The Company entered into an agreement to sell Ames True Temper on
December 24, 2001 for approximately $165 million in cash. The sale, which is
subject to the completion of financing and other customary closing conditions,
is currently expected to close in January 2002. Upon closing, the entire net
cash proceeds will be applied to reduce the Company's funded and unfunded senior
debt. Approximately $44 million of the proceeds are expected to be deposited
into the cash collateral accounts for the benefit of the holders of the
Company's Senior Notes and certain other creditors. The remainder will be
remitted to the Lenders under the Restructured Facilities, and the total
facility will be permanently reduced by such amount. As a result of the
remittance, the Lenders will concurrently restore the approximate $58 million of
borrowing capacity under the unfunded commitments of the Restructured Facilities
(which have been reduced by the terms of the December 2001 Waiver).

The Company is pursuing the sale of the Strategic Notes together with its
equity interest in Strategic at an amount expected to approximate the
September 30, 2001 carrying value. Upon closing, the entire net cash proceeds
will be applied to reduce the Company's funded and unfunded senior debt. A
portion of the proceeds is expected to be deposited into the cash collateral
accounts for the benefit of the holders of the Company's Senior Notes and
certain other creditors. The remainder will be remitted to the Lenders under the
Restructured Facilities, and the total facility will be permanently reduced by
such amount.

The net proceeds from the sale of Ames True Temper and the Strategic Notes
are expected to be sufficient to fund the required reductions of the Company's
senior debt through March 31, 2002. At December 31, 2001, excluding all amounts
related to the amended Rexair Credit Facility and after giving effect to the
approximate $58 million reduction pursuant to the December 2001 Waiver, the
Company had approximately $766 million committed under the Restructured
Facilities, of which approximately $669 million had been utilized and the
balance of $97 million was available. At December 31, 2001, $5.7 million was
available for borrowing solely by Rexair under the amended Rexair Credit
Facility. These amounts are net of letters of credit outstanding of
$15.0 million as of December 31, 2001. In addition, the Company had letters of
credit outstanding with other financial institutions totalling $41.4 million as
of December 31, 2001.

24

The Company continues to actively pursue its Disposal Plan. However, there
can be no assurance when or whether the Company will consummate any of these
transactions. If the Company is unable to consummate asset disposals as outlined
in its Disposal Plan in time to meet scheduled amortizations, the Company
expects to seek a further restructuring of its credit facilities. Furthermore,
the proceeds of the Disposal Plan, if consummated in its entirety, and the sale
of the Strategic Notes will be insufficient to repay the Restructured Facilities
upon their maturity in November 2002. Accordingly, the Company will have to
restructure or refinance its existing Restructured Facilities. The Company
believes it will be able to restructure or refinance its existing Restructured
Facilities before their scheduled maturity in November 2002. However, there can
be no assurance that it will be able to do so.

The Company's independent auditors have included a going concern explanatory
paragraph in their audit report accompanying the September 30, 2001 consolidated
financial statements. The paragraph states that the Company's need to generate
sufficient funds to make the required cumulative reductions of senior debt of
$450 million by June 30, 2002 through asset sales or a restructuring or
refinancing raises substantial doubt about the Company's ability to continue as
a going concern.

NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, BUSINESS COMBINATIONS, and No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS, effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill and intangible assets deemed to have indefinite lives will
no longer be amortized but will be subject to annual impairment tests in
accordance with the Statements. Other intangible assets will continue to be
amortized over their useful lives. SFAS 141 is effective commencing July 1, 2001
and the Company has elected to adopt SFAS 142 as of October 1, 2001.
Accordingly, as of October 1, 2001, the Company will no longer amortize
goodwill.

In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS. The FASB's new rules on asset impairment
supersede SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and provides a single accounting model
for long-lived assets to be disposed of. Although retaining many of the
fundamental recognition and measurement provisions of SFAS No. 121, the new
rules significantly change the criteria that would have to be met to classify an
asset as held-for-sale. The new rules also supersede the provisions of APB
Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS--REPORTING THE EFFECTS OF
DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY
OCCURRING EVENTS AND TRANSACTIONS, with regard to reporting the effects of a
disposal of a segment of a business and require expected future operating losses
from discontinued operations to be displayed in discontinued operations in the
period(s) in which the losses are incurred (rather than as of the measurement
date as presently required by APB No. 30). The Statement is effective for the
Company in the beginning of fiscal year 2003. The Company does not believe this
statement will have a material effect on the earnings or financial position of
the Company.

FOREIGN CURRENCY MATTERS

The functional currency of each of the Company's foreign operations at
September 30, 2001 is the local currency. Assets and liabilities of foreign
subsidiaries are translated at the exchange rates in effect at the balance sheet
dates, while revenue, expenses and cash flows are translated at average exchange
rates for the period. Translation gains and losses are reported as a component
of Stockholders' Equity.

EFFECTS OF INFLATION

Because of the relatively low level of inflation experienced in the
Company's principal markets, inflation did not have a material impact on its
results of operations in fiscal 2001, 2000 or 1999.

25

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of doing business, the Company is exposed to the risks
associated with changes in interest rates and currency exchange rates. To limit
the risks from such fluctuations, the Company enters into various hedging
transactions that have been authorized pursuant to the Company's policies, but
does not engage in such transactions for trading purposes.

To manage exposure to interest rate movements, the Company uses interest
rate protection agreements. Based on the Company's overall exposure to interest
rate changes, a hypothetical increase of 100 basis points across all maturities
of its floating rate debt obligations, after considering interest rate
protection agreements, would have decreased the Company's pre-tax earnings by
approximately $7.6 million in fiscal 2001 and $7.0 million in fiscal 2000. Net
payments (receipts) under swap agreements amounted to approximately $1.0
million, $(0.7) million and $4.3 million for fiscal 2001, 2000 and 1999,
respectively. The swaps were of notional amounts and maturities that relate to
specific portions of outstanding debt, and accordingly, were accounted for as
hedge transactions.

The Company also utilized foreign currency-denominated borrowings to
selectively hedge its net investments in subsidiaries in foreign countries.
However, as a result of the debt restructuring, the multi-currency borrowing
feature under the five-year Credit Agreement was terminated on August 15, 2001,
and the Company will no longer hedge its net investments in foreign entities.
The Company has also entered into foreign exchange forward contracts to manage
the risks associated with certain foreign currency transactions. Such contracts
have not been significant.

The Company is also exposed to foreign currency exchange risk related to its
international operations as well as its U.S. businesses, which import or export
goods. The Company has made limited use of financial instruments to manage this
risk.

Effective October 1, 2000, the Company adopted Financial Accounting Standard
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, which requires that all derivative instruments be reported on the
balance sheet at fair value and establishes criteria for designation and
effectiveness of hedging relationships. See NOTE 3 of the Company's consolidated
financial statements for additional information on its derivative and hedging
activities.

26

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of
U.S. Industries, Inc.

We have audited the consolidated balance sheets of U. S. Industries, Inc.
(the "Company") as of September 30, 2001 and 2000 and the related consolidated
statements of operations, cash flows, and changes in stockholders' equity for
each of the three years in the period ended September 30, 2001. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company at
September 30, 2001 and 2000, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended September 30,
2001, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company's restructured credit facilities require cumulative reductions of the
Company's senior debt of $450 million by June 30, 2002. The Company needs to
generate sufficient funds to make such reductions or, absent such reductions,
restructure or refinance its debt. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that may result from the outcome of
this uncertainty.

/s/ Ernst & Young LLP

New York, New York
January 14, 2002

27

U.S. INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN MILLIONS EXCEPT PER SHARE)

See notes to Consolidated Financial Statements.

28

U.S. INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE DATA)

See notes to Consolidated Financial Statements.

29

U.S. INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS)

See notes to Consolidated Financial Statements.

30

U.S. INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
(IN MILLIONS EXCEPT SHARE DATA)

See notes to Consolidated Financial Statements.

31

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--GOING CONCERN

The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not reflect any adjustments that might
result if U.S. Industries, Inc. (together with its subsidiaries, "USI" or the
"Company") were unable to continue as a going concern. On August 15, 2001, the
Company finalized a comprehensive restructuring of its bank debt and the bank
debt of Rexair Inc. ("Rexair"), a former subsidiary that was reacquired from
Strategic Industries, LLC ("Strategic") on the same date. The amended facilities
(together the "Restructured Facilities") extend the final maturity date of the
Company's debt under its credit agreement to November 30, 2002, which coincides
with the final maturity of the amended Rexair Credit Facility. The Restructured
Facilities provide for scheduled permanent reductions of the Company's senior
debt (a combination of the Restructured Facilities, Senior Notes and other
defined obligations) during the term of the Restructured Facilities. The
required cumulative permanent reductions of the Company's senior debt are
scheduled at $75 million, $200 million, $450 million and $600 million for the
periods ending December 31, 2001, March 31, 2002, June 30, 2002, and
October 15, 2002, respectively. The remaining balance of the Restructured
Facilities is due in full on November 30, 2002. The Company expects to satisfy
operating liquidity needs through operating cash flow. However, it will have to
sell a substantial amount of its assets and restructure or refinance its debt to
satisfy the required cumulative permanent reductions.

On December 28, 2001, the Board of Directors approved a formal Disposal Plan
for five businesses in order to meet the scheduled reductions. The five
businesses, Ames True Temper, Selkirk, Lighting Corporation of America, Spear &
Jackson and SiTeco Lighting, have an estimated net realizable value of
$491.6 million. The Disposal Plan calls for the sale of the five businesses over
the next 12 months. The net assets of the discontinued businesses are included
in net assets held for sale in all periods presented.

On December 21, 2001, the Company obtained a waiver (the "December 2001
Waiver") from its lenders under the Restructured Facilities that permitted the
Company to satisfy the remaining balance of the December 31, 2001 $75 million
reduction through a permanent reduction of the unfunded commitments under the
Restructured Facilities, to the extent not satisfied through cash flow or asset
sale proceeds. Under the terms of the waiver, if the Company completes any asset
sales between January 1 and February 28 of 2002, the permanent reduction
resulting from any such asset sales will be reduced by the amount of the
unfunded commitment (approximately $58 million) used to satisfy the
December 31, 2001 amortization.

