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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO ______________ TO ______________
COMMISSION FILE NO. 333-76055
------------------------
UNITED INDUSTRIES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 43-1025604
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
8825 PAGE BOULEVARD
ST. LOUIS, MISSOURI 63114
(Address of Principal Executive Office, Including Zip Code)
(314) 427-0780
(Registrant's Telephone Number, Including Area Code)
Securities resigistered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
------------------------
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 / /.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10K. (N/A)
The aggregate market value of the voting and non-voting common stock held by
non-affiliates is not determinable because there is no established public market
for the Registrant's common stock.
As of February 28, 2001, the Registrant had 27,650,000 Class A voting and
27,650,000 Class B non-voting shares of common stock outstanding and 15,000
non-voting shares of Class A preferred stock outstanding.
Documents Incorporated by Reference: None
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PART I
ITEM 1. BUSINESS
GENERAL
United Industries Corporation ("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's "value" and "opening price point" brands generally compete with
higher priced premium brands.
In 2000, the Company generated net sales, income from continuing operations
and EBITDA of $288.6 million, $1.4 million and $55.7 million, respectively.
INDUSTRY OVERVIEW
Retail sales of consumer lawn and garden pesticides and household
insecticides in the United States total approximately $2.7 billion in 2000.
Since 1996, the market for these products has grown at an average annual rate of
approximately 4%-6%. The Company believes that the industry will continue to
grow at a similar rate over the next several years due to favorable demographic
trends. Approximately 67% of households in the United States, or 68 million
households, participate in some form of lawn and garden care activity. Moreover,
consumers over the age of forty-five represent the largest segment of lawn and
garden care product users and typically enjoy more leisure time and higher
levels of discretionary income than the general population. As the baby boom
generation ages, this segment is expected to grow at a rate more than twice that
of the total population. This demographic trend is likely to increase the number
of lawn and garden care product users.
COMPETITIVE STRENGTHS
LEADING VALUE-ORIENTED BRANDS. 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's
value and opening price point brands have driven a shift in the industry by
offering innovative products comparable or superior in quality to premium brands
at lower prices. As a result, the Company's products have developed significant
brand awareness and customer loyalty.
STRATEGIC PARTNERSHIPS WITH LEADING RETAILERS. The Company has developed
"strategic partnerships" with a number of leading national retailers in the
fastest growing retail channels. The Company's three largest customers, Home
Depot, Wal*Mart and Lowes, each hold significant positions in the lawn and
garden care market and have together opened approximately 1,000 net new stores
over the last five years. As a result, the Company has been able to
significantly increase sales as these retailers have added new stores and
captured market share.
LARGE DIRECT SALES FORCE. The Company has one of the largest direct sales
forces in the industry, with approximately 300 sales representatives dedicated
to merchandising the Company's products. Each representative typically visits
each store on a weekly basis to merchandise shelf space, collect inventory data,
record orders and educate in-store personnel about the Company's products. This
process facilitates real time marketing, re-ordering and pricing decisions,
helping to maximize store-level profitability. In addition, the Company's sales
force helps to identify emerging trends and develop products to meet consumers'
needs.
PROPRIETARY MANAGEMENT INFORMATION SYSTEM. The Company's proprietary
management information system provides real time data on sales, orders and
inventories at each retail outlet, allowing targeted
3
sales promotions and efficient inventory management. With same-day order
processing and strategically located distribution centers throughout the United
States, the Company is generally able to deliver products to retailers within
72 hours of an order, allowing retailers to maintain lower inventory levels,
generate higher turns and minimize costly returns.
BUSINESS STRATEGY
The Company plans to capitalize on its strengths and the favorable industry
trends to enhance its leadership position in value and opening price point
brands by implementing the following key elements of its business strategy:
ENHANCE VALUE BRAND POSITION. The Company plans to maintain focus on
building its leading value brands for the consumer lawn and garden pesticide and
household insecticide markets. The Company's strategy is to provide innovative
products of comparable or superior quality to competitors at a lower price to
appeal to those consumers who are looking for a better value.
PARTNER WITH LEADING RETAILERS. The Company believes that its strong value
brand position coupled with its operational expertise will allow the Company to
partner with leading national retailers to develop opening price point brands.
The Company currently manufactures and markets the opening price point brands
for leading retailers such as Home Depot and Lowes.
MAXIMIZE CATEGORY PROFITABILITY FOR RETAILERS. The Company focuses on
maximizing retailers' profitability in selling the Company's products by being a
low-cost provider and leveraging the Company's one-step distribution. The
Company is a low-cost provider as a result of its high level of vertical
integration and patented water-based aerosol technology. The Company has a
one-step distribution process through its approximately 300 person exclusive
direct sales force, one of the largest in the industry.
LEVERAGE DISTRIBUTION NETWORK. The Company continually seeks to capitalize
on its strong distribution network and relationships with retailers. The Company
has increased its sales and improved operating leverage by supplying
complementary product lines to retailers. The Company adds new products either
through new product development or by acquiring product lines. The Company's new
product development strategy has been to introduce innovative products that have
superior performance, easy-to-understand packaging and value pricing. New
products generate additional sales and generally provide higher margins to the
Company and its retailers. The Company's brand acquisition strategy has been to
selectively acquire product lines that can benefit from the Company's strong
distribution network, product development expertise and other competitive
strengths. Acquired product lines such as Peters-Registered Trademark- and
Cutter-Registered Trademark- have experienced rapid growth upon integration into
the Company's distribution network.
THE COMPANY'S HISTORY
The Company was founded in 1969 and initially focused on metal works and
anchor and bolt production. In 1973, the Company acquired Spray Chem, a contract
manufacturer of liquid and aerosol insecticides and herbicides. In 1985, the
Company acquired Real-Kill-Registered Trademark- and entered into the
manufacturing and distribution of branded products. In 1988, the Company formed
its core businesses through the acquisition of certain assets of various
businesses of Chesebrough-Ponds, a subsidiary of Unilever plc. The acquired
brands included Spectracide-Registered Trademark-, Hot
Shot-Registered Trademark-, Rid-a-Bug-Registered Trademark-,
Bag-a-Bug-Registered Trademark- and No-Pest-Registered Trademark-, expanding the
Company's products to include a wide array of value-oriented indoor and outdoor
pesticides. In 1994, the Company acquired assets relating to Cutter from
Miles, Inc. In 1995, the Company acquired assets from Alljack Company and Celex
Corporation, including certain licensing rights for
Peters-Registered Trademark-, the manufacturing rights of Kmart's opening price
point brand, Krid-Registered Trademark-, and the Shootout-Registered Trademark-
and Gro Best-Registered Trademark- brand names.
4
On January 20, 1999, pursuant to a Recapitalization Agreement with UIC
Holdings, L.L.C., which is owned by Thomas H. Lee Equity Fund IV, L.P., the
Company was recapitalized (the "Recapitalization") in a transaction in which:
(i) UIC Holdings, L.L.C. purchased common stock from the Company's existing
stockholders for approximately $254.7 million; (ii) the Company's senior
managers purchased common stock from the Company's existing stockholders for
approximately $5.7 million; and (iii) the Company used the net proceeds of a
Senior Subordinated Facility (which was subsequently refinanced by the issuance
of new notes) and borrowings under a Senior Credit Facility to redeem a portion
of the common stock held by the Company's existing stockholders. Following the
Recapitalization, UIC Holdings, L.L.C. 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%. The total transaction value of the Recapitalization was
approximately $652.0 million, including related fees and expenses, and the
implied total equity value following the Recapitalization was approximately
$277.0 million. In December 1999, however, the Company recorded a $7.2 million
charge to equity to finalize costs associated with the Recapitalization,
increasing the total transaction value to $659.2 million.
PRODUCTS
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's products have comparable or superior quality and
performance to premium brands, but are typically priced at a discount. The
Company's value brands are targeted toward consumers who want products and
packaging that are comparable or superior to premium brands, but at a lower
price, while the Company's opening price point brands are designed for consumers
who want quality products and packaging, but are extremely cost conscious. The
following is a description of each of the Company's major products.
VALUE BRANDS (76% OF 2000 NET SALES)
The Company sells a broad line of value brands marketed under such names as
Spectracide-Registered Trademark-, Spectracide Terminate-TM-, Hot
Shot-Registered Trademark-, Cutter-Registered Trademark- and
Peters-Registered Trademark-. Below is a description of each of the Company's
value brands:
SPECTRACIDE. The Spectracide product line primarily consists of outdoor
insect control products and herbicides, but also includes indoor insect control
products, specialty items such as plant disease control and rose care products,
and regional products such as fire ant killer and Japanese beetle traps.
SPECTRACIDE TERMINATE. Introduced in 1998, Spectracide Terminate is the
first ever do-it-yourself consumer termite killing system. The product is based
on professional bait stake technology and comes in 20 and 40 stake packages to
meet the needs of a wide range of property sizes.
HOT SHOT. The Hot Shot product line consists of household insecticides,
including items such as roach and ant killers, flying insect killers, foggers,
wasp and hornet killers, flea control products, and roach and ant baits.
CUTTER. The Cutter product line provides protection for the entire family,
ranging from area repellent citronella candles to products designed especially
for use on children and the outdoorsman. The Company has repositioned Cutter as
a value brand and increased its distribution.
PETERS. Peters is a water-soluble fertilizer available in all-purpose
formulations as well as specialty formulations for lawns, roses, tomatoes,
orchids and azaleas.
OTHER VALUE BRANDS. The Company also manufactures and markets regional
value brands in Florida and the Caribbean. Rid-a-Bug-Registered Trademark-, sold
exclusively in Florida, is a leading household pesticide
5
product in that state. Real-Kill-Registered Trademark-, marketed as a
Spanish-labeled product throughout the Caribbean, has become the leading brand
of household insecticides in Puerto Rico. The Company also manufactures private
label products for hardware co-operatives and other retailers and produce under
contract pesticides and other chemicals for other customers.
OPENING PRICE POINT BRANDS (24% OF 2000 NET SALES)
An important aspect of the Company's growth over the past few years has been
the Company's introduction of opening price point brands at home improvement
centers, mass merchandisers, hardware and others. By introducing these products,
the Company has effectively acquired shelf space at the expense of its
competitors by displacing premium brands and lower quality regional brands. The
Company's strategic retail partners have also benefited from the Company's
introduction of opening price point brands through streamlined logistics, better
inventory control and higher margins. Below is a description of each of the
Company's opening price point brands.
REAL-KILL. In 1997, the Company repositioned Real-Kill, by re-launching the
brand exclusively at Home Depot as its opening price point brand. The brand
consists of indoor and outdoor pesticides, and rodenticides.
NO-PEST-REGISTERED TRADEMARK-. In late 1997, the Company introduced No-Pest
exclusively at Lowes Companies as its opening price point brand. The brand
consists of indoor and outdoor pesticides.
KRID-REGISTERED TRADEMARK- AND KGRO-REGISTERED TRADEMARK-. In late 1995,
the Company acquired the manufacturing operations, which produce the Kmart owned
opening price point brands, Krid and Kgro. These brands consist of indoor and
outdoor pesticides and soluble fertilizers. During the third quarter of 2000,
Kmart notified the Company that the contract to manufacture Kgro would not be
renewed. As a result of this development, the Company does not expect to
manufacture Kgro in the future. Historically, the Kgro business has had low
margins and high operating costs. The Company does not expect this development
to have a significant impact on EBITDA for future periods.
CUSTOMERS
The Company sells its products through all major retail channels, including
home improvement centers, mass merchandisers, hardware stores, grocery and drug
stores, wholesale clubs and garden centers. The Company is heavily dependent on
Home Depot, Wal*Mart and Lowes for a substantial portion of its sales. These
three customers accounted for approximately 57%, 61%, and 57% of net sales for
2000, 1999, and 1998, respectively.
The Company manufactures and supplies products to hundreds of customers
representing more than 70,000 retail stores across the United States and in
select locations in Canada, Puerto Rico and the Caribbean. The Company's
leadership position in the home improvement center and mass merchandiser
channels is a key element of its past and future success. Industry wide,
category sales continue to shift to the home improvement center and mass
merchandiser channels. Sales are seasonal, as approximately 75% of shipments
will occur in the first two quarters of the fiscal year. For this reason net
revenue and results of operations are stronger from January to June.
BACKLOG
The Company does not believe that backlog is a meaningful and material
indicator of sales that can be expected for any period. All of the Company's
backlog is expected to be filled within 12 months, but there can be no assurance
that the backlog at any point in time will translate into sales in any
particular subsequent period. The amount of backlog at yearend is not material.
