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QuickLinks-- Click here to rapidly navigate through this documentUNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON,Washington, D.C. 20549
------------------------FORM 10-Q
(MARK ONE)(Mark One)
/X/
/x/
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED SEPTEMBERFor the quarterly period ended June 30,
20002001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM TO ______________ TO ______________ COMMISSION FILE NO.For the Transition period fromto
Commission File No. 333-76055
------------------------UNITED INDUSTRIES CORPORATION
(Exact
(Exact name of registrant as specified in its charter)
DELAWARE 43-1025604 (State
(State or other jurisdiction of(I.R.S Employer
incorporation or organization)43-1025604
(I.R.S Employer
Identification No.)8825
PAGE BOULEVARD ST. LOUIS, MISSOURIPage Boulevard
St. Louis, Missouri 63114(Address
(Address of principal executive office, including zip code)(314) 427-0780
(Registrant's
(Registrant's telephone number, including area code)Indicate by check mark whether the
registrantregistrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes/X//x/ No //. There is no established public market for the Registrant's common stock./As of
November 15, 2000,June 30, 2001, the Registrant had27,650,00027,550,000 Class A voting and27,650,00027,550,000 Class B non-voting shares of common stock outstanding and 15,000 non-voting shares of Class APreferred Stockpreferred stock outstanding.Documents Incorporated by Reference: None - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTSFinancial StatementsBALANCE SHEETS
(DOLLARS IN THOUSANDS) (UNAUDITED)
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31 2000 1999 1999 ------------- ------------- -----------ASSETS Current assets: Cash and cash equivalents............................ $ 17,146 $ 11,853 $ -- Accounts receivable (less allowance for doubtful accounts of $875 at September 30, 2000, $535 at September 30, 1999 and $1,031 at December 31, 1999).............................................. 31,376 32,750 19,165 Inventories.......................................... 31,799 35,987 53,243 Prepaid expenses..................................... 2,666 1,352 3,501 --------- --------- --------- Total current assets............................. 82,987 81,942 75,909 Equipment and leasehold improvements, net.............. 25,871 27,567 27,860 Deferred income tax.................................... 116,268 107,574 116,268 Other assets........................................... 19,806 21,018 20,870 --------- --------- --------- Total assets..................................... $ 244,932 $ 238,101 $ 240,907 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Current maturities of long-term debt and capital lease obligations.................................. $ 11,846 $ 12,165 $ 12,178 Accounts payable..................................... 11,789 13,024 25,507 Accrued expenses..................................... 23,049 19,876 27,464 Short-term borrowings................................ 15,000 -- -- --------- --------- --------- Total current liabilities........................ 61,684 45,065 65,149 Long-term debt......................................... 343,375 352,000 349,125 Capital lease obligations.............................. 5,261 8,127 7,952 Other liabilities...................................... 6,725 5,377 5,483 --------- --------- --------- Total liabilities................................ 417,045 410,569 427,709 Stockholders' deficit.................................. Common stock......................................... 554 554 554 Additional paid-in capital........................... 126,865 116,687 126,865 Accumulated deficit.................................. (296,832) (287,009) (311,521) --------- --------- --------- Common stock held in grantor trust................... (2,700) (2,700) (2,700) --------- --------- --------- Total stockholders' deficit...................... (172,113) (172,468) (186,802) --------- --------- --------- Total liabilities and stockholders' deficit...... $ 244,932 $ 238,101 $ 240,907 ========= ========= =========JUNE 30, 2001 AND 2000, AND DECEMBER 31, 2000
(Dollars in thousands)
(Unaudited)
June 30, June 30, December 31, 2001 2000 2000 ASSETS Current assets: Cash and cash equivalents $ — $ — $ — Accounts receivable (less allowance for doubtful accounts of $1,419 and $1,609 at June 30, 2001 and 2000 and $777 at December 31, 2000) 77,040 76,041 19,944 Inventories 38,149 38,899 47,007 Prepaid expenses 4,835 2,924 6,357 Total current assets 120,024 117,864 73,308
Equipment and leasehold improvements, net
24,276
26,336
24,736
Deferred income tax 116,763 116,268 116,763 Other assets 18,632 20,489 20,087 Total assets $ 279,695 $ 280,957 $ 234,894
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt and capital lease obligation $ 5,693 $ 6,096 $ 5,675 Accounts payable 29,527 24,109 18,625 Accrued expenses 33,887 27,840 24,791 Short-term borrowings 18,550 21,050 15,000 Total current liabilities 87,657 79,095 64,091 Long-term debt 323,693 349,125 329,000 Capital lease obligation 4,428 5,345 4,626 Other liabilities 16,167 11,922 7,940 Total liabilities 431,945 445,487 405,657 Stockholders' deficit Common Stock (27.6 million shares of $0.01 par value Class A and 27.6 million $0.01 par value Class B) 554 554 554 Preferred Stock (15,000 shares of $0.01 par value Class A) — — — Warrants 2,784 — 2,784 Additional paid-in capital 139,081 126,865 139,081 Accumulated deficit (291,640 ) (289,249 ) (310,482 ) Accumulated other comprehensive loss (329 ) — — Common stock held in grantor trust (2,700 ) (2,700 ) (2,700 ) Total stockholders' deficit (152,250 ) (164,530 ) (170,763 ) Total liabilities and stockholders' deficit $ 279,695 $ 280,957 $ 234,894 See accompanying notes to financial statements
2
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(Dollars in thousands)
(Unaudited)
Three months ended June 30, Six months ended June 30, 2001 2000 2001 2000 Sales before promotion expense $ 124,428 $ 123,508 $ 212,864 $ 212,054 Promotion expense 9,781 9,307 18,298 16,958 Net sales 114,647 114,201 194,566 195,096
Operating costs and expenses:
Cost of goods sold 60,748 62,134 104,707 105,971 Selling, general and administrative expenses 22,121 17,767 42,185 39,406 Total operating costs and expenses 82,869 79,901 146,892 145,377 Operating income 31,778 34,300 47,674 49,719 Interest expense 9,388 10,479 19,401 21,084 Income before provision for income taxes 22,390 23,821 28,273 28,635 Income tax expense 6,637 5,366 8,284 6,363 Net income $ 15,753 $ 18,455 $ 19,989 $ 22,272 See accompanying notes to financial statements.
23
STATEMENTS OF
OPERATIONS (DOLLARS IN THOUSANDS) (UNAUDITED)CASH FLOWS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 2000 1999 2000 1999 -------- -------- -------- --------Net sales........................................ $ 51,080 $53,536 $263,134 $281,819 -------- ------- -------- -------- Operating costs and expenses: Cost of goods sold............................. 26,563 25,224 132,535 137,925 Advertising and promotion expenses............. 4,021 4,115 23,489 29,024 Selling, general and administrative expenses... 15,078 16,425 51,974 54,331 Recapitalization transaction fees.............. -- -- -- 10,690 Change of control bonuses...................... -- -- -- 8,645 Severance charges.............................. -- -- -- 1,606 Durshan related expenses (see note 11)......... 8,000 -- 8,000 -- Non-recurring litigation charges............... -- -- -- 1,500 -------- ------- -------- -------- Total operating costs and expenses............. 53,662 45,764 215,998 243,721 -------- ------- -------- -------- Operating income (loss).......................... (2,582) 7,772 47,136 38,098 Interest expense................................. 10,120 9,020 31,204 26,388 -------- ------- -------- -------- Income (loss) before provision for income taxes, and extraordinary item......................... (12,702) (1,248) 15,932 11,710 Income tax expense (benefit)..................... (5,120) 1,693 1,243 9,468 -------- ------- -------- -------- Income (loss) before extraordinary item.......... (7,582) (2,941) 14,689 2,242 Extraordinary loss from early extinguishment of debt, net of income tax benefit of $1,425...... -- -- -- (2,325) -------- ------- -------- -------- Net income (loss)................................ $ (7,582) $(2,941) $ 14,689 $ (83) ======== ======= ======== ========FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(Dollars in thousands)
(Unaudited)
Six months ended June 30, 2001 2000 Cash flows from operating activities: Net income $ 19,989 $ 22,272 Adjustments to reconcile net income to net cash used by operating activities: Non cash reduction of capital lease obligation — (1,182 ) Depreciation and amortization 2,436 2,881 Amortization of deferred financing fees 1,346 1,140 Unrealized loss on interest rate swap, net of taxes (329 ) — Provision for deferred income tax expense 8,284 6,363 Changes in assets and liabilities: Increase in accounts receivable (57,096 ) (56,876 ) Decrease in inventories 8,858 14,344 Decrease in prepaid expenses 1,522 577 Increase in accounts payable and accrued expenses 23,465 11,153 Decrease in Dursban charge (4,614 ) — Decrease in other assets 11 33 Other, net (57 ) 77 Net cash used by operating activities 3,815 782 Investing activities: Purchases of equipment and leasehold improvements (1,878 ) (2,606 ) Net cash used by investing activities (1,878 ) (2,606 )
Financing activities:
Transaction costs related to the redemption of treasury stock — (12,175 ) Debt issuance costs — (903 ) Proceeds from the issuance of debt 3,550 21,050 Repayment of borrowings on revolver and other debt (5,487 ) (6,148 ) Net cash provided by (used for) financing activities (1,937 ) 1,824
Net increase (decrease) in cash and cash equivalents
—
—
Cash and cash equivalents—beginning of period — — Cash and cash equivalents—end of period $ — $ — Noncash financing activity: Execution of capital lease $ — $ 5,344 Dividends declared $ 1,146 $ — See accompanying notes to financial statements.