The Company entered into an agreement to sell Ames True Temper on
December 24, 2001 for approximately $165 million in cash. The sale, which is
subject to the completion of financing and other customary closing conditions,
is currently expected to close in January 2002. Upon closing, the entire net
cash proceeds will be applied to reduce the Company's funded and unfunded senior
debt. Approximately $44 million of the proceeds are expected to be deposited
into the cash collateral accounts for the benefit of the holders of the
Company's Senior Notes and certain other creditors. The remainder will be
remitted to the Lenders under the Restructured Facilities, and the total
facility will be permanently reduced by such amount. As a result of the
remittance, the Lenders will concurrently restore the approximate $58 million of
borrowing capacity under the unfunded commitments of the Restructured Facilities
(which have been reduced by the terms of the December 2001 Waiver).

The Company is pursuing the sale of the Strategic Notes together with its
equity interest in Strategic at an amount expected to approximate the
September 30, 2001 carrying value. Upon closing,

32

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--GOING CONCERN (CONTINUED)
the entire net cash proceeds will be applied to reduce the Company's funded and
unfunded senior debt. A portion of the proceeds is expected to be deposited into
the cash collateral accounts for the benefit of the holders of the Company's
Senior Notes and certain other creditors. The remainder will be remitted to the
Lenders under the Restructured Facilities, and the total facility will be
permanently reduced by such amount.

The net proceeds from the sale of Ames True Temper and the Strategic Notes
are expected to be sufficient to fund the required reductions of the Company's
senior debt through March 31, 2002. At December 31, 2001, excluding all amounts
related to the amended Rexair Credit Facility and after giving effect to the
approximate $58 million reduction pursuant to the December 2001 waiver, the
Company had approximately $766 million committed under the Restructured
Facilities of which approximately $669 million had been utilized and the balance
of $97 million was available.

The Company continues to actively pursue its Disposal Plan. However, there
can be no assurance when or whether the Company will consummate any of these
transactions. If the Company is unable to consummate asset disposals as outlined
in its Disposal Plan in time to meet scheduled amortizations, the Company
expects to seek a further restructuring of its credit facilities. Furthermore,
the proceeds of the Disposal Plan, if consummated in its entirety, and the sale
of the Strategic Notes will be insufficient to repay the Restructured Facilities
upon their maturity in November 2002. Accordingly, the Company will have to
restructure or refinance its existing Restructured Facilities. The Company
believes it will be able to restructure or refinance its existing Restructured
Facilities before their scheduled maturity in November 2002. However, there can
be no assurance that it will be able to do so.

The Company's independent auditors have included a going concern explanatory
paragraph in their audit report accompanying the September 30, 2001 consolidated
financial statements. The paragraph states that the Company's need to generate
sufficient funds to make the required cumulative reductions of senior debt of
$450 million by June 30, 2002 through asset sales or a restructuring or
refinancing raises substantial doubt about the Company's ability to continue as
a going concern.

NOTE 2--BASIS OF PRESENTATION

The Company manufactures and distributes a broad range of consumer and
industrial products.

The Company operates on a 52- or 53-week fiscal year ending on the Saturday
nearest to September 30. The fiscal year periods presented in our consolidated
financial statements consisted of the 52 weeks ending on September 29, 2001,
September 30, 2000 or October 2, 1999, but are presented as of September 30 in
each of those years for convenience. Businesses over which the Company has the
ability to exercise significant influence are accounted for using the equity
method. In March 2000, the Company completed the disposition of a majority
equity interest in its Diversified segment. Since then, the Company has
accounted for its retained interest in the Diversified segment under the equity
method of accounting. The Company eliminates intercompany balances and
transactions when consolidating the account balances of the subsidiaries.

Certain amounts have been reclassified in the Company's prior year
statements to reflect the discontinuance of certain operations (see NOTE 5) and
to conform them to the presentation used in the current year.

33

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--ACCOUNTING POLICIES

USE OF ESTIMATES: Accounting guidelines require that the Company make
estimates and assumptions that affect amounts reported in its financial
statements and accompanying notes. Actual results could differ from those
estimates.

FOREIGN CURRENCY TRANSLATION: The Company's subsidiaries outside of the
United States record transactions using their local currency as their functional
currency. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 52, FOREIGN CURRENCY TRANSLATION, the assets and liabilities of the
Company's foreign subsidiaries are translated into U.S. dollars using the
exchange rates in effect at the balance sheet dates. Revenues, expenses and cash
flow items are translated at average daily exchange rates for the period. The
translation adjustments that result from translating the balance sheets at
different rates than the statements of operations are included in accumulated
other comprehensive income, which is a separate component of the Company's
stockholders' equity.

CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.

TRADE RECEIVABLES AND CONCENTRATION OF CREDIT RISK: The Company records an
allowance for doubtful accounts, reducing its receivables balance to an amount
the Company estimates is collectible from its customers.

The Company operates in the United States, Europe and, to a lesser extent,
in other regions of the world. The Company performs periodic credit evaluations
of its customers' financial condition and generally does not require collateral.
The Company encounters a certain amount of credit risk as a result of a
concentration of receivables among a few significant customers. One of its
customers accounts for 14%, 10% and 5% of sales in fiscal 2001, 2000 and 1999,
respectively. As of September 30, 2001 and 2000, this customer represents
approximately 10% and 14% of the Company's trade receivables balances. Credit
losses have not been significant and are within management's expectations.

INCOME TAXES: Deferred tax assets and liabilities represent the tax effects,
based on current law, of any temporary differences in the timing of when
revenues and expenses are recognized for tax purposes and when they are
recognized for financial statement purposes. The deferred tax assets are
reviewed periodically for recoverability and valuation allowances are provided
as necessary.

INVENTORIES: The Company's inventories are stated at the lower of cost or
market value. The Company used the first-in-first-out (FIFO) method for
determining the cost of approximately 39% of its inventories in 2001 and
approximately 52% of its inventories in 2000, and the last-in-first-out (LIFO)
method for the remainder of its inventories. The carrying value of the Company's
LIFO method inventories approximate their FIFO cost value at September 30, 2001
and 2000. The FIFO method approximates replacement cost. The Company's
inventories can be categorized as follows:

34

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT: The Company records its property, plant and
equipment at cost. The Company records depreciation and amortization in a manner
that recognizes the cost of its depreciable assets in operations over their
estimated useful lives using the straight-line method. The Company estimates the
useful lives of its depreciable assets to be 20-50 years for buildings and
3-10 years for machinery, equipment and furniture. Leasehold improvements are
amortized over the shorter of the terms of the underlying leases, including
probable renewal periods, or the estimated useful lives of the improvements.

Property, plant and equipment consisted of:

DEPRECIATION AND AMORTIZATION: Depreciation and amortization consisted of:

OTHER ASSETS: Included in other assets are excess properties held for sale,
consisting primarily of land and buildings no longer used in operations. These
assets are carried at the lower of cost or fair value less costs to sell. The
carrying value of such properties was $10.1 million and $14.6 million as of
September 30, 2001 and 2000, respectively. In fiscal 2001 the Company recorded a
loss from excess properties of $0.2 million, compared to income from excess
properties of $2.7 million and $13.9 million in fiscal 2000 and 1999,
respectively. This amount is included in other (expense) income, net and
consists of net gains on the sale of these properties, adjustments to net
realizable value and the carrying costs incurred in the period.

GOODWILL: Goodwill represents the excess of the purchase price over the fair
value of net assets acquired. The Company reviews operating results and other
relevant facts every fiscal quarter for each of its businesses to determine if
there are indications that the carrying value of its long-lived assets,
including goodwill may be impaired. When there are indicators of impairment, the
Company first assesses the recoverability of goodwill associated with long-lived
assets in accordance with the requirements of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF, which
requires impairment losses to be recorded when the undiscounted cash

35

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--ACCOUNTING POLICIES (CONTINUED)
flows estimated to be generated by those assets are less than the carrying
amount of those assets. In addition, an enterprise level assessment of the
recoverability of any remaining goodwill is performed using the fair value
methodology, as permitted under APB No. 17. In the event that such fair value is
below the carrying value of an enterprise, for those companies with goodwill,
the Company reduces goodwill to the extent it is impaired based upon fair value.

The fair value methodology is applied to determine the recoverable value for
each business on a stand-alone basis using ranges of fair values obtained from
independent appraisers. In developing these ranges, the independent appraisers
consider (a) publicly available information, (b) financial projections of each
business based on management's best estimates, (c) the future prospects of each
business as discussed with senior operating and financial management,
(d) publicly available information regarding comparable publicly traded
companies in each industry, (e) market prices, capitalization and trading
multiples of comparable public companies and (f) other information deemed
relevant. In reviewing these valuations and considering the need to record a
charge for impairment of enterprise value and goodwill to the extent it is part
of the enterprise value, the Company also evaluates solicited and unsolicited
bids for the businesses of the Company.

Goodwill is amortized on a straight-line basis over the estimated future
periods to be benefited (ranging from 20 to 40 years, primarily forty years).
Accumulated amortization aggregated $79.0 million and $74.5 million, at
September 30, 2001 and 2000, respectively.

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES: Accrued expenses and other
current liabilities consisted of the following:

FAIR VALUE OF FINANCIAL INSTRUMENTS: SFAS No. 107, DISCLOSURE ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, requires that the Company disclose the fair
value of its financial instruments when it is practical to estimate. The Company
has determined the estimated fair values of its financial instruments, which are
either recognized in the Company's consolidated balance sheets or disclosed
within these notes, using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting market
data to develop estimates of fair value. Accordingly, the estimates presented
are not necessarily indicative of the amounts the Company could realize in a
current market exchange.

