ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)

Overview

The Company develops, manufactures and markets a broad range of consumer and specialty products. It recognizes revenues and profits from selling its products under a variety of brands, including ARM & HAMMER and TROJAN, to consumers through supermarkets, drug stores and mass merchandisers; and to industrial customers and distributors. On May 28, 2004, the Company acquired the joint venture interest in Armkel owned by affiliates of Kelso & Company, and Armkel was merged into the Company. This is sometimes referred as “the Armkel acquisition.” The discussion of results of operations of Armkel are reflected in the results of operations since the acquisition on May 28, 2004.

The Company is divided into three primary segments, Consumer Domestic, Consumer International and Specialty Products. Our Consumer Domestic segment includes household products for deodorizing and cleaning, such as ARM & HAMMER baking soda, cat litter, SCRUB-FREE, BRILLO cleaning products and laundry products, such as XTRA and ARM & HAMMER laundry detergents; and personal care products, such as TROJAN condoms, NAIR depilatories and waxes, FIRST RESPONSE and ANSWER home pregnancy and ovulation test kits, ARRID antiperspirant and ARM & HAMMER, MENTADENT, CLOSE-UP, PEPSODENT and AIM toothpastes. Our Consumer International segment sells a variety of personal care products, some of which use the same brands as our domestic product lines, in international markets, including France, the United Kingdom, Canada, Mexico, Australia and Spain. Our Specialty Products segment is the largest U.S. producer of sodium bicarbonate, which it sells together with other specialty inorganic chemicals for a variety of industrial, institutional, medical and food applications. This segment also sells a range of animal nutrition and specialty cleaning products. For the twelve months ended December 31, 2004, our Consumer Domestic, Consumer International and Specialty Products segments (“SPD”) represented approximately 74%, 12% and 14%, respectively, of net sales.

For the two year period ended December 31, 2004, the Company’s earnings per share has grown at an average rate of approximately 13%, its sales has increased from $1,047.1 million in 2002 to $1,462.1 million in 2004 and its gross profit margin increased from 29.7% in 2002 to 36.5% in 2004. The major reasons for these increases stem from the Unilever oral care business and Armkel acquisitions.

The Company operates in highly competitive consumer product markets, in which cost efficiency, new product offerings and innovation are critical to success. The consumer products markets are particularly mature in North America and are characterized by high household penetration, particularly with respect to our most significant product categories such as laundry detergents and oral care. Furthermore, because of ongoing retail sector consolidation and the competitive environment facing retailers, the Company faces pricing pressure from these customers, particularly the high-volume retail store customers, who have increasingly sought to obtain pricing concessions or better trade terms. To protect our existing market share or to capture increased market share, the Company has had to increase expenditures for promotions and advertising and to introduce and establish new products. Consequently, the need for on-going cost cutting initiatives needs to be sustained as new product introductions or product line extensions remain the most viable path to generating organic top-line growth given the mature nature of most product categories in North American markets. Through its recent acquisitions, the Company has been able to lower its overall unit costs and increase the productivity of its various manufacturing facilities. This has resulted in higher levels of cash flow.

In the Specialty Products segment, competition within the specialty chemicals and animal nutrition product lines remained intense in 2003 and 2004. Specialty chemicals operates in a competitive environment influenced by capacity utilization, buyers’ leverage and the impact of raw material and energy costs. With respect to the animal nutrition product line, the Company continues to face higher ingredient costs for its line of nutritional supplements under the MEGALAC brand name, and weathered a poor U.S. dairy economy in 2003, which had a severe impact on the purchasing ability and financial viability of dairymen. To meet these challenges, the Specialty Products business pursued an important business improvement initiative which was aimed at improving its longer term operational effectiveness and cost structure.

Critical accounting policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principals generally accepted in the United States of America (GAAP). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, our observance of trends in industry, information provided by our customers and information available from other outside sources, as appropriate. Our critical accounting policies include:

Promotional and sales returns reserves

The reserves for consumer and trade promotion liabilities and sales returns are established based on our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. Promotional reserves are provided for sales incentives made directly to consumers such as coupons and sales incentives made to vendors such as slotting, cooperative advertising, incentive discounts based on volume of sales and other arrangements. All such costs are netted against sales. Slotting costs are recorded when the related sale is recognized. Co-op advertising costs are recorded when the customer places the advertisement for the Company’s products. Discounts relating to price reduction arrangements are recorded when the related sale takes place. Costs associated with end-aisle or other in-store displays are recorded when product is sold relating to the promotion. The Company relies on historical experience and forecasted data to determine the required reserves. For example, the Company uses historical experience to project coupon redemption rates

18

Table of Contents

to determine reserve requirements. Based on the total face value of coupons redeemed over the past couple of years, a 0.1% deviation in the actual rate of redemptions versus the rate accrued for in the financial statements could result in approximately a $2 million difference in the reserve required. With regard to other promotional reserves and sales returns, we use experience-based estimates, customer and sales organization inputs, and historical trend analysis in arriving at the reserves required. If the Company’s estimates for vendor promotional activities and sales returns were to differ by 10%, the impact to promotional spending and sales return accruals would be approximately $6.0 million. While we believe that our promotional and sales returns reserves are adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable could differ materially from what will actually transpire in the future. During the twelve months ended December 31, 2004, the Company reversed prior year promotion liabilities of approximately $10.2 million based on changes to previous estimates, and in 2003 and 2002 the Company reversed prior year promotion liabilities of approximately $1.3 million and $5.3 million, respectively.

Impairment of goodwill, trademarks and other intangible assets and property, plant and equipment

Carrying values of goodwill, trademarks and other indefinite lived intangible assets are reviewed periodically for possible impairment in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. The Company’s impairment review is based on a discounted cash flow approach that requires significant judgment with respect to volume, revenue and expense growth rates, and the selection of an appropriate discount rate. Management uses estimates based on expected trends in making these assumptions. With respect to goodwill, impairment occurs when the carrying value of the reporting unit exceeds the discounted present value of cash flows for that reporting unit. For trademarks and other intangible assets, an impairment charge is recorded for the difference between the carrying value and the net present value of estimated cash flows, which represents the estimated fair value of the asset. The Company uses its judgment in assessing whether assets may have become impaired between annual valuations. Indicators such as unexpected adverse economic factors, unanticipated technological change or competitive activities and acts by governments and courts may indicate that an asset has become impaired.

Property, plant and equipment and other long-lived assets are reviewed periodically for possible impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. The Company’s impairment review is based on an undiscounted cash flow analysis at the lowest level for which identifiable cash flows exist. The analysis requires management judgment with respect to changes in technology, the continued success of product lines, and future volume, revenue and expense growth rates. The Company conducts annual reviews for idle and underutilized equipment, and reviews business plans for possible impairment implications. Impairment occurs when the carrying value of the asset exceeds the future undiscounted cash flows. When an impairment is indicated, the estimated future cash flows are then discounted to determine the estimated fair value of the asset and an impairment charge is recorded for the difference between the carrying value and the net present value of estimated future cash flows.

The estimates and assumptions used are consistent with the business plans and estimates that the Company uses to manage its business operations. The use of different assumptions would increase or decrease the estimated value of future cash flows and would have increased or decreased any impairment charge taken. Future outcomes may also differ. If the Company’s products fail to achieve estimated volume and pricing targets, market conditions unfavorably change or other significant estimates are not realized, then the Company’s revenue and cost forecasts may not be achieved, and the Company may be required to recognize additional impairment charges. In 2004, the Company recognized tradename impairment, plant impairment and equipment obsolescence charges of approximately $6.7 million, which was included in the operating results of the Consumer Domestic segment. In 2003 the Company recognized an impairment charge of $2.7 million on manufacturing equipment which was charged to the Consumer Domestic segment. In 2002, the Company recognized tradename, equipment obsolescence and plant impairment charges of approximately $6.2 million, which was charged to the Consumer Domestic segment.

