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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999March 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transitiontransition period from to
Commission File No. 333-76055
UNITED INDUSTRIES CORPORATION
(Exact Namename of Registrantregistrant as Specifiedspecified in Its Charter)
DELAWAREits charter)
Delaware 43-1025604
(State or Other Jurisdictionother jurisdiction of (IRS(I.R.S. Employer
incorporation or organization) Identification No.)
Incorporation or Organization)
8825 Page Boulevard
St. Louis, Missouri 63114
(Address of Principal Executive Office, Including Zip Code)principal executive office, including zip code)
(314) 427-0780
(Registrant's Telephone Number, Including Area Code)telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
No [X]
IndicateThere is no established public market for the numberRegistrant's common stock.
As of May 12, 2000, the Registrant had 27,650,000 Class A voting and
27,650,000 Class B non-voting shares outstanding of each of the registrant's
classes of Common Stock as of the latest practicable date.
Shares Outstanding
November 4, 1999
------------------
Common Stock, $0.01 par value............................. 55,300,000
common stock outstanding.
Documents Incorporated by Reference: None
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PART I1
FINANCIAL INFORMATION
UNITED INDUSTRIES CORPORATION
ItemITEM 1. Financial Statements
2
UNITED INDUSTRIES CORPORATION
BALANCE SHEETS
September 30, 1999March 31, 2000 and December 31, 19981999
(Dollars in thousands)
(Unaudited)
September 30,March 31, December 31,
2000 1999
1998
---------------------- ------------
ASSETS
Current assets:
Cash and cash equivalents.........................equivalents............................ $ 11,853-- $ --
Accounts receivable (less allowance for doubtful
accounts of $60$1,187 at September 30, 1999March 31, 2000 and $1,031
December 31, 1998)............................... 33,225 17,650
Inventories....................................... 35,987 41,4441999).................................. 70,083 19,165
Inventories.......................................... 56,250 53,243
Prepaid expenses.................................. 1,352 2,172expenses..................................... 2,854 3,501
--------- -----------------
Total current assets............................ 82,417 61,266assets............................... 129,187 75,909
Equipment and leasehold improvements, net........... 27,567 20,156net.............. 33,590 27,860
Deferred income tax................................. 107,574 --tax.................................... 116,268 116,268
Other assets........................................ 21,018 6,948
Investment in discontinued operations............... -- 5,791assets........................................... 21,123 20,870
--------- -----------------
Total assets....................................assets....................................... $ 238,576300,168 $ 94,161240,907
========= =================
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITYDEFICIT
Current liabilities:
Current maturities of long-term debt and capital
lease obligation.................................obligation.................................... $ 12,16512,570 $ 92912,178
Accounts payable.................................. 13,024 18,519payable..................................... 30,103 25,507
Accrued expenses.................................. 20,351 12,705expenses..................................... 38,957 27,464
Short-term borrowings................................ 35,550 --
--------- -----------------
Total current liabilities....................... 45,540 32,153liabilities.......................... 117,180 65,149
Long-term debt...................................... 352,000 3,716debt......................................... 346,250 349,125
Capital lease obligation............................ 8,127 --obligations.............................. 13,169 7,952
Other liabilities................................... 5,377 35liabilities...................................... 6,555 5,483
--------- -----------------
Total liabilities............................... 411,044 35,904liabilities.................................. 483,154 427,709
Commitments and contingencies (see Notes 9 & 10)
Stockholders' (deficit) equity:deficit
Common stock...................................... 553 2stock......................................... 554 554
Additional paid-in capital........................ 116,687 972
Retained earnings................................. (287,008) 70,193capital........................... 126,865 126,865
Accumulated deficit.................................. (307,705) (311,521)
Common stock held in Grantor Trust................grantor trust................... (2,700) (2,700)
Treasury stock....................................... -- Treasury stock.................................... --
(12,910)
--------- -----------------
Total stockholders' (deficit) equity............ (172,468) 58,257deficit........................ (182,986) (186,802)
--------- -----------------
Total liabilities and stockholders' (deficit)
equity.........................................deficit........ $ 238,576300,168 $ 94,161240,907
========= ========
See accompanying notes to financial statements.
2
UNITED INDUSTRIES CORPORATION
STATEMENTS OF OPERATIONS
September 30, 1999 and September 30, 1998
(Dollars in thousands)
(Unaudited)
Three Months
Ended September Nine Months Ended
30, September 30,
---------------- ------------------
1999 1998 1999 1998
------- ------- -------- --------
Net sales................................. $53,536 $47,952 $281,819 $257,178
Operating costs and expenses:
Cost of goods sold...................... 25,224 25,407 137,925 127,102
Advertising and promotion expenses...... 4,115 4,173 29,024 29,226
Selling, general and administrative
expenses............................... 16,425 14,152 54,331 50,138
Recapitalization transaction fees....... -- -- 10,690 --
Change of control bonuses............... -- -- 8,645 --
Severance charge........................ -- -- 1,606 --
Non-recurring litigation charges........ -- -- 1,500 1,200
------- ------- -------- --------
Total operating costs and expenses.... 45,764 43,732 243,721 207,666
------- ------- -------- --------
Operating income.......................... 7,772 4,220 38,098 49,512
Interest expense (income)................. 9,020 (93) 26,388 961
------- ------- -------- --------
Income (loss) before provision for income
taxes, discontinued operations and
extraordinary item....................... (1,248) 4,313 11,710 48,551
Income tax expense........................ 1,693 76 9,468 855
------- ------- -------- --------
Income (loss) from continuing operations,
before extraordinary item................ (2,941) 4,237 2,242 47,696
Income from discontinued operations, net
of tax................................... -- 424 -- 1,378
------- ------- -------- --------
Income (loss) before extraordinary item... (2,941) 4,661 2,242 49,074
Extraordinary loss from early
extinguishment of debt, net of income tax
benefit of $1,425........................ -- -- (2,325) --
------- ------- -------- --------
Net income (loss)......................... $(2,941) $ 4,661 $ (83) $ 49,074
======= ======= ======== =================
See accompanying notes to financial statements.
3
UNITED INDUSTRIES CORPORATION
STATEMENTS OF CASH FLOWS
September 30,OPERATIONS
March 31, 2000 and March 31, 1999 and September 30, 1998
(Dollars in thousands)
(Unaudited)
Nine monthsThree Months Ended
September 30,
-------------------March 31,
------------------
2000 1999
1998------------------
Net sales...................................................... $ 88,546 $ 96,593
-------- ---------
Operating costs and expenses:
Cost of goods sold........................................... 43,837 48,055
Advertising and promotion expenses........................... 9,747 11,638
Selling, general and administrative expenses................. 19,543 18,320
Recapitalization transaction fees............................ -- 10,690
Change of control bonuses.................................... -- 8,645
Non-recurring litigation charges............................. -- 1,500
-------- ---------
Total operating costs and expenses......................... 73,127 98,848
-------- ---------
Operating income (loss)........................................ 15,419 (2,255)
Interest expense............................................... 10,605 7,906
-------- ---------
Income (loss) before provision for income taxes, and
extraordinary item............................................ 4,814 (10,161)
Income tax expense............................................. 997 2,719
-------- ---------
Income (loss) before extraordinary item........................ 3,817 (12,880)
Extraordinary loss from early extinguishment of debt,
net of income tax benefit of $1,425........................... -- (2,325)
-------- ---------
Net income (loss).............................................. $ 3,817 $ (15,205)
======== =========
See accompanying notes to financial statements.