Short-term Assets and Liabilities: The fair values of the Company's cash and
cash equivalents, trade receivables and accounts payable approximate their
carrying values because of their short-term nature.

Long-term Debt: The fair values of the Company's Senior Notes represent
quoted market prices. The fair values of the Company's remaining debt are
determined by discounting the cash flows using

36

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--ACCOUNTING POLICIES (CONTINUED)
current interest rates for financial instruments with similar characteristics
and maturities. The fair value of the Company's remaining debt approximates 80%
of its carrying value as of September 30, 2001.

There were no other significant differences as of September 30, 2001 and
September 30, 2000 between the carrying value and fair value of the Company's
financial instruments except as disclosed below:

Interest Rate Swaps and Foreign Currency Contracts: The fair value of the
Company's interest rate swap and foreign currency contracts is the amount the
Company would receive or have to pay to terminate the agreement at the reporting
date, taking into account current interest rates and exchange rates. The fair
value of the interest rate swap is provided to the Company by its financial
institution, the counter-party to the interest rate swap agreement. For more
information on these financial instruments, see the DERIVATIVE FINANCIAL
INSTRUMENTS section of this note.

REVENUE RECOGNITION: The Company currently records revenue when delivery has
occurred and title has passed to the customer. Provisions are made for warranty
and return costs at the time of sale. Such provisions have not been material to
the Company.

ACCOUNTING CHANGE: In December 1999, the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, REVENUE RECOGNITION IN
FINANCIAL STATEMENTS, which, along with other guidance, clarified the SEC's
views on various revenue recognition and reporting matters. As a result, the
Company changed its method of accounting for certain sales transactions.
Historically, the Company recognized revenue upon shipment of products to the
customer because, even though some products were shipped FOB destination, the
Company used a common carrier and thus gave up substantially all the risks of
ownership. Under the new accounting method adopted retroactive to October 1,
2000, the Company now recognizes revenue when title passes. The net effect of
the accounting change was not material to the results for the year ended
September 30, 2001. Net sales for the year ended September 30, 2001 includes
$4.4 million of net sales that, prior to the accounting change, had been
recognized through September 30, 2000. The pro forma amounts, had the new
revenue recognition method been applied retroactively to prior periods, were not
materially different from the amounts shown in the Company's consolidated
statements of operations for the years ended September 30, 2000 and 1999.
Therefore, these amounts have not been presented.

SHIPPING AND HANDLING FEES AND COSTS: After adopting Emerging Issues Task
Force ("EITF") Issue No. 00-10, ACCOUNTING FOR SHIPPING AND HANDLING FEES AND
COSTS, the Company classifies amounts charged to its customers for shipping and
handling as revenues, while shipping and handling costs are recorded as cost of
goods sold.

In connection with the adoption of EITF Issue No. 00-10, the Company has
reclassified certain revenue, cost of goods sold and SG&A expense amounts in all
periods presented in its consolidated

37

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--ACCOUNTING POLICIES (CONTINUED)
statements of operations. The reclassifications resulted in an increase in net
sales of approximately $15.9 million, $18.4 million and $16.9 million for 2001,
2000 and 1999, respectively, and an increase in cost of goods sold of
$58.7 million, $65.2 million and $52.1 million for 2001, 2000 and 1999,
respectively. These increases were offset by decreases in the Company's SG&A
expenses. These reclassifications had no effect on the Company's results of
operations or financial position.

ADVERTISING COSTS: Advertising costs are charged to expense when incurred.
The Company participates in cooperative advertising programs with certain
customers for which the Company reimburses a portion of advertising costs.
Advertising expense totaled $31.1 million, $34.8 million and $27.4 million in
2001, 2000 and 1999, respectively.

RESEARCH AND DEVELOPMENT COSTS: Research and development costs are expensed
as incurred. Such amounts totaled $5.2 million, $6.2 million and $5.0 million in
2001, 2000 and 1999, respectively.

DERIVATIVE FINANCIAL INSTRUMENTS: Effective October 1, 2000, the Company
adopted SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, as amended, which requires that all derivative instruments be
reported on the balance sheet at fair value and establishes criteria for
designation and effectiveness of hedging relationships. The Company uses several
types of derivative financial instruments including interest rate swaps, forward
contracts and debt denominated in a foreign currency to hedge its exposure to
volatility in interest rates and currency exchange rates.

INTEREST RATE HEDGING

The Company hedged a portion of its variable-rate debt by entering into an
interest rate swap in which the Company agreed to exchange, at specified
intervals, the calculated difference between fixed and variable interest amounts
on $90 million of its debt. The swap, which matures on June 30, 2002, is
designated as a cash flow hedge of the underlying variable-rate interest
payments and is recorded as a current liability in the Company's balance sheet.
Since an assessment of the hedging relationship revealed that it was 100%
effective, the entire unrealized loss, net of tax, is recorded in accumulated
other comprehensive income (loss) ("OCI") within stockholders' equity. As of
September 30, 2001 there was an unrealized loss of $1.4 million in OCI related
to this contract. The amounts in OCI will be recognized as additional interest
expense over the term of the swap agreement.

FORWARD EXCHANGE

The Company manufactures and sells its products in a number of countries
throughout the world and, as a result, is exposed to movements in foreign
currency exchange rates. The primary purpose of the Company's foreign currency
hedging activities is to manage the volatility associated with foreign currency
payments to related entities or to vendors for purchases of materials and with
foreign currency collections from customers in the normal course of business.
The Company utilizes forward exchange contracts with maturities of less than
twelve months, which qualify as foreign currency hedges. These hedges are
intended to offset the effect of transaction gains and losses, which arise when
payments or collections in a foreign currency are made or received one to three
months after the asset or liability is generated. The fair value of these
instruments at September 30, 2001 was negligible. Since the Company's assessment
of these hedges revealed no ineffectiveness, gains and losses on these
instruments are deferred in OCI, net of tax, until the underlying transaction
gain or loss is recognized in earnings. Amounts in OCI will be reclassified into
earnings within the next twelve months.

38

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY DENOMINATED DEBT (NET INVESTMENT HEDGING)

The Company is exposed to foreign currency risk when the financial
statements of its non-U.S. dollar subsidiaries are translated into its
functional currency. In order to hedge its net investment position in select
subsidiaries, the Company entered into foreign currency denominated debt. Since
the Company's assessment of these hedges revealed no ineffectiveness, all of the
transaction gains and losses associated with this debt have been reflected in
the foreign currency translation adjustment in OCI. As a result of the Company's
amended credit agreement, all foreign currency denominated debt was repaid and
the Company will no longer have a hedge of its net investment position in these
subsidiaries.

COMPREHENSIVE INCOME (LOSS): Comprehensive income (loss) represents the
change in stockholders' equity from transactions and other events and
circumstances arising from non-stockholder sources. The Company's comprehensive
income (loss) for 2001, 2000 and 1999 consisted of net income (loss), foreign
currency translation adjustments, minimum pension liability adjustments and
unrealized gains and losses on derivatives established as cash flow hedges, net
of applicable income taxes.

Components of accumulated other comprehensive income (loss) consist of the
following:

INCOME (LOSS) PER SHARE: Basic net income (loss) per share is based on the
weighted average number of shares outstanding during each period, excluding the
weighted average of restricted shares outstanding during each period (see
NOTE 11). Diluted earnings per share further assumes that, under the treasury
stock method, any dilutive stock options are exercised, restricted stock awards
are vested and any other dilutive equity instruments are converted.

39

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--ACCOUNTING POLICIES (CONTINUED)
The information required to compute basic and diluted net income (loss) per
share is as follows:

Options to purchase 6.1 million, 2.4 million and 1.8 million shares in the years
ended September 30, 2001, 2000 and 1999, respectively, were not included in the
computation of earnings per share because the exercise prices of these options
exceeded the average market price of the common shares. The effect of assuming
that 1.0 million shares of restricted stock vested in 2001 was also excluded
from the computation of diluted earnings per share because the effect would also
have been anti-dilutive.

NEW ACCOUNTING PRONOUNCEMENTS: In June 2001, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards No. 141,
BUSINESS COMBINATIONS, and No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS,
effective for the fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests in accordance
with the Statements. Other intangible assets will continue to be amortized over
their useful lives. SFAS 141 is effective commencing July 1, 2001, and the
Company has elected to adopt SFAS 142 as of October 1, 2001. Accordingly, as of
October 1, 2001, the Company will no longer amortize goodwill.

In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS. The FASB's new rules on asset impairment
supersede SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and provide a single accounting model
for long-lived assets to be disposed of. Although retaining many of the
fundamental recognition and measurement provisions of SFAS No. 121, the new
rules significantly change the criteria that would have to be met to classify an
asset as held-for-sale. The new rules also supersede the provisions of APB
Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS--REPORTING THE EFFECTS OF
DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY
OCCURRING EVENTS AND TRANSACTIONS, with regard to reporting the effects of a
disposal of a segment of a business and require expected future operating losses
from discontinued operations to be displayed in discontinued operations in the
period(s) in which the losses are incurred (rather than as of the measurement
date as presently required by APB No. 30). The Statement is effective for the
Company in the beginning of fiscal year 2003. The Company does not believe this
statement will have a material effect on the earnings or financial position of
the Company.

40

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--ACQUISITIONS AND DISPOSITIONS OF BUSINESSES

ACQUISITIONS OF BUSINESSES

The pro forma effects of the acquisitions described below are not material
to the Company's results of operations and are not presented herein. These
acquisitions have been accounted for as purchases and their results of
operations are included in the financial statements from the dates of
acquisition.