Inventory valuation

When appropriate, the Company writes down the carrying value of its inventory to the lower of cost or market (net realizable value), including any costs to sell or dispose. The Company identifies any slow moving, obsolete or excess inventory to determine whether a valuation allowance is needed. The determination of whether inventory items are slow moving, obsolete or in excess of needs requires estimates and assumptions about the future demand for the Company’s products, technological changes, and new product introductions. The estimates as to the future demand used in the valuation of inventory are dependent on the ongoing success of the Company’s products. In addition, the Company’s allowance for obsolescence may be impacted by the rationalization of the number of stock keeping units (“SKU’s”). The number of SKU’s has been reduced by approximately 27% over the last 2 years. To minimize this risk, the Company evaluates its inventory levels and expected usage on a periodic basis and records adjustments as required. Adjustments to the inventory’s net realizable value were $5.9 million at December 31, 2004, and $3.2 million at December 31, 2003.

Valuation of pension and postretirement benefit costs

The Company’s pension and postretirement benefit costs are developed from actuarial valuations. Inherent in these valuations are key assumptions provided by the Company to our actuaries, including the discount rate and expected long-term rate of return on plan assets. Material changes in the Company’s pension and postretirement benefit costs may occur in the future due to changes in these assumptions.

The discount rate is subject to change each year, consistent with changes in applicable high-quality, long-term corporate bond indices. Based on the expected duration of the benefit payments for our pension plans and postretirement plans we refer to applicable indices such as the Moody’s AA Corporate Bond Index to select a rate at which we believe the pension benefits could be effectively settled. Based on the published rates as of December 31, 2004, as well as selected Corporate bonds matching our estimated cash flows of the plans, the Company used a discount rate of 5.75% for the three remaining domestic plans, a decline of 25 basis points from the 6.00% rate used in 2003. This had the effect of increasing the projected benefit obligation for pensions and the accumulated postretirement benefit obligation by approximately $1.5 million and $0.4 million, respectively, for the year ended December 31, 2004.

19

Table of Contents

The expected long-term rate of return on pension plan assets is selected by taking into account a historical trend based on a 15 year average, the expected duration of the projected benefit obligation for the plans, the asset mix of the plans, and known economic and market conditions at the time of valuation. Based on these factors, the Company’s weighted average expected long-term rate of return as of December 31, 2004 is 7.61%, a decline of 111 basis points from the 8.72% rate used at December 31, 2003. This decrease is due to the change in the expected long-term rate of the Company’s domestic plans from 8.75% to 8.25% and the inclusion of Armkel’s plans. A 50 basis point change in the expected long-term rate of return would result in less than a $0.4 million change in pension expense for 2005.

On December 31, 2004 the accumulated benefit obligation related to our pension plans exceeded the fair value of the pension plan assets (such excess is referred to as an un-funded accumulated benefit obligation). This difference is attributed to (1) an increase in the accumulated benefit obligation that resulted from the decrease in the interest rate used to discount the projected benefit obligation to its present settlement amount from 6.00% to 5.75%, partially offset by (2) the increase in the market value of the plan assets at December 31, 2004. As a result, in accordance with SFAS No. 87, the Company recognized an additional minimum pension liability of $1.4 million included in benefit obligations, and recorded a charge, net of tax, to accumulated other comprehensive loss of $0.8 million which decreased stockholders’ equity. The charge to stockholders’ equity for the excess of additional pension liability represents a net loss not yet recognized as pension expense. Based on the aforementioned assumptions, the income statement impact for 2004 is estimated to be approximately $0.8 million charged to earnings. On a cash basis, an estimated contribution of approximately $5.4 million will be required in 2005.

Tax contingencies

The Company records liabilities in income taxes payable for potential assessments in various tax jurisdictions. The liabilities relate to tax return positions, although supportable by the Company, that may be challenged by the tax authorities. The Company adjusts these liabilities as a result of changes in tax legislation, interpretations of laws by Courts, rulings by tax authorities, changes in estimates and the closing of the statute of limitations. The Company’s tax rate includes the impact of the liabilities and any changes to the liabilities. Settlement of any issue with the tax authorities would require the use of cash. Favorable resolution of an issue would be recognized as a reduction to the Company’s annual tax rate. The IRS is currently examining the Company’s 2002 US Federal Corporation Income Tax Return and, to date, no adjustments have been proposed.

Recent Accounting Pronouncements

In January 2004, the FASB issued FASB Staff Position (FSP) No. 106-1, “Accounting and Disclosure Requirements to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the Act). The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The FSP permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Act. The Company’s consolidated financial statements and notes reflect the effects of the Act on the postretirement health care plan. The effect of adopting the provisions of this FSP did not have a material effect on the Company’s consolidated financial statements.

The Emerging Issues Task Force (EITF) concluded in EITF Issue 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” that contingently convertible debt (“Co-Cos”) be treated for diluted EPS purposes as if converted from debt to equity, beginning with the date the contingently convertible debt instrument is initially issued, even if the triggering events (such as stock price) have not yet occurred. The effective date would be reporting periods ending on or after December 15, 2004 and prior period EPS amounts presented for comparative purposes would have to be restated. The Company has implemented this consensus in its 2004 financial statements, which had the effect of lowering 2004 diluted earnings per share by $0.01 and did not have an effect on 2003 and 2002 earnings per share.

In November 2004, the FASB issued SFAS No. 151 “Inventory Costs, an amendment for ARB 43, Chapter 4”. This Statement requires that certain abnormal costs that were included in inventory pricing such as abnormal costs for idle facility expense, excessive spoilage, double freight, and rehandling costs be treated as current period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this Statement shall be effective for inventory costs incurred during the fiscal years beginning after June 15, 2005. The adoption of the provisions of SFAS 151 will not have a material impact on the Company’s consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”. SFAS No. 123R supersedes APB Opinion No. 25, which requires recognition of an expense when goods or services are provided. SFAS No. 123R requires the determination of the fair value of the share-based compensation at the grant date and the recognition of the related expense over the period in which the share-based compensation vests. SFAS No. 123R permits a prospective or two modified versions of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by the original SFAS No. 123. The Company is required to adopt the provisions of SFAS No. 123R effectively July 1, 2005, at which time the Company will begin recognizing an expense for unvested share-based compensation that has been issued or will be issued after that date. Under the retroactive options, prior periods may be restated either as of the beginning of the year of adoption, January 1, 2005 for the Company, or for all periods presented. The Company has not yet finalized its decision concerning the transition option and measurement methodology it will utilize to adopt SFAS No. 123R, but estimates that the impact will not be materially different than the amounts in its pro forma disclosure.

20

Table of Contents

The American Jobs Creation Act of 2004 (the AJCA) was enacted on October 22, 2004. The AJCA repeals an export incentive, creates a new deduction for qualified domestic manufacturing activities and includes a special one-time deduction of 85% of certain foreign earnings repatriated to the U.S.

The FASB issued FSP FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (FSP FAS 109-1) on December 21, 2004. In accordance with FSP FAS 109-1, the Company will treat the deduction for qualified domestic manufacturing activities, which is effective for the Company beginning January 1, 2005, as a reduction of the income tax provision in future years as realized.

In December 2004, the FASB issued FSP FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,” allowing companies additional time to evaluate the effect of the AJCA on plans for reinvestment or repatriation of foreign earnings. The Company is in the process of evaluating the effects of the repatriation provision.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

The discussion of results of operations at the consolidated level presented below is followed by a more detailed discussion of results of operations by segment. The discussion of our segment operating results is presented on a historical basis for the years ending December 31, 2004, 2003, and 2002. The segment discussion also presents certain product line fluctuations. The Company’s reporting units are consistent with its reportable segments.