34
UNITED INDUSTRIES CORPORATION
STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, -------------------- 2000 1999 -------- ---------Cash flows from operating activities: Net income (loss)......................................... $ 14,689 $ (83) Loss from early extinguishment of debt.................. -- 3,750 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Non cash reduction of capital lease obligation........ (1,182) -- Deferred compensation................................. -- 2,700 Depreciation and amortization......................... 4,088 3,468 Recapitalization transaction fees..................... -- 10,690 Amortization of deferred financing fees............... 1,779 1,493 Provision for deferred income tex expense............. 1,243 8,043 Changes in assets and liabilities: Increase in accounts receivable..................... (12,211) (15,575) Decrease in inventories............................. 21,444 5,457 Decrease in prepaid expenses........................ 835 820 Decrease in accounts payable and accrued expenses... (13,437) (3,649) Increase in Dursban related expenses................ 7,479 -- Decrease in other assets............................ (75) (413) Other, net.......................................... -- 188 -------- --------- Net cash provided by operating activities......... 24,652 16,889 Investing activities: Purchase of equipment and leasehold improvements.......... (3,175) (1,499) -------- --------- Net cash used for investing activities............ (3,175) (1,499) Financing activities: Redemption of treasury stock.............................. (12,175) (337,896) Transaction costs related to redemption of treasury stock................................................... -- (11,378) Recapitalization transactions with affiliate.............. -- (5,700) Issuance of common stock.................................. -- 1,990 Shareholder equity contribution........................... -- 8,425 Debt issuance costs....................................... (924) (19,271) Proceeds from the issuance of short-term debt............. 15,000 520,205 Payments on debt.......................................... (6,232) (160,162) Repayment of note receivable from employee................ -- 250 -------- --------- Net cash used for financing activities............ (4,331) (3,537) Net increase in cash and cash equivalents................... 17,146 11,853 Cash and cash equivalents - beginning of period............. -- -- -------- --------- Cash and cash equivalents - end of period................... $ 17,146 $ 11,853 ======== =========See accompanying notes to financial statements. 4UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS(DOLLARS IN THOUSANDS) (UNAUDITED) NOTE 1--BASIS OF PRESENTATION
(Dollars in thousands)
(Unaudited)Note 1—Basis of presentation
The accompanying unaudited financial statements have been prepared in accordance with the instructions for Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles
in the United Statesfor complete financial statements. In the opinion of management, all adjustments(consisting of normal recurring adjustments)considered necessary for a fair presentation have been included. Operating results for any quarter are not necessarily indicative of the results for any other quarter or for the full year. These statements should be read in conjunction with the financial statements and notes thereto included in theannual reportAnnual Report on Form 10-K of United Industries Corporation (the "Company") for the year ended December 31,1999. Certain balance sheet accounts have been reclassified from the September 30, 1999 and December 31, 1999 balance sheets in order to provide a consistent comparison with the September 30, 2000 balance sheet. NOTE 2--RECAPITALIZATION OF THE COMPANY AND NON-RECURRING CHARGES On January 20, 1999, pursuant to a Recapitalization agreement with UIC Holdings, L.L.C. (the "Equity Investor"), which is owned by Thomas H. Lee Equity Fund IV, L.P. ("THL Fund IV" and, together with its affiliates, the "THL Parties"), the Company was recapitalized (the "Recapitalization") in a transaction in which: (i) the Equity Investor purchased common stock from the Company's existing stockholders for approximately $254,700; (ii) the Company's senior managers purchased common stock from the Company's existing stockholders for approximately $5,700; and (iii) the Company used the net proceeds of a senior subordinated facility (the "Senior Subordinated Facility") and borrowings under a Senior Credit Facility (the "Senior Credit Facility") to redeem a portion of the common stock held by the Company's existing stockholders. Following the Recapitalization, the Equity Investor owned approximately 91.9% of the Company's issued and outstanding common stock, the existing stockholders retained approximately 6.0% and the Company's senior managers owned approximately 2.1%. On January 20, 1999, the total transaction value of the Recapitalization was approximately $652,000, including related fees and expenses, and the implied total equity value following the Recapitalization was approximately $277,000. The total consideration paid to redeem the Company's common stock was subject to both upward and downward adjustments based on the Company's working capital on the date of the Recapitalization and excess taxes of certain stockholders arising from the Company's Section 338(h)(10) election. In December 1999, the Company recorded a $7,200 charge to equity to finalize the costs associated with the Recapitalization increasing the total transaction value to $659,200. On January 20, 1999, the Recapitalization was funded by: (i) $225,000 of borrowings under the Senior Credit Facility; (ii) $150,000 of borrowings under the Senior Subordinated Facility; (iii) $254,700 equity investment by the THL Parties through the Equity Investor; (iv) $5,700 equity investment by the Company's senior management team; and (v) equity retained by the Company's existing stockholders having an implied fair market value of approximately $16,600. The Recapitalization was accounted for as a leveraged recapitalization, which had no impact on the Company's historical basis of assets and liabilities for financial reporting purposes. During 1999, the Company recorded $31,312 in fees and expenses associated with the Recapitalization. The total fees and expenses consist of: (i) fees and expenses related to the debt and 5UNITED INDUSTRIES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) (UNAUDITED) NOTE 2--RECAPITALIZATION OF THE COMPANY AND NON-RECURRING CHARGES (CONTINUED) equity transactions, including bank commitment fees and underwriting discounts and commissions; (ii) professional, advisory and investment banking fees and expenses; and (iii) miscellaneous fees and expenses such as printing and filing fees. The fees and expenses that could be specifically identified as relating to the issuance of debt were capitalized and will be amortized over the life of the debt as interest expense. The fees and expenses that could be specifically identified as relating to the equity transactions were charged directly to equity. Other transaction fees were allocated between debt and Recapitalization transaction fees based on the Company's estimate of the effort spent in the activity giving rise to the fee or expense. The allocation of fees and expenses to the debt, equity and Recapitalization transaction fees is as follows:
DEBT EQUITY FEES TOTALS -------- -------- -------- --------Direct costs.............................. $17,205 $688 $ -- $17,893 Allocated costs........................... 2,729 -- 10,690 13,419 ------- ---- ------- ------- Total fees and expenses................... $19,934 $688 $10,690 $31,312 ======= ==== ======= =======During the first nine months of 1999, the Company recorded various non-recurring charges as follows: (i) change of control bonuses to some members of senior management totaling $8,645, which were contractually required as a result of the Recapitalization (senior management reinvested $2,700 of their change in control bonuses in the Company's common stock through a Grantor Trust); (ii) $1,100 to cost of goods sold for the write-off of its "Citri-Glow" candle inventory (the Company discontinued this product line during 1999 and chose to dispose of the inventory by selling it through discount channels at prices below cost); and (iii) $900 related to deductions taken by customers for advertising and promotional spending in excess of contractual obligations for which the Company elected not to pursue collection. NOTE 3--COMMON STOCK AND STOCK SPLIT On January 20, 1999, the Company's Board of Directors declared an 83,378.37838 to 1 stock split and increased the Company's authorized capital to 65,000 shares, of which 32,500 have been designated as Class A Voting Common Stock and 32,500 have been designated as Class B Non-Voting Common Stock. As of January 20, 1999, there were 27,600 shares of Class A Voting Common Stock outstanding and 27,600 shares of Class B Non-Voting Common Stock outstanding. In conjunction with the stock split, the Company's board of directors reduced the par value of both the Class A Voting shares and Class B Non-Voting shares to $0.01 per share. 6UNITED INDUSTRIES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) (UNAUDITED) NOTE 4--INVENTORIES2000.Note 2—Inventories
Inventories are as follows:
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, 2000 1999 1999 -------------- -------------- -------------Raw materials.......................................... $ 7,715 $ 5,899 $ 9,916 Finished goods......................................... 25,071 30,919 44,149 Allowance for obsolete and slow-moving inventory....... (987) (831) (822) ------- ------- ------- Total inventories...................................... $31,799 $35,987 $53,243 ======= ======= =======NOTE 5--EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