Contemporaneously with the closing of its debt restructuring on August 15,
2001 (see NOTE 7), the Company reacquired the 75% equity interest in
Rexair, Inc., the manufacturer of "Rainbow" vacuum cleaners, previously sold to
Strategic as part of the Diversified transactions in March 2000. The purchase
consideration included $27.4 million in face value of Strategic's senior notes
and the assumption of borrowings outstanding under Rexair's $200 million credit
facility (see DISPOSITIONS OF BUSINESSES below). In connection with the
reacquisition, the Company reduced the reacquired basis in Rexair by the amount
of its previously deferred gain and reclassified its retained 25% share of
Rexair's net liabilities from other long-term liabilities. The allocation of the
purchase consideration, including the deferred gain and the carrying value of
the retained liabilities, to the assets acquired and liabilities assumed
resulted in goodwill and other intangible assets of approximately
$68.9 million, the majority of which have indefinite lives and will not be
amortized. In addition, the Company expensed $17.4 million of deferred
transaction costs associated with the March 2000 sale of Rexair. The results of
Rexair have been included in the Bath & Plumbing segment since it was
reacquired. The Company accounted for Rexair under the equity method of
accounting during the time period from March 24, 2000 until August 15, 2001 when
the Company held only a 25% interest.

In June 2000, upon expiration of the contingency period related to the
December 1997 acquisition of Spear & Jackson, the Company made additional cash
payments totaling $71.4 million to the former owners of Spear & Jackson. The
Company was required to pay $36.0 million because the Company's stock price fell
below a guaranteed minimum as defined in the acquisition agreement. This amount
was recorded as an adjustment to paid in capital as it was based upon the market
price of the Company's stock. The remaining $35.4 million payment was made in
satisfaction of additional contingent consideration based on other criteria set
forth in the purchase agreement. This amount was recorded as additional goodwill
as it was made in satisfaction of contingent consideration based on other
criteria set forth in the purchase agreement.

In July 1999, the Company acquired Spring Ram Corporation PLC ("Spring Ram")
for approximately $133.6 million in cash, plus the assumption of $21.3 million
in debt, resulting in goodwill of approximately $110.0 million. Spring Ram,
located in Leeds, England, is a manufacturer of bathroom products. The results
of Spring Ram are included in the Bath & Plumbing segment.

In June 1999, the Company purchased the assets of Gatsby Spas, Inc.
("Gatsby") for approximately $17.0 million in cash, resulting in goodwill of
$9.6 million. Gatsby manufactures and distributes spas. The results of Gatsby
are included in the Bath & Plumbing segment.

In April 1999, the Company purchased the assets of the Factory Built Chimney
Division of GSW Inc., ("Supervent") in Canada and the assets of the DEC Group
("DEC") in the Netherlands for approximately $16.1 million in cash, resulting in
goodwill of $13.3 million. Supervent and DEC manufacture factory built chimneys,
chimney liners and flexible duct and related products. The results of Supervent
were included in the Bath & Plumbing segment until they were disposed of in
November 2000 as part of the disposition of the European HVAC business.

41

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--ACQUISITIONS AND DISPOSITIONS OF BUSINESSES (CONTINUED)
In March 1999, the Company purchased the assets of True Temper Hardware
Company ("True Temper") for approximately $96.3 million in cash, resulting in
goodwill of $31.9 million. True Temper manufactures lawn and garden tools and
wheelbarrows. The results of True Temper are included in Discontinued
Operations.

In March 1999, the Company purchased the assets of the Dual-Lite business
("Dual-Lite") for approximately $46.1 million in cash, resulting in goodwill of
$36.3 million. Dual-Lite manufactures emergency lights, and central inverter
systems. The results of Dual-Lite are included in Discontinued Operations.

In January 1999, the Company purchased the Bowers Group PLC ("Bowers") for
approximately $15.6 million in cash, resulting in goodwill of $10.2 million.
Bowers manufactures metrology instruments. The results of Bowers are included in
Discontinued Operations.

In January 1999, the Company purchased Atech Turbine Components, Inc.
("Atech") for approximately $7.0 million in cash, resulting in goodwill of
$5.7 million. Atech repairs and overhauls small aviation engines. The results of
Atech were included in the Diversified segment up until the sale of Diversified
to Strategic in March 2000.

DISPOSITIONS OF BUSINESSES

In November 2000, the Company sold its European HVAC business for proceeds
of $7.5 million, which approximated its carrying value.

On March 24, 2000, the Company disposed of a majority equity interest in its
Diversified segment in two separate transactions. In the first transaction, the
Company disposed of the following subsidiaries: Atech Turbine Components, Inc.;
Bearing Inspection, Inc.; BiltBest Products, Inc.; EJ Footwear Corp. (including
Georgia Boot Inc. and Lehigh Safety Shoe Co.); Garden State Tanning Inc.;
Huron Inc.; Jade Holdings Pte Ltd (including Jade Technologies Singapore Ltd and
FSM Europe B.V.); Leon Plastics Inc.; Native Textiles Inc. and SCF
Industries, Inc. The Company received gross cash proceeds of approximately
$203.4 million, retained a preferred equity interest in the buyer, Strategic,
having a stated value of approximately $19.5 million, retained a common equity
interest in Strategic of 17.7% and received approximately $209.0 million
aggregate principal amount of 12% (12.5% effective August 18, 2000) senior notes
(the "Strategic Notes") due 2007. In addition, Strategic assumed approximately
$7.9 million of existing bank debt. As a result of its disposal of the
Diversified businesses, the Company recorded a pre-tax gain of $38.4 million.

In the second transaction, Rexair sold newly issued shares to Strategic
representing, after issuance, 75% of the equity interest in Rexair. The Company
received approximately $195.0 million in cash and retained a 25% direct equity
interest in Rexair. In addition, the Company guaranteed Rexair's $200 million
credit facility. In connection with the Rexair transaction, the Company recorded
a liability of $82.2 million, related to its retained 25% share of Rexair's net
liabilities and a deferred gain, which, together with the deferral of the
related transaction costs, was to be deferred until the release of the Company's
guarantee of Rexair's credit facility. On August 15, 2001, the Company
reacquired Rexair from Strategic in exchange for the return to Strategic of
$27.4 million in face value of the Strategic Notes. Accordingly, the deferred
transaction costs were expensed in full at such date, and the deferred gain as
well as the Company's retained 25% share of Rexair's net liabilities were
included in the reacquired basis in Rexair (see ACQUISITIONS OF BUSINESSES
above).

42

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--ACQUISITIONS AND DISPOSITIONS OF BUSINESSES (CONTINUED)
In August 2000, the Company sold $25.0 million of the Strategic Notes,
approximately $1.8 million of the stated value of its preferred equity interest
in Strategic and approximately 1.9% of its common equity interest in Strategic.
This transaction resulted in a pretax gain of $0.9 million. At September 30,
2001, the Company held a preferred equity interest in Strategic having a stated
value of approximately $18.0 million, a 15.8% common equity interest and
Strategic Notes with a face value of $156.9 million. The Company is pursuing the
sale of the Strategic Notes together with its equity interest in Strategic at an
amount expected to approximate the September 30, 2001 carrying value. The
Strategic Notes and related equity interests have been written down to their net
realizable value and are included in other current assets in the accompanying
September 30, 2001 balance sheet.

In the second quarter of fiscal 2000, the Company sold its fire protection
businesses. The cash consideration paid for these businesses totaled
approximately $23.0 million, which approximated their carrying value. During the
first quarter of fiscal 2000, the Company disposed of assets relating to its
ladder operations and the infant and children footwear operation. In
September 1999, the Company sold the assets of the water resource construction
business for approximately $11.1 million, which approximated book value.

NOTE 5--DISCONTINUED OPERATIONS

On December 28, 2001, the Board of Directors approved a formal Disposal Plan
for five businesses in connection with the Company's obligation to pay debt
amortization as set forth in the restructured debt agreements. In connection
with the Disposal Plan, the Company recorded a charge of $232.6 million, which
represented the difference between the historical net carrying value and the
estimated net realizable value of the five businesses, Ames True Temper,
Selkirk, Lighting Corporation of America, Spear & Jackson and SiTeco Lighting.
The Disposal Plan calls for the sale of the five businesses over the next
12 months. The net assets of the discontinued businesses are included in net
assets held for sale for all periods presented.

The operating results of these businesses have been included in discontinued
operations for all periods presented. Summarized results of discontinued
operations are as follows:

The Company disposed of The Ertl Company Inc. ("Ertl") in the second quarter
of fiscal 1999. Ertl was sold for proceeds of approximately $95.0 million, which
resulted in an after-tax loss of $13.1 million. In April 1999, the Company also
completed the sale of its investment in Teardrop Golf, which resulted in a
$1.0 million after-tax gain. In January 1999, the Company completed the sale of
its remaining interest in the power systems operations for proceeds of
approximately $29.8 million. No gain or loss was realized.

NOTE 6--IMPAIRMENT, RESTRUCTURING AND OTHER NON-RECURRING CHARGES

GOODWILL IMPAIRMENT CHARGES

Operating results at a number of the Company's subsidiaries declined during
2001. In the third quarter of 2001, the Company evaluated the recoverability of
the goodwill of these subsidiaries in accordance with its accounting policy (See
NOTE 3). This evaluation indicated that the carrying value of the goodwill of
certain of its subsidiaries was impaired. As a result, in 2001, the Company
recorded goodwill impairment charges totaling $100.2 million in the Bath &
Plumbing segment.

In fiscal 2000, the Company conducted a strategic review of certain
operations in the Bath & Plumbing segment. Upon completion of its review, the
Company decided to dispose of its European HVAC operations and to exit three
product lines at its U.S. Brass operations. In reaching this decision, the
Company considered the profitability of these operations, the fact that the
Company was not a market leader in these businesses and the fact that
significant investment would be required in order to make these businesses
competitive with no assurance of a reasonable return on such investment. As a
result of this decision, the Company recorded goodwill impairment charges
totaling $24.1 million related to its European HVAC operations and $1.4 million
related to its U.S. Brass operations. Other non-recurring charges recorded in
conjunction with this decision are discussed below.