Consolidated results

2004 compared to 2003

Net Sales

Net sales increased by $405.2 million or 38.3% to $1,462.1 million, compared to $1,056.9 million in the previous year. The increase is primarily due to the Armkel acquisition and the oral care business acquisition which contributed sales of $380.4 million in 2004. Also contributing to the increase was the effect of favorable foreign exchange rates of $4.6 million, and $10.2 million resulting from the reversal of prior year’s promotion reserves due to a change in estimate. The 2003 sales also included $25.2 million generated by the oral care business, which was acquired in fourth quarter and $1.3 million due to the reversal of prior year promotion adjustments.

Operating Costs

The Company’s gross margin increased to 36.5% from 30.1% in the prior year. The increase in gross margin is primarily due to the Armkel acquisition and full year effect of the oral care business acquisition. The acquired products carry a higher gross margin than the Company’s existing product lines prior to the acquisitions. Included in the 2004 gross margin was the impact of a $10.5 million inventory related purchase accounting charge associated with the Armkel acquisition and a $1.5 million plant impairment charge. Gross profit in 2003 included a $5.9 million inventory related purchase accounting charge related to the oral care business acquisition.

Marketing expenses of $161.2 million increased $72.4 million or 81% from 2003. Approximately $62 million of the increase is associated with the acquired Armkel and oral care brands. Marketing expenses for existing brands increased $10 million primarily in support of Deodorizing and Cleaning products, Personal Care products and new product activity. This increase was partially offset by lower expense for BRILLO SCRUB’N TOSS, which was introduced in 2003.

Selling, general and administrative expenses of $200.5 million increased $83.1 million or 41% as compared to 2003. This increase is primarily due to approximately $62.0 million associated with the former Armkel business and additional costs in support of the oral care business acquisition. Other increases include $4 million of severance costs and the termination costs relating to one of the Company’s foreign subsidiary’s pension plan, a $1.9 million tradename impairment charge, higher performance related compensation costs of $6.4 million, higher Sarbanes-Oxley compliance expenses of $3.7 million, and higher research & development (“R&D”) expenses of $1.7 million (exclusive of costs to support the acquired Armkel and oral care brands).

Other Income and Expenses

The decrease in equity in earnings of affiliates of $13.5 million reflects the consolidation of the Armkel acquisition since May 28, 2004. Included in the Company’s equity earnings from Armkel in 2004 is a $2.5 million tradename impairment charge. The 2003 result benefited from a litigation settlement, partially offset by an impairment of an asset held for sale, for a net contribution to the Company of approximately $5 million. The combined results of the Company’s other equity investments, Armand Products Company (“Armand”) and the ArmaKleen Company (“ArmaKleen”), increased by $0.8 million.

Interest expense increased $21.0 million to $ 41.4 million. The increase can be attributed primarily to increased debt that was assumed by the Company as part of the Armkel acquisition, and new debt required to purchase the remaining interest in Armkel, a $4.9 million third quarter interest payment related to a legal settlement and the full year effect of the debt required to purchase the oral care business.

21

Table of Contents

Net loss on early extinguishment of debt of $22.9 million includes an $8.0 million charge incurred in the second quarter of 2004 associated with the Company’s bank debt refinancing to effect the acquisition of Armkel and a $14.9 million charge in the fourth quarter related to the redemption of the Armkel 9 ½% Senior Subordinated Notes due 2009 assumed as part of the Armkel acquisition. The charge in 2003 of $4.1 million was associated with the bank debt refinanced to acquire the oral care business.

Investment income was approximately $1.9 million higher than in 2003 as a result of a higher amount of investable cash available and slightly higher interest rates.

Other income and expense includes the effect of foreign exchange remeasurement gains related to intercompany loans between the Company’s subsidiaries.

Taxation

The tax rate for 2004 was 30.3% as compared to 30.8% in 2003. This year’s tax rate was favorably impacted by prior year R&D tax credits and other items of $4.6 million. The 2003 tax rate included a settlement of a state tax matter as well as the resolution of other tax contingencies.

2003 compared to 2002

Net Sales

Net sales increased by $9.8 million or 0.9% to $1,056.9 million, compared to $1,047.1 million in the previous year. The majority of this increase was due to the additional sales resulting from the fourth quarter acquisition of certain assets of Unilever’s oral care business in the United States and Canada. Other increases included the effects of foreign exchange of approximately $3.0 million and the reversal of prior period promotion reserves of approximately $1.3 million due to a change in estimate. These increases were partially offset by the Company’s change in revenue recognition policy from FOB shipping point to FOB destination point, which reduced sales by approximately $6.3 million in 2003. Sales in 2002 included a similar change in promotion estimate of $5.3 million, as well as the discontinuation of certain former USA Detergents cleaners and former Carter-Wallace pet care products of approximately $8.6 million. The impact of these discontinued products was approximately $1.2 million in 2003.

Operating Costs

The Company’s gross margin increased to 30.1% from 29.7% in the prior year. This increase in gross margin represented a substantial improvement in the consumer domestic product margin partially offset by a substantial reduction in specialty products margin. The higher consumer products margin was due to the full-year benefits of the integration of certain former Carter-Wallace products completed in 2002, as well as additional purchasing, manufacturing and distribution efficiencies associated with economies of scale achieved in 2003, partially offset by higher start-up costs and promotion expenses associated with new product introductions. The lower specialty products margin was primarily due to higher ingredient costs for the animal nutrition business.

Marketing expenses increased $2.6 million to $88.8 million. The increase was primarily associated with advertising expenses for Personal Care products, namely ARM & HAMMER dentifrice and ARRID brands, as well as the marketing costs associated with the newly introduced cleaning product, BRILLO SCRUB’N TOSS, partially offset by a reduction in advertising expenses for other Personal Care products.

Selling, general and administrative expenses decreased $3.2 million. This decrease was primarily a result of the elimination of transition related expenses incurred in 2002 associated with the Carter-Wallace products acquired in the fourth quarter of 2001, and tradename impairment charges recorded in 2002, partially offset by higher personnel related expenses.

Other Income and Expenses

The increase in equity in earnings of affiliates of $7.1 million was almost entirely due to the Company’s pro-rata share in the year over year increase in earnings from Armkel. Armkel’s earnings increase for the year was primarily a result of a litigation settlement in the second quarter, partially offset by an impairment of an asset held for sale, for a net contribution to the Company of approximately $5 million. This increase over the prior year also reflected a strong performance by international operations, partially offset by significantly weaker domestic results. Earnings in 2002 reflected the disproportionate recapture of $5 million of allocated losses sustained in the fourth quarter of 2001 in accordance with the terms of the Armkel joint venture agreement. The prior period increase was also impacted by the inventory step-up charge in the first quarter of 2002 related to Armkel’s opening inventory values. The combined results of the Company’s other equity investments, Armand and ArmaKleen, were virtually unchanged.

Investment earnings were lower as a result of lower interest rates on funds invested.

Interest expense increased $0.5 million for the year even though there was a significant reduction in average debt outstanding at lower interest rates. This is because the Company recorded a $4.9 million charge to write off deferred financing costs related to previous financing transactions and settlement of interest rate swaps.

Other income and expense includes foreign exchange gains realized by the Company’s Brazilian subsidiary, while 2002 was unfavorably affected by foreign exchange losses incurred by the same subsidiary.

22

Table of Contents

Taxation

The effective tax rate for the year was 30.8%, compared to 34.0% in the previous year. This decrease is primarily a result of a settlement of a state tax matter as well as the resolution of other tax contingencies.

Segment results for 2004, 2003 and 2002

Segment results are presented based upon segments as described in Note 17 of the notes to the Company’s audited consolidated financial statements.

As a result of the Armkel acquisition, the Company has redefined its reportable segments. The Company has identified its reportable segments based on differences in the nature of products and organizational and ownership structures. Specifically, the Company has identified the following segments: Consumer Domestic, Consumer International and Specialty Products. The Company also has a Corporate segment.