6
SALES AND MARKETING
The Company conducts sales activities through its exclusive direct sales
force, which consists of approximately 280 market sales managers and 20 area
sales managers. Market sales managers typically visit accounts on a weekly basis
to merchandise shelves and collect inventory data. Market sales managers' store
visits generate close to 1,000 store reports a day. The data collected includes
real-time information on SKUs, inventory levels and sales by market sales
managers and customers and is used to develop promotional campaigns and
merchandising plans that maximize store level sales and profitability. This
process facilitates real-time marketing, re-ordering and pricing decisions. In
addition, the Company supports the Spectracide Terminate-TM- product through
employing a seasonal in-store sales force of approximately 150 people.
The Company's marketing department leads the new product development process
and develops consumer support plans to help drive sales through the Company's
strong distribution network. To promote the Company's products to consumers, the
Company advertises on national and local television, radio and print media;
develops consumer promotions; and engages in market research efforts.
RESEARCH AND DEVELOPMENT
In 2000, 1999, and 1998, the Company spent $1.0, $1.0, and $0.8 million,
respectively, on research and development. The Company's research and
development department has developed over 80 new products since 1996.
RAW MATERIALS AND SUPPLIERS
The key elements of the Company's products are various specialty chemicals
as well as packaging materials. The Company obtains raw materials from various
suppliers, which the Company currently considers to be adequate. No one vendor
is considered to be essential to the Company's operations, and the Company has
never experienced a significant interruption of supply. Several of the Company's
agreements with suppliers provide for price adjustments. In addition, some of
the Company's agreements with suppliers provide for exclusivity rights, subject
to minimum purchase requirements.
COMPETITION
The Company operates in a highly competitive market and competes against a
number of national and regional brands. The Company's principal national
competitors include: The Scotts Company, which markets products under the
Ortho-Registered Trademark-, Roundup-Registered Trademark- and
Miracle-Gro-Registered Trademark- brand names; S.C. Johnson & Son, Inc., which
markets products under the Raid-Registered Trademark- and
OFF!-Registered Trademark- brand names; Bayer A.G., which markets products under
the Bayer brand name, and The Clorox Company, which markets products under the
Combat-Registered Trademark- and Black Flag-Registered Trademark- brand names.
INTELLECTUAL PROPERTY
The Company operates and owns a substantial number of trademarks and
tradenames including the following: Spectracide-Registered Trademark-,
Spectracide Terminate-TM-, Spectracide Pro-Registered Trademark-, Hot
Shot-Registered Trademark-, Rid-a-Bug-Registered Trademark-,
Bag-a-Bug-Registered Trademark-, Real-Kill-Registered Trademark-,
No-Pest-Registered Trademark-, Shootout-Registered Trademark- and Gro
Best-Registered Trademark-. The Company licenses the
Cutter-Registered Trademark- trademark and other members of the
Cutter-Registered Trademark- family of trademarks from Bayer Corporation and the
Peters-Registered Trademark- and Peters Professional-Registered Trademark-
trademarks from The Scotts Company. These licenses are, in effect, perpetual and
exclusive.
7
EMPLOYEES
As of December 31, 2000, the Company had approximately 800 full-time
employees. Approximately 200 of the Company's employees are covered by
collective bargaining agreements, which expire in August 2002, with Finishers,
Maintenance Painters, Industrial and Allied Workers Local Union 980, AFL-CIO.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state, local and foreign laws and
regulations governing environmental matters. The Company's manufacturing
operations are subject to requirements regulating air emissions, wastewater
discharge, waste management, and the cleanup of contamination. Based on
assessments conducted by independent environmental consultants the Company
believes that it is in material compliance with these requirements and has no
material environmental liabilities. The Company may be subject to fines or
penalties if the Company fails to comply with these environmental laws and
regulations. The Company does not anticipate any material capital expenditures
for environmental controls in 2001.
The Company's pesticide products must be reviewed and registered by the U.S.
Environmental Protection Agency (EPA) and similar state agencies or, in foreign
jurisdictions, foreign agencies, before they can be marketed. The Company
devotes substantial resources to maintaining compliance with these registration
requirements. If the Company fails to comply, however, registration of the
affected pesticide could be suspended or canceled, and the Company could be
subject to fines or penalties. Additionally, the EPA is in the process of
re-registering all pesticides and is requiring manufacturers to supply the EPA
with additional data regarding their pesticides. Where possible, the Company is
working with trade associations and suppliers to reduce the Company's cost of
developing this data.
The Company's fertilizer products must be reviewed and registered by each
state prior to sale. The states typically check the weight of the product and
the accuracy of the analysis statement on the packaging. Other consumer products
the Company markets are subject to the safety requirements of the Consumer
Product Safety Commission. If the Company fails to comply with any of these
requirements, the Company could be suspended or prohibited from marketing the
affected product.
FINANCIAL INFORMATION ABOUT INDUSTRY AND GEOGRAPHIC SEGMENTS
For detailed information concerning the Company's industry and geographic
segments, reference is made to Note 19 of the Financial Statements included
elsewhere in this Annual Report on Form 10-K.
ITEM 2. PROPERTIES
The Company has two manufacturing facilities located in Vinita Park,
Missouri and one manufacturing facility in Plymouth, Michigan. Three types of
product categories are manufactured at these facilities: aerosols, liquids and
water-soluble fertilizers. The typical manufacturing process consists of four
stages: batch, fill, label and pack. The Company currently produces over 300
SKUs through the Company's aerosol production lines, three liquid production
lines and two water-soluble fertilizer production lines. The Company's
production lines are flexible and can operate at a variety of filling speeds and
produce multiple shipping configurations. The Company often uses outside
manufacturers for the production of granular insecticides, baits and candles.
The Company has distribution centers, located in Vinita Park, Missouri;
Allentown, Pennsylvania; Gainesville, Georgia; and Ontario, California.
In management's opinion, current facilities generally are well maintained
and provide adequate production capacity for future operations. However,
management continues to evaluate the need to
8
reposition the Company's portfolio of business and facilities to meet the needs
of the changing markets it serves.
The Company's manufacturing and distribution facilities are primarily leased
under long-term leases with renewal options.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation and arbitration proceedings in the
normal course of business. When it appears probable in management's judgment
that the Company will incur monetary damages or other costs in connection with
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 financial position, results of operations and cash flows from the
claims and proceedings described above is remote.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 8, 2000 the Company's Board adopted resolutions recommending
that the Company's stockholders approve amending the Company's Certificate of
Incorporation to:
- Create 15,000 shares of $0.01 par value Class A Preferred Stock to be sold
to UIC Holdings, L.L.C. for $1,000 per share. Dividends accrue at 15% of
the Liquidation Value.
- Increase the Company's total authorized Class A voting Common Stock from
32,500,000 to 34,100,000 shares to accommodate the Company's granting of
Stock Purchase Warrants to UIC Holdings, L.L.C., which will receive a
10-year option to purchase up to 1,600,000 shares of Class A Common Stock
at $2.00 per share.
- Increase the Company's total authorized Class B non-voting Common Stock
from 32,500,000 to 34,100,000 shares to accommodate the Company's granting
of Stock Purchase Warrants to UIC Holdings, L.L.C., which will receive a
10-year option to purchase up to 1,600,000 shares of Class A Common Stock
at $2.00 per share.
The holders of the issued and outstanding shares of the Company's voting
stock approved of the Board's resolution on November 9, 2000.
On December 21, 2000, the holders of a majority of the issued and
outstanding shares of the Company's voting common stock voted to approve the
Company's 2001 Stock Option Plan.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company does not have publicly held common stock. Pursuant to the
Recapitalization Agreement, the Company's Senior Managers purchased
approximately 2.1% of the Company's issued and outstanding common stock. The
Company does not pay dividends on common stock, nor does it intend to pay any
dividends in the future. In addition, the Compan's Senior Credit Facility
includes a limitation on the Company's ability to pay dividends on Common Stock.
9
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data for the fiscal years ended
December 31, 2000 and 1999 have been derived from audited financial statements
included elsewhere in this report. The historical financial data for the years
ended December 31, 1998, 1997 and 1996 have been derived from audited financial
statements, which do not appear in this report. When you read this selected
historical financial data, it is important that you read along with it the
financial statements and related notes, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," all of which is
included in this report
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- -------- -------- --------
(000'S)
STATEMENT OF INCOME DATA:
Net sales................................................... $ 288,618 $ 304,048 $282,676 $242,601 $199,495
--------- --------- -------- -------- --------
Operating costs and expenses:
Cost of goods sold........................................ 146,229 150,344 140,445 128,049 106,640
Advertising and promotion expenses........................ 25,204 29,182 31,719 25,547 22,804
Selling, general and administrative expenses.............. 66,719 70,886 61,066 52,092 46,276
Dursban charge............................................ 8,000 -- -- -- --
Recapitalization transaction fees......................... -- 10,690 -- -- --
Change of control bonuses................................. -- 8,645 -- -- --
Severance charge.......................................... -- 2,446 -- -- --
Non-recurring litigation charges.......................... -- 1,647 2,321 -- --
--------- --------- -------- -------- --------
Total operating costs and expenses.......................... 246,152 273,840 235,551 205,688 175,720
--------- --------- -------- -------- --------
Operating income............................................ 42,466 30,208 47,125 36,913 23,775
Interest expense............................................ 40,973 35,223 1,106 1,267 1,502
--------- --------- -------- -------- --------
Income (loss) before provision for income taxes,
discontinued operations and extraordinary item............ 1,493 (5,015) 46,019 35,646 22,273
Income tax expense.......................................... 134 4,257 992 726 447
--------- --------- -------- -------- --------
Income (loss) from continuing operations, before
extraordinary
item...................................................... $ 1,359 $ (9,272) $ 45,027 $ 34,920 $ 21,826
========= ========= ======== ======== ========
OTHER FINANCIAL DATA:
Cash flow provided by continuing operations................. $ 14,896 $ 10,434 $ 50,763 $ 35,136 $ 27,741
Cash used by investing activities continuing operations..... 3,950 3,038 3,628 5,138 6,384
Cash used by financing activities........................... 10,946 7,396 49,088 32,329 23,645
EBITDA(1)................................................... 55,727 58,351 53,284 40,510 27,336
Depreciation and amortization............................... 5,261 4,715 3,838 3,597 3,561
Capital expenditures(2)..................................... 3,950 3,038 3,628 5,138 6,384
Gross margin................................................ 49.3% 50.6% 50.3% 47.2% 46.5%
EBITDA margin............................................... 19.3 19.2 18.8 16.7 13.7
Ratio of earnings to fixed charges(3)....................... 1.0x .9x 17.6x 13.9x 8.3x
BALANCE SHEET DATA:
Working Capital(4).......................................... $ 29,892 $ 22,938 $ 30,042 $ 32,046 $ 26,919
Total assets................................................ 234,894 240,907 94,161 97,441 84,254
Total debt.................................................. 354,301 369,255 4,645 3,997 13,960
Stockholder's equity (deficit).............................. (170,763) (186,802) 58,257 64,449 46,829
- ------------------------------
(1) EBITDA represents income from continuing operations before interest expense,
income tax expense, depreciation and amortization, Dursban charge,
recapitalization transaction fees, change of control bonuses, severance
charges and non-recurring litigation charges. During 2000, the Company
incurred an $8,000 charge for Dursban. During 1999, the Company incurred
charges of $10,690 for recapitalization transaction fees, $8,645 for change
of control bonuses and $2,446 for severance charges. For 1999 and 1998, the
Company incurred charges of $1,647 and $2,321 for non-recurring litigation
charges, respectively. The Company has included information concerning
EBITDA because the Company believes certain investors use it as one measure
of a company's historical ability to fund operations and meet its financial
obligations. EBITDA is not intended to represent cash flow from operations
as defined by accounting principles generally accepted in
10
the United States of America and should not be used as an alternative to
operating income or income from continuing operations as an indicator of the
Company's operating performance or cash flow as a measure of liquidity. In
addition, the Company's definition of EBITDA may not be comparable to that
reported by other companies. EBITDA is calculated as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Income (loss) from continuing operations(a)................ $ 1,359 $(9,272) $45,027 $34,920 $21,826
Interest expense........................................... 40,973 35,223 1,106 1,267 1,502
Income tax expense......................................... 134 4,257 992 726 447
Depreciation and amortization.............................. 5,261 4,715 3,838 3,597 3,561
Recapitalization transaction fees(b)....................... -- 10,690 -- -- --
Change of control bonuses(c)............................... -- 8,645 -- -- --
Severance charges(c)....................................... -- 2,446 -- -- --
Non-recurring litigation charges(c)........................ -- 1,647 2,321 -- --
Dursban charge(d).......................................... 8,000 -- -- -- --
------- ------- ------- ------- -------
EBITDA..................................................... $55,727 $58,351 $53,284 $40,510 $27,336
======= ======= ======= ======= =======
----------------------------------
(a) Does not reflect the elimination of stockholder salaries and certain
fringe benefits that were in effect prior to the recapitalization and
were reflective of the private ownership structure that existed prior to
the Recapitalization, offset by the salary and fringe benefit structure
that was implemented with the Recapitalization. The net effect of these
related party transactions' amounts were $7,740, $3,061, and $3,847 for
the years ended 1998, 1997, and 1996.