OTHER NON-RECURRING CHARGES

In September 2000, the Company's Bath & Plumbing segment announced to its
employees and to the marketplace that U.S. Brass was exiting its Valley line of
faucets, Eastman line of connectors and Sanitary Dash line of under-the-sink
pipes. Accordingly, in fiscal 2000, the Company recorded restructuring and other
non-recurring charges of $19.4 million, which consists of severance and
commitment costs of $3.4 million (recorded as restructuring costs) and inventory
related charges of $16.0 million ($13.9 million recorded in cost of goods sold
and $2.1 million recorded in selling general and administrative expenses). The
Company also recorded other non-recurring charges of $4.8 million (recorded in
cost of goods sold) in fiscal 2001 consisting primarily of accelerated
depreciation on

44

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--IMPAIRMENT, RESTRUCTURING AND OTHER NON-RECURRING CHARGES (CONTINUED)
machinery that was used to complete the remaining in-process inventory. The
Company's decision to exit these three product lines required the closure of two
manufacturing facilities in Abilene and Plano, Texas and the termination of
approximately 335 employees.

The Company recorded restructuring and other non-recurring charges of
$21.7 million in 2000 related to its decision to dispose of its European HVAC
operations (see GOODWILL IMPAIRMENT CHARGES). These charges consisted of
$18.2 million in fixed asset impairments and $3.5 million in inventory-related
charges (recorded in cost of goods sold). The European HVAC operation was
subsequently sold in November 2000 (see NOTE 4).

In January 2000, a decision was made to close the former Zurn corporate
office in Dallas, Texas which resulted in the termination of 30 employees. The
Company recorded a restructuring charge in fiscal 2000 of $13.1 million relating
to this decision, which included severance costs of $1.9 million, lease costs of
$9.1 million for a lease expiring November 2007, and write-offs of $2.1 million
relating to leasehold improvements and other fixed assets. During fiscal 1999,
the Company's Bath & Plumbing segment recorded other non-recurring charges of
$4.6 million related to the severance of a senior executive.

DIVERSIFIED

During fiscal 1999, the Company's expanded its 1998 restructuring plan
related to its footwear operations by closing a second domestic manufacturing
facility. The closure of the second facility was completed by June 1999, with
production being outsourced to offshore vendors. As a result, the Company
recorded restructuring charges of $1.7 million primarily for the costs of
terminating 110 employees and the write-off of impaired fixed assets.
Furthermore, the Company recorded other non-recurring charges for inventory
obsolescence totaling $0.9 million, which were recorded in cost of goods sold.
The restructuring charges resulting from the closure of the Company's footwear
facility were offset somewhat by a $1.0 million reduction in severance reserves
that were originally set up in 1998 for the Company's vacuum cleaner and textile
operations. Voluntary departures prior to final termination resulted in
severance payments that were lower than previously estimated. The Company
subsequently sold its footwear, vacuum cleaner and textile operations (see NOTE
4). Also during fiscal 1999, the Company's Diversified segment incurred
$6.1 million in charges and losses related to the closure of an unprofitable
window operation.

The principal components of impairment and restructuring charges recorded
for continuing operations are:

45

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--IMPAIRMENT, RESTRUCTURING AND OTHER NON-RECURRING CHARGES (CONTINUED)
OTHER

In fiscal 2001, the Company recorded $8.1 million for professional fees
associated with the previously planned spin-off of LCA Group and $6.7 million in
advisory and other related costs associated with the debt restructuring. The
Company recorded charges of $45.1 million in 2001 to reflect the Strategic Notes
at their net realizable value. Finally, in 2001, the Company recorded
$17.4 million in deferred transaction costs related to the original sale of
Rexair in March 2000 once the business was reacquired in August 2001. In 2000,
the Company recorded $0.9 million in charges related to the abandoned sale of
the LCA Group. All of these costs, as well as $16.9 million of expenses incurred
in 2001 associated with the amendments to the revolving facilities, have been
classified as "Other expenses" in the Company's consolidated statements of
operations. In 2000, the Company also recorded a $39.3 million gain on the sale
of its Diversified businesses (see NOTE 4).

As of September 30, 2001, the Company has remaining accruals of
$7.1 million for restructuring costs. The activity in the restructuring
liability accounts by cost category is as follows:

46

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--IMPAIRMENT, RESTRUCTURING AND OTHER NON-RECURRING CHARGES (CONTINUED)
Approximately $2.0 million of the reserves are included in the balance sheet
caption "Accrued expenses and other current liabilities," while the remaining
$5.1 million are recorded in the balance sheet caption "Other liabilities." The
Company expects the remaining accruals to be paid with cash over the periods
provided by the severance and lease agreements of one and six years,
respectively.

NOTE 7--LONG-TERM DEBT

Long-term debt consisted of the following:

Principal reductions of senior debt and other borrowings for the next five
years ended September 30 are as follows:

The fiscal 2002 principal reduction amount of $436.5 million presented above
reflects the cumulative required senior debt reduction required by the terms of
the Restructured Facilities through June 30, 2002 of $450.0 million, less the
amount paid (or deposited in cash collateral accounts for the benefit of the
holders of the Company's Senior Notes and certain other creditors of the
Company) through September 30, 2001. To the extent the remaining principal
reduction amount for fiscal 2002 is satisfied through asset sales, the reduction
will be effected in part by depositing cash in cash collateral accounts for the
benefit of the holders of the Company's Senior Notes (if required) and certain
other creditors of the Company. The fiscal 2003 principal reduction amount of
$397.0 million presented above (which is primarily comprised of the remaining
balance due to the Company's Lenders under its Restructured Facilities in
October 2002 and November 2002), assumes that no portion of the reduction

47

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--LONG-TERM DEBT (CONTINUED)
in fiscal 2002 will be satisfied by deposits to cash collateral accounts. To the
extent it is satisfied by deposits to cash collateral accounts, the principal
reduction amount for fiscal 2003 will be increased by an amount equal to any
deposits into collateral accounts during fiscal 2002. The majority of the
deposits in collateral accounts will serve to reduce the required principal
payments on the Senior Notes which are due in fiscal 2004 and 2007.

In October 1998, USI and USI American Holdings, Inc. ("USIAH"), jointly
issued $250 million aggregate principal amount of Senior Notes due October 15,
2003, which bear interest at 7.125%, payable semiannually (the "7.125% Notes").
A supplemental indenture was later executed adding USI Global Corporation ("USI
Global"), a wholly owned subsidiary of USI, as a co-obligor under the
7.125% Notes. The net cash proceeds were $247.7 million after transaction fees
and discounts. On July 9, 1999, the Company exchanged its 7.125% Notes which
were not registered under the Securities Act of 1933, for registered 7.125%
Notes having substantially the same terms. In anticipation of the security
offering, the Company entered into certain interest rate protection agreements
in March and April 1998. Due to subsequent market changes, the principal amount
and term of the 7.125% Notes that were ultimately sold in the offering varied
from those originally anticipated. These interest rate protection agreements
were terminated in September 1998 and settled with payments in October 1998
aggregating $22.0 million. The portion of the settlement related to the 7.125%
Notes amounted to $10.1 million and is being amortized over the term of the
7.125% Notes, thus increasing the effective interest rate to approximately 8.4%.
The remainder of the settlement was expensed in fiscal 1998.

In fiscal 1997, USIAH issued $125 million aggregate principal amount of
Senior Notes due December 1, 2006, which bear interest at 7.25%, payable
semiannually (the "7.25% Notes"). The net cash proceeds were $123.0 million
after transaction fees and discounts. Supplemental indentures were later
executed adding USI and USI Global as co-obligors, with USIAH under the 7.25%
Notes.

The 7.25% Notes and the 7.125% Notes (collectively, the "Senior Notes") are
guaranteed by USI Atlantic. The Senior Notes are redeemable at the option of the
Company, in whole or in part, at a redemption price equal to the greater of
(i) 100% of the principal amount to be redeemed or (ii) the sum of the present
values of the remaining scheduled payments of principal and interest on the
Senior Notes to be redeemed, discounted at a rate based on the yield to maturity
of the comparable U.S. Government securities plus a spread (10 basis points for
the 7.25% Notes and 50 basis points for the 7.125% Notes) plus, in each case,
accrued interest to the date of redemption. The Notes contain restrictions on
dividends as well as the purchase of common stock for treasury. The security
interests granted to the holders of the Senior Notes as a result of the
Restructured Facilities are described below.

During fiscal 2000 and 2001, the Company had a commercial paper program,
supported by its $300 million 364-day credit facility (the "Credit Facility").
The commercial paper program was terminated and the Company began borrowing
under the Credit Facility. The Credit Facility was scheduled to expire on
October 26, 2001, but was terminated on August 15, 2001 as part of the debt
restructuring. The Company also had a five-year revolving line of credit
providing for borrowings in both U.S. dollars and foreign currencies, which had
original availability of $750 million (the "Credit Agreement"). The Credit
Agreement, which was permanently reduced over time to an availability of
$500 million, was scheduled to terminate on December 12, 2001. The Credit
Facility and Credit Agreement (together, the "Revolving Facilities") were
restructured on August 15, 2001 into an

48

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--LONG-TERM DEBT (CONTINUED)
amended credit facility providing for, among other things, an increase in
availability to $830 million and an extension of the final maturity of the debt
through November 30, 2002.

Although the Revolving Facilities were previously unsecured, the lenders of
the Revolving Facilities were granted on April 30, 2001 security interests in
substantially all of the assets of the Company and its domestic subsidiaries,
including shares of the Company's domestic subsidiaries and 65% of the shares of
certain of the Company's foreign subsidiaries. As a result of having the
Revolving Facilities secured, the Rexair guarantee referred to below became
secured with certain assets. In addition, the Company's Senior Notes also became
equally and ratably secured with the Revolving Facilities and the Rexair
Guaranty with respect to the assets of the Company and its subsidiaries that are
subject to the covenant restrictions under the Senior Notes. The covenants
contained in the indentures under which the Senior Notes were issued apply to
the Company and any domestic subsidiary that is a "significant subsidiary"
(within the meaning of rule 1-02(w) of Regulation S-X promulgated under the
Securities and Exchange Act of 1934 or any successor provision).