Segment revenues are derived from the sale of the following products:

The Company had a 50 percent ownership interest in the Armand and ArmaKleen partnerships as of December 31, 2004. Since the Company did not control these entities as of December 31, 2004, they were accounted for under the equity method in the consolidated financial statements of the Company and its equity in earnings are included in Income Before Taxes and Minority Interest of the Corporate segment.

On May 28, 2004, the Company purchased the remaining 50% of Armkel that it did not own and Armkel was merged into the Company. Operating results for the former Armkel business have been fully consolidated in the Consumer Domestic and Consumer International segments for results subsequent to May 28, 2004. The Company’s equity in earnings of Armkel’s domestic operations for the period up to May 28, 2004 are included in Income Before Taxes and Minority Interest of the Consumer Domestic segment, and equity in earnings of Armkel’s international operations for the period up to May 28, 2004 are included in Income Before Taxes and Minority Interest of the Consumer International segment.

The following table presents selected financial information relating to the Company’s segments for each of the three years in the period ended December 31, 2004. The Company’s segment presentation for the years ended December 31, 2003 and 2002 have been revised from prior period presentations to conform with the new segments. The segment discussion also presents product line fluctuations.

Consumer Domestic

2004 compared to 2003

Consumer Domestic Net Sales increased $245.0 million to $1,077.1 million for the year. The increase is largely due to the Armkel and oral care business acquisitions, which contributed an additional $214.9 million in sales, and the reversal of $9.6 million of prior year promotion reserves due to a change in estimate. At the product line level, after accounting for the effect of the previously mentioned items, net sales of deodorizing and cleaning products rose strongly, laundry products rose slightly and personal care products declined. At the brand level, sales of ARM & HAMMER and XTRA liquid laundry detergent, ARM & HAMMER SUPER SCOOP cat litter, and ARM & HAMMER toothpaste, were all above last year, while sales of laundry detergent powder, fabric softeners and antiperspirants were lower. The trend of higher liquid laundry detergent and lower powder detergent sales continued in 2004 as an increasing number of consumers switch to the liquid form of the product.

23

Table of Contents

Consumer Domestic Income Before Taxes and Minority Interests increased $23.0 million to $112.7 million in 2004 as compared to $89.7 million in 2003. This is primarily a result of the Armkel and oral care business acquisitions. This increase was negatively impacted by the inventory related purchase accounting charge in 2004 of $8.2 million, a $1.5 million plant impairment charge and a tradename impairment charge of $1.9 million. The results of 2003 include the effect of a $5.9 million inventory related purchase accounting charge. Existing Consumer Domestic products earnings contributions were slightly higher in 2004 as a result of higher gross profit partially offset by higher marketing in support of Deodorizing and Cleaning products, certain Personal Care products, new product activity and SG&A expenses. The segments earnings from affiliates was significantly lower than in 2003 as a result of the Armkel acquisition, whose results since May 28, 2004 are included in the segment’s operating results. Interest expense was significantly higher due to the debt required to purchase Armkel, debt assumed as part of the Armkel acquisition and the full year effect of interest associated with the debt to purchase the oral care business.

2003 compared to 2002

Consumer Domestic Net Sales were essentially unchanged at $832.1 million for the year, which reflected the fourth quarter Unilever acquisition, partially offset by a change in revenue recognition policy. Major factors that impacted comparative product lines performance included a $1.3 million reversal of prior year promotion reserves due to a change in estimate; net sales in 2002 reflected a similar change in promotion estimate of $5.3 million. Furthermore, Consumer Domestic Net Sales were also lower due to discontinuation of some former USA Detergents cleaners and former Carter-Wallace pet care products, which impacted the Deodorizing and Cleaning Products line. Net sales of liquid laundry detergent were significantly higher and more than offset the continuing industry trend of declining powder laundry detergent sales as an increasing number of consumers switched to the liquid form of the product in the Laundry Products line. Personal Care Products, exclusive of the impact of the oral care business acquisition, were lower in part because of a reduction in gum sales and the discontinued ARM & HAMMER Breathcare line.

Consumer Domestic Income Before Taxes and Minority Interest increased $15.2 million, or 20.3%, to $89.7 million mostly due to a $9.5 million increase in gross profit with more than half of this increase attributable to the acquired oral care brands. The remainder of the gross profit improvement was the result of improved Laundry Product margins as well as lower manufacturing costs for ARRID Antiperspirant after the relocation of manufacturing to the Lakewood plant from the former Carter-Wallace Cranbury plant. Higher marketing expenses of $4.1 million were incurred mainly to support the newly introduced Cleaning Product BRILLO SCRUB’N TOSS, as well as by higher advertising costs for ARRID Antiperspirant and ARM & HAMMER Dentifrice, partially offset by lower marketing costs for the gum line and the discontinued Breathcare line. Selling, general and administrative expenses decreased by $2.0 million due to the elimination of transition related expenses incurred in 2002 associated with Carter-Wallace products acquired by the Company in the fourth quarter of 2001. In addition, selling, general and administrative expenses in 2002 reflected tradename impairment charges of $2.3 million. These factors were partially offset by higher personnel related costs. Equity in Armkel’s earnings increased $2.7 million as a result of a higher gross margin, which was negatively impacted in 2002 by Armkel’s recognition of the remainder of its purchase accounting inventory step up charge and lower selling, general and administrative expenses, partially offset by higher marketing expenses.

Consumer International

2004 compared to 2003

Consumer International’s Net Sales rose $139.7 million to $176.7 million. This increase includes $138.0 million that was attributable to the former Armkel foreign subsidiaries and $2.4 million associated with favorable foreign exchange rates. Existing product sales were virtually unchanged.

Consumer International Income Before Taxes and Minority Interest of $15.3 million was $3.7 million or 31.5% higher than in 2003 primarily due to contributions from the former Armkel foreign subsidiaries. Higher operating profit of $9.6 million was partially offset by lower equity in earnings of affiliates of $3.8 million and an allocation of interest expense. The 2004 results include a $2.3 million inventory related purchase accounting charge relating to the Armkel acquisition and a charge included in SG&A for the termination of a pension plan.

2003 compared to 2002

Consumer International’s Net Sales of $37.0 million were $5.3 million or 16.9% higher than 2002. Favorable foreign exchange of $2.9 million and increased export sales of $1.1 million were the main contributors to the higher sales.

Consumer International Income Before Taxes and Minority Interest increased $5.0 million to $11.6 million. The major reason for the increase was higher equity income from Armkel’s foreign subsidiaries of $4.4 million, which reflected higher sales and gross profit, and lower selling, general and administrative expenses, partially offset by higher marketing expenses. Favorable exchange rates also contributed to higher earnings.

24

Table of Contents

Specialty Products

2004 compared to 2003

Specialty Products Net Sales increased $20.4 million or 10.9% to $208.3 million in 2004 due to higher sales of animal nutrition and specialty chemical products. Also impacting the sales increase was favorable foreign exchange rates of approximately $2.2 million.

Specialty Products Income Before Taxes and Minority Interest of $18.0 million was $1.8 million or 11.1% above last year. This increase is due to higher gross profit contributions by both animal nutrition and specialty chemical products, partially offset by higher marketing expenses in support of animal nutrition products and a higher amount of allocated interest expense.

2003 compared to 2002

Specialty Products Net Sales grew $4.8 million or 2.6% due to higher specialty chemicals sales, which included the impact of favorable foreign exchange rates at the Company’s subsidiaries in the United Kingdom and Brazil, partially offset by lower sales of animal nutrition products and the impact from the change in revenue recognition policy.