June 30, June, 30 December 31, 2001 2000 2000 Raw materials $ 8,895 $ 7,494 $ 10,663 Finished goods 30,658 32,391 37,343 Allowance for obsolete and slow-moving inventory (1,404 ) (986 ) (999 ) Total inventories $ 38,149 $ 38,899 $ 47,007 Note 3—Equipment and leasehold improvements
Equipment and leasehold improvements
netare as follows:
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, 2000 1999 1999 -------------- -------------- -------------Machinery and equipment................................ $27,514 $25,763 $26,791 Office furniture and equipment......................... 10,227 9,182 9,606 Automobiles, trucks and aircraft....................... 6,412 9,574 9,573 Leasehold improvements................................. 6,985 6,834 6,848 ------- ------- ------- 51,138 51,353 52,818 Less: accumulated depreciation......................... 25,267 23,786 24,958 ------- ------- ------- $25,871 $27,567 $27,860 ======= ======= =======NOTE 6--OTHER ASSETS
June 30, June 30, December 31, 2001 2000 2000 Machinery and equipment $ 28,773 $ 27,421 $ 27,435 Office furniture and equipment 10,951 9,784 10,565 Automobiles, trucks and aircraft 6,156 6,290 6,067 Leasehold improvements 7,108 6,956 7,043 52,988 50,451 51,110 Less: accumulated depreciation 28,712 24,115 26,374 $ 24,276 $ 26,336 $ 24,736 5
Note 4—Other assets
Other assets are as follows:
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, 2000 1999 1999 -------------- -------------- -------------Goodwill............................................... $ 7,988 $ 7,988 $ 7,988 Accumulated amortization............................... (2,130) (1,909) (1,964) ------- ------- ------- 5,858 6,079 6,024 ------- ------- ------- Deferred financing fees................................ 17,108 15,534 16,184 Accumulated amortization............................... (3,770) (1,506) (1,991) ------- ------- ------- 13,338 14,028 14,193 ------- ------- ------- Other.................................................. 610 911 653 ------- ------- ------- Total other assets..................................... $19,806 $21,018 $20,870 ======= ======= =======7UNITED INDUSTRIES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) (UNAUDITED) NOTE 7--ACCRUED EXPENSES
June 30, June 30, December 31, 2001 2000 2000 Goodwill $ 7,175 $ 7,988 $ 7,988 Accumulated amortization (1,461 ) (2,075 ) (2,175 ) 5,714 5,913 5,813 Deferred financing fees 18,067 17,087 18,067 Accumulated amortization (5,757 ) (3,131 ) (4,411 ) 12,310 13,956 13,656 Other 608 620 618 Total other assets $ 18,632 $ 20,489 $ 20,087 Note 5—Accrued expenses
Accrued expensed are as follows:
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, 2000 1999 1999 -------------- -------------- -------------Recapitalization costs................................. $ -- $ 5,800 $13,000 Advertising and promotional............................ 8,009 10,150 4,799 Dursban................................................ 7,479 -- -- Interest............................................... 3,782 -- 3,840 Cash overdraft......................................... -- -- 2,078 Severance charges...................................... 952 1,115 1,805 Settlement charges and litigation...................... -- 1,200 114 Other.................................................. 2,827 1,611 1,828 ------- ------- ------- Total accrued expenses................................. $23,049 $19,876 $27,464 ======= ======= =======NOTE 8--LONG-TERM DEBT AND CREDIT FACILITIES
June 30, June 30, December 31, 2001 2000 2000 Advertising and promotional $ 13,506 $ 11,615 $ 5,520 Dursban charge 1,452 — 6,066 Interest 3,834 4,019 3,886 Cash overdraft 7,414 6,586 6,181 Dividend payable 1,466 — 320 Severence charges 457 1,168 1,010 Other 5,758 4,452 1,808 Total accrued expenses $ 33,887 $ 27,840 $ 24,791 6
Note 6—Long-term debt and credit facilities
Long-term debt is comprised of the following:
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, 2000 1999 1999 -------------- -------------- -------------Senior Credit Facility: Term loan A.......................................... $ 57,500 $ 65,000 $ 62,500 Term loan B.......................................... 147,375 148,500 148,125 Revolving credit facility.............................. 15,000 -- -- 9 7/8% Series B Registered Senior Subordinated Notes... 150,000 150,000 150,000 -------- -------- -------- 369,875 363,500 360,625 Less portion due within one year....................... (26,500) (11,500) (11,500) -------- -------- -------- Total long-term debt net of current portion............ $343,375 $352,000 $349,125 ======== ======== ========
June 30, June 30, December 31, 2001 2000 2000 Senior Credit Facility: Term Loan A $ 43,817 $ 57,500 $ 48,430 Term Loan B 135,183 147,375 135,878 Revolving Credit Facility 18,550 21,050 15,000 97/8% Series B Registered Senior Subordinated Notes 150,000 150,000 150,000 347,550 375,925 349,308 Less portion due within one year (23,857 ) (26,800 ) (20,308 ) Total long-term debt net of current portion $ 323,693 $ 349,125 $ 329,000 The Senior Credit Facility was provided by NationsBank, N.A., Morgan Stanley Senior Funding, Inc. and CIBC Inc. and consists of (i) a
$110,000$80,000 revolving credit facility (the "Revolving Credit Facility"); (ii) a $75,000 term loan facility ("Term Loan A"); and (iii) a $150,000 term loan facility ("Term Loan B"). The Revolving Credit Facility and Term Loan A matures on January 20, 2005, and Term Loan B matures on January 20, 2006. The Revolving Credit Facility is subject to a clean-down period during which the aggregate amount outstanding under the Revolving Credit Facility shall not exceed$10,000$10.0 million for 30 consecutive days occurring during the period between August 1 and November 30 in each calendar year.In 2000, the actual clean-down period began on August 2.OnSeptemberJune 30,2000, $15,0002001, $18,550 was outstanding under the$110,000 revolving credit facility.Revolving Credit Facility. There were no compensating balance requirements for the$110,000 revolving credit facilityRevolving Credit Facility atSeptemberJune 30,2000. 8UNITED INDUSTRIES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) (UNAUDITED) NOTE 8--LONG-TERM DEBT AND CREDIT FACILITIES (CONTINUED)2001.The principal amount of Term Loan A is to be repaid in twenty-three consecutive quarterly installments commencing
MarchJune 30, 1999 with a final installment due January 20, 2005.$10,000 will be payable in each of the first four years and $17,500 will be repaid in each of the last two years.The principal amount of Term Loan B is to be repaid in twenty-seven consecutive quarterly installments commencingMarchJune 30, 1999 with a final installment due January 20, 2006.$1,500 will be paid in each of the first six years and $141,000 will be payable in year seven.The Senior Credit Facility agreement contains restrictive affirmative, negative and financial covenants. Affirmative and negative covenants put restrictions on levels of investments, indebtedness, insurance and capital expenditures. Financial covenants require the maintenance of certain financial ratios at defined levels. At
December 31, 1999,June 30, 2001, the Company wasnotin compliance withcertainall financial covenants.On January 24, 2000 the Senior Credit Facility agreement was amended to provide new provisions for financial covenant requirements and a waiver of the covenant requirements at December 31, 1999. The amendment contains provisions for the increase in interest rates upon reaching certain maximum leverage ratios. As part of the amended agreement, the Company paid bank fees of $862, which were reflected as deferred financing fees in January 2000 and will be amortized over the life of the debt as interest expense. At September 30, 2000, the Company was not in compliance with certain financial covenants. See subsequent event footnote.Under the
January 24, 2000covenants, interest on the Revolving Credit Facility, Term Loan A and Term Loan B ranges from200250 to375400 basis points above LIBOR depending on certain financial ratios. Unused commitments under the Revolving Credit Facility are subject to a 50 basis point annual commitment fee. LIBOR was6.62%3.86% atSeptemberJune 30,2000.2001.7
Note 6—Long-term debt and credit facilities (continued)
The Senior Credit Facility may be prepaid at any time in whole or in part without premium or penalty. During
1999,fiscal 2000, principal payments on Term Loans A and B of$12,500$14.1 million and$1,875,$12.2 million, respectively, were paid, which included optional principal prepayments of$5,000$4.1 million and$675$10.8 on Term Loan A and Term Loan B, respectively. During the six month period ended June 30, 2001, optional principal prepayments of $4.6 million and $.7 million on Term Loan A and Term Loan B, respectively, were paid. The optional payments were made in order for the Company to remain two quarterly payments ahead. According to the Senior Credit Facility agreement, each prepayment on Term Loan A and Term Loan B can be applied to the next principal repayment installments.In the nine months ended September 30, 2000,Management intends to pay a full year of principalpayments on Term Loans A and B of $5,000 and $750, respectively, were paid. The optional principal payments were applied September 2000. Obligations underrepayment installments in 2001 in accordance with the Senior Credit Facility agreement.In November 1999, the Company issued 97/8% Senior Subordinated Notes for $150 million that are
secured by substantiallydue April 1, 2009.Interest accrues at the rate of 97/8% per annum, payable semi-annually on each April 1 and October 1.