On August 15, 2001, the Company finalized a comprehensive restructuring of
its bank debt and the bank debt of Rexair, which was reacquired from Strategic
on the same date (see NOTE 4). The amended facilities (including the Rexair
Credit Facility, the "Restructured Facilities") extend the final maturity date
of the Company's debt under the Revolving Facilities to November 30, 2002, which
coincides with the final maturity of the amended Rexair Credit Facility. The
Restructured Facilities provide for an increase in availability under the Credit
Agreement from $500 million to $830 million, the termination of the
multi-currency borrowing feature under the Credit Agreement, the elimination of
the 364-day Credit Facility and scheduled permanent reductions of the Company's
senior debt (a combination of the Restructured Facilities, Senior Notes and
other defined obligations) during the term of the Restructured Facilities. The
required cumulative permanent reductions of the Company's senior debt are
scheduled at $75 million, $200 million, $450 million and $600 million for the
periods ending December 31, 2001, March 31, 2002, June 30, 2002 and October 15,
2002, respectively, with the remaining balance of the Restructured Facilities
due in full on November 30, 2002. The Company expects to satisfy operating
liquidity needs through operating cash flow. However, it will have to sell a
substantial amount of its assets and restructure or refinance its debt to
satisfy the required cumulative permanent reductions.

On December 21, 2001, the Company obtained a waiver (the "December 2001
Waiver") from its lenders under the Restructured Facilities that permitted the
Company to satisfy the remaining balance of the December 31, 2001 $75 million
reduction through a permanent reduction of the unfunded commitments under the
Restructured Facilities, to the extent not satisfied through cash flow or asset
sale proceeds. Under the terms of the waiver, if the Company completes any asset
sales between January 1 and February 28 of 2002, the permanent reduction
resulting from any such asset sales will be reduced by the amount of the
unfunded commitment (approximately $58 million) used to satisfy the
December 31, 2001 amortization. The Restructured Facilities mature November 30,
2002.

The Company entered into an agreement to sell Ames True Temper on
December 24, 2001 for approximately $165 million in cash. The sale, which is
subject to the completion of financing and other customary closing conditions,
is currently expected to close in January 2002. Upon closing, the entire net
cash proceeds will be applied to reduce the Company's funded and unfunded senior
debt. Approximately $44 million of the proceeds are expected to be deposited
into the cash collateral accounts for the benefit of the holders of the
Company's Senior Notes and certain other creditors. The

49

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--LONG-TERM DEBT (CONTINUED)
remainder will be remitted to the Lenders under the Restructured Facilities, and
the total facility will be permanently reduced by such amount. As a result of
the remittance, the Lenders will concurrently restore the approximate
$58 million of borrowing capacity under the unfunded commitments of the
Restructured Facilities (which have been reduced by the terms of the
December 2001 Waiver).

The Company is pursuing the sale of the Strategic Notes together with its
equity interest in Strategic at an amount expected to approximate the
September 30, 2001 carrying value. Upon closing, the entire net cash proceeds
will be applied to reduce the Company's funded and unfunded senior debt. A
portion of the proceeds is expected to be deposited into the cash collateral
accounts for the benefit of the holders of the Company's Senior Notes and
certain other creditors. The remainder will be remitted to the Lenders under the
Restructured Facilities, and the total facility will be permanently reduced by
such amount.

The net proceeds from the sale of Ames True Temper and the Strategic Notes
are expected to be sufficient to fund the required reductions of the Company's
senior debt through March 31, 2002.

The Restructured Facilities require the Company and Rexair to maintain
minimum monthly EBITDA, as defined, comply with maximum monthly capital
expenditure limits; maintain minimum availability (as defined) under the Credit
Facility of no less than $25 million and comply with other customary affirmative
and negative covenants. In addition, the amended Rexair Credit Facility, which
provides a term loan of $175 million and availability under a revolver of
$20 million, requires that excess cash generated by Rexair be segregated from
excess cash generated by the remainder of the Company's operations and used only
to reduce the debt outstanding on the Rexair Credit Facility. Rexair's
availability under the revolver will be permanently reduced by $5 million on
May 31, 2002. In connection with the term loan, Rexair will be required to make
payments of $2.2 million each in December 2001 and March 2002 and $4.4 million
each in June 2002 and September 2002. Such payments are credited towards the
scheduled permanent reductions of the Company's senior debt. The Senior Notes
and the Restructured Facilities contain cross-default and cross-acceleration
provisions.

The Restructured Facilities provide for increasing interest rates over the
remaining term. The spreads over London Interbank Offered Rate ("LIBOR") was 275
basis points until December 31, 2001, after which the spread increases by 50
basis points each quarter thereafter. The Restructured Facilities also provides
for several new fees including an unused commitment fee of 0.50% and a facing
fee on all outstanding letters of credit of 0.25% per annum. At the Company's
option, up to 0.50% of the interest rate applicable to borrowings may be paid
through the issuance of notes.

The security interests that were granted to the lenders of the Revolving
Facilities on April 30, 2001 remain in place under the debt restructuring, as do
the arrangements to equally and ratably secure the Rexair Guaranty and to
equally and ratably secure the Senior Notes with certain assets. In addition,
certain domestic and foreign subsidiaries of the Company that are not subject to
the Senior Notes' covenant restrictions have guaranteed the Restructured
Facilities. Under the Restructured Facilities, the Company also agreed to
provide the lenders with security interests in the shares and assets of certain
of the Company's foreign subsidiaries.

Under the Restructured Facilities, substantially all asset sales proceeds
are required to be applied to reduce the Company's funded and unfunded senior
debt, on a pro rata basis. The senior debt includes the Senior Notes in those
cases when the Company or any subsidiary subject to the Senior Notes' covenants
completes an asset sale. Proceeds allocable to the Senior Notes and other
defined

50

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--LONG-TERM DEBT (CONTINUED)
obligations are required to be deposited in cash collateral accounts for the
benefit of the relevant holders; any claims of the lenders of the Restructured
Facilities to amounts on deposit in the cash collateral accounts are
subordinated to the claims of the relevant holders, including the payment in
full of the Senior Notes and other obligations. Any reductions of senior debt
with asset sale proceeds are credited dollar-for-dollar towards the scheduled
permanent reductions. At September 30, 2001, $4.4 million had been deposited in
cash collateral accounts for the benefit of the relevant holders.

At December 31, 2001, excluding all amounts related to the amended Rexair
Credit Facility and the giving effect to the approximate $58 million reduction
pursuant to the December 2001 waiver, the Company had approximately
$766 million committed under the Restructured Facilities, of which approximately
$669 million had been utilized and the balance of $97 million was available. At
December 31, 2001, $5.7 million was available for borrowing solely by Rexair
under the amended Rexair Credit Facility. These amounts are net of letters of
credit outstanding of $15.0 and $13.6 million at December 31, 2001 and
September 30, 2001, respectively. In addition, the Company had letters of credit
outstanding with other financial institutions totalling $41.4 million as of both
December 31, 2001 and September 30, 2001.

Interest paid was $87.2 million, $84.6 million and $71.4 million for 2001,
2000 and 1999, respectively.

NOTE 8--PENSION AND RETIREMENT PLANS

DOMESTIC BENEFIT ARRANGEMENTS

The Company and its subsidiaries sponsor a number of non-contributory
defined benefit pension plans covering the majority of its United States
employees. The benefits under these plans are based primarily on years of
credited service and/or compensation as defined under the respective plan
provisions. The Company's funding policy is to contribute amounts to the plans
sufficient to meet the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974, plus such additional amounts as the
Company may determine to be appropriate from time to time.

The Company and certain of its subsidiaries also sponsor defined
contribution plans. Contributions relating to defined contribution plans are
made based upon the respective plans' provisions.

The Company also provides health care and life insurance benefits to certain
groups of retirees with most retirees contributing a portion of its costs.

51

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--PENSION AND RETIREMENT PLANS (CONTINUED)
The assumptions and the net periodic pension income for the Company's
defined benefit plans, as well as the total contributions charged to pension
expense for the defined contribution plans covering employees in the United
States are presented below:

Included in the fiscal year 2000 curtailment gain of $20.4 million is
$19.6 million related to the sale of the Diversified businesses and is included
in the statement of operations caption "Gain on sale of businesses."

52

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--PENSION AND RETIREMENT PLANS (CONTINUED)
The following table provides a reconciliation of changes in the projected
benefit obligation, fair value of plan assets and the funded status of the
Company's defined benefit pension and postretirement benefit plans to the
amounts recorded in the Company's balance sheet at September 30:

The fiscal 2001 continuing operations pension asset of $132.9 million
includes approximately $70 million of pension assets classified in discontinued
operations in fiscal 2000 relating to pension assets of Ames True Temper for
non-active employees that the Company will retain upon the sale of Ames True
Temper.

53

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--PENSION AND RETIREMENT PLANS (CONTINUED)

The aggregate projected benefit obligation and the aggregate fair value of
plan assets, for the plans that have a projected benefit obligation in excess of
plan assets, are $29.1 million and $11.7 million, respectively, in 2001 and
$51.6 million and $37.4 million, respectively, in 2000.

The aggregate accumulated benefit obligation and the aggregate fair value of
plan assets, for the plans that have an accumulated benefit obligation in excess
of plan assets, are $25.6 million and $11.7 million, respectively, in 2001 and
$48.8 million and $37.4 million, respectively, in 2000.

The assets for the Company's U.S. plans are included in a master trust which
principally invests in listed stocks and bonds, including common stock of the
Company. Included in plan assets were 1,333,100 and 1,253,100 shares of the
Company's common stock at September 30, 2001 and 2000, respectively,
representing $3.1 million and $12.5 million of the master trust's assets for the
same respective periods. During fiscal 2001 and 2000, $0.1 million and
$0.2 million, respectively, in dividends were paid to the master trust.