4
UNITED INDUSTRIES CORPORATION
STATEMENTS OF CASH FLOWS
March 31, 2000 and March 31, 1999
(Dollars in thousands)
(Unaudited)
For the Three
Months Ended
March 31,
-----------------
2000 1999
------- --------
Cash flows from operating activities:
Net income (loss)................................................................................ $ (83) $ 49,0743,817 $(15,205)
Loss from early extinguishment of debt................debt.................. -- 3,750 --
Adjustments to reconcile net income (loss) to net cash
provided
byused for operating activities:
Income from discontinued operations...................Deferred compensation................................... -- (1,378)
Deferred compensation................................. 2,700 --
Depreciation and amortization......................... 3,468 2,742amortization........................... 1,447 848
Recapitalization transaction fees.....................fees....................... -- 10,690 --
Amortization of deferred financing fees............... 1,493 --fees................. 565 465
Provision for deferred income tax expense............. 8,043 --expense............... 997 1,294
Changes in assets and liabilities:
Increase(Increase) in accounts receivable..................... (15,575) (17,842)
Decrease(50,918) (51,597)
(Increase) in inventories............................. 5,457 15,573(3,007) (13,754)
Decrease in prepaid expenses........................ 820 801
(Decrease) increaseexpenses.......................... 647 552
Increase in accounts payable and accrued expenses........................................... (3,649) 3,884
Increaseexpenses..... 16,089 23,336
Decrease in other assets............................ (413) (17)assets.............................. 29 994
Other, net.......................................... 188 60
--------- --------
Cash flow from continuing operations.............. 16,889 52,897
Cash flow from discontinued operations............ -- 765
---------net............................................ 75 335
------- --------
Net cash provided byused for operating activities......... 16,889 53,662activities.............. (30,259) (35,592)
Investing activities:
Purchases of equipment and leasehold improvements....... (1,499) (2,489)
Increase in amounts due from affiliates................. -- (13,949)
--------- --------
Cash used by investing activities--continuing
operations............................................. (1,499) (16,438)
Cash used by investing activities--discontinued
operations............................................. -- (145)
---------improvements......... (1,254) (353)
------- --------
Net cash used byfor investing activities............. (1,499) (16,583)activities.............. (1,254) (353)
Financing activities:
Redemption of commontreasury stock.............................. -- (337,896) --
Transaction costs related to the Recapitalization.......redemption of common
stock.................................................... -- (11,378)
Recapitalization transactions with affiliate.............. -- Net advances to affiliated company...................... (5,700) --
Issuance of common stock................................ 1,990stock.................................. -- 1,806
Shareholder equity contribution.........................contribution........................... -- 8,425 --
Debt issuance costs..................................... (19,271) --costs....................................... (902) (18,517)
Proceeds from the issuance of debt...................... 520,205 73,895
Paymentdebt........................ 35,550 451,355
Payments on debt......................................... (160,162) (66,905)
Repayment of note receivable from employee.............. 250 --
Issuance of treasury stock.............................. -- (5,818)
Distributions paid...................................... -- (38,392)
---------debt.......................................... (3,135) (52,150)
------- --------
Net cash usedprovided by financing activities............. (3,537) (37,220)activities........... 31,513 35,945
Net increase (decrease) in cash and cash equivalents...... 11,853 (141)equivalents........ -- --
Cash and cash equivalents--beginning of period............period.............. -- 316
-----------
------- --------
Cash and cash equivalents--end of period..................period.................... $ 11,853-- $ 175
=========--
======= ========
Noncash financing activity:
Execution of capital lease.............................. $ 5,869 $ 9,215
See accompanying notes to financial statements.
45
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
Note 1--Basis of presentation
Interim Financial Statements
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 for complete financial statements. In the opinion of management,
all 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 the annual report on form 10-K of United Industries Corporation
(the "Company") for the year ended December 31, 1998.1999. Certain balance sheet
accounts have been restated from the December 31, 1999 balance sheet in order
to provide a consistent comparison with the March 31, 2000 balance sheet.
Note 2--Recapitalization of the Company and other mattersnon-recurring charges
On January 20, 1999, pursuant to a recapitalizationRecapitalization 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 ourthe
Company's existing stockholders for approximately $254.7 million;$254,700; (ii) Thethe Company's
senior managers purchased common stock from ourthe Company's existing
stockholders for approximately $5.7 million;$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 facilitySenior 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
ownsowned approximately 91.9% of the Company's issued and outstanding common
stock, the existing stockholders retainretained approximately 6.0% and the Company's
senior managers ownowned approximately 2.1%. On January 20, 1999, the total
transaction value of the Recapitalization was approximately $652.0 million,$652,000,
including related fees and expenses, and the implied total equity value
following the Recapitalization was approximately $277.0 million.$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 the excess taxes of certain stockholders arising
from the Company's Section 338(h)(10) election. In OctoberDecember 1999, the Company
reached an
agreement with these stockholders on the method used to compute their excess
taxes. Based upon this computation method, the Company believes that its
estimated liability for the excess taxes of these stockholders is
approximately $13.0 million, of which the Company has recorded a $7,200 charge to equity of $5.8 million forto finalize the nine months ended September 30, 1999. The
Company will record an additional charge of $7.2 million incosts associated with the
fourth quarter
of 1999, for an aggregate charge of $13.0 million for excess taxes. TheRecapitalization increasing the total
consideration was not required to be adjusted based on the Company's working
capital on the date of the Recapitalization. The final transaction value for
the Recapitalization after these adjustment provisions was approximately
$659.2 million.to $659,200.
On January 20, 1999, the Recapitalization was funded by: (i) $225.0 million$225,000 of
borrowings under the Senior Credit Facility; (ii) $150.0 million$150,000 of borrowings under
the Senior Subordinated Facility; (iii) approximately $254.7
million$254,700 equity investment by the THL
Parties through the Equity Investor; (iv) approximately $5.7 million$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
$16.6
million.$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.
5
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
(Unaudited)
Note 2--Recapitalization of the Company and other matters (continued)
The Senior Subordinated Facility was redeemed through the issuance of 9
7/8% Senior Subordinated Notes due 2009. In connection with this redemption,
the Company incurred an extraordinary loss from the early extinguishment of
debt, net of tax of $2,325.