Substantially all of the properties and assets of the Company and substantially all of the properties and assets of the Company's future domestic
subsidiaries. The Company's previous Senior Subordinated Facility was redeemed through the issuance of 9 7/8% Senior Subordinated Notes due April 1, 2009. In connection with this redemption, the Company incurred an extraordinary loss from the early extinguishment of debt, net of tax of $2,325. In the fourth quarter of 1999, the Company exchanged the 9 7/8% Senior Subordinated Notes for new notes registeredsubsidiaries secure obligations under theSecurities Act of 1933. The new notes are substantially identical to the old notes.Senior Credit Facility.The carrying amount of the Company's obligation under the Senior Credit Facility
approximatesapproximate fair value because the interest rates are based on floating interest rates identified by reference to market rates.9UNITED INDUSTRIES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) (UNAUDITED) NOTE 8--LONG-TERM DEBT AND CREDIT FACILITIES (CONTINUED)Aggregate maturities under the Senior Credit Facility (excluding the
revolving credit facility)Revolving Credit Facility) and the Senior Subordinated Notes are as follows:
2000 Remainder of year...................................... $ 2,875 2001........................................................ 11,500 2002........................................................ 11,500 2003........................................................ 17,125 2004........................................................ 18,375 Thereafter.................................................. 293,500 -------- $354,875 ========The company entered into a capital lease agreement in March 1999 for $9,215, which was cancelled in May of 2000. A new capital lease agreement was entered into in March of 2000 for $5,869. The effect of the two capital lease transactions was a non-cash gain of $1,182. NOTE 9--COMMITMENTS
2001 Remainder of year $ — 2002 10,614 2003 15,804 2004 17,534 2005 102,382 Thereafter 182,666 $ 329,000 Note 7—Commitments
The Company leases the majority of its operating facilities from a company owned by a significant shareholder of the Company under various operating leases expiring December 31, 2010. The Company has options to terminate the leases on a year-to-year basis by giving advance notice of at least twelve months. The Company leases a portion of its operating facilities from the same company under a sublease agreement expiring on December 31,
2005 with minimum annual rentals ranging from $578 to $653.2005. The Company has two five-year options to renew this lease, beginning January 1, 2006. Management believes that the terms and expenses associated with8
the related party leases described above are similar to those negotiated by unrelated parties at arm's length.
The Company is obligated under other operating leases for use of warehouse space. The leases expire at various dates through December 1, 2006.
SeveralFive of the leases provide as many as five five-year options to renew.NOTE 10--CONTINGENCIESNote 9—Contingencies
The Company is involved in litigation and arbitration proceedings in the normal course of business that assert product liability and other claims. The Company is contesting all such claims. When it appears probable in management's judgment that the Company will incur monetary damages or other costs in connection with such claims and proceedings, and such costs can be reasonably estimated, appropriate liabilities are recorded in the financial statements and charges are made against earnings.
Management believes the possibility of a material adverse effect on the Company's consolidated financial position, results of operations and cash flows from the claims and proceedings described above is remote.
10UNITED INDUSTRIES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) (UNAUDITED) NOTE 11--DURSBAN RELATED EXPENSES On September 7,Note 10—Dursban Charge
During 2000 the US Environmental Protection Agency and manufacturers of chlorpyrifos (the active ingredient in Dursban pesticidal products) entered into a voluntary agreement that provides for
phasing out most nonresidential uses andwithdrawal of virtually all residential uses of Dursban. Formulation of new Dursban products intended for residential usemustwere required to cease by December 1,2000, and formulators2000. Formulators can no longer sell such products to retailersafteras of February 1,2001. Retailers2001 and retailers will no longer be able to sell Dursban products after December 31, 2001.The Company has assessed the potential financial impact of the Dursban agreement on its operations.A charge of $8,000 wasbookedrecorded in Septemberof2000 for costs associated with this agreement. The Companycurrently has a replacement chemical forbelieves that theactive ingredient in Dursban, which chemicalaccrual isalready being used in productionadequate as ofnew pesticidal products.June 30, 2001.Details of this charge and the accrual balances remaining are as follows:
THIRD QUARTER AMOUNTS UTILIZED THIRD QUARTER 2000 CHARGE DURING THIRD QUARTER 2000 ACCRUAL BALANCE ----------- -------------------- --------------------Returns..................................... $5,415 $ 68 $5,347 Inventory................................... 1,370 -- 1,370 Disposal
Accrual Balances
at the end of 2000Year to Date
2001 UtilizationAmount to be utilized
during remainder of 2001Customer returns and markdowns $ 4,509 $ 2,707 $ 1,802 Inventory 1,118 1,064 54 Disposal and related costs 439 843 (404 ) $ 6,066 $ 4,614 $ 1,452 Note 11—Shipping and handling costs
Certain shipping and handling costs are included in the selling, general and administrative expenses line item on the Company's Statements of Operations. The amount included is $4,230 and $4,139 for the three months ended June 30, 2001 and
related costs.................. 1,215 453 762 ------ ---- ------ $8,000 $521 $7,479 ====== ==== ======NOTE 12--SUBSEQUENT EVENT On November 9,2000, respectively. The amount included is $7,906 and $7,752 for theSeniorsix months ended June 30, 2001 and 2000, respectively.9
Note 12—Derivatives and Hedging Activities
The Company is exposed to market risks relating to changes in interest rates. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. The Company enters into financial instruments to manage and reduce the impact of changes in interest rates.