(b) As of December 31, 1999, the Company recorded $31,312 in fees and
expenses associated with the Recapitalization. Fees and expenses that
were 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 were 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 United's estimate of the effort spent
in the activity, giving rise to the fee or expense.
(c) During 1999, the Company recorded various charges as follows:
(a) change of control bonuses paid to certain members of senior
management amounting to $8,645; (b) $2,446 of severance charges incurred
as a result of the President and Chief Executive Officer and Senior Vice
President, Sales terminating their employment with the Company; and
(c) $1,500 of non-recurring litigation charges 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. This case was settled in July 1999. In 1998, the
Company recorded non-recurring litigation charges of $2,321 related to
two separate lawsuits. In March 1998, a judgment was entered against the
Company, in a lawsuit filed by the spouse of a former employee claiming
benefits from a United-owned key man life insurance policy. The Company
recorded a charge of $1,200 for this case in the first quarter of 1998
and an additional $147 in the fourth quarter of 1999. The Company also
incurred costs pertaining to certain litigation concerning the
advertising of the Company's Spectracide Terminate-TM- product for which
a settlement was negotiated. Costs related to this case amounted to
$1,121.
(d) During 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 the withdrawal of
virtually all residential uses of Dursban. Manufacturing of new Dursban
products intended for residential use must cease by December 1, 2000, and
formulators can no longer sell such products to retailers after
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. A charge of
$8,000 was recorded in September of 2000 for costs associated with this
agreement. The Company has replacement chemicals for Dursban, which are
currently being used in production of new pesticidal products.
(2) Capital expenditures for 2000 and 1999, exclude capital lease obligations of
$5,344 and $9,215 respectively.
(3) For purposes of this calculation, earnings are defined as income before
provision for income taxes and discontinued operations plus fixed charges.
Fixed charges include interest expense on all indebtedness (including
amortization of deferred financing costs) and the portion of operating lease
rental expense which management believes is representative of the interest
factor of rent expense (approximately one-third of rent expense).
(4) Working capital is defined as current assets (excluding cash and cash
equivalents) less current liabilities (excluding short-term debt and current
portion of long-term debt).
11
ITEM 7. 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 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 risks set
forth under Item 7A of this report 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.
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 States 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 audited financial statements and the
related notes to the audited financial statements.
RESULTS OF OPERATIONS
The following discussion regarding results of operations refers to net
sales, cost of goods sold, advertising and promotion expense and selling and
general and administrative expenses, which the Company defines as follows:
- Net sales are gross sales of products sold to customers in accordance with
the shipping terms applicable to each sale 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 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 and 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.
The following table sets forth the percentage relationship of certain items
in the Company's Statements of Operations to net sales for 2000, 1999 and 1998:
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
-------- -------- --------
Net sales:
Value brands.................................... 76.0% 80.0% 82.3%
Opening price point brands...................... 24.0 20.0 17.7
----- ----- -----
Total net sales................................... 100.0 100.0 100.0
Operating costs and expenses:
Cost of goods sold.............................. 50.7 49.4 49.7
Advertising and promotion expenses.............. 8.7 9.6 11.2
Selling, general and administrative expenses.... 23.1 23.3 21.6
Dursban charge.................................. 2.8 -- --
Recapitalization transaction fees............... -- 3.5 --
Change of control bonuses....................... -- 2.8 --
Severance charges............................... -- 0.8 --
Non-recurring litigation charges................ -- 0.6 0.8
----- ----- -----
Total operating costs and expenses................ 85.3 90.0 83.3
----- ----- -----
Operating income.................................. 14.7 10.0 16.7
Interest expense.................................. 14.2 11.6 0.4
----- ----- -----
Income (loss)before provision for income taxes,
discontinued operations and extraordinary
item............................................ 0.5 (1.6) 16.3
Income tax expense................................ -- 1.4 0.4
----- ----- -----
Income (loss) from continuing operations, before
extraordinary item.............................. 0.5% (3.0)% 15.9%
===== ===== =====
FISCAL 2000 COMPARED TO FISCAL 1999
NET SALES. Net sales decreased 5.1% to $288.6 million for the twelve months
ended December 31, 2000 from $304.0 million for the twelve months ended
December 31, 1999. This decrease was driven by a combination of factors
including:
- Key markets in the southern half of the country experienced an extreme
drought, which impacted consumer take-away at several key retailers.
- Decline in value brand sales due to a reduction in products carried by
Home Depot, partially offset by gains at other customers.
- Retail inventory balancing issues affecting shipments of Spectracide
Terminate.
- Lost sales opportunity due to voluntary withdrawal of Dursban per
agreement between the EPA and manufacturers of chlorpyrifos.
- 1999 Spectracide Pro-Registered Trademark- sales reflected initial sell in
to stock retail shelves.
Net sales of the Company's value brands decreased 9.9% to $219.3 million for
the twelve months ended December 31, 2000 from $243.3 million for the twelve
months ended December 31, 1999. Value brand sales to Home Depot were impacted by
Home Depot's strategy to move more listings to opening
13
price point brands as well as overall category sales performed below market
trends at Home Depot. The declines at Home Depot were partially offset by the
continual same store and new store growth at Lowes. The extreme drought in the
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 continued to show improved consumer acceptance.
Spectracide Pro's net sales decreased to $3.6 million for the twelve months
ended December 31, 2000 from $5.9 million for the twelve months ended
December 31, 1999, as the first half of 1999 reflected the initial sell in to
stock retail shelves. Net sales of opening price point brands increased 14.2% to
$69.3 million for the twelve months ended December 31, 2000 from $60.7 million
for the twelve months ended December 31, 1999. The increase was driven by an
increase in opening price point listings at Home Depot and continued same store
and new store growth at Lowes.
GROSS PROFIT. Gross profit decreased 7.4% to $142.4 million for the twelve
months ended December 31, 2000 compared to $153.7 million for the twelve months
ended December 31, 1999. As a percentage of sales, gross profit decreased to
49.3% as compared to 50.6% for the twelve months ended December 31, 1999. The
decrease in gross profit as a percentage of sales was the result of a change in
sales mix to slightly lower margin products, offset by lower material costs.
ADVERTISING AND PROMOTION EXPENSES. Advertising and promotion expenses
decreased 13.6% to $25.2 million for the twelve months ended December 31, 2000,
compared to $29.2 million for the twelve months ended December 31, 1999. As a
percentage of net sales, advertising and promotion expenses decreased to 8.7%
for twelve months ended December 31, 2000 from 9.6% for the twelve months ended
December 31, 1999. The reduction in advertising and promotion expense was due to
the shift from Terminate media spending to supporting in store retail selling
programs for Terminate. 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. Selling, general and
administrative expenses decreased 5.9% to $66.7 million for the twelve months
ended December 31, 2000 from $70.9 million for the twelve months ended
December 30, 1999. As a percentage of net sales, selling, general and
administrative expenses decreased to 23.1% for the twelve months ended
December 31, 2000 from 23.3% for the twelve months ended December 30, 1999. The
overall decrease in selling, general and administrative expenses was primarily
due to a reduction of marketing and sales expenses related to sales volume
decrease, gain recognized on the termination of a capital lease and other cost
reduction efforts.
RECAPITALIZATION TRANSACTION FEES. No charges were recorded for the twelve
months ended December 31, 2000. For the twelve months ended December 31, 1999,
the Company recorded a charge of $10.7 million for recapitalization transaction
fees. As of December 31, 2000, the Company recorded $32.2 million in fees and
expenses associated with the Recapitalization. Fees and expenses that were
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 twelve months
ended December 31, 2000. For the twelve months ended December 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.
14
SEVERANCE CHARGES. No charges were recorded for the twelve months ended
December 31, 2000. For the twelve months ended December 31, 1999, the Company
recorded severance charges of $2.4 million as a result of the Company's
President and Chief Executive Officer and Senior Vice President of Sales
terminating employment with the Company.
NON-RECURRING LITIGATION CHARGES. No charges were recorded for the twelve
months ended December 31, 2000. For the twelve months ended December 31, 1999,
the Company recorded a non-recurring litigation charge of $1.6 million. In
March 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 CHARGE. During 2000, the Company recorded a non-recurring expense
of $8.0 million as a result of the EPA and the manufacturers of Dursban
voluntary withdrawal of the active chemical in the Company's products. There
were no related charges in 1999. See footnote 18 to Financial Statements.
OPERATING INCOME. Operating income increased 40.7% to $42.5 million for the
twelve months ended December 31, 2000 from $30.2 million for the twelve months
ended December 31, 1999. As a percentage of net sales, operating income
increased to 14.7% for the twelve months ended December 31, 2000 and a reduction
in the estimates for fiscal year 2000 taxable income. Operating income was 10.0%
for the twelve months ended December 31, 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. For the twelve months ended December 31, 2000, the
Company's effective income tax rate reflects the estimated utilization of the
goodwill deduction in fiscal year 2000. The goodwill deduction is related to the
step-up in tax basis in conjunction with the Recapitalization. For the twelve
months ended December 31, 1999, income tax expense included the one-time impact
of the conversion of the Company from an "S" corporation to a "C" corporation of
$2.1 million. This conversion was in conjunction with the Recapitalization.
FISCAL 1999 COMPARED TO FISCAL 1998
NET SALES. Net sales increased 7.5% to $304.0 million for 1999 from
$282.7 million for 1998. This increase was driven by a combination of factors
including:
- The continued shift of consumers' preferences toward value and opening
price point brands;
- The introduction of Spectracide Pro-Registered Trademark-; and
- Expanded distribution at home improvement centers and mass merchandisers
due to continued store expansion.
Net sales of the Company's value brands increased 4.6% to $243.3 million for
1999 from $232.6 million for 1998. This increase was a result of continued
growth of core value brands including Spectracide-Registered Trademark-,
Bag-a-Bug-Registered Trademark- and Cutter-Registered Trademark-. Net sales of
opening price point brands increased 21.2% to $60.7 million for 1999 from
$50.1 million for 1998 driven by the continued rapid pace of store openings by
the Company's top retail customers. The net sales growth described above was
primarily driven by sales volume. Selling price changes did not have a material
impact on 1999 net sales growth.
15
GROSS PROFIT. Gross profit increased 8.1% to $153.7 million for 1999
compared to $142.2 million for 1998. As a percentage of sales, gross profit
increased slightly to 50.6% 1999 as compared to 50.3% for 1998. In March 1999,
the Company recorded a charge of $1.1 million to cost of goods sold for the
write-off of the Company's "Citri-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 1999 would have
been 50.9% of sales and would have increased 8.9% to $154.8 million as compared
to $142.2 million for 1998.
ADVERTISING AND PROMOTION EXPENSES. Advertising and promotion expenses
decreased 7.9% to $29.2 million for 1999 compared to $31.7 million for 1998. As
a percentage of net sales, advertising and promotion expenses decreased to 9.6%
for 1999 from 11.2% for 1998. Advertising and promotion expenses decreased as a
percentage of net sales growth since most of the Company's first, second and
third quarter 1999 growth was due to store expansion by home improvement
centers. For 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 1999. If this charge had not been recorded in 1999, advertising and
promotional expenses would have decreased 10.7% to $28.3 as compared to
$31.7 million for 1998. As a percentage of sales, advertising and promotional
expenses would have decreased to 9.3% for 1999 from 11.2% for 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 16.0% to $70.9 million for 1999 from
$61.1 million for 1998. As a percentage of net sales, selling, general and
administrative expenses increased to 23.3% for 1999 from 21.6% for 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 December 31, 1999, the Company
recorded $31.3 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. For 1999, the
Company recorded a charge of $10.7 million for Recapitalization transaction
fees.