For the nine months ended September 30,During 1999, the Company has recorded $36,449$31,312 in fees and expenses associated
with the Recapitalization. SuchThe total fees and expenses consist of: (i) fees
and expenses related to the debt and 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
6
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
(Unaudited)
Note 2--Recapitalization of the Company and non-recurring charges (continued)
as relating to the equity transactions were charged directly to equity. Other
transaction fees were allocated between debt and recapitalizationRecapitalization 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 recapitalizationRecapitalization transaction fees is as follows:
Recapitalization
Transaction
Debt Equity Transaction Fees TotalsTotal
------- ------ ---------------- -------
Direct costs........................ $16,543 $6,488costs........................... $17,205 $688 $ -- $23,031$17,893
Allocated costs..................... 2,728costs........................ 2,729 -- 10,690 13,41813,419
------- ---------- ------- -------
Total fees and expenses........... $19,271 $6,488expenses.............. $19,934 $688 $10,690 $36,449$31,312
======= ========== ======= =======
In connection withDuring the Recapitalizationfirst quarter of the Company as described above,
the Company formed a wholly-owned subsidiary DW Wej-it, Inc., a Delaware
corporation ("DW"). All of the Company's assets and liabilities related to the
Company's business of manufacturing and marketing construction anchoring
fasteners and providing contract-manufacturing services in metals fabrication
(which is collectively referred to as the "Metals Business") were contributed
to DW. Effective January 1, 1999, the Company distributed all of the shares of
capital stock of DW owned by the Company to its shareholders.
For the nine months ended September 30, 1999, the Company recorded various non-recurring
charges as followsfollows: (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(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 (ii) $1,606 of severance charges incurred as a resultchose to
dispose of the Presidentinventory by selling it through discount channels at prices
below cost); and Chief Executive Officer's termination(iii) $900 related to deductions taken by customers for
advertising and promotional spending in excess of employment withcontractual obligations for
which the Company.Company elected not to pursue collection.
Note 3--Common stock and stock split
The Company's articles of incorporation previously authorized 20,00020 shares of
$1.00 par value Class A Voting shares and 20,00020 shares of $1.00 par value Class B
Non-Voting shares. At December 31, 1998, 740.740 Class A Voting shares and 740.740
Class B Non-Voting shares were outstanding.
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 million65,000 shares, of which 32.5 million32,500 have been designated as Class A Voting
Common Stock and 32.5 million32,500 have been designated as Class B Non-
VotingNon-Voting Common
Stock. As of January 20, 1999, there were 27.7 million27,600 shares of Class A Voting
Common Stock outstanding and 27.7 million27,600 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.
6
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
(Unaudited)
Note 4--Inventories
Inventories at September 30, 1999 and December 31, 1998 are as follows:
September 30,March 31, December 31,
2000 1999
1998
---------------------- ------------
Raw materials..................................materials............................................ $10,142 $ 6,084 $ 7,7489,916
Finished goods................................. 29,903 33,696goods........................................... 47,134 44,149
Allowance for obsolete and slow-moving inventory......... (1,026) (822)
------- -------
Total inventories............................ $35,987 $41,444inventories...................................... $56,250 $53,243
======= =======
Note 5--Other Assets
Other assets at September 30, 1999 and December 31, 1998 consist of:
September 30, December 31,
1999 1998
------------- ------------
Goodwill....................................... $ 7,988 $ 7,988
Accumulated amortization....................... (1,909) (1,744)
------- -------
6,079 6,244
Debt issuance costs, net of amortization....... 14,028 --
Other.......................................... 911 704
------- -------
Total other assets........................... $21,018 $ 6,948
======= =======
Note 6--Accrued expenses
Accrued expenses at September 30, 1999 and December 31, 1998 consist of:
September 30, December 31,
1999 1998
------------- ------------
Advertising and promotional expenses........... $10,150 $ 5,018
Recapitalization fees and expenses............. 5,800 --
Settlement charges............................. 1,200 1,200
Severance...................................... 1,115 --
Commissions.................................... 417 262
Cash overdraft................................. -- 3,148
Litigation expenses............................ -- 1,121
Freight expense................................ -- 238
Other.......................................... 1,669 1,718
------- -------
Total accrued expenses....................... $20,351 $12,705
======= =======
Note 7--Income taxes
In conjunction with the Recapitalization, the Company converted from an "S"
corporation to a "C" corporation. The impact of the conversion was a charge of
$2,062, which has been reflected as income tax expense in the accompanying
financial statements.
7
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
(Unaudited)
Note 7--Income taxes (continued)
Deferred income taxes5--Equipment and leasehold improvements
Equipment and leasehold improvements are as follows:
March 31, December 31,
2000 1999
--------- ------------
Machinery and equipment.................................. $27,195 $26,791
Office furniture and equipment........................... 9,077 9,606
Automobiles, trucks and aircraft......................... 15,521 9,573
Leasehold improvements................................... 6,878 6,848
------- -------
58,671 52,818
Less: accumulated depreciation........................... 25,081 24,958
------- -------
$33,590 $27,860
======= =======
Note 6--Other assets
Other assets are as follows:
March 31, December 31,
2000 1999
--------- ------------
Goodwill................................................. $ 7,988 $ 7,988
Accumulated amortization................................. (2,019) (1,964)
------- -------
5,969 6,024
------- -------
Deferred financing fees.................................. 17,086 16,184
Accumulated amortization................................. (2,557) (1,991)
------- -------
14,529 14,193
------- -------
Other.................................................... 625 653
------- -------
Total other assets..................................... $21,123 $20,870
======= =======
Note 7--Accrued expenses
Accrued expensed are as follows:
March 31, December 31,
2000 1999
--------- ------------
Recapitalization costs................................... $13,000 $13,000
Advertising and promotional expenses..................... 8,119 4,799
Interest expense......................................... 8,144 3,840
Cash overdraft........................................... 5,774 2,078
Severance charges........................................ 1,443 1,805
Settlement charges and litigation expenses............... -- 114
Other.................................................... 2,220 1,828
------- -------
Total accrued expenses................................. $38,957 $27,464
======= =======
8
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
(Unaudited)
Note 8--Long-term debt and credit facilities
Long-term debt is comprised of the following:
March 31, December 31,
2000 1999
--------- ------------
Senior Credit Facility:
Term loan A............................................ $ 60,000 $ 62,500
Term loan B............................................ 147,750 148,125
Revolving credit facility.............................. 35,550 --
9 7/8% Series B Registered Senior Subordinated Notes..... 150,000 150,000
-------- --------
393,300 360,625
Less portion due within one year......................... (47,050) (11,500)
-------- --------
Total long-term debt net of current portion.............. $346,250 $349,125
======== ========
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 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 for
30 consecutive days occurring during the period between August 1 and November
30 in each calendar year. On March 31, 2000, $35,550 was outstanding under the
$110,000 revolving credit facility. There were recordedno compensating balance
requirements for the temporary differences that$110,000 revolving credit facility at March 31, 2000.
The principal amount of Term Loan A is to be repaid in twenty-three
consecutive quarterly installments commencing June 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 commencing June 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, the Company was not in
compliance with certain 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 createdreflected as
deferred financing fees in conjunctionJanuary 2000 and will be amortized over the life of
the debt as interest expense.