Specialty Products Income Before Taxes and Minority Interest decreased by $0.4 million to $16.2 million for the year. The decrease was mainly a result of a $3.7 million decrease in gross profit due to higher manufacturing costs in certain animal nutrition and specialty chemical products, particularly a palm oil derivative used in animal nutrition. Offsetting factors were lower marketing expenses of $1.5 million, mostly with respect to the animal nutrition products, combined with flat year over year selling, general and administrative expenses, and a $0.7 million reduction in interest expense.

Competitive Environment

Many of our competitors are large companies, including The Procter & Gamble Company, Unilever, Inc., The Clorox Company, Colgate-Palmolive Company, The Gillette Company, S.C. Johnson & Son, Inc., Pfizer, Inverness and SSL International, which have greater financial resources than the Company. These companies have the capacity to outspend the Company in an attempt to gain market share.

Because of the competitive environment facing retailers, the Company faces pricing pressure from these customers, particularly the high-volume retail store customers, who have increasingly sought to obtain pricing concessions or better trade terms. These concessions or terms could reduce the Company’s margins. Furthermore, if the Company is unable to maintain price or trade terms acceptable to its trade customers, the customers could increase product purchases from our competitors, which would harm the Company’s sales and profitability.

Consumer products, particularly those that are value-priced, such as laundry and household cleaning products are subject to significant price competition. From time to time, the Company may need to reduce the prices for some of its products to respond to competitive and customer pressures and to maintain market share.

The Company has entered the oral care and personal care and deodorizing businesses using the unique strengths of its ARM & HAMMER trademark and baking soda technology. These are highly innovative markets, characterized by a continuous flow of new products and line extensions, and requiring heavy advertising and promotion.

In the toothpaste category, after leading its category in growth several years ago, driven by the success of ARM & HAMMER ADVANCE WHITE toothpaste, the Company’s share dropped in both 2002 and 2003 mainly as a result of competitive new products and aggressive spending by other manufacturers in the category. However in 2004, share increased modestly based upon the introduction of ARM & HAMMER ENAMEL CARE.

Early in 2004, the Company launched ARM & HAMMER ENAMEL CARE toothpaste, its most important oral care innovation in several years. ENAMEL CARE is based on proprietary formulation and packaging technology which combines the cleaning and whitening properties of baking soda with fluoride and patented liquid calcium in a dual chamber tube to fill tooth surfaces and restore enamel luster. The product is available in two variants: Advanced Cleaning and Natural Whitening. In 2005, the Company will introduce ARM & HAMMER ENAMEL CARE with Breath Defense, which combines LIQUID CALCIUM technology with additional long-lasting breath benefits. In addition, the entire ARM & HAMMER toothpaste line has been re-staged with new packaging graphics designed to return the brand to its original emphasis on therapeutic benefits. In 2005, the Company is launching MENTADENT REPLENISHING WHITE toothpaste with liquid calcium technology to strengthen tooth enamel and prevent stains from forming. Other important personal care initiatives, early in 2004, included additions to the ARM & HAMMER ULTRAMAX antiperspirant line and in 2005, the entire ARRID antiperspirant line will be restaged with improved formulas, fragrances and packaging.

The domestic condom market is highly concentrated in product offerings with a limited number of competitors. The market is divided between premium brands and price brands, with companies competing on the basis of quality, innovation and price. The major domestic producers are the Company, with its TROJAN, NATURALAMB and CLASS ACT brands, SSL International with its Durex and Avanti brands, and Ansell with its Lifestyles brand. The Company is the market leader with an approximate 70% share in the U.S. The Company is currently the leading advertiser in the U.S. condom category based on dollars spent. The Company also increased its promotional programs and has regularly developed new and innovative product line extensions including the very successful introduction of HER PLEASURE in

25

Table of Contents

2002 and TWISTED PLEASURE in 2003. In 2004, the Company added two new products to the TROJAN condom line, SHARED PLEASURE and MAGNUM WITH WARM SENSATION, a unique lubricant system which warms the skin on contact for advanced pleasure. In 2005, the Company introduced TROJAN MINT TINGLE, a uniquely flavored lubricated condom. In addition, the successful Warming Sensations lubricating system introduced last year will now be extended to the HER PLEASURE line of TROJAN condoms.

The domestic market for home pregnancy test kits is divided between premium and value brands. The Company markets its FIRST RESPONSE pregnancy kits with a superior “use 5 days before a missed period” claim. The home pregnancy test kit industry is highly competitive and in 2003 the first digital pregnancy kit was introduced by Inverness . In 2004, Pfizer also introduced digital pregnancy kits . The major domestic pregnancy test kit producers are the Company, Pfizer and Inverness .

The domestic depilatories and waxes market is highly concentrated with a limited number of competitors. Products compete based on their functionality, innovation and price. The major domestic manufacturers are the Company with its NAIR brand, Del Labs with its Sally Hansen brand, Reckitt Benckiser with its Veet brand, and Aussie Nads with its Nads wax product. The Company believes that, as a result of its dedicated advertising and promotional programs, distinct packaging and several successful line extensions, NAIR is positioned to continue to be a major participant in lotion and cream depilatories. In 2004, the Company introduced a “No Touch” line of depilatory products. In 2005, there will be several new additions to the NAIR depilatory line, including a novel bladeless shaving kit.

During the fourth quarter of 2003, the Company completed the national distribution of ARM & HAMMER EASY FLUSH Clumping Cat Litter, a major new addition to its cat litter line. The Company also repackaged its XTRA Liquid Laundry Detergent line in vibrant new bottle colors cued to the product’s fragrance variants, and expanded distribution of this product line in the mass channel. In the fourth quarter of 2004, the Company launched ARM & HAMMER Multi-Cat clumping cat litter, a superior deodorizing litter designed for the large number of households with two or more cats. Early in 2005, the Company introduced ARM & HAMMER Detergent Plus a Touch of Softener which combines detergent and fabric softener technologies to meet the need of consumers who want trusted cleaning efficacy with a softening benefit.

Internationally, the Company’s products compete in similar, competitive categories. Some of the Company’s U.S. branded products are also marketed in other countries, holding leading or number two market share positions. Examples include: TROJAN in Canada and Mexico, and NAIR, in Canada, Mexico, France, Australia, and the U.K., and Spain, where the Company’s depilatory products are marketed under the TAKY brand name. The Company also has a position in the cosmetic whitening dentifrice segment with its PEARL DROPS brand in the U.K., Australia, Italy, and Germany (under the PERLWEISS brand), as well as in France (where the Company’s products are marketed as EMAIL DIAMANT).

The Company markets home pregnancy test kits in many countries, under such brand names as FIRST RESPONSE, DISCOVER, CONFIDELLE, and ANSWER. This category has been negatively affected in international markets by the introduction of many lower-priced and private label products, but the Company has seen some growth for its business recently as it has rolled out the “use 3 days before a missed period” claim first used domestically.

In the skin care category the Company markets such brands as LINEANCE and BARBARA GOULD in France, the former for anti-cellulite and general body care and the latter for facial care. In Spain, the Company markets EUDERMIN hand care cream, in the mass market class of trade, where it has a number two position. Recently this line has been expanded to include body and foot care products.

In various countries the Company also markets OTC pharmaceutical products. These include GRAVOL and OVOL, the leading anti-nauseant and anti-gas brands in Canada, the PANGAVIT range of vitamin supplements in Mexico, STERIMAR, a sea-water nasal hygiene product sold primarily in France, but also in about fifty other countries, including most recently Mexico.

In the Specialty Products business, competition remained intense especially in the buffer segment of the animal nutrition business. Potassium carbonate was negatively impacted by the excess capacity caused by the departure of the U.S. video glass industry, which migrated to lower cost regions of the world.