Effective April 1, 2001, the Company entered into two interest rate swaps that have fixed the interest rate as of April 30, 2001 for $75.0 million of variable rate debt under the Credit Facility. The interest rate swaps are for $50.0 and $25.0 million of the Credit Facility
was amendedand will terminate on April 30, 2002. The fixed LIBOR interest rates are 4.74% and 4.66%, for the $50.0 and $25.0 million interest rate swaps, respectively. The Company's objective is toprovide new financial covenantsmanage the cash flow risks associated with its variable rate debt and not to trade such instruments for profit and loss. The Company's interest rate hedges are classified as cash flow hedges. For awaivercash flow hedge, the ineffective portion is deferred in accumulated other comprehensive income on the balance sheet until the transaction is realized, at which time any deferred hedging gains or losses are recorded in earnings. The fair value ofcertain covenantsthe interest rate swaps is reported as a liability and as a component of comprehensive income in Stockholders' deficit atSeptemberJune 30,2000. As a condition2001. The June 30, 2001 fair value is $0.3 million.Note 13—Comprehensive Income
Comprehensive income differs from net income due to the
effectivenesscash flow hedge. Comprehensive income for the three and six months ended June 30, 2001 was $15,424 and $19,660, respectively.10
Item 2: Management's Discussion and Analysis of
this amendmentFinancial Condition andwaiver, the Company agreed to the following items: 1. The Company agreed to terminate $30,000Results ofthe unused portion of the Revolving Credit Facility under the credit agreement, thereby reducing the Revolving Credit Facility from $110,000 to $80,000. 2. The Company agreed to sell Common Stock and/or permitted Preferred Stock to the Equity Investors for net cash proceeds equal to $15,000, which net cash proceeds have been applied to the prepayment of Term Loan advances. 3. Interest rate increase will range from 25 to 75 basis points higher than previous Revolving Credit Facility. On November 8, 2000, the Company Board of Directors, authorized the creation of 15,000 shares of Class A Preferred Stock to be sold to UIC Holdings LLC at a price of $1,000 per share. 11ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOperationsFORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute "forward-looking
statementsstatements" within the meaning ofSection27ASection 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended."All statements other than statements of historical facts included in this report regarding the Company's financial position, business strategy, budgets and plans and objectives of management for future operations are forward-looking statements. Although the management of the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from those contemplated or projected, forecasted, estimated or budgeted in or expressed or implied by such forward-looking statements. Such factors include, among others, theriskrisks and other factors set forth under"Risk Factors" in the Company's Registration Statement on Form S-4 filed with the Commission andItem 7A in the Company's Annual Report on Form 10-K for1999the year ended December 31, 2000 as well as the following: general economic and business conditions; governmental regulations; industry trends; the loss of major customers or suppliers; cost and availability of raw materials; changes in business strategy or development plans; availability and quality of management; and availability, terms and deployment of capital.OVERVIEWThe Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.Overview
The Company is the leading manufacturer and marketer of value-oriented branded products for the consumer lawn and garden pesticide and household insecticide markets in the United States. The Company manufactures and markets one of the broadest lines of pesticides in the industry, including herbicides and indoor and outdoor insecticides, as well as insect repellents and water-soluble fertilizers, under a variety of brand names. The Company believes that the key drivers of growth for the $2.7 billion consumer lawn and garden pesticide and household insecticide retail markets include: (a) the aging of the population of the United
States population;States; (b) growth in the home improvement center and mass merchandiser channels; and (c) shifting consumers preferences' toward value-oriented branded products.The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the historical financial information included in the unaudited quarterly financial statements and the related notes to the unaudited quarterly financial
statements. RESULTS OF OPERATIONSstatements contained elsewhere in this report.Results of Operations
The following discussion regarding results of operations refers to net sales, cost of goods sold
advertising and promotion expenseand selling and general and administrative expenses, which the Company defines as follows:-
- •
- Net sales are gross sales of products sold to customers
upon shipment of productin accordance with the shipping terms applicable to each sale less any customer discounts from list price and customerreturns. -returns; and promotion expense of products through cooperative programs with retailers.- •
- Cost of goods sold includes chemicals, container and packaging material costs as well as direct labor, outside labor, manufacturing overhead and freight.
- Advertising- •
- Selling and
promotion expense includes the cost of advertising of products through national and regional media as well as the advertising and promotion of products through cooperative programs with retailers. 12- Selling,general and administrative expenses include all costs associated with the selling and distribution of product, product registrations, and administrative functions such as finance, information systems and human resources.11
The following table sets forth the percentage relationship of certain items in the Company's
statementStatements ofoperationsOperations to net sales for the three months endedSeptemberJune 30,20002001 andSeptemberJune 30,1999 (percentages are calculated based on actual data, but columns may not add due2000:
Three Months Ended June 30, 2001 2000 Net sales: Value brands 81.9 % 74.1 % Opening price point brands 18.1 25.9 Total net sales 100.0 100.0 Operating costs and expenses: Cost of goods sold 53.9 54.4 Selling, general and administrative expenses 19.3 15.6 Total operating costs and expenses 72.3 70.0 Operating income 27.7 30.0 Interest expense 8.2 9.2 Income before provision for income taxes 19.5 20.8 Income tax expense 5.8 4.6 Net income 13.7 % 16.2 % Three Months Ended June 30, 2001 compared to
rounding):
THREE MONTHS ENDED SEPTEMBER 30, ---------------------- 2000 1999 -------- --------Net Sales: Value brands.............................................. 74.7% 77.8% Opening price point brands................................ 25.3 22.2 ----- ----- Total net sales............................................. 100.0 100.0 Operating costs and expenses: Cost of goods sold........................................ 52.0 47.1 Advertising and promotion expenses........................ 7.9 7.7 Selling, general and administrative expenses.............. 29.5 30.6 Recapitalization transaction fees......................... -- -- Change of control bonuses................................. -- -- Severance charge.......................................... -- -- Dursban related expenses.................................. 15.7 -- Non-recurring litigation charges.......................... -- -- ----- ----- Total operating costs and expenses.......................... 105.1 85.4 ----- ----- Operating income (loss)..................................... (5.1) 14.6 Interest expense............................................ 19.8 16.8 ----- ----- Income (loss) before provision for income taxes and extraordinary item........................................ (24.9) (2.2) Income tax expense (benefit)................................ (10.0) 3.2 ----- ----- Loss before extraordinary item.............................. (14.9)% (5.4)% ===== =====THREE MONTHS ENDED SEPTEMBERThree Months Ended June 30, 2000COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999 NET SALES.Net Sales. Net sales
decreased 4.6%increased 0.4% to$51.1$114.6 million for the three months endedSeptemberJune 30,20002001 from$53.5$114.2 million for the three months endedSeptemberJune 30,1999.2001. Thisdecreaseincrease was driven by a combination of offsetting factors including:- Lost
- •
- Loss of Kmart Kgro private label business for 2001;
- •
- Heavy key account emphasis on lower retail inventories;
- •
- Gains related to restages of branded product;
- •
- Increased sales
opportunity dueof value brands tovoluntary phase-outhardware channels;- •
- Decreased sales related to products that contain chlorpyrifos; and
- •
- Increase in demand of
Dursban between EPAinsect repellents andmanufacturer. - Extreme weather conditions in our major markets in the United States. - Decline in value brand sales due to the elimination of item listings at Home Depot, partially offset by gains at other customers. - Retail inventory balancing issues affecting shipments of Spectracide Terminate-TM-.termiticides.Net sales of the Company's value brands
decreased 8.4%increased 11.0% to$38.1$93.9 million for the three months endedSeptemberJune 30,20002001 from$41.7$86.4 million for the three months endedSeptemberJune 30,1999.2000. Value brand sales toHome Depothardware channels increased $4.2 million primarily due to additional product listings that wereimpacted by Home Depot's strategy to move more listings to opening price point brands, as well as overall category sales performed below market trends at Home Depot.secured. Theextreme droughtgains achieved in theSouthhardware channel, were partially offset by the lost sales of products that contain chlorpyrifos. During 2000 the US Environmental Protection Agency andSouthwest combined with unusually wetmanufacturers of chlorpyrifos (the active ingredient in Dursban pesticidal products) entered into a voluntary agreement that provided for the withdrawal of virtually all residential uses of Dursban. The Increase in promotion expense was due to growth of the home centers business. The Increase in demand for insect repellants and termiticides was related primarily to weatherin the Northeast severely impacted customer point-of-sales in all seasonal goods. Spectracide Terminate-TM- shipments 13were impacted by high retail inventory levels. However, retail point-of-sale trend continues to show improved consumer acceptance.conditions.Net sales of opening price point brands