Under the new covenants, interest on the Revolving Credit Facility, Term
Loan A and Term Loan B ranges from 200 to 375 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
was 6.14% at March 31, 2000. As of March 31, 2000 the Company was in
compliance with the Recapitalizationamended financial covenant requirements.
9
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
(Unaudited)
Note 8--Long-term debt and conversioncredit facilities (continued)
The Senior Credit Facility may be prepaid at any time in whole or in part
without premium or penalty. During 1999, principal payments on Term Loans A
and B of $12,500 and $1,875, respectively, were paid, which included optional
principal prepayments of $5,000 and $675 on Term Loan A and Term Loan B,
respectively. According to a "C"
Corporation.the Senior Credit Facility agreement, each
prepayment on Term Loan A and Term Loan B can be applied to the next principal
repayment installments.
Obligations under the Senior Credit Facility are secured by 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 deferred income taxes were as follows on 1/21/99:
Goodwill....................................................... $ 266,300
Equipment and leasehold improvements........................... (2,668)
Other.......................................................... 606
---------
Gross deferred tax asset....................................... 224,238
Valuation allowance............................................ (113,150)
---------
Net deferred tax asset......................................... $ 111,088
=========
The temporary difference for goodwill resultsSenior 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 step up inearly
extinguishment of debt, net of tax basis
dueof $2,325. 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 recapitalization while maintaining historical basis for book
purposes. This benefit will be realized over 15 years. Basedold notes.
The carrying amount of the Company's obligation under the Senior Credit
Facility approximates fair value because the interest rates are based on
historical
levels of incomefloating interest rates identified by reference to market rates.
Aggregate maturities under the Senior Credit Facility (excluding the
revolving credit facility) and the length of time required to utilize this benefit, a
valuation allowance representing 50% of the total benefit has been
established.
Deferred tax assets and liabilities included in the balance sheet at
September 30, 1999Senior Subordinated Notes are as follows:
Deferred income tax............................................. $107,574
Other liabilities............................................... (2,668)2000 Remainder of year.......................................... $ 8,625
2001............................................................ 11,500
2002............................................................ 11,500
2003............................................................ 17,125
2004............................................................ 18,375
Thereafter...................................................... 290,625
--------
$104,906$357,750
========
The company entered into a capital lease agreement in March 1999 for $9,215,
which will subsequently be cancelled in May of 2000. A new capital lease
agreement was entered into in March of 2000 for $5,869.
Note 8--Commitments and transactions with related parties9--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, 1999. Minimum annual rentals under these
operating leases amount to approximately $2,637.2010. The Company has options to renewterminate the
leases on a year-to-year basis for an additional ten years,
beginning January 1, 2000.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 $140$578 to $368.$653. The Company has two five-year
options to renew thethis lease, beginning January 1, 2006.
The Company is also obligated under other operating leases for use of
warehouse space. The leases expire at various dates through January 31, 2001.
Three of the leases provide as many as three five-year options to renew. Management believes
that the terms and expenses associated with the related party leases described
above are similar to those negotiated by unrelated parties at arm's length.
In connection with the Recapitalization Agreement, theThe Company entered into
a professional service agreement with the Thomas H. Lee Company.is obligated under other operating leases for use of warehouse
space. The agreement
extends for a term of three years, beginning January 20, 1999, and
automatically extends for successive one-year periods thereafter, unless the
parties give 30 days' notice prior to the endleases expire at various dates through December 1, 2006. Five of
the term. The agreement
provides that the Thomas H. Lee Company will receive $62.5 per month for
management and other consulting services providedleases provide as many as five five-year options to the Company. For the nine
months ended September 30, 1999, the Company has paid $522 under this
agreement. The agreement also provides that the Company will reimburse out-of-
pocket expenses incurred in connection with management advisory services.
8renew.
10
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
(Unaudited)
Note 9--Contingencies
In March 1998, a judgement for $1,200 was entered against the Company for a
lawsuit filed in 1992 by the spouse of a former employee claiming benefits
from a Company-owned key man life insurance policy. On August 24, 1999 the
Missouri Court of Appeals, Eastern District, affirmed the trial court's
decision. The Company has filed an application to transfer the case to the
Missouri Supreme Court for further review. The Company has reflected the
judgement amount as non-recurring litigation charges for the nine months ended
September 30, 1998, of which no amounts have been paid as of September 30,
1999.
In October 1998, the FTC and several state attorneys general filed a suit
against the Company seeking to enjoin the Company's advertising of Spectracide
Terminate as a "termite home defense system." The suit alleges that the
Company made deceptive and unsubstantiated claims regarding Spectracide
Terminate; the Company has denied the allegations. The Company has entered
into a settlement agreement regarding its advertising claims with the FTC and
the state attorney generals involved in the litigation. As part of the
settlement, the Company agreed that it would not, without competent and
reliable scientific evidence, represent to consumers that: (a) use of
Spectracide Terminate alone is effective in preventing terminate infestations
or eliminating active termite infestations; (b) Spectracide Terminate provides
"protection for you home against subterranean termites"; and (c) Spectracide
Terminate is a "termite home defense system" or make any representations
comparing the performance of Spectracide Terminate to other termite control
methods. The Company further agreed to apply to the federal EPA to rename the
product as "Spectracide Terminate" (without reference to "termite home defense
system"). The agreement provides that the Company may describe the product as
a "do-it-yourself termite killing system for subterranean termites." Finally,
in virtually any advertisement that indicates, either expressly or implicitly,
that Spectracide Terminate kills termites or prevents termite damage or
infestation, the Company agreed to make the following disclosure: "Not
recommended as sole protection against termites, and for active infestations,
get a professional inspection." The Company incurred charges from this suit
totaling $1,100, including $400 paid to 10 states' attorneys general for
reimbursement of their legal expenses and $700 for other legal expenses we
incurred in connection with this suit. These expenses were reflected as non-
recurring litigation charges in the fourth quarter of 1998 and were paid in
the first quarter of 1999.10--Contingencies
In March 1999, the Company tookrecorded a non-recurring litigation charge of
$1,500 to primarily reserve for the expected cost of an adverse judgement on a
counterclaim.counterclaim filed by defendants in the case of United Industries Corporation
vs. John Allman, Craig Jackman et al., pending in the U.S. District Court in
Detroit, Michigan; Case No. 97-76147. 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 to
them by the Company. On July 29, 1999, the Company paid $900 in liquidatingliquidated
damages and $112 in past commissions in
settlement of this case.commissions. The remaining amounts accrued in
connection with the $1,500 charge willwere primarily be used to cover unpaid legal costs
associated with this case.
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.
911
ItemITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute "forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities 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, the risk and other factors set forth under "Risk Factors" in the
Company's Registration Statement on Form S-4 filed with the Commission and in
the Company's Annual Report on Form 10-K for 1999 as well as the following:
general economic and business conditions; industry trends; the loss of major
customers or suppliers; cost and availability of raw materials; changes in
business strategy or development plans; availability and quality of
management; and availability, terms and deployment of capital.