During 2004, the Company continued to pursue opportunities to build a specialized industrial cleaning business using our aqueous-based technology. In early 1999, the Company extended its alliance with Safety-Kleen Corp. to build a specialty cleaning products business based on our technology and their sales and distribution organization. The second year of this alliance was impacted by Safety-Kleen’s financial difficulties leading to a Chapter 11 filing in June of 2000, and a major reorganization implemented during the second half of that year. Safety-Kleen Corp. emerged from bankruptcy in 2003. While this opportunity has demonstrated more stability in 2004 and continues to hold great promise, the outcome will not be known for some time.

26

Table of Contents

Liquidity and capital resources

Debt

The Company had outstanding total debt of $858.7 million and cash of $145.5 million (of which $56.5 million resides in foreign subsidiaries). Total debt less cash (“Net debt”) was $713.2 million at December 31, 2004. The Company had outstanding total debt of $397.0 million, and cash of $75.6 million, resulting in net debt of $321.4 million at December 31, 2003.

During the first quarter of 2003, the Company entered into a receivables purchase agreement with an issuer of receivables-backed commercial paper in order to refinance a portion, $60.0 million, of its primary credit facility. Under this arrangement, the Company sold, and will sell from time to time, throughout the three-year term of the agreement, its trade accounts receivable to a wholly-owned, consolidated, special purpose finance subsidiary, Harrison Street Funding LLC, a Delaware limited liability company (“Harrison”). Harrison in turn sold, and will sell on an ongoing basis, to the commercial paper issuer an undivided interest in the pool of accounts receivable. The receivables assets and the short-term borrowings of Harrison are included in the consolidated financial statements of the Company. The transactions were entered into to reduce certain expenses associated with the credit facility in addition to lowering the Company’s financing costs by accessing the commercial paper market. During July 2004, as a result of purchasing Kelso’s interest in Armkel, the Company amended its accounts receivable securitization agreement to increase the capacity that can be borrowed from $60 million to the current $100 million. The balance outstanding under the agreement on December 31, 2004 was $93.7 million. The proceeds of the increased borrowing were used to make a voluntary Term A Loan payment on August 4, 2004.

In August of 2003, the Company issued $100 million principal amount of 5.25% convertible senior debentures due August 15, 2033 through a private placement to qualified institutional buyers. The debentures rank equal in right of payment with all of the Company’s existing and future unsecured senior indebtedness. The debentures are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness to the extent of the value of the assets securing that indebtedness and to all of the existing and future indebtedness and other liabilities of the Company’s subsidiaries. The Company has the right to redeem all or part of the debentures on or after August 15, 2008. Interest is paid semi-annually on August 15th and February 15th of each year.

On each of August 15, 2010, August 15, 2013, August 15, 2018, August 15, 2023 and August 15, 2028, or in the event of a change in control, holders may require the Company to repurchase all or any portion of the debentures at a purchase price equal to 100.0% of the principal amount of the debentures, plus accrued and unpaid interest to the date of repurchase. The Company must pay cash for any debentures repurchased on August 15, 2010. However, the Company may choose to pay cash, shares of its common stock, or a combination of cash or shares of its common stock for any debentures repurchased on August 15, 2013, August 15, 2018, August 15, 2023 or August 15, 2028 or following a change in control.

Holders may convert their debentures into shares of the Company’s common stock prior to maturity at a conversion rate of 32.26 shares of common stock per each $1,000 principal amount of debentures, which is equivalent to a conversion price of approximately $31.00 per share, subject to adjustment in certain circumstances. A holder may convert the debentures into the Company’s common stock under the following circumstances: during any conversion period prior to August 15, 2032, if the sale price of the Company’s common stock is more than 120% of the conversion price for at least 20 trading days in the 30 consecutive trading day period ending on the first day of that conversion period (the “20% conversion price premium”); the trading price of a debenture falls below a specified threshold; specified credit rating events with respect to the debentures occur; the Company calls the debentures for redemption; or specified corporate transactions occur.

Because of the inclusion of the restricted convertibility feature of the debentures, the Company’s diluted net income per common share calculation effective for periods ending before December 15, 2004 did not account for the effect to the dilution from the conversion of the debentures until the Company’s share price exceeded the 20% conversion price premium or one of the other events described above occurs. However, the Emerging Issues Task Force (EITF) concluded in EITF Issue 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” that contingently convertible debt (“Co-Cos”) be treated for diluted earnings per share purposes as if converted from debt to equity, beginning with the date the contingently convertible debt instrument is initially issued, even if the triggering events (such as stock price) have not yet occurred, and prior period EPS amounts presented for comparative purposes would have to be restated. The Company has implemented this consensus in its 2004 financial statements, which had the effect of lowering 2004 diluted earnings per share by $0.01 and did not have an effect on 2003 and 2002 earnings per share.

In conjunction with the Armkel acquisition, the Company entered into an amended and restated credit agreement (the “Credit Agreement”) with several banks and other financial institutions, The Bank of Nova Scotia, Fleet National Bank and National City Bank, each as a documentation agent, Citicorp North America, Inc., as syndication agent, and J.P. Morgan Chase Bank, as administrative agent. The Credit Agreement provides for (i) a five year term loan in a principal amount of $100.0 million (the “Term A Loan”), (ii) a seven year term loan in the principal amount of $440.0 million, which term loan may be increased by up to an additional $250.0 million upon the satisfaction of certain conditions (the “Term B Loan,” and together with the Term A Loan, the “Term Loans”), and (iii) a five year multi-currency revolving credit and letter of credit facility in an aggregate principal amount of up to $100.0 million (the “Revolving Loans”), $94.0 million of which was undrawn at December 31, 2004. The Term Loans were used to finance the acquisition of the remaining 50% interest in Armkel not previously owned by the Company, pay amounts outstanding under Armkel’s principal credit facility of approximately $136.0 million and refinance the Company’s principal credit facility of approximately $194.0 million. The Revolving Loans are available for general corporate purposes. The obligations of the Company under the Credit Agreement are secured by substantially all of the assets of the Company and certain of its domestic subsidiaries. Those domestic subsidiaries have also guaranteed the loan obligations under the Credit Agreement. The Term Loans and the Revolving Loans bear interest under one of two rate options, selected by the Company, equal to (a) either (i) a eurocurrency rate (adjusted for any reserve requirements) (“Eurocurrency Rate”) or (ii) the greater of the

27

Table of Contents

prime rate, the secondary market rate for three-month certificates of deposit (adjusted for any reserve requirements) plus the applicable FDIC assessment rate plus 1.0%, or the federal funds effective rate plus 0.5% (“Alternate Base Rate”), plus (b) an applicable margin. The applicable margin is determined by the Company’s current leverage ratio. At the closing date of the Credit Agreement, the applicable margin was (a) 1.75% for the Eurocurrency Rate and (b) 0.75% for the Alternate Base Rate.

During the fourth quarter of 2004, the Company issued $250 million of 6.0% Senior Subordinated Notes due December 15, 2012 through a private placement. In conjunction with the placement, the Company effected a cash tender offer and consent solicitation for any and all of the outstanding Armkel 9 ½% Senior Subordinated Notes due 2009 that it assumed as part of the acquisition. It was determined that the price to be paid for each $1,000 principal amount of Notes tendered and accepted for payment (including a consent payment of $30 per $1,000 principal amount of Notes) was $1,086.80, plus accrued and unpaid interest to the payment date. Of the outstanding balance of $225 million, $218.6 million was purchased by the Company. As a result, the Company incurred a fourth quarter net loss on early extinguishment of debt charge of $14.9 million (which included the write-off of existing deferred financing costs and prepayment penalty).