increased 9.0%decreased 30.0% to$12.9$20.7 million for the three months endedSeptemberJune 30,20002001 from$11.9$29.6 million for the three months endedSeptemberJune 30,1999.2000. Theincreasedecrease was drivenprimarilybyan increasethe loss of the Kmart Kgro business that was discontinued inopening price point listings at Home Depot and continued same store and new store growth at Lowes. GROSS PROFIT.the third quarter of 2000.Gross Profit. Gross profit
decreased 13.4%increased 3.5% to$24.5$53.9 million for the three months endedSeptemberJune 30,2000,2001 compared to$28.3$52.1 million for the three months endedSeptemberJune 30,1999.2000. As a percentage of sales, gross profitdecreasedincreased to48.0% as compared to 52.9%47.0% for the three months endedSeptemberJune 30,1999.2001 as compared to 45.6% for12
the three months ended June 30, 2000. The
decreaseincrease in gross profit as a percentage of sales was the result ofathe change in mix of salesmixtoslightly lowermore value brand sales, which are higher marginproducts, offset by lower material costs primarily driven by supplier rebates. ADVERTISING AND PROMOTION EXPENSES. Advertisingproducts.Selling, General and
promotionAdministrative Expenses. Selling, general and administrative expensesdecreased 2.3%increased 24.5% to$4.0$22.1 million for the three months endedSeptemberJune 30,2000, compared to $4.12001 from $17.8 million for the three months endedSeptemberJune 30,1999. As a percentage of net sales, advertising and promotion expenses increased to 7.9% for the three months ended September 30, 2000 from 7.7% for the three months ended September 30, 1999. The reduction in advertising and promotion expense is due to the shift from media spending to supporting in store retail selling programs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased 8.2% to $15.1 million for the three months ended September 30, 2000 from $16.4 million for the three months ended September 30, 1999.2000. As a percentage of net sales, selling, general and administrative expensesdecreasedincreased to29.5%19.3% for the three months endedSeptemberJune 30,20002001 from30.7%15.6% for the three months endedSeptemberJune 30,1999.2000. Theoverall decreaseincrease is attributed to greater advertising spending to support the value brands, along with additional spending for in-store sales and support inselling, general and administrativethe home centers. Prior year expenseswas primarilyalso reflect a cost reduction due toreductionthe impact ofmarketing and sales expenses related to sales volume decrease and other cost reduction efforts. DURSBAN RELATED EXPENSES.the termination of a capital lease. TheCompany recorded a non-recurring expense of $8.0 milliondouble-digit percentage increase should not be viewed as aresult oftrend for theEPA and manufacturers voluntary phase-out of the active chemical in the Company's products. OPERATING INCOME (LOSS).future.Operating Income. Operating income
(loss)decreased 7.4% to$(2.6)$31.8 million for the three months endedSeptemberJune 30,20002001 from$7.8$34.3 million for the three months endedSeptemberJune 30,1999.2000. As a percentage of net sales, operating income decreased to(5.1)%27.7% for the three months endedSeptemberJune 30,20002001 from14.5%30.0% for the three months endedSeptemberJune 30,1999. INCOME TAX EXPENSE.2000.Income tax expense. For the three months ended
SeptemberJune 30,2000,2001, the Company's effective income tax rate is 28.0%, which reflects the estimated utilization of the goodwill deduction in fiscal year2000 and a reduction in the taxable income estimate for fiscal year 2000 taxable income.2001. The goodwill deduction and corresponding release of valuation allowance is related to thestep-upstep up in tax basis in conjunction with the Recapitalization.14On January 20, 1999, pursuant to a Recapitalization agreement with UIC Holdings, L.L.C. (the "Equity Investor"), which is owned by Thomas H. Lee Equity Fund IV, L.P. ("THL Fund IV" and, together with its affiliates, the "THL Parties"), the Company was recapitalized (the "Recapitalization"). 13
The following table sets forth the percentage relationship of certain items in the Company's
income statementStatements of Operations to net sales for theninesix months endedSeptemberJune 30,20002001 andSeptemberJune 30,1999 (percentages are calculated based on actual data, but columns may not add due2000:
Six Months Ended June 30, 2001 2000 Net sales: Value brands 82.6 % 75.7 % Opening price point brands 17.4 24.3 Total net sales 100.0 100.0 Operating costs and expenses: Cost of goods sold 53.8 54.3 Selling, general and administrative expenses 21.7 20.2 Dursban charge — — Total operating costs and expenses 75.5 74.5 Operating income 24.5 25.5 Interest expense 10.0 10.8 Income before provision for income taxes 14.5 14.7 Income tax expense 4.3 3.3 Net income 10.2 % 11.4 % Six Months Ended June 30, 2001 compared to
rounding):
NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 2000 1999 -------- --------Net Sales: Value brands.............................................. 75.7% 80.2% Opening price point brands................................ 24.3 19.8 ----- ----- Total net sales............................................. 100.0 100.0 Operating costs and expenses: Cost of goods sold........................................ 50.4 48.9 Advertising and promotion expenses........................ 8.9 10.3 Selling, general and administrative expenses.............. 19.8 19.3 Recapitalization transaction fees......................... -- 3.8 Change of control bonuses................................. -- 3.1 Severance charge.......................................... -- 0.6 Dursban related expenses.................................. 3.0 -- Non-recurring litigation charges.......................... -- 0.5 ----- ----- Total operating costs and expenses.......................... 82.1 86.5 ----- ----- Operating income............................................ 17.9 13.5 Interest expense............................................ 11.9 9.4 ----- ----- Income before provision for income taxes and extraordinary item...................................................... 6.1 4.1 Income tax expense.......................................... 0.5 3.3 ----- ----- Loss before extraordinary item.............................. 5.6% 0.8% ===== =====NINE MONTHS ENDED SEPTEMBERSix Months Ended June 30, 2000COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999 NET SALES.Net Sales. Net sales decreased
6.7%0.3% to$263.1$194.6 million for theninesix months endedSeptemberJune 30,20002001 from$281.8$195.1 million for theninesix months endedSeptemberJune 30,1999.2000. This decrease was driven by a combination of offsetting factors including:- Extreme weather conditions in our major markets in the United States. - Decline in value brand
- •
- Loss of Kmart Kgro private label business for 2001;
- •
- Increased sales
due to the elimination of item listings at Home Depot, partially offset by gains at other customers. - Retail inventory balancing issues affecting shipmentsof SpectracideTerminate-TM-. - LostTerminate™;- •
- Decreased sales
opportunity duerelated tovoluntary phase-out of Dursban between EPAproducts that contain chlorpyrifos; andmanufacturer. - 1999 Spectracide Pro-Registered Trademark- sales reflected initial sell- •
- Increase in
to stock retail shelves.demand for insect repellants.Net sales of the Company's value brands
decreased 11.9%increased 8.7% to$199.2$160.6 million for theninesix months endedSeptemberJune 30,20002001 from$226.1$147.7 million for theninesix months endedSeptemberJune 30,1999.2000. Value brand sales of Spectracide Terminate™ increased $6.0 million primarily due toHome Depot were impactedfocused marketing programs and replenishment of inventory levels at retail. The gains achieved byHome Depot's strategy to move more listings to opening price point brands as well as overall category sales performed below market trends at Home Depot. The declines at Home DepotSpectracide Terminate™, were partially offset by loss sales of products that contained chlorpyrifos. During 2000 thecontinual same storeUS Environmental Protection Agency andnew store growth at Lowes. The extreme droughtmanufacturers of chlorpyrifos (the active ingredient inthe South and Southwest combined with unusually wet weather in the Northeast severely impacted customer Point-of-Sales in all seasonal goods. Spectracide Terminate-TM- shipments were impacted by high retail inventory levels. However, retail point-of-sale trends continue 15to show improved consumer acceptance. Spectracide Pro's net sales decreased 38.6% to $3.6 millionDursban pesticidal products) entered into a voluntary agreement that provided for thenine months ended September 30, 2000 from $5.9 millionwithdrawal of virtually all residential uses of Dursban. The increase in demand forthe nine months ended September 30, 1999, as the first half of 1999 reflected the initial sell ininsect repellants is related primarily tostock retail shelves.weather conditions.Net sales of opening price point brands
increased 14.8%decreased 28.3% to$63.9$33.9 million for theninesix months endedSeptemberJune 30,20002001 from$55.7$47.4 million for theninesix months endedSeptemberJune 30,1999.2000. Theincreasedecrease was driven byan increasethe loss of the Kmart Kgro business that was discontinued inopening price point listings at Home Depot and continued same store and new store growth at Lowes. GROSS PROFIT.the third quarter of 2000.Gross Profit. Gross profit
decreased 9.2%increased 0.8% to$130.6$89.9 million for theninesix months endedSeptemberJune 30,20002001 compared to$143.9$89.1 million for theninesix months endedSeptemberJune 30,1999.2000. As a percentage of sales, gross profitdecreasedincreased to49.6%46.2% for the six months ended June 30, 2001 as compared to51.1%45.7% for theninesix14
months ended
SeptemberJune 30,1999.2000. Theminimal decreaseincrease in gross profit as a percentage of sales was the result ofachange in mix of salesmixtoslightly lowervalue brands, which are higher marginproducts, offset by lower material costs primarily driven by supplier rebates. ADVERTISING AND PROMOTION EXPENSES. Advertisingproducts.Selling, General and