Overview
The Company is the leading manufacturer and marketer of value-oriented
branded products for the consumer lawn and garden pesticide and household
insecticide markets in the United States. The Company manufactures and markets
one of the broadest lines of pesticides in the industry, including herbicides
and indoor and outdoor insecticides, as well as insect repellents and 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 United State population; (b) growth in the home improvement center and
mass merchandiser channels; and (c) shifting consumers preferences' toward
value-oriented branded products.
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the historical
financial information included in the unaudited quarterly financial statements
and the related notes to the unaudited quarterly financial statements.
Results of Operations
The following discussion regarding results of operations refers to net
sales, cost of goods sold, advertising and promotion expensesexpense and 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
product less any customer discounts from list price and customer
returns.
. Cost of goods sold includes chemicals, container and packaging material
costs as well as direct labor, outside labor, manufacturing overhead and
freight.
. Advertising and promotion expensesexpense 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.
. Selling and general and administrative expenses includesinclude all costs
associated with the selling and distribution of product, product
registrations, and administrative functions such as finance, information
systems and human resources.
1012
The following table sets forth the percentage relationship of certain items
in the Company's income statement to net sales for the three months ended
September 30, 1999March 31, 2000 and the three months ended September 30, 1998:March 31, 1999:
Three Months
Ended
Three Months Ended
September 30, 1998 September 30,March 31,
--------------
2000 1999
------------------ ------------------------ ------
Net sales:
Value brands........................... 72.7% 71.6%Brands................................................ 73.3% 78.2%
Opening price point brands............. 27.3 28.4
----- -----brands.................................. 26.7 21.8
------ ------
Total net sales..........................sales............................................ 100.0 100.0
Operating costs and expenses:
Cost of goods sold..................... 53.0 47.1sold.......................................... 49.5 49.7
Advertising and promotion expenses..... 8.7 7.7expenses.......................... 11.0 12.0
Selling, general and administrative expenses.............................. 29.5 30.6
----- -----expenses................ 22.1 19.0
Recapitalization transaction fees........................... -- 11.1
Change of control bonuses................................... -- 8.9
Non-recurring litigation charges............................ -- 1.6
------ ------
Total operating costs and expenses....... 91.2 85.4
----- -----expenses......................... 82.6 102.3
------ ------
Operating income......................... 8.8 14.6income (loss)....................................... 17.4 (2.3)
Interest (income) expense................ (0.2) 16.8
----- -----expense.............................................. 12.0 8.2
------ ------
Income (loss) before provision for income taxes and
discontinued operations....... 9.0 (2.2)extraordinary item........................................... 5.4 (10.5)
Income tax expense....................... 0.2 3.2
----- -----expense............................................ 1.0 2.8
------ ------
Income (loss) from continuing operations. 8.8% (5.4%)
===== =====before extraordinary item....................... 4.4% (13.3)%
====== ======
Three Months Ended September 30, 1999March 31, 2000 compared to Three Months Ended September
30, 1998March 31,
1999
Net Sales. Net sales increased 11.5%decreased 8.4% to $53.5$88.5 million for the three months
ended September 30, 1999March 31, 2000 from $48.0$96.6 million for the three months ended September 30, 1998.March 31,
1999. This increasedecrease was driven by expanded distributiona combination of factors including:
. Decline in value brand sales due to the company's value brands and opening price point brandselimination of item listings at
home improvement
centers and mass merchandisers as well as the continued shift in consumer
preferences toward value and opening price point brands.Home Depot.
. Retail inventory balancing issues affecting shipments.
. 1999 Spectracide Pro(R) sales reflected initial sell-in to stock retail
shelves.
Net sales of the Company's value brands increased 9.7%decreased 13.7% to $38.3$69.4 million for
the three months ended September 30, 1999March 31, 2000 from $34.9$80.4 million for the three months
ended September 30, 1998. This increase was a resultMarch 31, 1999. Value brand sales to Home Depot were impacted by Home
Depot's strategy to move more listings to our opening price point brands as
well as competitors' brands. Spectracide Terminate(TM) shipments were impacted
by high retail inventory levels. However, retail point of continued growthsale trends continue
to show improved consumer acceptance. Spectracide Pro's net sales decreased
52.5% to $1.6 million for the three months ended March 31, 2000 from 3.3
million for the three months ended March 31, 1999, as the first quarter of
1999 reflected the Company's core value brands including Bag-a-Bug, Hot Shot and Cutter.initial sell-in to stock retail shelves. Net sales of
opening price point brands increased 16.0%17.7% to $15.2$19.2 million for the three
months ended September 30, 1999March 31, 2000 from $13.1$16.2 million for the three months ended
September 30, 1998March 31, 1999. The increase was driven by thean increase in opening price point
listings at Home Depot and continued rapid pace ofsame store openings
by the Company's top retail customers.and new store growth at Lowes.
Gross Profit. Gross profit increased 25.8%decreased 7.9% to $28.3$44.7 million for the three
months ended September 30, 1999March 31, 2000 compared to $22.5$48.5 million for the three months
ended September 30, 1998.March 31, 1999. As a percentage of sales, gross profit increased to
52.9%50.5% as compared to 50.3% for the three months ended September 30, 1999 as compared to 47.0% for
the three months ended September 30, 1998.March 31, 1999. The
increase in gross
13
profit as a percentage of sales was the result of lower material costs
primarily driven by increased supplier rebates which were received earlier in 1999 than in 1998.rebates. Overall product mix changes will
determine if this favorable trend will continue for the remainder of the year.
Advertising and Promotion Expenses. Advertising and promotion expenses
decreased 2.4%16.2% to $4.1$9.7 million for the three months ended September 30, 1999March 31, 2000
compared to $4.2$11.6 million for the three months ended September 30, 1998March 31, 1999. As a
percentage of net sales, advertising and promotion expenses decreased to 11.0%
for the three months ended March 31, 2000 from 12.0% for the three months
ended March 31, 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 reduction$0.9 million charge was taken in cooperative advertising costs with grocery store customers1999 for customer
deductions taken in excess of contractual obligations, which the third quarter of 1999. This decrease was offset by increased cooperative
advertising with home improvement centers dueCompany
elected not to continued store expansion.
11
pursue.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 15.5%6.7% to $16.4$19.5 million for the three months
ended September 30, 1999March 31, 2000 from $14.2$18.3 million for the three months ended September 30, 1998.March 31,
1999. As a percentage of net sales, selling, general and administrative
expenses increased to 30.6%22.1% for the three months ended September 30, 1999March 31, 2000 from
29.5%19.0% for the three months ended September 30, 1998.March 31, 1999. The overall increase in
selling, general and administrative expenses was relateddue to higher selling, marketing and distribution costsincreased spending to
support the
growth in sales.
Operating Income. Operating income increased 85.7% to $7.8 million for the
three months ended September 30, 1999 from $4.2 million for the three months
ended September 30, 1998. As a percentage of net sales, operating income
increased to 14.6% for the three months ended September 30, 1999 from 8.8% for
the three months ended September 30, 1998 as a result of the factors described
above.