As noted above, on December 22, 2004, the Company issued $250 million of 6.0% senior subordinated notes due December 15, 2012 (“Notes”) with interest paid semi-annually. The Notes were issued at par and the Company received $225 million of proceeds that were used to redeem $218.6 million of the Armkel notes and the balance was used to make voluntary bank debt repayments. The notes will be guaranteed on an unsecured senior basis by substantially all of the Company’s existing and future domestic subsidiaries whose annual revenues (other than intercompany revenues) or total assets (other than intercompany receivables) are $100,000 or more. The notes will be redeemable at the Company’s option, in whole or in part, at any time on or after December 15, 2008, at pre determined redemption prices, together with accrued and unpaid interest, if any, to the date of redemption. The notes will be redeemable at the Company’s option, in whole or in part, at any time prior to December 15, 2008, at a price equal to 100% of the principal amount plus accrued and unpaid interest, if any, to the date of redemption plus a “make-whole” premium. At any time prior to December 15, 2007, the Company may redeem up to 35% of the original principal amount of the notes (calculated after giving effect to any issuance of additional notes issued under the same indenture) with the proceeds of one or more equity offerings of the Company’s capital stock at a redemption price of 106.0% of the principal amount of the notes, together with accrued and unpaid interest, if any, to the date of redemption.

The terms of the subordinated note and credit agreement place a limit on the amount of certain cash payments the Company can make. This limitation includes the amount the Company can pay in dividends on its common stock. As long as the Company is not in default under either agreement, the limitation ( which is a percentage of net income relative to the Company’s consolidated leverage ratio) is such that the Company does not currently anticipate having an effect on its ability to pay dividends at its current rate.

In addition, QGN has lines of credit which allow it to borrow in its local currency. This amounts to $7 million, of which approximately $3 million was utilized as of December 31, 2004 and 2003. The weighted average interest rate on these borrowings at December 31, 2004 and 2003 was approximately 18% and 15.3%, respectively; QGN’s long-term debt is at various interest rates that are determined by several local inflation indexes.

Adjusted EBITDA is a required component of the financial covenants contained in the Company’s primary credit facility and Senior Subordinated Notes. Management believes that the presentation of Adjusted EBITDA is useful to investors as a financial indicator of the Company’s ability to service its indebtedness. Adjusted EBITDA may not be comparable to similarly titled measures used by other entities and should not be considered as an alternative to cash flows from operating activities, which is determined in accordance with accounting principles generally accepted in the United States. Financial covenants include a total debt to Adjusted EBITDA leverage ratio and an interest coverage ratio, which, if not met, could result in an event of default and trigger the early termination of the credit facility and notes, if not remedied within a certain period of time. The definition of Adjusted EBITDA in the notes are not materially different than that of the credit agreement.

Adjusted EBITDA was approximately $287.0 million for 2004. The leverage ratio (total debt to Adjusted EBITDA) for the twelve months December 31, 2004 which, under the credit agreement, permitted the inclusion of Armkel’s EBITDA prior to its acquisition by the Company for pro forma purposes, was 2.96 versus the agreement’s maximum 4.25, and the interest coverage ratio (Adjusted EBITDA to total interest expense) was 5.3 versus the agreement’s minimum of 3.0. This credit agreement is secured by the assets of the Company and certain domestic subsidiaries. The reconciliation of Net Cash Provided by Operating Activities (the most directly comparable GAAP financial measure) to Adjusted EBITDA is as follows (in millions):

28

Table of Contents

Cash flow from operating activities

In 2004, cash flow from operating activities was $194.9 million. Major factors affecting cash flow from operating activities included operating earnings before non-cash charges for depreciation and amortization and disposal and write-down of assets, the write-off of deferred financing costs and a decrease in working capital (excluding cash and cash equivalents). Operating cash flow, together with an increase in bank debt, the issuance of the Notes, distributions from affiliates, proceeds from stock option exercises and existing cash, were used to fund the purchase of Kelso’s interest in Armkel, make additions to property, plant and equipment, and pay dividends and debt repayments, including the tender of the Armkel Notes.

During 2003, cash flow from operating activities was $117.9 million. Major factors contributing to the cash flow from operating activities included operating earnings before non-cash charges for depreciation and amortization, a decrease in working capital (excluding cash and cash equivalents) partially offset by the net non-cash impact from the equity in earnings of affiliates. Operating cash flow together with new bank borrowing activity, the issuance of convertible debt and proceeds obtained through a receivables purchase agreement described above, were used to fund the investing activities to acquire certain assets of Unilever’s oral care business in the United States and Canada, and to pay for additions to property, plant and equipment. Remaining cash was used to make both voluntary and mandatory debt repayments, and the proceeds from stock options exercised helped to pay cash dividends.

Commitments as of December 31, 2004

The table below summarizes the Company’s material contractual obligations and commitments as of December 31, 2004.

Off-Balance Sheet Arrangements

The Company does not have off-balance sheet financing or unconsolidated special purpose entities.

29

Table of Contents

Financial Condition

The Company generally relies on operating cash flows supplemented by borrowings to meet its financing requirements. Our broad product portfolio, strong brand names and market positions have provided a stable base of cash flow. Its broad product line is marketed through multiple distribution channels. The Company believes that, as is the case with other basic consumer products, consumers purchase most of its products largely independent of economic cycles. However, the Company’s ability to meet its financial obligations depends on successful financial and operating performance. The Company cannot guarantee that its business strategy will succeed or that it will achieve the anticipated financial results. The Company’s financial and operational performance depends upon a number of factors, many of which are beyond its control. These factors include:

The Company cannot give assurance that it will generate sufficient cash flow from operations or that it will be able to obtain sufficient funding to satisfy all its obligations, including those noted above. If the Company is unable to pay its obligations, it will be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring indebtedness or raising additional equity capital. However, the Company cannot give assurance that any alternative strategies will be feasible or prove adequate to satisfy its obligation.

The Company has a total debt-to-capital ratio of approximately 61%. At December 31, 2004 the Company had approximately $94.0 million of additional domestic borrowing capacity available through the revolving loans under its Credit Agreement. Management believes that operating cash flow, coupled with the Company’s access to credit markets, will be sufficient to meet the anticipated cash requirements for the coming year.

On July 2, 2004, the Company announced that it had agreed to invest $30 million in a company formed by Kelso & Company to acquire Del Laboratories, Inc. The Company’s investment was to be substantially in the form of convertible preferred stock, and would have represented about 20% of the equity financing. Kelso & Company was to provide the remaining equity, with the participation of Del’s existing management team. On December 6, 2004, the Company and Kelso agreed that the Company would not have to proceed with its participation in the transaction and the Company was released from its obligation to invest.

OTHER ITEMS

Market risk

Concentration of Risk

A group of three Consumer Domestic customers accounted for approximately 26% of consolidated net sales in 2004, including a single customer, Wal-Mart, which accounted for approximately 18%. A group of three Consumer Domestic customers accounted for approximately 26% of consolidated net sales in 2003, including Wal-Mart, which accounted for approximately 17%. A group of three Consumer Domestic customers accounted for approximately 23% of consolidated net sales in 2002, including Wal-Mart, which accounted for approximately 16%.

As part of the USA Detergents merger agreement in 2001, the Company divested USA Detergents non-laundry business and other non-core assets to former USA Detergents executives under the new company name of USA Metro, Inc. (“USAM”), subsequently renamed USA Detergents (“USAD”). The Company had a concentration of risk with USAD at December 31, 2004 in the form of trade accounts receivable and an amount due for leased space of approximately $2.8 million and approximately $3.2 million at December 31, 2003, a $0.4 million equity interest in USAD and a note receivable for other assets of $2.0 million (repayments start in 2006). This note has a carrying value of approximately $1.4 million using an effective interest rate of 17%.