CHANGE OF CONTROL BONUSES. During 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. During 1999, the Company recorded severance charges of
$2.4 million as a result of the Company's President and Chief Executive Officer,
and Senior Vice President of Sales, terminating their employment with the
Company.
NON-RECURRING LITIGATION CHARGES. The Company recorded non-recurring
litigation charges of $1.6 million for 1999 and $2.3 million for 1998. In
March 1999, the Company took a charge of $1.5 million to primarily reserve for
the expected cost of an adverse judgment on a 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 $0.9 million in liquidating damages and $0.1 million in past
commissions. The
16
remaining amounts accrued in connection with the $1.5 million charge were used
to cover legal cost associated with this case.
Charges recorded as of December 31, 1998 of $2.3 million were related to two
separate lawsuits. During 1998, the Company incurred $1.1 million in settlement
costs pertaining to certain litigation concerning the advertising of the
Company's Spectracide Terminate-TM- product. In 1992, the spouse of a former
employee filed suit against the Company claiming benefits from a Company-owned
key man life insurance policy. On December 1, 1999, after the Missouri Supreme
Court further reviewed the trial courts decision, the Company paid $1.3 million
in settlement of this case including legal costs of $.1 million. Settlement and
legal costs in excess of the original charge of $1.2 million recorded in 1998
were charged to non-recurring litigation charges in the fourth quarter of 1999.
OPERATING INCOME. Operating income decreased 35.9% to $30.2 million for
1999 from $47.1 million for 1998. As a percentage of net sales, operating income
decreased to 10.0% for 1999 from 16.7% for 1998, primarily as a result of
factors discussed above.
INCOME TAX EXPENSE. In conjunction with the Recapitalization, 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
reflects the one time impact of the conversion from an "S" corporation to a "C"
corporation, offset by the estimated fiscal year 1999 benefit related to the
step up in tax basis 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 Company has
significantly increased cash requirements for debt service relating to the
Company's Senior Subordinated Notes and Senior Credit Facility. As of
December 31, 2000, the company had total debt outstanding of $354.3 million. As
of December 31, 1999, the Company had total debt outstanding of $369.3 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 $80.0 million Revolving Credit Facility, under which $15 million in
borrowings were outstanding at December 31, 2000;
- The $75.0 million Term Loan A ($48.4 million outstanding at December 31,
2000); and
- The $150.0 million Term Loan B ($135.9 million outstanding at
December 31, 2000).
The Company's Revolving Credit Facility and the Term Loan A mature in
January 2005, and the Term Loan B matures in January 2006. The Revolving Credit
Facility is subject to a clean-down period during which the aggregate amount
outstanding under the Revolving Credit Facility shall not exceed $10.0 million
for 30 consecutive days occurring during the period August 1 and November 30 in
each 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 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.
17
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 $30.0 million of the Revolving
Credit Facility under the credit agreement, thereby reducing the Revolving
Credit Facility from $110.0 million to $80.0 million.
2. The Company agreed to sell Common Stock and/or permitted Preferred
Stock to UIC Holdings L.L.C. for net cash proceeds equal to $15.0 million,
which net cash proceeds have been applied to the prepayment of Term Loan
advances.
3. An interest rate increase which will range from 25 to 75 basis
points higher than previous Senior 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
similar 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. Cash flow from continuing operations provided net cash of approximately
$14.9, $10.4 million, and $50.8 million in 2000, 1999, and 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 expenditures are related to the enhancement of the Company's
existing facilities and the construction of additional productions and
distribution capacity. Cash used for capital expenditures in 2000, 1999, and
1998 was $4.0, $3.0 million, and $3.6 million respectively. In addition, the
Company entered into a capital lease agreement in March 2000 for $5.3 million.
Cash used for capital expenditures in fiscal 2001 is expected to be less than
$5.0 million.
Principal on 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. The principal amount of Term Loan B is to be repaid in
twenty-seven consecutive quarterly installments commencing June 30, 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 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.
18
SEASONALITY
The Company's business is highly seasonal because the Company's products are
used primarily in the spring and summer. For the past three 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 2000 DURSBAN AGREEMENT
During 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 the withdrawal of virtually all
residential uses of Dursban. Formulation of new Dursban products intended for
residential use must cease by December 1, 2000, and formulators can no longer
sell such products to retailers after 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. A charge of $8.0 million was recorded in September
of 2000 for costs associated with this agreement. The Company currently has
replacement chemicals for Dursban, and the replacement chemicals are currently
being used in production of new pesticidal products.
SIGNIFICANT CUSTOMER
During the third quarter of 2000, Kmart notified the Company that the
contract to manufacture KGro private label products would not be renewed.
Historically, the KGro business has had low margins and high operating costs.
The Company does not expect this development to have a significant impact on
EBITDA for 2001.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Emerging Issues Task Force (EITF) issued EITF 00-10. EITF 00-10 requires
that if shipping and handling cost are significant and are not included in cost
of sales, a company should disclose both the amount of such costs and which line
item on the income statement includes that amount.
EITF 00-10 became effective for the Company in the fourth quarter of 2000. The
Company has disclosed the effect of EITF 00-10 in the Notes to the Financial
Statements.
The EITF also issued EITF 00-25. This issue addresses when consideration
from a vendor to a retailer (a) in connection with the retailer's purchase of
the vendor's 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. No implementation date has been set for EITF 00-25. The adoption of
EITF 00-25 will most likely require the Company to reclassify all trade and
co-op advertising and promotional expense line item in the Statement of
Operations to net sales. This reclassification would, as currently drafted, be
made to all prior periods. The impact of this statement is not expected to be
material.
The Securities and Exchange Commission (SEC) recently issued Staff
Accounting Bulletin
(SAB) 101, which expresses the SEC staff's views on applying generally accepted
accounting principles to revenue recognition in financial statements. The most
significant aspect of SAB 101 affecting the Company is shipping terms.
Implementation of SAB 101 became effective for the Company in the fourth quarter
of 2000. The Company's adoption of SAB 101 did not have a material effect on the
Company's financial results.
19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST 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 December 31, 2000, variable rate debt was
$199.3 million.
Interest ranges from 250 to 400 basis points above LIBOR depending on
certain financial ratios. LIBOR was 6.64% on December 31, 2000.
EXCHANGE RATE
The Company does not use derivative instruments to hedge against its 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and supplementary data included in this Report are
listed in Item 14 and begin immediately after Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below is the name, age and position of each of the Company's
executive officers and directors. The Company's board of directors presently
consists of seven directors who are elected annually. Executive officers serve
at the discretion of the board of directors and, in the case of Messrs. Caulk,
Bender, and Johnston, pursuant to employment agreements.
NAME AGE POSITION
- ---- -------- --------------------------------------------------------
David A. Jones............. 51 Chairman of the Board; Director
Robert L. Caulk............ 49 President and Chief Executive Officer; Director
Richard A. Bender.......... 51 Senior Vice President, Human Resources & Operations
Daniel J. Johnston......... 42 Senior Vice President, Chief Financial Officer,
Information Systems, Legal & Administration; Director
Matthew M. McCarthy........ 53 Vice President, General Counsel and Secretary
David C. Pratt............. 56 Director
C. Hunter Boll............. 45 Director
Scott A. Schoen............ 42 Director
Charles A. Brizius......... 32 Director
DAVID A. JONES became a director of the Company in January 1999 in
connection with the Recapitalization and was appointed Chairman of the Board in
June 1999. Mr. Jones has been the President, Chief Executive Officer and
Chairman of the Board of Rayovac Corporation since March 1996. Between
February 1995 and March 1996, Mr. Jones was Chief Operating Officer, Chief
Executive Officer and Chairman of the Board of Directors of Thermoscan, Inc.
From 1989 to 1994, he served as President and Chief Executive Officer of The
Regina Company, a manufacturer of vacuum cleaners and other floor care
equipment. Mr. Jones is also a director at Tyson Foods; University of
Wisconsin-Madison, School of Business Dean's Advisory Board and Unison College,
Kentucky, Board of Directors.
ROBERT L. CAULK joined the Company in November 1999 as the Company's
President and Chief Executive Officer. Prior to joining the Company, Mr. Caulk
spent five years from 1995-1999 as the President and Executive Vice President of
Clopay Building Products Company, Inc., a marketer and distributor of garage
doors. Between 1989 and 1994, Mr. Caulk was President, Vice President/General
Manager and Director of Corporate Acquisitions and Planning at Johnson Worldwide
Associates, a manufacturer of outdoor recreational products. From 1980 to 1989,
Mr. Caulk held various management positions at S.C. Johnson & Son, Inc.
Mr. Caulk is also a director at Sligh Furniture Company.
RICHARD A. BENDER has served as the Company's Senior Vice President, Human
Resources and Operations since 1996. Mr. Bender joined the Company in 1988 as
Vice President of Human Resources. He has held various positions during his
tenure with the Company, including responsibilities in the Company's former
metals group division, administration, management information systems, product
supply and distribution. Prior to joining the Company, Mr. Bender was a general
manager in an automotive related private business and spent 13 years in various
roles including sales, plant operations and human resources at Colgate-Palmolive
Co.
DANIEL J. JOHNSTON has served as the Company's Senior Vice President, Chief
Financial Officer, Information Systems, Legal and Administration since 1997.
Mr. Johnston joined the Company in 1994 as Controller and then worked as
Assistant to the Chairman. Prior to joining the Company, he spent five years
from 1990 to 1994 at Cooper Industries, Inc. in various financial functions at
its corporate office and Bussmann Division. Prior to joining Cooper
Industries, Inc., he was employed by PriceWaterhouse, LLP from 1982 to 1990.
21
MATTHEW M. MCCARTHY has served as the Company's Vice President and General
Counsel since 1994, as well as the Company's Secretary since 1999. Prior to
joining the Company, Mr. McCarthy was Vice President, General Counsel and
Secretary from 1986 to 1994 for Wetterau Incorporated, a food wholesaler and
retailer based in St. Louis. From 1975 to 1986 Mr. McCarthy served in various
in-house corporate legal functions at Wetterau and at General Grocer Company,
both St. Louis area based food distributors.
DAVID C. PRATT was the Company's President and Chief Executive Officer from
the Company's inception until the Recapitalization and served as Chairman of the
Board until Mr. Jones' acceptance of that position. Mr. Pratt has continued as a
director and consultant of the Company.
C. HUNTER BOLL became a director of the Company in January 1999 in
connection with the Recapitalization. Mr. Boll is a managing director of Thomas
H. Lee Partners, L.P. where he has been employed since 1986. Mr. Boll is also a
Principal Managing Director and Member of Thomas H. Lee Advisors, LLC, the
general partner of Thomas H. Lee Partners, L.P., which controls the general
partner of Thomas H. Lee Equity Fund IV, L.P. and Vice President of Thomas H.
Lee Advisors I and T. H. Lee Mezzanine II, affiliates of ML-Lee Acquisition
Fund, L.P., ML-Lee Acquisition Fund II, L.P. and ML-Lee Acquisition Fund II
(Retirement Accounts), L.P., respectively. Mr. Boll also serves as a director of
Cott Corporation, The Smith & Wollensky Restaurant Group, Inc., Tucker Anthony
Sutro, Metris Companies, Inc., Big V Supermarkets, Inc., TransWestern
Publishing, L.P. and several private corporations.
SCOTT A. SCHOEN became a director of the Company in January 1999 in
connection with the Recapitalization. He is a Managing Director of Thomas H. Lee
Partners, L.P., which he joined in 1986. In addition, Mr. Schoen is a Principal
Managing Director and Member of Thomas H. Lee Advisors, LLC, the general partner
of Thomas H. Lee Partners, L.P., which controls the general partner of Thomas H.
Lee Equity Fund IV, LP and Vice President of Thomas H. Lee Advisors I and T. H.
Lee Mezzanine II, affiliates of ML-Lee Acquisition Fund, L.P., ML-Lee
Acquisition Fund II, L.P. and ML-Lee Acquisition Fund II (Retirement Accounts),
L.P., respectively. He is also a director of Rayovac Corporation, Syratech
Corporation, TransWestern Publishing, L.P., Wyndham International Inc. and
several private corporations.
CHARLES A. BRIZIUS became a director of the Company in January 1999 in
connection with the Recapitalization. Mr. Brizius worked at Thomas H. Lee
Partners, L.P. from 1993 to 1995, rejoined in 1997 and currently serves as a
Vice President. Mr. Brizius is a Member of Thomas H. Lee Advisors, LLC, the
general partner of Thomas H. Lee Partners, L.P., which controls the general
partner of Thomas H. Lee Equity Fund IV, L.P. From 1991 to 1993, Mr. Brizius
worked at Morgan Stanley & Co. Incorporated in the Corporate Finance Department.