Income tax expense.retail selling programs.
Recapitalization Transaction Fees. For the three months ended September 30, 1999, the
Company's effective income tax rate reflects a reduction in the estimated
utilization of the goodwill deduction in fiscal year 1999 and the related
change in the valuation allowance.
The following table sets forth the percentage relationship of certain items
in the Company's income statement to net sales for the nine months ended
September 30, 1999 and the nine months ended September 30, 1998:
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1999
------------------ ------------------
Net sales:
Value brands........................... 77.2% 75.7%
Opening price point brands............. 22.8 24.3
----- -----
Total net sales.......................... 100.0 100.0
Operating costs and expenses:
Cost of goods sold..................... 49.4 48.9
Advertising and promotion expenses..... 11.4 10.3
Selling, general and administrative
expenses.............................. 19.5 19.3
Recapitalization transaction fees...... -- 3.8
Change of control bonuses.............. -- 3.1
Severance charge....................... -- 0.6
Non-recurring litigation charges....... 0.5 0.5
----- -----
Total operating costs and expenses....... 80.8 86.5
----- -----
Operating income......................... 19.2 13.5
Interest expense......................... 0.4 9.4
----- -----
Income before provision for income taxes
and discontinued operations............. 18.8 4.1
Income tax expense....................... 0.3 3.3
----- -----
Income from continuing operations........ 18.5% 0.8%
===== =====
Nine Months Ended September 30, 1999 compared to Nine Months Ended September
30, 1998
Net Sales. Net sales increased 9.6% to $281.8 million for the nine months
ended September 30, 1999 from $257.2 million for the nine months ended
September 30, 1998. This increase was driven by a combination of factors
including:
. the continued shift of consumers' preferences towards value and opening
price point brands;
. new product introductions, including Spectracide Pro; and
12
. expanded distribution at home improvement centers and mass merchandisers
through increased shelf space and continued store expansion.
Net sales of the Company's value brands increased 7.4% to $213.2 million
for the nine months ended September 30, 1999 from $198.6 million for the nine
months ended September 30, 1998. This increase was a result of continued
growth of core value brands including Spectracide, Bag-a-Bug, Hot Shot and
Cutter and the introduction of Spectracide Pro. Net sales of opening price
point brands increased 17.1% to $68.6 million for the nine months ended
September 30, 1999 from $58.6 million for the nine months ended September 30,
1998 driven by the continued rapid pace of store openings by the Company's top
retail customers.
Gross Profit. Gross profit increased 10.6% to $143.9 million for the nine
months ended September 30, 1999 compared to $130.1 million for the nine months
ended September 30, 1998. As a percentage of sales, gross profit increased
slightly to 51.1% for the nine months ended September 30, 1999 as compared to
50.6% for the nine months ended September 30, 1998. This increase in gross
profit as a percentage of sales was the result of lower material costs
primarily driven by increased supplier rebates which were received earlier in
1999 than in 1998. For the nine months ended September 30,March 31,
1999, the Company recorded a charge of $1.1 million to cost of goods sold for the write-off of
the Company's "Citro-Glow" candle inventory. The Company discontinued the
production of this product line during 1999 and chose to dispose of the
inventory by selling it through discount channels at prices below cost. If
this charge had not been recorded, gross profit for the nine months ended
September 30, 1999 would have been 51.5% of sales and would have increased
11.5% to $145.0 million as compared to $130.1$10.7 million for the nine months
ended September 30, 1998.
Advertising and Promotion Expenses. Advertising and promotion expenses
decreased 0.7% to $29.0 million for the nine months ended September 30, 1999
compared to $29.2 million for the nine months ended September 30, 1998 due to
a reduction in cooperative advertising costs with grocery store customers in
the third quarter of 1999. This decrease was offset by increased cooperative
advertising with home improvement centers due to continued store expansion.
For the nine months ended September 30, 1999, the Company recorded a charge of
$0.9 million 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. This charge has been included in
advertising and promotion expense for the nine months ended September 30,
1999. If this charge had not been recorded in the nine months ended September
30, 1999, advertising and promotional expenses would have decreased 3.8% to
$28.1 as compared to $29.2 million for the nine months ended September 30,
1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 8.4% to $54.3 million for the nine months
ended September 30, 1999 from $50.1 million for the nine months ended
September 30, 1998. As a percentage of net sales, selling, general and
administrative expenses decreased slightly to 19.3% for the nine months ended
September 30, 1999 from 19.5% for the nine months ended September 30, 1998.
The overall increase in selling, general and administrative expenses was
related to higher selling, marketing and distribution costs to support the
growth in sales.
Recapitalization Transaction Fees. As of September 30, 1999, the Company
recorded $36.4 million in fees and expenses associated with the
Recapitalization.recapitalization
transaction fees. 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.
For the
nine months ended September 30, 1999, the Company recorded a charge of $10.7
million for recapitalization transaction fees. In October, 1999, the Company
reached an agreement with certain stockholders on the method used to compute
their excess taxes. Based upon this computation method, the Company believes
its estimated liability for the excess taxes of these stockholders is
approximately $13.0 million, of which the Company has recorded a charge of
$5.8 million for the nine months ended September 30, 1999. The Company will
record an additional charge of $7.2 million in the fourth quarter of 1999 for
an aggregate charge of $13.0 million for excess taxes. This amount will be
charged to equity as additional costs of the treasury stock redemption.
13
Change of Control Bonuses. For the ninethree months ended September 30,March 31, 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.Non-recurring Litigation charges. For the ninethree months ended September 30,March 31, 1999,
the Company recorded a severance charge of $1.6 million incurred as a result of
the Company's President and Chief Executive Officer's termination of
employment with the Company.
Non-recurring Litigation Charges. The Company recorded non-recurring
litigation charges of $1.5 million for the nine months ended September 30,
1999 and $1.2 million for the nine months ended September 30, 1998. In March
1999, the Company took a charge of $1.5 million to primarily reserve for the
expected cost of an adverse judgmentjudgement on a counterclaim.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 $900$0.9 million in liquidating damages and $112$0.1 million in past
commissions. The remaining amounts accrued in connection with the $1,500$1.5 million
charge willwas primarily
be used to cover unpaid legal costs associated with this case.
Charges recorded as of September 30, 1998 of $1.2 million were related to
legal proceedings pertaining to a suit filed in 1992 by the spouse of a former
employee claiming benefits from a Company-owned key man life insurance policy.
EBITDA for the nine months ended September 30, 1999 was $64.0 million,
which excludes charges recorded for recapitalization transaction fees, change
of control bonuses, a severance charge and non-recurring litigation charges.
If the Company had excluded the $1.1 million write-off of the Company's
"Citri-Glow" candle inventory and the $0.9 million charge related to
advertising deductions taken by customers in excess of contractual
obligations, EBITDA would have been $66.0 million for the nine months ended
September 30, 1999.matter.