Interest Rate Risk

The Company has total debt outstanding at December 31, 2004 of $858.7 million, of which $356.6 million or 42% carries a fixed rate of interest. The remaining debt balance is comprised of $540 million in Term Loans under the Credit Agreement (which may be increased by $250 million upon the satisfaction of certain conditions), of which $400.3 million was outstanding as of December 31, 2004; and $100.0 million under the revolving facility under the Credit Agreement, $94.0 million of which was un-drawn at December 31, 2004. The Company entered into a receivables purchase agreement with the issuer of receivables-backed commercial paper in order to refinance a portion of its primary borrowing facility, and subsequently increased this facility as a result of the Armkel acquisition. The balance outstanding under this agreement was $93.7 million at December 31, 2004. The weighted average interest rate on all these borrowings at December 31, 2004, excluding deferred financing costs and commitment fees, was approximately 4.6%.

The Company’s domestic operations and its Brazilian subsidiary have other short and long-term debts that are floating rate obligations. If the floating rate were to change by 10% from the December 31, 2004 level, annual interest expense associated with the floating rate debt would be immaterial.

30

Table of Contents

Foreign Currency

The Company is subject to exposure from fluctuations in foreign currency exchange rates, primarily U.S. Dollar/Euro, U.S. Dollar/British Pound, U.S. Dollar/Canadian Dollar, U.S. Dollar/Mexican Peso, U.S. Dollar/Australian Dollar and U.S. Dollar/Brazilian Real.

As a result of the Armkel acquisition, the Company assumed intercompany loans with certain of its subsidiaries. The Company is exposed to foreign exchange accounting remeasurement gains and losses from these intercompany loans. The Company has entered into several foreign exchange contracts to hedge the net accounting remeasurement exposure on these loans. At December 31, 2004, the Company hedged 9.7 million Euros, which is approximately 65% of the Euro debt position, with an average rate of 1.36 U.S. dollars per Euro. The Company hedged 30.0 million Mexican Pesos, which is approximately 49% of the Peso debt position, with a rate of 0.0893 U.S. dollars per peso. The Company had 4.9 million Australian Dollars, which is approximately 55% of the Australian Dollar debt position, with an average rate of 0.78 U.S. dollars per Australian dollars. The terms of these contracts are for periods of under twelve months. The purpose of the Company’s foreign currency hedging activities is to protect the Company from the risk that the eventual dollar net cash inflows or outflows will be adversely affected by changes in exchange rates. These contracts do not qualify for hedge accounting in accordance with SFAS No. 133 and are marked to market in Other Expenses in the Company’s Income Statement.

The Company, from time to time, enters into forward exchange contracts to hedge anticipated but not yet committed sales or purchases denominated in the Canadian dollar, the British pound and the Euro. There were no material contracts at December 31, 2004 to hedge these transactions and the Company had no outstanding contracts at December 31, 2003.

The Company is also subject to translation exposure of the Company’s foreign subsidiaries’ financial statements. A hypothetical 10% change in the exchange rates for the U.S. Dollar to the currencies noted above at December 31, 2004 and 2003 would result in an annual currency translation gain or loss of approximately $1.0 million in 2004 and $0.5 million in 2003.

Equity Derivatives

The Company has entered into equity derivative contracts of its own stock in order to minimize the impact on earnings resulting from fluctuations in the market price of shares in the Company’s deferred compensation plan. These contracts, which consist of cash settled call options in the amount of 277,500 shares, were in excess of the amount of shares related to the plan and are marked to market through earnings. The over hedge position is a result of plan participant changes in investment elections during the term of the current hedge contracts. Assuming no material change in the amount of outstanding shares in the plan, the Company will not renew certain contracts. As a result of these contracts, the Company recognized income of approximately $2.1 million in 2004, $1.5 million in 2003, and $0.4 million in 2002, which reduced the charge for deferred compensation.

Related Party Transactions

Prior to the Armkel acquisition, the Company achieved substantial synergies by combining certain of its operations with those of Armkel, particularly in the areas of sales, manufacturing and distribution, and most service functions. Armkel retained its core marketing, research & development, and financial planning capabilities, and manufactured condoms, but purchased virtually all the support services it required for its U.S. domestic business from the Company under a management services agreement.

For the five months ended May 28, 2004, the Company invoiced Armkel $10.2 million for administrative and management oversight services (which is included as a reduction of selling, general and administrative expenses), purchased $0.8 million of deodorant anti-perspirant inventory produced by Armkel in the first five months of 2004 and sold Armkel $0.7 million of ARM & HAMMER products to be sold in international markets.

During 2003, the Company invoiced Armkel $24.4 million for administrative services, purchased $1.9 million of deodorant anti-perspirant inventory produced by Armkel at its cost and sold $2.9 million of ARM & HAMMER products that were sold in international markets. The Company had an open receivable from Armkel at December 31, 2003 of approximately $6.7 million that primarily related to administrative services.

As noted in “ Concentration of risk” above, the Company divested the USA Detergents non-laundry business and other non-core assets to former USA Detergents executives in connection with the acquisition of USA Detergents. The Company has a $0.4 million ownership interest in USAD. The Company supplies USAD with certain laundry and cleaning products it produces to meet the needs of USAD’s markets at cost plus a mark-up. In addition, the Company leases manufacturing and office space to USAD under a separate agreement.

During 2004 and 2003, the Company sold $24.9 million, and $21.8 million, respectively, of laundry and cleaning products to USAD. Furthermore, the Company billed USAD $0.3 million and USAD billed the Company $0.3 million for leased space. For open amounts receivable at December 31, 2004 and 2003, see “Concentration of risk.”

The Company’s only financial interest in Armkel, prior to its acquisition of Kelso’s interest in Armkel, and in USAD has been the Company’s direct equity investments in Armkel and USAD. The Company has no relationship with the other former equity holders of Armkel and the equity holders of USAD. For this reason, the Company believes it has had no incentive to negotiate with either Armkel or USAD in a manner that is not in the best interests of its stockholders generally.

31

Table of Contents

In connection with its Armand and ArmaKleen joint ventures and its partnership with a supplier of sodium raw materials, the Company believes it has no incentive to negotiate with any of those entities in a manner that is not in the best interests of stockholders generally, since it has no equity interest in the other partners. The Company has entered into agreements with these entities within the ordinary course of business.

Cautionary Note on Forward-Looking Statements

This Annual Report contains forward-looking statements relating to, among other things, short- and long-term financial objectives, sales and earnings growth, gross profit margin, earnings per share, non-cash accounting charges, cash flow, adoption of new accounting guidance, financial forecasts and cost improvement programs. These statements represent the intentions, plans, expectations and beliefs of the Company, and are subject to risk, uncertainties and other factors, many of which are outside the Company’s control and could cause actual results to differ materially from such forward-looking statements. The uncertainties include assumptions as to market growth and consumer demand (including the effect of political and economic events on consumer demand), increases in raw material, packaging and energy prices, the Company’s ability to raise prices or reduce promotion spending, the Company’s ability to implement cost reduction programs in response to commodity price increases, the financial condition of major customers, the risks of currency fluctuations, changes in foreign laws and other risks associated with our international operations and trade, competitive and consumer reactions to the Company’s products. With regard to the new product introductions referred to in this report, there is particular uncertainty relating to trade, competitive and consumer reactions. Other factors, which could materially affect the results, include the outcome of contingencies, including litigation, pending regulatory proceedings, environmental remediation and the acquisition or divestiture of assets.

The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our filings with the U.S. Securities and Exchange Commission.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Church & Dwight Co., Inc (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles; that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management evaluated the Company’s internal control over financial reporting as of December 31, 2004. In making this assessment, management used the framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As a result of this assessment and based on the criteria in the COSO framework, management has concluded that, as of December 31, 2004, the Company’s internal control over financial reporting was effective.

The Company’s independent registered public accounting firm, Deloitte & Touche LLP, have audited management’s assessment of the Company’s internal control over financial reporting. Their opinion on management’s assessment and their opinions on the effectiveness of the Company’s internal control over financial reporting and on the Company’s financial statements appear on pages 33 and 34 of this annual report on Form 10-K.

32

Table of Contents