He is also a director of Eye Care Centers of America, Inc., Big V
Supermarkets, Inc. and TransWestern Publishing, L.P.
22
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation of the Company's current
Chief Executive Officer during 2000 and other individuals who either served, or
acted in a similar capacity, as the Company's Chief Executive Officer during
2000 and the four other most highly compensated executive officers serving as
executive officers during 2000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
ANNUAL
COMPENSATION
------------------- OTHER ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(B) COMPENSATION(C)
- --------------------------- -------- -------- --------------- ---------------
Robert L. Caulk ....................... 2000 400,000 120,000 96,144 --
PRESIDENT AND CHIEF EXECUTIVE 1999 100,000 30,247
OFFICER(A)
Richard A. Bender ..................... 2000 300,000 -- -- --
SENIOR VICE PRESIDENT, HUMAN 1999 300,000 120,000 -- 2,808,490
RESOURCES AND OPERATIONS
Daniel J. Johnston .................... 2000 300,000 -- -- --
SENIOR VICE PRESIDENT, CHIEF 1999 300,000 120,000 -- 2,808,490
FINANCIAL OFFICER, INFORMATION
SYSTEMS, LEGAL AND ADMINISTRATION
Matthew M. McCarthy ................... 2000 186,166 11,000 5,390 --
VICE PRESIDENT, GENERAL COUNSEL AND 1999 179,000 46,504 5,880 --
SECRETARY
James J. Barone ....................... 2000 216,354 -- 88,649 --
SENIOR VICE PRESIDENT, SALES(D) 1999 -- -- -- --
- ------------------------
(a) Mr. Caulk joined the Company in November 1999.
(b) Includes automobile allowance and relocation.
(c) Includes change of control bonuses paid as a result of the Recapitalization.
Mr. Bender contributed $700,000 while Mr. Johnston contributed $1,000,000 of
the change of control bonuses to a grantor trust established pursuant to the
Company's Deferred Compensation Plan.
(d) Mr. Barone resigned from his position September 1, 2000
STOCK OPTION GRANTS
No stock options were granted to the Named Executive Officers during 2000,
except for the options granted to Mr. Barone which were subsequently cancelled
during 2000.
23
STOCK OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the Named
Executive Officers concerning unexercised options held as of December 31, 2000.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE MONEY OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT FY-END FY-END ($)
EXERCISE(A) REALIZED EXERCISEABLE/UNEXERCISEABLE EXERCISABLE/UNEXERCISEABLE(B)
----------- -------- --------------------------- -----------------------------
Robert L. Caulk............ -- -- --/800,000 --
Richard A. Bender.......... -- -- --/600,000 --
Daniel J. Johnston......... -- -- --/600,000 --
Matthew M. McCarthy........ -- -- --/15,000 --
James J. Barone............ -- -- --/-- --
- ------------------------
(a) As of December 31, 2000, no outstanding options were exercised.
(b) There is currently no active trading market for the Common Stock and thus
the fair market value as of December 31, 2000 is not determinable.
COMPENSATION OF DIRECTORS
During 2000, David C. Pratt received:
- a consulting payment of $15,000 per month,
- a directorship fee of $25,000 per year.
During 2000, David A. Jones received:
- an annual payment for services rendered of $300,000, which supersedes his
directorship fees,
- $71,246 of annual incentive compensation in accordance with the Company's
attainment of certain levels of EBITDA
EMPLOYMENT AGREEMENTS
In 1999, Messrs. Caulk, Bender and Johnston each entered into an employment
agreement with the Company. The Caulk agreement provides for employment until
October 2002 and the Bender and Johnston agreements provide for employment until
December 2001 unless terminated earlier. The employment agreements provide for
annual incentive compensation to be determined in accordance with the Company's
attainment of certain EBITDA targets. Each employment agreement may be
terminated by the Company at any time with or without cause. If the employment
agreement is terminated by the Company for cause or by the executive without
good reason, the terminated executive will be entitled to any unpaid base salary
through the date of termination plus any unpaid incentive compensation. If the
Company terminates the employment agreement without cause or if the executive
terminates the employment agreement for good reason or the executive dies or
becomes disabled, he will be entitled to any unpaid base salary through the date
of termination, any unpaid incentive compensation and, under certain conditions,
his base salary through the later of the contract period and the first
anniversary of his termination. Each employment agreement provides for
non-compete, non-solicitation and confidentiality provisions through the later
of one year after the executive's date of termination or the last date severance
payments are owed to the executive. In connection with entering his employment
agreement, Mr. Johnston purchased $1.0 million of common stock, and Mr. Bender
purchased $700,000 of common stock. Messrs. Johnston and Bender purchased their
common stock out of the proceeds of a bonus paid at the closing of the
Recapitalization. Under
24
some circumstances, the Company has the right to repurchase the shares owned by
Messrs. Johnston and Bender.
1999 STOCK OPTION PLAN
During 1999, the Company instituted the 1999 Stock Option Plan, which is
administered by the Compensation Committee of the Company's board of directors.
The 1999 Stock Option Plan was designed as an incentive to selected employees,
officers and directors to acquire proprietary interest in the Company. The
options are not designed to be incentive stock options within the meaning of
Section 422 of the U.S. Internal Revenue Code of 1986, as amended. The option
pool under the 1999 Stock Option Plan consists of an aggregate of 4,000,000
shares of the Company's common stock that may consist of shares of the Company's
Class A Voting Common Stock, the Company's Class B Non-Voting Common Stock or
some combination of Class A Voting Common Stock and Class B Non-Voting Common
Stock. The options to purchase shares of common stock are subject to vesting
schedules, which are both time and performance based. Unvested options are
forfeited upon termination of employment.
2001 STOCK OPTION PLAN
During 2000, the Company instituted the 2001 Stock Option Plan, which is
administered by the Compensation Committee of the Company's board of directors.
The 2001 Stock Option Plan was designed as an incentive to selected employees,
officers and directors to acquire proprietary interest in the Company. The
options are not designed to be incentive stock options within the meaning of
Section 422 of the U.S. Internal Revenue Code of 1986, as amended. The option
pool under the 2001 Stock Option Plan consists of an aggregate of
5,800,000 shares of the Company's common stock that may consist of shares of the
Company's Class A Voting Common Stock, the Company's Class B Non-Voting Common
Stock or some combination of Class A Voting Common Stock and Class B Non-Voting
Common Stock. The options to purchase shares of common stock are subject to
vesting schedules, which are both time and performance based. Unvested options
are forfeited upon termination of employment.
DEFERRED COMPENSATION PLAN
On January 20, 1999, the Company established the United Industries
Corporation Deferred Compensation Plan ("the Plan"). The Compensation Committee
of the Company's board of directors administers the Plan. Messrs. Bender and
Johnston are eligible to participate in the Plan. The Plan provides for the
establishment of a grantor trust for the purpose of accumulating the assets
contributed pursuant to the Plan. The grantor trust used the funds contributed
to it to purchase:
- 70,000 shares of the Company's Class A Voting Common Stock and 70,000
shares of the Company's Class B Non-Voting Common Stock for the benefit of
Mr. Bender; and
- 100,000 shares of the Company's Class A Voting Common Stock and 100,000
shares of the Company's Class B Non-Voting Common Stock for the benefit of
Mr. Johnston.
401(k) PLAN
The Company maintains a 401(k) defined contribution plan. The plan allows
for discretionary participant elective contributions. The Company is required to
match 50% of each participant's contributions up to 6% of the employee's salary
for those employees having less than 10 years of service and 75% of each
participant's contributions up to 6% of the employee's salary for those
employees having 10 or more years of service.
25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Class A Voting Common Stock by each of the Company's
directors and Named Executive Officers, by all of the Company's directors and
executive officers as a group, and by each owner of more than 5% of the
outstanding shares of Class A Voting Common Stock. Each directors and Named
Executive Officer owns an equal number of the Company's Class B Non-Voting
Common Stock.
NAME OF BENEFICIAL OWNER(1) NUMBER OF SHARES PERCENT OF CLASS
- --------------------------- ---------------- ----------------
UIC Holdings, L.L.C......................................... 25,468,000 92.1%
c/o Thomas H. Lee Company
75 State Street
Boston, Massachusetts 02109
David C. Pratt(2)........................................... 291,973 1.1%
Richard A. Bender(4)........................................ -- *
Daniel J. Johnston(4)....................................... -- *
Robert L. Caulk............................................. 100,000 *
Matthew M. McCarthy......................................... 1,000 *
David A. Jones.............................................. 100,000 *
C. Hunter Boll(3)........................................... 25,468,000 92.1%
Scott A. Schoen(3).......................................... 25,468,000 92.1%
Charles A. Brizius(3)....................................... 25,468,000 92.1%
All Directors and Executive Officers as a Group
(9 persons)(3)............................................ 25,960,973 93.9%
- ------------------------
* Denotes less than one percent.
(1) Beneficial owner generally means any person who, directly or indirectly, has
or shares voting power or investment power with respect to a security. All
of the parties listed above are party to a stockholders agreement, pursuant
to which they have agreed to vote their shares in the election of directors
in accordance with the terms of the stockholders agreement. The number of
shares indicated in this table does not include the shares of Class A Voting
Common Stock that are held by other stockholders subject to the stockholders
agreement. Unless otherwise indicated, the Company believes that each person
has sole voting and investment power with regard to their shares listed as
beneficially owned. The calculation of beneficial ownership is based on
27,650,000 shares outstanding.
(2) Includes 134,756 shares of the Company's Class A Voting Common Stock held by
the David C. Pratt Grantor Retained Interest Trust and 157,216 shares of the
Company's Class A Voting Common Stock held by the 1994 Ryder Pratt Grantor
Retained Annuity Trust.
(3) All of the equity interests in UIC Holdings, L.L.C. are controlled by the
Thomas H. Lee Equity Fund IV, L.P. and its affiliates, which may therefore
be deemed the beneficial owner of the shares held by UIC Holdings, L.L.C.
All of the shares beneficially owned by the Thomas H. Lee Equity Fund IV,
L.P. and its affiliates may be deemed to be beneficially owned by THL Equity
Advisors IV, L.L.C. ("Advisors"), Thomas H. Lee Equity Fund IV, L.P. the
general partner of THL Fund IV, by THL Equity Trust IV, the general partner
of Advisors, by THL and by Messrs. Boll, Schoen and Brizius and the other
officers of Thomas H. Lee Equity Fund IV, L.P. Each of these persons
disclaims beneficial ownership of such shares.
(4) Deferred Compensation for Messrs. Bender (70,000 shares of each of our
Class A Voting Common Stock and Class B Non-Voting Common Stock) and
Johnston (100,000 shares of each class) are held under a grantor trust.
26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PROFESSIONAL SERVICES AGREEMENT
In connection with the Recapitalization, the Company entered into a
professional services agreement with Thomas H. Lee Capital, LLC and THL Equity
Advisors IV, LLC. The agreement has a term of three years and automatically
extends for successive one year periods thereafter, unless the parties give
30 days' notice prior to the end of the term. The agreement provides for a
financial advisory fee of $12.0 million in connection with structuring,
negotiating and arranging the Recapitalization and structuring, negotiating and
arranging the debt financing, which was paid at the closing of the
Recapitalization. In addition, Thomas H. Lee Capital, LLC and THL Equity
Advisors IV, LLC will initially receive an aggregate of $62,500 per month for
management and other consulting services provided to the Company. The agreement
also provides that the Company will reimburse reasonable out-of-pocket expenses
incurred in connection with management advisory services. The Company believes
that the terms of the professional services agreement are comparable to those
that would have been obtained by unaffiliated sources.
STOCKHOLDERS AGREEMENT
In connection with the Recapitalization, the Company entered into a
stockholders agreement with UIC Holdings, L.L.C., and other stockholders of the
Company. Under the stockholders agreement, the stockholders are required to vote
their shares of capital stock of the Company for any sale or reorganization of
the Company that has been approved by the Company's board of directors or a
majority of the stockholders. The stockholders agreement also grants the
stockholders the right to affect the registration of their common stock they
hold for sale to the public, subject to some conditions and limitations. If the
Company proposes to register any of the Company's securities under the
Securities Act of 1933, as amended, the stockholders are entitled to notice of
such registration, subject to some conditions and limitations. The Company will
pay fees, costs and expenses of registration affected on behalf of the
stockholders under the stockholders agreement, other than underwriting discounts
and commissions.