Operating Income. Operating income decreased 23.0%increased to $38.1$15.4 million for the ninethree
months ended September 30, 1999March 31, 2000 from $49.5a loss of $(2.3) million for the ninethree months
ended September 30, 1998.March 31, 1999. As a percentage of net sales, operating income decreasedincreased
to 13.5%17.4% for the ninethree months ended September 30,March 31, 2000. Operating income in 1999
from 19.2% for
the nine months ended September 30, 1998, primarilywas negatively impacted due to costs associated with recapitalization
transaction fees of $10.7 million and change of control bonuses as a result of
charges
related to the Company's Recapitalization, as described above.recapitalization of $8.6 million.
Income tax expense. In conjunction withFor the Recapitalization,three months ended March 31, 2000, the Company
converted from an "S" corporation to a "C" corporation. The one-time impact of
this conversion was $2.1 million. The Company's
effective income tax rate is 20.7%, which reflects the one timeestimated utilization
of the goodwill deduction in fiscal year 2000. This benefit is related to the
step up in tax basis in conjunction with the Recapitalization. For the three
months ended March 31, 1999 income tax expense included the one-time impact of
the conversion of the Company from an "S" corporation to a "C" corporation offset by the estimated fiscal year 1999 benefit related to
the step up in tax basisof
$2.1 million. This conversion was in conjunction with 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
14
Company has significantly increased its cash requirements for debt service
relating to the Company's 9 7/8 Series B Registered Senior Subordinated Notesnotes and Senior Credit Facility. As of September 30,December 31,
1999, the Company had total debt outstanding of $372.3$369.3 million. As of March
31, 2000, the Company had total debt outstanding of $407.5 million. The
increase in debt from December 31, 1999 is due to borrowings on the Revolving
Credit Facility to meet seasonal working capital requirements. The Company
will rely on internally generated funds and, to the extent necessary,
borrowings under the Company's revolving
credit facilityRevolving Credit Facility to meet liquidity
needs.
. The Company's Senior Credit Facility consists of:
. The $110.0 million revolving credit facility, under which no borrowings
wereRevolving Credit Facility ($35.6 million outstanding
at September 30, 1999;March 31, 2000); and
. The $75.0 million Term Loan A ($65.060.0 million outstanding at September
30, 1999)March 31,
2000); and
. The $150.0 million Term Loan B ($148.5147.75 million outstanding at September
30, 1999)March 31,
2000).
14
The Company's revolving credit facilityRevolving Credit Facility and the Term Loan A mature six years
frommatures on
January 20, 2005 and the closing date of the Senior Credit Facility, and Term Loan B matures seven years from the closing date of the Senioron January 20, 2006. The
Revolving Credit Facility. The revolving
credit facilityFacility is subject to a clean-down period during which the
aggregate amount outstanding under the revolving credit facility shall not
exceed $10.0 million for 30 consecutive days occurring during the period
August 1 and November 30 in a calendar year.
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 has $150.0paid bank fees of $0.9
million, which will be reflected as deferred financing fees in January 2000
and will be amortized over the life of the debt as interest expense.
The Senior Subordinated Facility was redeemed through the issuance of 9 7/8%
Series B Registered Senior Subordinated Notes that mature ondue April 1, 2009. The Company's principal liquidity requirements areIn 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 working capital,
capital expenditures and debt servicenew notes
registered under the Senior Credit Facility and the
senior subordinated notes. Cash flow from continuing operations provided net
cashSecurities Act of $16.9 million and $52.9 million for the nine months ended September
30, 1999 and September 30, 1998, 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 (primarily accounts
receivable and inventory) during the first half of the year, with the second
and third quarters being significant cash collection periods.
Capital expenditures1933. The new notes are relatedsubstantially
identical to the enhancement of the Company's
existing facilities and the construction of additional productions and
distribution capacity. Cash used for capital expenditures was $1.5 million and
$2.5 million for the nine months ended September 30, 1999 and September 30,
1998, respectively. In addition, the Company entered into a capital lease
agreement in March 1999 for $9.2 million. Cash used for capital expenditures
for the remainder of 1999 is expected to be less than $1.0 million.old notes.
Principal on the Term Loan A is required to be repaid quarterly in annual
amounts 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
on the Term Loan B is required to be repaid quarterly in 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. Principal on the 9 7/8 Series
B Registered Senior Subordinated Notes is required to be repaid on April 1,
2009.senior credit facility. On September 30, 1999,March 31, 2000, principal
payments on Term Loans A and B of $7.5$2.5 million and $1.1 million,$375 thousand,
respectively, were paid, which includes optionalpaid.
The Company's principal prepayments of $5.0liquidity requirements are for working capital,
capital expenditures and debt service under the Senior Credit Facility and the
notes. Net cash used for operating activities was $30.3 million and $0.8 on Term Loan A$35.6
million for the three months ended March 31, 2000 and Term Loan B,1999, respectively. Net
cash used for operating activities fluctuates during the year as the seasonal
nature of the Company's sales results in a significant increase in working
capital (primarily accounts receivable and inventory) during the first half of
the year, with the second and third quarters being significant cash collection
periods.
Capital expenditures are related to the enhancement of the Company's
existing facilities and the construction of additional production and
distribution capacity. Cash used for capital expenditures was $1.3 million and
$.4 million for the three months ended March 31, 2000 and 1999, respectively.
In addition, the Company entered into a capital lease agreement in March of
1999 for $9.2 million to lease a plane. This capital lease agreement will
subsequently be cancelled in May of 2000, and replaced by a second capital
lease agreement for a replacement plane in the amount of $5.9 million that was
entered into in March of 2000. Cash used for capital expenditures for the
remainder of 2000 is expected to be less than $5.0 million.
15
The Company believes that cash flow from operations, together with available
borrowings under the revolving credit facility,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 to repay the notes and amounts outstanding under the Senior
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.
Seasonality
The Company's business is highly seasonal because the Company's products are
used primarily in the spring and summer. For both of the past two years ended
December 31, 1999 and 1998, 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.
Year 2000 Compliance
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than year 2000. Costs related to the
year 2000 issue were incurred in conjunction with the $2.5 million management
information systems upgrade that occurred in 1999. The Company does not
anticipate any additional costs relating to the year 2000 issue which would
have a material adverse effect on the Company's financial condition or results
of operations.
Through March 2000, the Company has not experienced any significant year
2000 business system issues. The company has not experienced any significant
product or service supply problems arising from the Company's vendors' year
2000 preparations.
Although there is no guarantee that all year 2000 issues have been
identified and resolved, the Company believes that any issues arising will not
have a material impact on the Company's financial position, results of
operations or cash flows. The Company continues to monitor and correct any
issues related to the year 2000.
Recently Issued Accounting Pronouncements
The Financial Accounting Standard Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" in June 1998. SFAS 133 provides
standards on accounting and disclosure for derivative instruments and requires
that all derivatives be measured at fair value and reported as either assets
or liabilities on the balance sheet. The Company will be required to adopt
this statement no later than the beginning of fiscal year 2001. The Company
has not completed the analysis to determine the impact of this statement on
the Company's financial statements; however, the impact is not expected to be
material.