The weighted average annual assumed rate of increase in the per capita cost
of covered benefits (i.e., the health care cost trend rate) for the other
postretirement benefit plans was 8.5% for 2001 and is assumed to decrease 0.5% a
year to either 5.5% or 5.0% depending on the plan. A one-percentage-point change
in the assumed health care cost trend rate would have the following effects at
and for the year ended September 30, 2001 (in millions):

Effect of a 1% increase in the health care cost trend rate
on:
Service cost plus interest cost........................... $ 0.2
Accumulated post-retirement benefit obligation............ 2.1

Effect of a 1% decrease in the health care cost trend rate
on:
Service cost plus interest cost........................... $(0.2)
Accumulated post-retirement benefit obligation............ (1.9)

Certain of the Company's discontinued operations participate in
multi-employer plans, which provide defined benefits to union employees.
Contributions relating to multi-employer plans are based on negotiated
collective bargaining agreements.

The tables above and on the previous page set forth the historical
components of net periodic pension cost and a reconciliation of the funded
status of the pension and other postretirement benefit plans for the employees
associated with the Company and is not necessarily indicative of the amounts to
be recognized by the Company on a prospective basis.

FOREIGN BENEFIT ARRANGEMENTS

The Company's foreign defined benefit pension plan cover salaried employees
of Spring Ram, which was acquired in July 1999 (see NOTE 4).

54

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--PENSION AND RETIREMENT PLANS (CONTINUED)
The assumptions used and the net periodic pension cost for the Company's
foreign defined benefit plan is presented below:

55

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--PENSION AND RETIREMENT PLANS (CONTINUED)
The following table provides a reconciliation of changes in the projected
benefit obligation, the fair value of plan assets and the funded status of the
Company's foreign defined benefit pension plan with the amounts recognized in
the Company's balance sheet as of September 30:

56

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--INCOME TAXES

The Company's income (loss) from continuing operations consisted of the
following:

The Company's (benefit) provision for income taxes attributable to income
(loss) from continuing operations consisted of the following:

The components of deferred income tax assets and liabilities consisted of
the following:

57

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--INCOME TAXES (CONTINUED)
The Company has established a valuation allowance principally related to
deferred tax assets resulting from the losses recognized in connection with the
Disposal Plan, reflecting the uncertainty of the future realization of these
assets. The federal income tax returns for fiscal 1995 through 1998 are
currently under IRS examination. While the ultimate results of such examination
cannot be predicted with certainty, management believes the examination will not
have a material adverse impact on the Company's consolidated financial position
or results of operations.

The deferred tax balances have been classified in the balance sheet as
follows:

The following is a reconciliation of income taxes at the federal statutory
rate of 35% to the (benefit) provision for income taxes attributable to
continuing operations:

The Company reduced the fiscal 2000 tax provision by approximately
$20.0 million as certain tax liabilities with respect to foreign subsidiaries,
which arose as a result of the spin-off from Hanson PLC in 1995 (the
"Spin-off"), were resolved that year. The Company also reduced the fiscal 1999
tax provision by approximately $6.2 million as certain foreign tax and other
miscellaneous matters were resolved that year. Other tax liabilities with
respect to undistributed earnings of foreign subsidiaries, which arose as a
result of the Spin-off, were also resolved in fiscal 1999. These liabilities
were originally

58

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--INCOME TAXES (CONTINUED)
recorded as a direct charge to paid-in capital at the time of the Spin-off.
Accordingly, approximately $15.9 million of such tax reserves were no longer
required and were credited directly to paid-in capital in fiscal 1999.

Income taxes paid during fiscal 2001, 2000 and 1999 were $24.1 million,
$56.8 million, and $47.3 million, respectively.

NOTE 10--STOCKHOLDERS EQUITY AND STOCK COMPENSATION PLANS

INCENTIVE STOCK PLANS

The Company maintains stock incentive plans (the "Stock Plans") that
provides for the grants of stock options and restricted stock awards to the
Company's directors, officers and key employees. As of September 30, 2001, the
Company had 7,147,736 shares of common stock reserved for issuance under the
Company's Stock Plans. In accordance with the guidelines of the Stock Plans,
stock options are granted at an option price equal to the market value of the
stock on the date of the grant. Options granted under this plan become
exercisable over four years in equal annual installments after the date of
grant, provided that the individual is continuously employed by the Company. The
Company had authorization under the Stock Option Plan to grant 1,065,195 and
527,393 additional options at September 30, 2001 and 2000, respectively.

Common stock issued under the Stock Plans is restricted, with vesting
periods of seven years from the date of grant (either in thirds--on the third
year, fifth year and seventh year--or solely at the end of the seventh year).
Although subject to certain restrictions and forfeiture provisions, restricted
stock is considered to be issued and outstanding common stock of the Company.
Compensation expense (i.e., the market value of the shares at the date of the
grant) is recognized over the vesting period. Unamortized compensation expense
(unearned restricted stock) is included as a separate component of stockholders'
equity. At September 30, 2001 and 2000, the unamortized restricted stock
outstanding was 977,660 and 1,091,336 shares, respectively.

ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company applies Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in accounting for its
stock-based compensation plans. Thus, the Company uses the intrinsic value
method to determine the compensation cost for its stock-based awards. The
compensation cost that has been charged against income for Stock Plans
approximated $2.9 million, $3.3 million and $5.9 million in 2001, 2000 and 1999,
respectively. No other compensation costs have been recognized under the
Company's stock-based compensation plans. Had compensation cost for awards under
its stock-based compensation plans been determined using the fair value method
prescribed by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the
Company's net income

59

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCKHOLDERS EQUITY AND STOCK COMPENSATION PLANS (CONTINUED)
(loss) and income (loss) per share would have been reduced to the pro forma
amounts presented below:

These pro forma results are not necessarily indicative of results that may
be expected in future disclosures since additional options may be granted and
the estimated fair value of the stock options is assumed to be amortized to
expense over the vesting periods.

The fair value of each stock option granted is established on the date of
the grant using the Black-Scholes option pricing model with the following
weighted average assumptions for grants in 2001, 2000 and 1999:

- expected volatility rates of 49% for 2001, 36% for 2000, and 37% for 1999

- risk-free interest rates of 4.88% for 2001, 6.55% for 2000, and 5.06% for
1999

- expected option lives of 4 years for all three years

- expected dividend yield of 2% for 2001, 2% for 2000 and 1% for 1999

As of September 30, 2001, the weighted average fair values of options
granted during 2001, 2000 and 1999 were $2.94, $4.02 and $5.51, respectively.

A summary of the status of and changes in the Company's stock option plans
for the last three years is presented below:

60

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCKHOLDERS EQUITY AND STOCK COMPENSATION PLANS (CONTINUED)

The following table summarizes the status of the stock options outstanding
and exercisable at September 30, 2001:

NOTE 11--CAPITAL STOCK

COMMON STOCK

In March 2001, the Company's Board of Directors indefinitely suspended the
Company's quarterly payment of dividends on its common stock.

STOCKHOLDER RIGHTS PLAN

The Company adopted a Stockholder Rights Plan (the "Rights Plan") effective
October 15, 1998. Under this Rights Plan, each of the Company's stockholders is
issued one right (the "Right") to acquire one-hundredth of a share of the
Company's Series A Junior Preferred Stock, having a market value of two times
the exercise price for the Rights, for each outstanding share of USI common
stock they own.

Initially, the Rights trade with the common stock of the Company and are not
exercisable. The Rights will separate from the common stock and only become
exercisable when a single person or company acquires or makes an offer to
acquire 15% or more of the Company's outstanding common stock. Upon exercise of
the Right, the economic and voting terms of the Preferred Stock acquired by the
stockholders will be equivalent to those possessed when they held shares of the
Company's common stock. The Rights will expire on October 15, 2008 or 90 days
following the date the Rights become exercisable, whichever is earlier.

TREASURY STOCK

During October 1999, the Company entered into equity instrument contracts to
purchase 2.8 million shares of its common stock. These contracts were settled
during 2001 for $43.1 million. During 1999 and 2000, the Company's Board of
Directors authorized share repurchase programs aggregating $350 million. As of
September 30, 2001, the Company had repurchased $331.8 million of its common
stock for treasury under these programs, of which $43.1 million, $99.2 million
and $189.5 million was purchased in 2001, 2000, and 1999, respectively. During
June 2000, in a separate transaction authorized and undertaken outside the
existing share repurchase program, the Company repurchased all of its common
stock held by the former owners of Spear & Jackson for $44.2 million.

61

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--CAPITAL STOCK (CONTINUED)
The repurchase program has been suspended indefinitely, as the Restructured
Credit Agreement entered into on August 15, 2001 (see NOTE 7) contains a
restriction on the purchase of the Company's common stock.

NOTE 12--COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The table below shows the Company's future minimum lease payments due under
non-cancelable leases as of September 30, 2001. These minimum lease payments
(presented in millions) do not include facility leases that were accrued as
restructuring costs (see NOTE 6).

2002........................................................ $13.9
2003........................................................ 10.5
2004........................................................ 8.0
2005........................................................ 6.6
2006........................................................ 5.8
Thereafter.................................................. 4.6
-----
Total minimum lease payments................................ $49.4
=====

Rent expense, including equipment rental, was approximately $13.3 million,
$15.9 million and $22.4 million in 2001, 2000 and 1999, respectively.

LITIGATION

The Company is subject to a wide range of environmental protection laws. The
Company has remedial and investigatory activities underway at approximately 46
sites. In addition, the Company has been named as a Potentially Responsible
Party ("PRP") at 17 "superfund" sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 or comparable
statutes.