RECAPITALIZATION AGREEMENT
The Company's Recapitalization Agreement with UIC Holdings, L.L.C., which is
owned by Thomas H. Lee Equity Fund IV, L.P., contains customary provisions,
including representations and warranties with respect to the condition and
operations of the business, covenants with respect to the conduct of the
business prior to the Recapitalization closing date and various closing
conditions, including the continued accuracy of the representations and
warranties. In general, the representations and warranties made in the
Recapitalization agreement survive until the earlier of 10 days following the
delivery of the Company's December 31, 1999, audited financial statements or
April 15, 2000. Representations and warranties with respect to tax matters
survive until 30 days after the expiration of the applicable statute of
limitations; representations with respect to environmental matters survive until
December 31, 2002. Representations and warranties regarding ownership of stock
do not expire. The total consideration paid to redeem the Company's common stock
is subject to adjustments based on the excess taxes of the Company's previous
stockholders arising from the Company's Section 338(h)(10) election.
Pursuant to the Recapitalization agreement and in consideration of payments
received under their Recapitalization agreement, David C. Pratt and Mark R.
Gale, the Company's former Vice President and Secretary, agreed that for a
period ending on the fourth anniversary of the Recapitalization closing date not
to own, control, participate or engage in any line of business in which the
Company is actively engaged or any line of business competitive with the Company
anywhere in the the United States and any other country in which the Company was
doing business at the closing of the Recapitalization. In
27
addition, each of the former stockholders of the Company has agreed that for a
period ending on the fourth anniversary of the Recapitalization closing date not
to contact, approach or solicit for the purpose of offering employment to or
hiring any person employed by the Company during the four year period.
Pursuant to the Recapitalization, the Company redeemed a portion of the
Company's common stock held by the Company's stockholders, and UIC Holdings,
L.L.C. and certain members of the Company's senior management purchased a
portion of the Company's common stock from the Company's stockholders. In the
Recapitalization, Messrs. Bender and Johnston collectively received an aggregate
of approximately $4.0 million in cash and an additional $1.7 million with which
the officers purchased the Company's common stock through grantor trusts.
LEASE AGREEMENTS
The Company leases six facilities in St. Louis from an affiliate of David C.
Pratt. Five of the leases expire on December 31, 2010. The Company has options
to terminate these leases on a year-to-year basis with advance notice of at
least 12 months. One of the leases is a sublease agreement expiring on
December 31, 2005, but may be extended for two additional five-year periods
beginning January 1, 2006. The Company believes that the terms of these leases
are similar to those negotiated by unrelated parties at arms length.
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
PAGE OF
10-K
--------
(a) 1. Financial Statements Covered by Report of Independent
Accountants............................................... 30
The Financial Statements listed below are included in this
Report:
Balance Sheets at December 31, 2000 and 1999................ 31
Statements of Operations for the years ended December 31,
2000, 1999, and 1998........................................ 32
Statements of Cash Flows for the years ended December 31,
2000, 1999, and 1998........................................ 33
Statements of Shareholders' (Deficit) Equity for the years
ended December 31, 2000, 1999, and 1998................... 34
Notes to Financial Statements............................... 35
Financial Statement Schedules not included have been omitted
because they are not applicable or the required information
is shown in the financial statements or notes thereto.
2. Exhibits--See Exhibit Index.
(b) Reports on Form 8-K filed during the last quarter of 2000:
None.
29
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENTS
Board of Directors and Shareholders
United Industries Corporation
St. Louis, Missouri
In our opinion, the accompanying balance sheets and the related satatements of
operations, statements of changes in stockholders' (deficit) equity and
statement of cash flows present fairly, in all material respects, the financial
position of United Industries Corporation at December 31, 2000 and December 31,
1999, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
ST. LOUIS, MISSOURI
FEBRUARY 13, 2001
30
UNITED INDUSTRIES CORPORATION
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(DOLLARS IN THOUSANDS)
DECEMBER 31,
---------------------
2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- $ --
Accounts receivable (less allowance for doubtful accounts
of $777 and $1,031 at December 31, 2000 and 1999)....... 19,944 19,165
Inventories............................................... 47,007 53,243
Prepaid expenses.......................................... 6,357 3,501
--------- ---------
Total current assets.................................... 73,308 75,909
Equipment and leasehold improvements, net................... 24,736 27,860
Deferred income tax......................................... 116,763 116,268
Other assets................................................ 20,087 20,870
--------- ---------
Total assets............................................ $ 234,894 $ 240,907
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt and capital lease
obligation.............................................. $ 5,675 $ 6,428
Accounts payable.......................................... 18,625 25,507
Accrued expenses.......................................... 24,791 27,464
Short-term borrowing...................................... 15,000 --
--------- ---------
Total current liabilities............................... 64,091 59,399
Long-term debt.............................................. 329,000 354,875
Capital lease obligation.................................... 4,626 7,952
Other liabilities........................................... 7,940 5,483
--------- ---------
Total liabilities....................................... 405,657 427,709
Stockholders' deficit:
Common stock.............................................. 554 554
Preferred stock........................................... -- --
Warrants.................................................. 2,784 --
Additional paid-in capital................................ 139,081 126,865
Accumulated deficit....................................... (310,482) (311,521)
Common stock held in grantor trust........................ (2,700) (2,700)
--------- ---------
Total stockholders' deficit............................. (170,763) (186,802)
--------- ---------
Total liabilities and stockholders' deficit............. $ 234,894 $ 240,907
========= =========
See accompanying notes to financial statements.
31
UNITED INDUSTRIES CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, & 1998
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
Net sales................................................... $288,618 $304,048 $282,676
-------- -------- --------
Operating costs and expenses:
Cost of goods sold........................................ 146,229 150,344 140,445
Advertising and promotion expenses........................ 25,204 29,182 31,719
Selling, general and administrative expenses.............. 66,719 70,886 61,066
Dursban charge............................................ 8,000 -- --
Recapitalization transaction fees......................... -- 10,690 --
Change of control bonuses................................. -- 8,645 --
Severance charge.......................................... -- 2,446 --
Non-recurring litigation charges.......................... -- 1,647 2,321
-------- -------- --------
Total operating costs and expenses........................ 246,152 273,840 235,551
-------- -------- --------
Operating income............................................ 42,466 30,208 47,125
Interest expense............................................ 40,973 35,223 1,106
-------- -------- --------
Income (loss) before provision for income taxes,
discontinued operations and extraordinary item............ 1,493 (5,015) 46,019
Income tax expense.......................................... 134 4,257 992
-------- -------- --------
Income (loss) from continuing operations, before
extraordinary item........................................ 1,359 (9,272) 45,027
Income from discontinued operations, net of tax............. -- -- 1,714
-------- -------- --------
Income (loss) before extraordinary item..................... 1,359 (9,272) 46,741
Extraordinary loss from early extinguishment of debt, net of
income tax benefit of $1,425.............................. -- (2,325) --
-------- -------- --------
Net income (loss)........................................... $ 1,359 $(11,597) $ 46,741
======== ======== ========
See accompanying notes to financial statements.
32
UNITED INDUSTRIES CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, & 1998
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income (loss)......................................... $ 1,359 $(11,597) $ 46,741
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) -- --
Income from discontinued operations..................... -- -- (1,714)
Deferred compensation................................... -- 2,700 --
Depreciation and amortization........................... 5,261 4,715 3,838
Loss on disposal of equipment........................... -- 54 31
Recapitalization transaction fees....................... -- 10,690 --
Amortization of deferred financing fees................. 2,420 1,991 --
Provision for deferred income tax expense............... 134 2,832 --
Changes in assets and liabilities:
Increase in accounts receivable....................... (779) (2,011) (124)
(Increase) decrease in inventories.................... 6,236 (11,799) 193
Increase in prepaid expenses.......................... (716) (57) (476)
Increase (decrease) in accounts payable and accrued
expenses............................................. (3,766) 9,243 2,411
Increase in Dursban charge............................ 6,066 -- --
(Increase) decrease in other assets................... (137) 52 --
Other, net............................................ -- (129) (137)
-------- -------- --------
Cash flow from continuing operations................ 14,896 10,434 50,763
Cash flow from discontinued operations.............. -- -- 1,858
-------- -------- --------
Net cash provided by operating activities......... 14,896 10,434 52,621
Investing activities:
Purchases of equipment and leasehold improvements......... (3,950) (3,038) (3,628)
-------- -------- --------
Cash used by investing activities--continuing
operations.............................................. (3,950) (3,038) (3,628)
Cash used by investing activities -- discontinued
operations.............................................. -- -- (221)
-------- -------- --------
Net cash used by investing activities............. (3,950) (3,038) (3,849)
Financing activities:
Redemption of treasury stock.............................. -- (337,895) --
Transaction costs related to the redemption of treasury
stock................................................... (12,175) (11,378) --
Recapitalization transactions with affiliate.............. -- (4,249) --
Issuance of common stock.................................. -- 1,990 --
Issuance of preferred stock............................... 15,000 -- --
Shareholder equity contribution........................... -- 8,425 --
Debt issuance costs....................................... (1,883) (19,934) --
Proceeds from the issuance of debt........................ 15,000 670,205 --
Repayment of borrowing on revolver and other debt......... (26,888) (314,810) (3,997)
Repayment of note receivable from employee................ -- 250 --
Issuance of treasury stock................................ -- -- (1,173)
Net advances from affiliates.............................. -- -- 3,428
Distributions paid........................................ -- -- (47,346)
-------- -------- --------
Net cash provided by financing activities......... (10,946) (7,396) (49,088)
Net decrease in cash and cash equivalents................... -- -- (316)
Cash and cash equivalents--beginning of period.............. -- -- 316
-------- -------- --------
Cash and cash equivalents--end of period.................... $ -- $ -- $ --
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 40,927 $ 31,383 $ 1,584
Income taxes paid......................................... $ 161 $ 371 $ 567
Noncash financing activity:
Execution of capital lease.............................. $ 5,344 $ 9,215 $ --
Retirement of treasury stock............................ $ -- $ 12,910 $ --
Treasury stock reissued for shareholder notes........... $ -- $ -- $ 4,645
Dividends declared...................................... $ 320 $ -- $ --
See accompanying notes to financial statements.
33
UNITED INDUSTRIES CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, & 1998
(DOLLARS IN THOUSANDS)
CLASS A NON-
ACCUMULATED CLASS A VOTING CLASS B VOTING VOTING
OTHER COMMON STOCK COMMON STOCK PREFERRED STOCK
COMPREHENSIVE --------------------- --------------------- -------------------
INCOME SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------- ---------- -------- ---------- -------- -------- --------
Balance at January 1,
1998...................... $ -- 1,000 $ 1 1,000 $ 1 -- $ --
Net income..................
Other comprehensive income..
Distributions paid..........
Treasury stock purchased....
Treasury stock cost
adjustment................
---- ---------- ---- ---------- ---- ------ ----
Balance at December 31,
1998...................... -- 1,000 1 1,000 1 -- --
Net loss....................
Other comprehensive income..
83,378.37838-for-1 stock
split and Treasury stock
redemption................ 27,699,000 277 27,699,000 277
Stock received and redeemed
in settlement of
shareholder note
purchased................. (50,000) (1) (50,000) (1)
Common stock issued under
stock purchase plan....... 274,000 3 274,000 3
Spin-off of the Metals
Business..................
Fees and expenses related to
the Recapitalization and
equity transactions.......
Recapitalization
transactions with
affiliate................. (544,000) (6) (544,000) (6)
Equity contributed by senior
managers.................. 270,000 3 270,000 3
Shareholder equity
contribution..............
Tax benefit from
Recapitalization..........
---- ---------- ---- ---------- ---- ------ ----
Balance at December 31,
1999...................... -- 27,650,000 277 27,650,000 277 -- --
Net income..................
Other comprehensive income..
Preferred stock issued...... 15,000 --
Warrants issued.............
Dividends declared..........