15
Year 2000 Compliance
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than year 2000.
In connection with a $2.5 million management information systems upgrade,
the Company has substantially completed an inventory of computer programs and
assessed year 2000 readiness. The Company's information systems and computer
programs include programs developed for the Company's proprietary management
information system. For programs which were identified as not being year 2000
ready, the Company repaired or replaced the programs and has substantially
completed performing appropriate testing for year 2000. The Company believes
that substantially all of the Company's information systems are year 2000
compliant.
Costs related to the year 2000 issue are included in the $2.5 million
management information systems upgrade. The Company estimates that the
remaining testing, repair and replacement necessary to complete the Company's
year 2000 compliance program will cost less than $1.0 million. The Company
does not anticipate any additional costs relating to the year 2000 issue which
would have a material adverse effect on the Company's financial condition or
the Company's results of operations.
While the Company believes all necessary work will be completed in a timely
fashion, the Company cannot assure that all systems will be compliant by the
year 2000, or that the systems of other companies and government agencies on
which the Company relys will be compliant. The Company believes the most
likely worst-case scenarios that the Company might confront with respect to
the year 2000 issues have to do with the possible failure of third-party
systems over which the Company has no control, including, but not limited to,
satellite, power and telephone services. If these failures were not
immediately corrected, the Company's supply and distribution functions would
be temporarily disrupted or delayed. Disruptions of the Company's supply and
distribution functions could also occur if any of the Company's personal
computers receiving electronic data interchange transmissions from third-party
suppliers were not Year 2000 compliant. The Company has exchanged Year 2000
information with most of the Company's third-party suppliers and major
customers. Of the third-party suppliers and major customers the Company has
contacted, over 90% have responded to the Company's requests for information.
The Company has developed a contingency plan to facilitate electronic date
interchange communication with the Company's main customers. The Company has
installed special "window adjustment" software to intercept non-Year 2000
compliant electronic data interchange transmissions and electronically correct
the transmission errors to make them Year-2000 compliant before the
transmissions are completed in the Company's system. The Company will have
replaced all non-Year 2000 personal computers utilized in the processing of
electronic data interchange transmission by December 31, 1999. Based on the
Company's assessment to date, the Company has not received any indication from
a third party indicating that it expects to experience year 2000 non-
compliance of a nature which would have a material impact on the Company.
However, the risk remains that the Company's customers or other third parties
may not have accurately determined their state of readiness, in which case
these parties' lack of year 2000 compliance may have a material adverse effect
on the Company's results of operations. The Company continues to monitor the
year 2000 compliance of third parties with which the Company does business.
Forward Looking Statements
This report and other public reports or statements made from time to time
by the Company or its management may contain "forward-looking" statements
concerning possible future events, objectives, strategies, trends or results.
Such statements are identified either by the context in which they appear or
by use of words such as "anticipate," "believe," "estimate," "expect," "plan"
or the like.
Readers are cautioned that any forward-looking statement reflects only the
beliefs of the Company or its management at the time the statement is made. In
addition, readers should keep in mind that, because all forward-
16
looking statements deal with the future, they are subject to risks,
uncertainties and developments that might cause actual events or results to
differ materially from those envisioned or reflected in any forward-looking
statement. Moreover, the Company does not have and does not undertake any duty
to update any forward-looking statement to reflect events or circumstances
after the date on which the statement was made. For all of these reasons,
forward-looking statements should not be relied upon as a prediction of actual
future events, objectives, strategies, trends or results.
It is not possible to anticipate and list all of the risks, uncertainties
and developments which may affect the future operations or performance of the
Company, or which otherwise may cause actual events or results to differ from
forward-looking statements. However, some of these risks and uncertainties
include the following: general economic and market conditions and risks, such
as the rate of economic growth in the United States, inflation, interest
rates, taxation, and the like; risks and uncertainties which could affect
industries or markets in which the Company participates, such as growth rates
and opportunities in those industries, or changes in demand for certain
products; and factors which could impact costs, including but not limited to
the availability and pricing of raw materials and the availability of labor
and wage rates.
17
ItemITEM 3. Quantitative and Qualitative Disclosures Aboutabout Market Risk
Interest Rate
The Company has not in the past used derivative financial instrumentsis exposed to hedge its exposure to interest rate risk. The table below provides information
about the Company's long-term debt obligations sensitivemarket risks relating to changes in interest
rates asrates. 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 September 30, 1999:
Scheduled Maturity Date
--------------------------------------------------
September 30, December 31,
1999 2000 2001 2002 2003 Thereafter 1999 1998
------ ------ ------ ------ ------ ---------- ------------- ------------
(dollars in millions)
Principal fixed rate
debt:
9 7/8 Series B
Registered Senior
Subordinated Notes.... $ -- $ -- $ -- $ -- $ -- $150.0 $150.0 $ --
Average interest rate.. 9.875% 9.875% 9.875% 9.875% 9.875% 9.875% 9.875% --
Principal variable rate
debt:
Senior Credit Facility
Term Loan A.......... 2.5 10.0 10.0 10.0 15.6 21.9 70.0 --
Term Loan B.......... 0.4 1.5 1.5 1.5 1.5 142.9 149.3 --
Miscellaneous debt...... -- 4.6
------ -----
Total debt.............. 369.3 4.6
Less: optional
prepayments............ (5.8) --
Less: current
maturities............. (11.5) (0.9)
------ -----
Total long-term debt.... $352.0 $ 3.7
====== =====
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 March 31, 2000,
variable rate debt was $243.4 million.
Interest on Term Loan A and Term Loan B ranges from 200 to 325375 basis points
above LIBOR depending on certain financial ratios. LIBOR was 5.38%6.14% as of September 30, 1999. On September 30, 1999, the Company made optional
prepayments on Term Loan A and Term Loan B of $5.0 million and $0.8 million,
respectively.March
31, 2000.
Exchange Rate
The Company does not use derivative instruments to hedge against foreign
currency exposures related to transactions denominated in other than the
Company's functional currency. Substantially all foreign currency transactions
are denominated in United States dollars.
Commodity 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 its exposure to price
changes in commodity and specialty chemicals.
1817
PART II
OTHER INFORMATION
There is no information required to be reported under any items.
Item 1. Legal Proceedings. The Company has no reportable legal proceedings in
the current period.
Item 2. Changes in Securities. None.
Item 3. Defaults Upon Senior Securities. None.None
Item 4. Submission of Matters to a Vote of Security Holders. No matters were
submitted.
Item 5. Other Information. None.None
Item 6. Exhibits and Reports on Form 8-K.8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule.Schedule
(b) ReportsReport on Form 8-K
None.None
II-1
SignaturesSIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the 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: May 12, 2000 /s/ Daniel J. Johnston
Dated: November 12, 1999 By: _________________________________
Name: Daniel J. Johnston
Title: Chief Financial Officer
II-2