promotion expenses decreased 19.1% to $23.5 million for the nine months ended September 30, 2000, compared to $29.0 million for the nine months ended September 30, 1999. As a percentage of net sales, advertising and promotion expenses decreased to 8.9% for nine months ended September 30, 2000 from 10.3% for the nine months ended September 30, 1999. The reduction in advertising and promotion expense is due to the shift from media spending to supporting in store retail selling programs. Additionally, a $0.9 million charge was taken in 1999 for customer deductions taken in excess of contractual obligations, which the Company elected not to pursue. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.Administrative Expenses. Selling, general and administrative expensesdecreased 4.3%increased 7.1% to$52.0$42.2 million for theninesix months endedSeptemberJune 30,20002001 from$54.3$39.4 million for theninesix months endedSeptemberJune 30,1999.2000. As a percentage of net sales, selling, general and administrative expenses increased to19.8%21.7% for theninesix months endedSeptemberJune 30,20002001 from19.3%20.2% for theninesix months endedSeptemberJune 30,1999.2000. Theoverall decreaseincrease is attributed to greater advertising spending to support the value brands, along with additional spending for in-store sales and support inselling, general and administrativethe home centers. Prior year expenseswas primarilyalso reflect a cost reduction due toa reductionthe impact ofmarketing and sales expenses related to sales volume decrease,the termination of a capitallease and other cost reduction efforts. RECAPITALIZATION TRANSACTION FEES. No charges were recorded for the nine months ended September 30, 2000. For the nine months ended September 30, 1999, the Company recorded a charge of $10.7 million for recapitalization transaction fees. As of September 30, 2000, the Company recorded $32.2 million in fees and expenses associated with the Recapitalization. Fees and expenses that could be specifically identified as relating to the issuance of debt were capitalized and will be amortized over the life of the debt as interest expense. The fees and expenses that could be specifically identified as relating to the equity transactions were charged directly to equity. Other transaction fees were allocated between debt and recapitalization transaction fees expense based on the Company's estimate of the effort spent in the activity-giving rise to the fee or expense. CHANGE OF CONTROL BONUSES. No charges were recorded for the nine months ended September 30, 2000. For the nine months ended September 30, 1999, the Company recorded charges for change of control bonuses paid to some members of senior management amounting to $8.6 million, which were contractually required as a result of the Recapitalization. SEVERANCE CHARGES. No charges were recorded for the nine months ended September 30, 2000. For the nine months ended September 30, 1999, the Company recorded severance charges of $1.6 million as a result of the Company's President and Chief Executive Officer terminating employment with the Company. 16NON-RECURRING LITIGATION CHARGES. No charges were recorded for the nine months ended September 30, 2000. For the nine months ended September 30, 1999, the Company took a charge of $1.5 million to primarily reserve for the expected cost of an adverse judgement on a counterclaim filed by defendants in the case of United Industries Corporation vs. John Allman, Craig Jackman et al. The Company alleged that defendants breached contracts by failing to perform various services. Defendants counterclaimed for sales commissions allegedly earned by them but not paid by the Company. On July 29, 1999, the Company paid $0.9 million in liquidating damages and $0.1 million in past commissions. The remaining amounts accrued in connection with the $1.5 million charge were primarily used to cover legal cost associated with the claim. DURSBAN RELATED EXPENSES. The Company recorded a non-recurring expense of $8.0 million as a result of the EPA and manufacturers voluntary phase-out of the active chemical in the Company's products. OPERATING INCOME.lease.Operating Income. Operating income
increaseddecreased 4.1% to$47.1$47.7 million for theninesix months endedSeptemberJune 30,20002001 from$38.1$49.7 million for theninesix months endedSeptemberJune 30,1999.2000. As a percentage of net sales, operating incomeincreaseddecreased to17.9%24.5% for theninesix months endedSeptemberJune 30,2000 and a reduction in the estimates for fiscal year 2000 taxable income. Operating income was 13.5%2001 from 25.5% for theninesix months endedSeptemberJune 30,1999. Operating income in 1999 was primarily negatively impacted by recapitalization transaction fees of $10.7 million and change of control bonuses as a result of the recapitalization of $8.6 million. INCOME TAX EXPENSE.2000.Income tax expense. For the
ninesix months endedSeptemberJune 30,2000,2001, the Company's effective income tax rate is 28.0%, which reflects the estimated utilization of the goodwill deduction in fiscal year2000.2001. The goodwill deduction and corresponding release of valuation allowance is related to thestep-upstep up in tax basis in conjunction with the Recapitalization.ForOn January 20, 1999, pursuant to a Recapitalization agreement with UIC Holdings, L.L.C. (the "Equity Investor"), which is owned by Thomas H. Lee Equity Fund IV, L.P. ("THL Fund IV" and, together with its affiliates, thenine months ended September 30, 1999, income tax expense included the one-time impact of the conversion of"THL Parties"), the Companyfrom an "S" corporation to a "C" corporation of $2.1 million. This conversionwasin conjunction with the Recapitalization. LIQUIDITY AND CAPITAL RESOURCESrecapitalized (the "Recapitalization").Liquidity and Capital Resources
Historically, the Company has utilized internally generated funds and borrowings under credit facilities to meet ongoing working capital and capital expenditure requirements. As a result of the Recapitalization, the Company has significantly increased cash requirements for debt service relating to the Company's
notesSenior Subordinated Notes and Senior Credit Facility. As of December 31,1999, the Company had total debt and capital lease obligations outstanding of $369.3 million. As of September 30,2000, the Company had total debtand capital lease obligationsoutstanding of$375.5$354.3 million. As of June 30, 2001, the Company had total debt outstanding of $352.4 million. The Company will rely on internally generated funds and, to the extent necessary, borrowings under the Company's Revolving Credit Facility to meet liquidity needs.The Company's Senior Credit Facility consists of:
-
- •
- The
September 30, 2000, $110.0$80.0 million Revolving Credit Facility, under whichno$18.6 million in borrowings were outstanding atthe closing of the Recapitalization. As of SeptemberJune 30,2000, $15.0 million was outstanding. The amount is a current liability and will be paid by funds from operations; -2001;- •
- The $75.0 million Term Loan A ($
57.543.8 million outstanding atSeptemberJune 30,2000)2001); and-- •
- The $150.0 million Term Loan B ($
147.4135.2 million outstanding atSeptemberJune 30,2000)2001).The Company's Revolving Credit Facility and the Term Loan A
matures onmature in January20,2005, and the Term Loan B maturesonin January20,2006. The Revolving Credit Facility is subject to a clean-down period during which the aggregate amount outstanding under therevolving credit facilityRevolving Credit Facility shall not exceed $10.0 million for 30 consecutive days occurring during the period August 1 and November 30 inaeach calendar year.17On January 24, 2000, The Senior Credit Facility agreement was amended to provide new provisions for financial covenant requirements and a waiver of the covenant requirements at December 31, 1999. The amendment contains provisions for an increase in interest rates upon reaching certain maximum leverage ratios. As part of the amended agreement, the Company paid bank fees of $0.9 million, which were reflected as deferred financing fees in January 2000 and will be amortized over the life of the debt as interest expense. On November 9, 2000, the Senior Credit Facility was amended to provide new financial covenants and a waiver of certain covenants at September 30, 2000. As a condition to the effectiveness of this amendment and waiver, the Company agreed to the following items: 1. The Company agreed to terminate $30,000 of the unused portion of the Revolving Credit Facility under the credit agreement, thereby reducing the Revolving Credit Facility from $110,000 to $80,000. 2. The Company agreed to sell Common Stock and/or permitted Preferred Stock to the Equity Investors for net cash proceeds equal to $15,000, which net cash proceeds have been applied to the prepayment of Term Loan advances. 3. Interest rate increase will range from 25 to 75 basis points higher than previous Revolving Credit Facility. On November 8, 2000, the Company Board of Directors, authorized the creation of 15,000 shares of Class A Preferred Stock to be sold to UIC Holdings LLC at a price of $1,000 per share. The Company's previous Senior Subordinated Facility was redeemed through the issuance of 9 7/8% Senior Subordinated Notes due April 1, 2009. In connection with this redemption, the Company incurred an extraordinary loss from the early extinguishment of debt, net of tax, of $2.3 million. In the fourth quarter of 1999, the Company exchanged the 9 7/8% Senior Subordinated Notes for new notes registered under the Securities Act of 1933. The new notes are substantially identical to the old notes.The Company's principal liquidity requirements are for working capital, capital expenditures and debt service under the Senior Credit Facility and the notes.
NetCash flow from continuing operations provided net cashprovided by operating activities was $24.7of approximately $3.8 million and$16.9$0.8 million for theninesix months endedSeptemberJune 30,20002001 and1999,June 30, 2000, respectively. Net cash used by operating activities fluctuates during the year as the seasonal nature of the Company's sales results in a significant increase in working capital (primarily15
accounts
receivable)receivable and inventory) during the first half of the year, with the second and third quarters being significant cash collection periods.In November 1999, the Company issued 97/8% Senior Subordinated Notes for $150 million that are due April 1, 2009.
Interest accrues at the rate of 97/8% per annum, payable semi-annually on each April 1 and October 1.