---- ---------- ---- ---------- ---- ------ ----
Balance at December 31,
2000...................... $ -- 27,650,000 $277 27,650,000 $277 15,000 $ --
==== ========== ==== ========== ==== ====== ====
COMMON
RETAINED STOCK HELD
WARRANTS ADDITIONAL EARNINGS/ IN TREASURY STOCK TOTAL
------------------- PAID-IN (ACCUMULATED GRANTOR ------------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) TRUST SHARES AMOUNT EQUITY
-------- -------- ---------- ------------ ---------- -------- -------- -------------
Balance at January 1,
1998...................... -- $ -- $ 972 $ 70,798 $ -- (400) $ (7,323) $ 64,449
Net income.................. 46,741 46,741
Other comprehensive income.. --
Distributions paid.......... (47,346) (47,346)
Treasury stock purchased.... (120) (5,818) (5,818)
Treasury stock cost
adjustment................ 231 231
------ ------ -------- --------- ------- ---- -------- ---------
Balance at December 31,
1998...................... -- -- 972 70,193 -- (520) (12,910) 58,257
Net loss.................... (11,597) (11,597)
Other comprehensive income.. --
83,378.37838-for-1 stock
split and Treasury stock
redemption................ (554) (363,805) 520 12,910 (350,895)
Stock received and redeemed
in settlement of
shareholder note
purchased................. (521) -- (523)
Common stock issued under
stock purchase plan....... 2,738 2,744
Spin-off of the Metals
Business.................. -- (5,791) (5,791)
Fees and expenses related to
the Recapitalization and
equity transactions....... (688) (688)
Recapitalization
transactions with
affiliate................. (4,237) (4,249)
Equity contributed by senior
managers.................. 2,694 (2,700) --
Shareholder equity
contribution.............. 8,425 8,425
Tax benefit from
Recapitalization.......... 117,515 117,515
------ ------ -------- --------- ------- ---- -------- ---------
Balance at December 31,
1999...................... -- -- 126,865 (311,521) (2,700) -- -- (186,802)
Net income.................. 1,359 1,359
Other comprehensive income..
Preferred stock issued...... -- -- 15,000 15,000
Warrants issued............. 3,200 2,784 (2,784)
Dividends declared.......... (320) (320)
------ ------ -------- --------- ------- ---- -------- ---------
Balance at December 31,
2000...................... 3,200 $2,784 $139,081 $(310,482) $(2,700) -- $ -- $(170,763)
====== ====== ======== ========= ======= ==== ======== =========
See accompanying notes to financial statements.
34
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investment instruments purchased
with an original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined using the first-in, first-out method. Cost includes raw materials,
direct labor and overhead. Provision for potentially obsolete or slow-moving
finished goods and raw materials are made based on management's analysis of
inventory levels and future sales forecasts.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Expenditures for equipment and leasehold improvements and those that
substantially increase the useful lives of equipment are capitalized.
Maintenance, repairs and minor renewals are expensed as incurred. When equipment
is retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the accounts and gains or losses on the
dispositions are reflected in earnings. Depreciation is computed on the
straight-line basis by charges to costs or expenses at rates based on the
estimated useful lives of the assets. Machinery and equipment are depreciated
over periods ranging from three to twelve years. Office furniture and equipment
are depreciated over periods ranging from five to ten years. Automobiles and
trucks are depreciated over periods ranging from three to seven years. Leasehold
improvements are amortized over periods ranging from five to thirty-nine years.
Property under capital lease is amortized over the term of the lease.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining useful lives of equipment and leasehold
improvements may warrant revision or that the remaining balance of equipment and
leasehold improvements may not be recoverable. The measurement of possible
impairment is based on the ability to recover the balance of the equipment and
leasehold improvements from expected future operating cash flows on an
undiscounted basis. In the opinion of management, no such impairment existed as
of December 31, 2000 and 1999.
GOODWILL
Goodwill is included in other assets and represents the excess of cost over
the net tangible assets of acquired businesses and is amortized over 40 years.
Subsequent to the acquisition, the Company continually evaluates whether later
events and circumstances have occurred that indicate the remaining
35
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
useful life of an intangible asset may warrant revision or that the remaining
balance of an intangible asset may not be recoverable. The measurement of
possible impairment is based on the ability to recover the balance of intangible
assets from expected future operating cash flows on an undiscounted basis. In
the opinion of management, no such impairment existed as of December 31, 2000
and 1999.
ADVERTISING AND PROMOTION EXPENSES
The Company advertises and promotes its products through national and
regional media. Products are also advertised and promoted through cooperative
programs with retailers. The Company expenses advertising and promotion costs as
incurred, although costs incurred during interim periods are generally expensed
ratably in relation to revenues.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and approximated
$1,019, $1,038, and $776 for 2000, 1999 and 1998.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the shipping terms
applicable to each sale. Sales are net of discounts and allowances.
COMPREHENSIVE INCOME
Comprehensive income is defined as the total of net income and all other
non-owner changes in equity. The Company has no other items that affect
comprehensive income other than net income.
INCOME TAXES
In conjunction with the Recapitalization, the Company converted from an "S"
corporation to a "C" corporation. As a "C" corporation, the Company accounts for
income taxes under the asset and liability method. Under this method, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial reporting basis and the tax
basis of the Company's assets and liabilities at enacted tax rates expected to
be in effect when such amounts are recovered or settled.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." Compensation cost for stock options, if any, is
measured as the excess of the fair market value of the Company's stock at the
date of grant over the amount an employee must pay to acquire stock.
EARNINGS PER SHARE
In accordance with generally accepted accounting principles, earnings per
share information is not presented since the Company does not have publicly held
common stock.
36
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
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 $254.7 million; (ii) the
Company's senior managers purchased common stock from the Company's existing
stockholders for approximately $5.7 million; 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 $652.0 million, including related fees and expenses, and the
implied total equity value following the Recapitalization was approximately
$277.0 million. 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 $7.2 million charge to equity to finalize
the costs associated with the Recapitalization increasing the total transaction
value to $659.2 million.
On January 20, 1999, the Recapitalization was funded by:
(i) $225.0 million of borrowings under the Senior Credit Facility;
(ii) $150.0 million of borrowings under the Senior Subordinated Facility;
(iii) $254.7 million equity investment by the THL Parties through the Equity
Investor; (iv) $5.7 million 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.
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 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,
37
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 2--RECAPITALIZATION OF THE COMPANY AND NON-RECURRING CHARGES (CONTINUED)
giving rise to the fee or expense. The allocation of fees and expenses to the
debt, equity and Recapitalization transaction fees is as follows:
RECAPITALIZATION
TRANSACTION
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 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) $2,446 of severance
charges incurred as a result of the President and Chief Executive Officer and
the Senior Vice President, Sales terminating their employment with the Company;
(iii) $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 (iv) $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--DISCONTINUED OPERATIONS
In connection with the Recapitalization, 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 (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.
The Metals Business is accounted for as a discontinued operation in the
accompanying financial statements. The investment in discontinued operations at
December 31, 1998 is primarily comprised of cash, accounts receivable,
inventory, fixed assets, accounts payable and accrued expenses. Operating
results for the Metals Business have been included in the Statements of
Operations for 1998.
Results for discontinued operations are as follows:
DECEMBER 31,
----------------------------------
2000 1999 1998
---------- ---------- --------
Net sales............................................. $ -- $ -- $18,038
Income before income taxes............................ -- -- 1,751
Income tax expense.................................... -- -- 37
---------- ---------- -------
Income from discountinued operations.................. $ -- $ -- $ 1,714
========== ========== =======
38
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--PREFERRED STOCK, COMMON STOCK AND STOCK SPLIT
On November 8, 2000 the Company's Board adopted resolutions recommending
that the Company's stockholders approve amending the Company's Certificate of
Incorporation to:
- Create 15,000 shares of $0.01 par value Class A Preferred Stock to be sold
to UIC Holdings, L.L.C. for $1,000 per share. Dividends accrue at 15% of
the Liquidation Value. The liquidation value of any share shall be equal
to $1,000. Dividends to the extent not paid on December 31 of each year
shall be cumulative. As of December 31, 2000 the total number of shares
outstanding is 15,000 and the cumulative dividend payable is $320.
- Increase the Company's total authorized Class A voting Common Stock from
32,500,000 to 34,100,000 shares to accommodate the Company's granting of
Stock Purchase Warrants to UIC Holdings, L.L.C., which will receive a
10-year option to purchase up to 1,600,000 shares of Class A Common Stock
at $2.00 per share.
- Increase the Company's total authorized Class B non-voting Common Stock
from 32,500,000 to 34,100,000 shares to accommodate the Company's granting
of Stock Purchase Warrants to UIC Holdings, L.L.C., which will receive a
10-year option to purchase up to 1,600,000 shares of Class A Common Stock
at $2.00 per share.
The holders of the issued and outstanding shares of the Company's voting
stock approved of the Board's resolution on November 9, 2000.
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
65.0 million shares, of which 32.5 million have been designated as Class A
Voting Common Stock and 32.5 million have been designated as Class B Non-Voting
Common Stock. As of January 20, 1999 and December 31, 2000, there were
27.6 million shares of Class A Voting Common Stock outstanding and 27.6 million
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.
The Company's articles of incorporation previously authorized 20,000 shares
of $1.00 par value Class A Voting shares and 20,000 shares of $1.00 par value
Class B Non-Voting shares. At December 31, 1998, 740 Class A Voting shares and
740 Class B Non-Voting shares were outstanding.
NOTE 5--INVENTORIES
Inventories are as follows:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Raw materials............................................. $10,663 $ 9,916
Finished goods............................................ 37,343 44,149
Allowance for obsolete and slow-moving inventory.......... (999) (822)
------- -------
Total inventories......................................... $47,007 $53,243
======= =======
39
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 6--EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Equipment and leasehold improvements are as follows:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Machinery and equipment................................... $27,435 $26,791
Office furniture and equipment............................ 10,565 9,606
Automobiles, trucks and aircraft.......................... 6,067 9,573
Leasehold improvements.................................... 7,043 6,848
------- -------
51,110 52,818
Less: accumulated depreciation............................ 26,374 24,958
------- -------
$24,736 $27,860
======= =======
Depreciation expense was $5,050, $4,495, and $3,624 in 2000, 1999, & 1998,
respectively.
NOTE 7--OTHER ASSETS
Other assets are as follows:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Goodwill.................................................. $ 7,988 $ 7,988
Accumulated amortization.................................. (2,175) (1,964)
------- -------
5,813 6,024
------- -------
Deferred financing fees................................... 18,067 16,184
Accumulated amortization.................................. (4,411) (1,991)
------- -------
13,656 14,193
------- -------
Other..................................................... 618 653
------- -------
Total other assets........................................ $20,087 $20,870
======= =======
40
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 8--ACCRUED EXPENSES
Accrued expenses are as follows:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Amounts due certain shareholders for recapitalization
costs................................................... $ -- $13,000
Advertising and promotional............................... 5,520 4,324
Dursban charge............................................ 6,066 --
Interest.................................................. 3,886 3,840
Cash overdraft............................................ 6,181 2,078
Dividend payable.......................................... 320 --
Severance charges......................................... 1,010 1,805
Settlement charges and litigation......................... 52 114
Other..................................................... 1,756 2,303
------- -------
Total accrued expenses.................................... $24,791 $27,464
======= =======
NOTE 9--LONG-TERM DEBT AND CREDIT FACILITIES
Long-term debt is comprised of the following:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Senior Credit Facility:
Term loan A........................................... $ 48,430 $ 62,500
Term loan B........................................... 135,878 148,125
Revolving credit facility............................. 15,000 --
9 7/8% Series B Registered Senior Subordinated Notes.... 150,000 150,000
-------- --------
349,308 360,625
Less portion due within one year........................ (20,308) (5,750)
-------- --------
Total long-term debt net of current portion............. $329,000 $354,875
======== ========
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"), under which no borrowings
were outstanding at the closing of the Recapitalization; (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 mature in January 2005,
and Term Loan B matures in January 2006. The revolving credit facility is
subject to a clean-down period during which the aggregate amount outstanding
under the revolving credit facility shall not exceed $10.0 million for 30
consecutive days occurring during the period between August 1 and November 30 in
each calendar year.
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. 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.
41
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 9--LONG-TERM DEBT AND CREDIT FACILITIES (CONTINUED)
The Senior Credit Facility agreement contains restrictive affirmative,
negative and financial covenants. Affirmative and negative convenants 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 covenants 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 have been reflected
as deferred financing fees in January 2000 and amortized over the life of the
debt as interest expense.
On September 30, 2000, the Company was not in compliance with certain
financial covenants. On November 9, 2000, the Senior Credit Facility was amended
to provide new financial covenant 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 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 UIC Holding, L.L.C. 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
the 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 L.L.C. at
a price of $1,000 per share.
Under the new covenants, interest on the revolving credit facility, Term
Loan A and Term Loan B ranges from 250 to 400 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 6.64%
at December 31, 2000. The company was in compliance with all covenants at
December 31, 2000.