It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. The Company accrues for losses
associated with environmental remediation obligations when such losses are
probable and reasonably estimable. This practice is followed whether the claims
are asserted or unasserted. Reserves for estimated losses from environmental
remediation are, depending on the site, based primarily upon internal or third
party environmental studies, and estimates as to the number, participation level
and financial viability of any other PRP's, the extent of contamination and the
nature of required remedial actions. Such accruals are adjusted as further
information develops or circumstances change. Costs of future expenditures for
environmental remediation obligations are not discounted to their present fair
value. Recoveries of environmental remediation costs from other parties are
recognized as assets when their receipt is deemed probable. Management expects
that the amount reserved will be paid out over the periods of remediation for
the applicable sites which range up to 30 years and that such reserves are
adequate based on all current data. Each of the sites in question is at various
stages of investigation or remediation; however, no information currently
available reasonably suggests that projected expenditures associated with
remedial action or compliance with environmental

62

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12--COMMITMENTS AND CONTINGENCIES (CONTINUED)
laws for any single site or for all sites in the aggregate, will have a material
adverse affect on the Company's financial condition, results of operations or
cash flows.

At September 30, 2001, the Company had accrued approximately $11.2 million
($1.3 million accrued as current liabilities; $9.9 million as non-current
liabilities) for various environmental related liabilities of which the Company
is aware. The Company believes that the range of liability for such matters is
between approximately $6.1 million and $16.7 million.

In June 1998, the Company acquired Zurn Industries, Inc. ("Zurn"). Zurn is a
wholly-owned subsidiary of the Company. Zurn, along with many other companies,
is a codefendant in numerous asbestos related lawsuits pending in the United
States. Plaintiffs claims against Zurn allege personal injuries allegedly caused
by exposure to asbestos used in industrial boilers formerly manufactured by
Zurn. As reported by numerous other asbestos defendants, there has been a
significant increase in the number of asbestos suits filed over the past several
years. Zurn has also experienced an increase in the number of suits filed
against it in the last fiscal year. As of September 30, 2001, the number of
asbestos claims pending against Zurn was approximately 52,000.

Since Zurn received its first asbestos claim in the 1980's, Zurn has settled
or otherwise disposed of approximately 35,000 asbestos claims. Zurn's insurers
have paid all settlement costs relating to these claims in an aggregate amount
that has not eroded the available insurance coverage by a material amount.
Defense costs are currently being paid by Zurn's insurers without eroding the
coverage amounts of its insurance policies.

Zurn estimates that its potential liability for asbestos claims pending
against it and for claims estimated to be filed over a 10 year period (i.e.,
through 2011) is approximately $107 million. This estimate is based on its view
of the current and anticipated number of asbestos claims, the timing and amounts
of asbestos payments and the status of ongoing litigation, defense strategies
and settlement initiatives. However, there are inherent uncertainties involved
in estimating both the number of future asbestos claims as well as future
settlement costs, and the actual liability could exceed Zurn's estimate due to
changes in facts and circumstances after the date of the estimate. Further,
while there is presently no reasonable basis for estimating Zurn's asbestos
liability beyond 2011, such liability may continue beyond 2011, and such
liability could be substantial.

Zurn's available insurance to cover its potential asbestos liability is
between approximately $318 million and $380 million. Zurn believes, based on its
experience in defending the claims and the amount of insurance coverage
available, that it has sufficient insurance to cover the pending and reasonably
estimable future claims. This conclusion was reached after considering the
insurance payments made to date by Zurn's insurance carriers, existing insurance
policies, and the advice of insurance coverage counsel with respect to
applicable insurance coverage law relating to the terms and conditions of those
policies. After review of the foregoing with Zurn and its consultants, the
Company believes that the resolution of Zurn's pending and reasonably estimable
asbestos claims will not have a material adverse effect on the Company's
financial condition, results of operations or cash flows.

Also, certain of the Company's subsidiaries are defendants or plaintiffs in
lawsuits that have arisen in the normal course of business. While certain of
these matters involve substantial amounts, it is management's opinion, based on
the advice of counsel, that the ultimate resolution of such litigation and
environmental matters will not have a material adverse effect on the Company's
financial condition, results of operations or cash flows.

63

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13--SEGMENT INFORMATION

The Company currently operates in one reportable segment--Bath & Plumbing.
Bath & Plumbing manufacturers whirlpools, spas, faucets, chinaware, bathtubs,
showertub enclosures, bath accessories, plumbing fittings, other behind the wall
plumbing products and vacuum cleaners. Prior to March 2000 (see NOTE 4), the
Company also operated a wide range of businesses through its Diversified
segment. These businesses manufactured automotive interiors,
precision-engineered products for the automotive, jet aviation and electronics
industries and various other consumer products. The Company's products are
primarily sold to the home improvement and home construction markets through
mass merchandisers, hardware stores, home centers, distributors, wholesalers and
other outlets.

The financial information of the segments is regularly evaluated by the
corporate operating executives in determining resource allocation and assessing
performance and is periodically reviewed by the Company's Board of Directors.
The Company's senior management evaluates the performance of each business
segment based on its operating results and, other than general corporate
expenses, allocates specific corporate overhead to each segment. Accounting
policies for the segments are the same as those for the Company (see NOTE 3).

The following is a summary of the significant accounts and balances by
segment, reconciled to the consolidated totals.

- ------------------------

(1) Operating income (loss) for the Bath & Plumbing segment includes
restructuring, impairment and other non-recurring charges of
$105.0 million, $79.7 million and $4.6 million in fiscal 2001, 2000

64

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13--SEGMENT INFORMATION (CONTINUED)
and 1999, respectively (see NOTE 6). Operating income (loss) for the
Diversified segment included $12.5 million of restructuring, impairment and
other non-recurring charges.

(2) Corporate assets include net assets held for sale of $491.6 million,
$941.6 million, and $891.7 million for fiscal 2001, 2000 and 1999,
respectively

Aside from the operating income (loss) amounts noted above, the Company's
income from continuing operations includes interest income and expense, equity
earnings or losses in investees, other income and expense items and income
taxes, none of which are included in the Company's measurement of segment
operating profit. Corporate assets consist primarily of real property, net
assets held for sale, cash and cash equivalents and other investments.

The Company's operations are principally located in North America and Europe
and to a lesser extent, in other regions of the world. The Company's country of
domicile is the United States. Export sales represented 4%, 9% and 13% of the
Company's total net sales for fiscal years 2001, 2000 and 1999, respectively.
Principal international markets served include Europe, South America, Canada and
Asia.

The following table presents summarized financial information by geographic
area:

- ------------------------

(1) Operating loss for the year ended September 30, 2001 included goodwill
impairment charges of $100.2 million and other related costs of
$4.8 million. Of these charges, $44.2 million and $60.8 million relate to
operating income of the United States and foreign locations, respectively.
Operating income for the year ended September 30, 2000 included goodwill
impairment and restructuring charges of $60.2 million and other related
costs of $19.5 million. Of these charges, $34.0 million and $45.7 million
relate to operating income of the United States and foreign locations,
respectively. Operating income for the year ended September 30, 1999
included restructuring charges of $0.7 million and impairment and
restructuring related costs of

65

U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13--SEGMENT INFORMATION (CONTINUED)
$17.1 million. Of these charges, $12.3 million and $5.5 million relate to
operating income of the United States and foreign locations, respectively.

NOTE 14--QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial information for the fiscal years ended
September 30, 2001 and 2000 is as follows (in millions, except per share
amounts):

The above quarterly financial information has been restated to reflect the
reclassification of discontinued operations (see NOTE 5), the retroactive
adoption of SAB No. 101 on October 1, 2000 (see NOTE 3) and the adoption of EITF
No. 00-10 (see NOTE 3).

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

66

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information concerning our executive officers is set forth in Item 1 of this
Annual Report on Form 10-K under the caption "Executive Officers."

Information with respect to our directors is incorporated herein by
reference to the information "Election of Directors" in the Company's definitive
proxy statement to be filed with the Commission pursuant to Regulation 14A of
the Securities Exchange Act of 1934 in connection with the 2002 Annual Meeting
of Stockholders to be held on March 21, 2002 (the "Proxy Statement").

Information required by Item 405 of Regulation S-K is incorporated herein by
reference to "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Proxy Statement for our 2002 Annual Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION

Information with respect to executive compensation is incorporated herein by
reference to the information under the caption "Executive Officer Compensation"
in the Proxy Statement for the Company's 2002 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information with respect to security ownership of certain beneficial owners
and management is incorporated herein by reference to the information under the
caption "Ownership of Common Stock" in the Proxy Statement for the Company's
2002 Annual Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as a part of this report:

1. The financial statements listed in Item 8.

2. The financial statement schedule consists of the following:

II. Valuation and Qualifying Accounts

3. The exhibits listed in the "Index to Exhibits."

(b) Reports on Form 8-K.

No reports on Form 8-K were filed during the year ended September 30,
2001 except those disclosed in the Company's fiscal 2001 Quarterly Reports
on Form 10-Q.

(c) Exhibits

67

INDEX TO EXHIBITS

(D) Financial Statement Schedules

As described elsewhere herein, the Company has pledged the shares of its
domestic subsidiaries and 65% of the shares of certain of its foreign
subsidiaries to the lenders under its Restructured Facilities. As a result of
these pledges, the Company's Senior Notes became equally and ratably secured

72

with respect to the subsidiaries of the Company that are subject to the covenant
restrictions under the Senior Notes. The Company's legal structure utilities
subsidiary holding companies at various levels to hold the shares of its
operating subsidiaries. The financial statements of four of the Company's
subsidiary holding companies are presented separately, as each such entity
constitutes a "substantial portion" of the collateral (within the meaning of
Rule 3.16 of the Securities and Exchange Commission) for the Company's 7.125%
and 7.25% Senior Notes. Accordingly, the financial statements of USI Atlantic
Corp., USI American Holdings Corp., USI Global Corporation and JUSI Holdings,
Inc. are included herein.

- ------------------------

* Incorporated by reference

73

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on this 14th day of January, 2002.

U.S. INDUSTRIES, INC.

By: /s/ DAVID H. CLARKE
-----------------------------------------
David H. Clarke
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, and on the date set forth above.

74

SCHEDULE II

U.S. INDUSTRIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)

All other schedules have been omitted because they are inapplicable, not
required or the information is included elsewhere herein.

75