Capital expenditures are related to the enhancement of the Company's existing facilities and the construction of additional
productionproductions and distribution capacity. Cash used for capitalexpenditureswas$3.2$1.9 million and$1.5$2.6 million for theninesix months endedSeptemberJune 30,20002001 and1999,June 30, 2000, respectively. In addition, the Company entered into a capital lease agreement in March 2000 for$5.9$5.3 million. Cash used for capital expenditures for the remainder of2000fiscal 2001 is expected to be less than $5.0 million.PrincipalThe principal amount on Term Loan A is
requiredto be repaid in twenty-three consecutive quarterlyin annual amountsinstallments commencing June 30, 1999 with a final installment due January 20, 2005. The principal amount of$10.0 million for years one through four and $17.5 million for years five and six after the closing of the Senior Credit Facility. Principal onTerm Loan B isrequiredto be repaid in twenty-seven consecutive quarterlyin annual amounts of $1.5 million for the first six years and $141.0 million for the seventh year after the closing of the senior credit facility. For the nine months ended Septemberinstallments commencing June 30,2000, principal payments on Term Loans A and B of $5,000 and $750, respectively, were paid.1999 with a final balloon installment due January 20, 2006.The Company believes that cash flow from operations, together with available borrowings under the Revolving Credit Facility, will be adequate to meet the anticipated requirements for working capital, capital expenditures and scheduled principal and interest payments for at least the next two years. However, the Company cannot ensure that sufficient cash flow will be generated from operations
18to repay the notes and amounts outstanding under the senior credit facilitySenior Credit Facility at maturity without requiring additional financing. The Company's ability to meet debt service and clean-down obligations and reduce debt will be dependent on the Company's future performance, which in turn, will be subject to general economic conditions and to financial, business and other factors, including factors beyond the Company's control. Because a portion of the Company's debt bears interest at floating rates, the Company's financial condition is and will continue to be affected by changes in prevailing interest rates.SEASONALITYSeasonality
The Company's business is highly seasonal because the Company's products are used primarily in the spring and summer. For the past two years, approximately 75% of the Company's net sales have occurred in the first and second quarters. The Company's working capital needs, and correspondingly the Company's borrowings, peak near the end of the Company's first quarter.
IMPACT OF SEPTEMBER 7,Impact of 2000
DURSBAN AGREEMENT On September 7,Dursban WithdrawalDuring 2000, the U.S. Environmental Protection Agency and manufacturers of chlorpyrifos (the active ingredient in Dursban pesticidal products) entered into a voluntary agreement that provides for
phasing out most nonresidential uses andwithdrawal of virtually all residential uses of Dursban. Formulation of new Dursban products intended for residential usemustwere required to cease by December 1,2000, and formulators2000. Formulators can no longer sell such products to retailersafteras of February 1, 2001. Retailers will no longer be able to sell Dursban products after December 31, 2001.The Company
has assessed the potential financial impact of the Dursban agreement on its operations. Arecorded a charge of$8,000 was recorded$8.0 million in Septemberof2000 for costs associated with this agreement. The Company currently has replacement chemicals for Dursban,whichand the replacement chemicals are currently being used in production of new pesticidal products.SIGNIFICANT CUSTOMER DuringRecently Issued Accounting Pronouncements
The Emerging Issues Task Force (EITF) issued EITF 00-25. This issue addresses when consideration from a vendor to a retailer (a) in connection with the
third quarter, Kmart notifiedretailer's purchase of the vendor's16
products or (b) to promote sales of the vendor's products by the retailer should be classified in the vendor's income statement as a reduction of revenue. The Company has adopted EITF 00-25 for fiscal year 2001. The Company has reclassified all trade and co-op promotional expense in the Statements of Operations to net sales.
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (SFAS 141), "Business Combinations." SFAS 141 requires that the
contract to manufacture KGro private label productspurchase method of accounting be used for all business combinations initiated after June 30, 2001 and establishes specific criteria for recognition of intangible assets separately from goodwill. For business combinations initiated after June 30, 2001, SFAS 141 also requires that unallocated negative goodwill be written off immediately as an extraordinary gain. Any unamortized deferred credit arising from a business combination completed before July 1, 2001 willnotberenewed. Historically,recognized as theKGro business has had low margins and high operating costs.cumulative effect of a change in accounting principle. The Companydoesis currently evaluating the impact of SFAS 141 on its financial statements.Also in July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets". SFAS 142 eliminates the amortization of goodwill and instead requires goodwill to be tested for impairment annually. Also, intangible assets are required to be amortized over their useful lives and reviewed for impairment in accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Under SFAS 142, if the intangible asset has an indefinite useful life, it is not
expect this developmentamortized until its life is determined tohave a significantbe finite. The Company is required to adopt SFAS 142 no later than the first quarter of fiscal 2003, but is permitted to adopt as of the first quarter of fiscal 2002. The Company is currently evaluating the impact of SFAS 142 onEBITDA for 2001. ITEMits financial statements.17
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATEQuantitative and Qualitative Disclosures about Market RiskInterest Rate
The Company is exposed to market risks relating to changes in interest rates. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. The Company enters into financial instruments to manage and reduce the impact of changes in interest rates.
The Company manages interest rate risk by balancing the amount of fixed and variable debt. For fixed rate debt, interest rate changes affect the fair market value of such debt but do not impact earnings or cash flows. Conversely for variable rate debt, interest rate changes generally do not affect the fair market value of such debt but do impact future earnings and cash flows, assuming other factors are held constant.
At SeptemberAs of June 30,2000,2001, variable rate debt was$219.9 million.$197.6 million, which includes the interest rate swaps as discussed below.The Company entered into two interest rate swaps that have fixed the interest rate as of April 30, 2001 for $75.0 million of variable rate debt under the Credit Facility. The interest rate swaps are for $50.0 and $25.0 million of the Credit Facility and will terminate on April 30, 2002. The fixed LIBOR interest rates are 4.74% and 4.66%, for the $50.0 and $25.0 million interest rate swaps, respectively. The change in fair value of the interest rate swaps is reported as a liability and as a component of comprehensive income in Stockholders' deficit at June 30, 2001. The June 30, 2001, reduction in fair value of $0.3 million is net of taxes.
Interest
on Term Loan A and Term Loan Branges from200250 to375400 basis points above LIBOR depending on certain financial ratios. LIBOR was6.62% as of September3.86% on June 30,2000. 19EXCHANGE RATE2001.Exchange Rate
The Company does not use derivative instruments to hedge against foreign currency exposures related to transactions denominated in
currenciesother than the Company's functional currency. Substantially all foreign currency transactions are denominated in United States dollars.COMMODITY PRICESCommodity Price
The Company does not use derivative instruments to hedge its exposures to changes in commodity prices. The Company utilizes various commodity and specialty chemicals in its production process. Purchasing procedures and arrangements with major customers serve to mitigate
the Company'sits exposure to price changes in commodity and specialty chemicals.20PART18
OTHER INFORMATION
THERE IS NO INFORMATION REQUIRED TO BE REPORTED UNDER ANY ITEMS. ITEMItem 1.
LEGAL PROCEEDINGS.Legal Proceedings. The Company has no reportable legal proceedings in the current period.ITEMItem 2.
CHANGES IN SECURITIES.Changes in Securities. None.ITEMItem 3.
DEFAULTS UPON SENIOR SECURITIES. None ITEMDefaults Upon Senior Securities. None.Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.Submission of Matters to a Vote of Security Holders. No matters were submitted.ITEMItem 5.
OTHER INFORMATION. On November 9, 2000, the Senior Credit Facility was amended to provide new financial covenantsOther Information. None.Item 6. Exhibits and
a waiver of certain covenants at September 30, 2000. As a condition to the effectiveness of this amendment and waiver, the Company agreed to the following items: 1. The Company agreed to terminate $30,000 of the unused portion of the Revolving Credit Facility under the credit agreement, thereby reducing the Revolving Credit Facility from $110,000 to $80,000. 2. The Company agreed to sell Common Stock and/or permitted Preferred Stock to the Equity Investors for net cash proceeds equal to $15,000, which net cash proceeds have been applied to the prepayment of Term Loan advances. 3. Interest rate increase will range from 25 to 75 basis points higher than previous Revolving Credit Facility. On November 8, 2000, the Company Board of Directors, authorized the creation of 15,000 shares of Class A Preferred Stock to be sold to UIC Holdings LLC at a price of $1,000 per share. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27.1 Financial Data Schedule (b) ReportReports on Form 8-KNone 21
- (a)
- Exhibits
None.
- (b)
- Reports on Form 8-K
None.
19
Pursuant to the requirements of
Section 13 or 15(d) fthe Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
UNITED INDUSTRIES CORPORATION
Dated:November 15, 2000August 14, 2001
By:/s/
/s/ DANIEL J. JOHNSTON-----------------------------------------
Name: Daniel J. Johnston
Title: Executive Vice President and
Chief Financial Officer(Duly authorized officer and principal officer of the registrant)22