The Senior Credit Facility may be prepaid at any time in whole or in part
without premium or penalty. During 2000, principal payments on Term Loans A and
B of $14.1 million and $12.2 million, respectively, were paid, which included
optional principal prepayments of $4.1 million and $10.8 on Term Loan A and Term
Loan B, respectively. 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. Management intends to pay a full year of principal
repayment installments in 2001 in accordance with the Senior Credit Facility
agreement.
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 secure obligations under the Senior Credit Facility.
42
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 9--LONG-TERM DEBT AND CREDIT FACILITIES (CONTINUED)
The 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 registered under the
securities act of 1933. The new notes are substantially identical to the old
notes.
$15 million were outstanding under the $80.0 million Revolving Credit
Facility at December 31, 2000.
There were no compensating balance requirements for the $80.0 million
Revolving Credit Facility at December 31, 2000.
The carrying amount of the Company's obligation under the Senior Credit
Facility approximates fair value because the interest rates are based on
floating interest rates identified by reference to market rates. The fair value
of the 9 7/8% Senior Subordinated Notes was $76,500 at December 31, 2000 based
on the quoted market price of the notes at that date.
Aggregate maturities under the Senior Credit Facility (excluding the
revolving credit facility) and the Senior Subordinated Notes are as follows:
2001........................................................ $ 5,307
2002........................................................ 10,615
2003........................................................ 15,804
2004........................................................ 17,533
2005........................................................ 102,382
Thereafter.................................................. 182,666
--------
$334,307
========
NOTE 10--TREASURY STOCK
On January 20, 1999, the Company redeemed all of its treasury stock on hand.
(See Note 2--Recapitalization of the Company and other matters)
On January 30, 1998, the Company purchased 120 shares, which represented all
of the outstanding Common stock of three stockholders for cash of $1,173 and
shareholder notes totaling $4,645. In 1998, the Treasury stock was revalued,
resulting in a decrease of $231 in the value of treasury stock.
NOTE 11--INCOME TAXES
Prior to the Recapitalization, the Company had elected "S" corporation
status under provisions of the Internal Revenue Code, and similar provisions of
Missouri tax law. As such, the Company was not liable for federal or Missouri
state income taxes, but rather the stockholders included their distributive
share of the taxable income of the Company on their respective income tax
returns. The Company was under a contractual obligation to its stockholders to
distribute a percentage of net income equal to 110% of the highest personal
income tax rates to provide the stockholders with funds to make their personal
quarterly estimated income tax payments.
43
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 11--INCOME TAXES (CONTINUED)
In conjunction with the Recapitalization, the Company converted to a "C"
corporation and was subject to federal income tax in 1999. The impact of the
conversion to a "C" corporation was a charge of $2,062, which has been reflected
as income tax expense in the accompanying financial statements.
The income tax expense was allocated as follows for the year ended:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Income from continuing operations........................... $134 $4,257
Extraordinary item.......................................... -- (1,425)
---- ------
Total income tax expense................................ $134 $2,832
==== ======
Income tax expense is as follows for the year ended:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Current:
Federal................................................... $ -- $ --
State and local........................................... -- --
------ ------
Total current........................................... -- --
------ ------
Deferred:
Federal................................................... 1,078 2,569
State and local........................................... 293 487
C-Corporation conversion charge........................... -- 2,062
Valuation allowance release............................... (1,237) (2,286)
------ ------
Total deferred.......................................... 134 2,832
------ ------
Total income tax expense.................................... $ 134 $2,832
====== ======
44
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 11--INCOME TAXES (CONTINUED)
Income tax expense attributable to the income (loss) from continuing
operations differed from the amounts computed by applying the U.S. Federal
income tax rate of 35% to the income (loss) from operations by the following
amounts:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Computed "expected" tax expense (benefit)................. $ 523 $(1,755)
Tax effect of:
Non-deductible recapitalization transaction fees........ -- 3,742
Pre-Recapitalization loss as an "S" corporation......... -- 1,684
Non-deductible goodwill................................. -- 77
Non-deductible meals & entertainment expenses........... 62 35
C-Corporation conversion charge......................... -- 2,062
Valuation allowance release............................. (1,237) (2,286)
State and local taxes (net of Federal tax benefit)...... 786 698
------- -------
Total tax expense on income from continuing
operations.......................................... $ 134 $ 4,257
======= =======
Deferred income taxes are as follows for the year ended:
DECEMBER 31,
---------------------
2000 1999
--------- ---------
Deferred tax assets:
Goodwill............................................ $ 203,693 $ 219,361
NOL carryforward.................................... 24,149 10,954
Inventories......................................... 253 186
Deferred compensation............................... 1,026 1,026
Severance accruals.................................. 384 686
Dursban charge...................................... 2,305 --
Other accruals...................................... 206 485
--------- ---------
Gross deferred tax assets........................... 232,016 232,698
--------- ---------
Valuation allowance................................. (113,921) (115,158)
--------- ---------
Total deferred tax assets............................. 118,095 117,540
--------- ---------
Deferred tax liabilities:
Equipment and leasehold improvements................ (3,158) (2,858)
--------- ---------
Net deferred tax assets............................. $ 114,937 $ 114,682
========= =========
The temporary difference for goodwill results from the step up in tax basis
due to the Recapitalization while maintaining historical basis for book
purposes. This benefit will be utilized over 15 years. Based on historical
levels of income and the length of time required to utilize this benefit, a
valuation allowance representing 50% of the total benefit has been established.
The valuation allowance releases of $1,237 and $2,286 were recorded to 2000 and
1999 income tax expense,
45
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 11--INCOME TAXES (CONTINUED)
respectively, to maintain the 50% valuation allowance against goodwill and the
NOL carryforward created in 1999.
Deferred income tax assets and liabilities are reflected in the balance
sheet are as follows:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Prepaid expenses, net................................... $ 1,332 $ 1,272
Deferred income tax, net................................ 113,605 113,410
-------- --------
$114,937 $114,682
======== ========
NOTE 12--STOCK OPTIONS
1999 STOCK OPTION PLAN
In connection with the Recapitalization, the Company instituted the 1999
Stock Option Plan (the 1999 Plan), which is administered by a committee of the
Company's Board of Directors. The Plan was designed as an incentive plan for
selected employees and directors of the Company. The option pool under the Plan
consists of an aggregate of 4,000,000 shares of the Company's common stock that
may consist of shares of the Company's Class A Voting Common Stock, par value
$0.01, the Company's Class B Non-Voting Common Stock, par value $0.01, or some
combination of Class A Voting Common Stock and Class B Non-Voting Common Stock.
A portion of the options become exercisable ratably over a five-year period
beginning on the date of grant. The remaining portion the options are vested
based upon attainment of certain financial and performance objectives, with a
maximum vesting period of 10 years.
Changes in stock options outstanding at December 31, 2000 are summarized
below:
SHARES PRICE
--------- --------
Outstanding at December 31, 1999.......................... 2,955,000 $5.00
Granted................................................... 527,500 5.00
Exercised................................................. -- 5.00
Cancelled................................................. (386,000) 5.00
---------
Outstanding at December 31, 2000.......................... 3,096,500 $5.00
=========
At December 31, 2000, 903,500 shares were available for future grants and
194,695 shares were vested and exercisable under the Plan.
The Company has elected to account for stock options under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and not the fair value method as provided by FAS 123, "Accounting and
Disclosure of Stock -Based Compensation." Under APB 25, because the exercise
price of the Company's employee stock options equals the estimated fair value of
the underlying stock on the grant date, no compensation expense is recognized
46
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 12--STOCK OPTIONS (CONTINUED)
Pro Forma information regarding net income and earnings per share is
required by FASB Statement No. 123, which also requires that the information be
determined as if the Company accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method. The fair value of
these options estimated at the date of grant using the Black-Scholes
option-pricing model was $1.59. The weighted average fair value of the 2000
options granted is estimated on the date of grant using the following
assumption: expected volatility of 0%, risk-free interest rate of 6.52%, no
dividend yield and an expected life of 5 or 10 years.
Because the Company's employee stock options have characteristics different
than those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
judgment, applying the provisions of FAS 123 does not necessarily provide a
reliable single measure of the fair value of its stock options. It is also not
likely that the current pro forma net income (loss) will be representative of
pro forma net income (loss) in future years. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options vesting period.
The Company's pro forma information is as follows:
2000 1999
-------- --------
Pro Forma Net Income/(Loss).............................. $ 867 $(12,064)
2001 STOCK OPTION PLAN
During 2000, the Company instituted the 2001 Stock Option Plan, which is
administered by the Compensation Committee of the Company's board of directors.
The 2001 Stock Option Plan was designed as an incentive to selected employees,
officers and directors to acquire proprietary interest in the Company. The
options are not designed to be incentive stock options within the meaning of
Section 422 of the U.S. Internal Revenue Code of 1986, as amended. The option
pool under the 2001 Stock Option Plan consists of an aggregate of
5,800,000 shares of the Company's common stock that may consist of shares of the
Company's Class A Voting Common Stock, the Company's Class B Non-Voting Common
Stock or some combination of Class A Voting Common Stock and Class B Non-Voting
Common Stock. The options to purchase shares of common stock are subject to
vesting schedules, which are both time and performance based. Unvested options
are forfeited upon termination of employment.
NOTE 13--DEFERRED COMPENSATION PLANS
The Company has a 401(k) savings plan, which covers substantially all of its
employees with six months or more of continuous service. The 401(k) feature
allows participants to defer a portion of eligible compensation on a
tax-deferred basis. The plan provides for the Company to match 50% of each
employee's voluntary contribution up to 6% of gross earnings. The matching
amount increases to 75% after ten years of service. The matching contribution
amounted to $551, $467, and $239 for 2000, 1999, and 1998 respectively.
47
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 13--DEFERRED COMPENSATION PLANS (CONTINUED)
The Company also sponsors a deferred compensation plan for certain members
of senior management. The plan allows participants to contribute an unlimited
amount of earnings to the plan. The Company does not match contributions to this
plan.
NOTE 14--TRANSACTIONS WITH RELATED PARTIES
In connection with the Recapitalization Agreement, the Company entered into
a professional service agreement with the Thomas H. Lee Company. 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 end of the term. Under the agreement, the Thomas H.
Lee Company will receive $62.5 per month for management and other consulting
services provided to the Company. The agreement also provides that the Company
will reimburse out-of-pocket expenses incurred in connection with management
advisory services. During 2000, the Company paid $750 under this agreement,
which is reflected in selling, general and administrative expenses in the
accompanying statement of operations. During 1999, the Company paid $710 under
this agreement.
Prior to the Recapitalization, the Company occasionally advanced funds or
received funds from a company with common ownership to the Company. The advances
were unsecured and bore interest at the Company's borrowing rate. The amounts
due from the affiliated company bore interest at 10.5% per year and were repaid
in 1998. In addition, the Company guaranteed the debt of an affiliated company.
The guaranteed debt amounted to approximately $4,833 at December 31, 1998. This
debt guarantee was terminated in connection with the Recapitalization.
NOTE 15--CONCENTRATION OF CREDIT RISKS, EXPOSURES AND FINANCIAL INSTRUMENTS
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of trade accounts receivable.
The Company is heavily dependent on three customers for a substantial majority
of its sales. These three customers accounted for approximately 57%, 61%, and
57% of net sales for 2000, 1999, and 1998 respectively. At December 31, 2000,
accounts receivable from these four customers were 58% of total accounts
receivable. (See Note 18--Segment information)
The Company performs ongoing credit evaluations of its customers' financial
conditions and generally does not require collateral from its customers. The
Company maintains allowances for potential credit losses, and such losses have
generally been within management's expectations.
The Company does not use any derivative financial instruments to hedge its
exposure to interest rate changes. The Company does utilize various commodity
and specialty chemicals in its production process. The Company does not use
derivative commodity instruments to hedge its exposures to changes in commodity
prices.
The carrying value of cash and short-term financial instruments approximates
fair value due to the short maturity of those instruments.
NOTE 16--COMMITMENTS
The Company leases the majority of its operating facilities from Rex Realty,
Inc., a company owned by a significant shareholder of the Company under various
operating leases expiring
48
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 16--COMMITMENTS (CONTINUED)
December 31, 2010. Rent expense under these operating leases was approximately
$2,238 during 2000. 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. The Company has two five-year options to renew this
lease, beginning January 1, 2006. 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. Aggregate rent expense
amounted to $4,956, $5,228, and $4,367 for 2000, 1999, and 1998, respectively.
The Company is obligated under other operating leases for use of warehouse
space. The leases expire at various dates through December 1, 2006. Five of the
leases provide as many as five five-year options to renew.
The Company entered into a 5-year lease agreement for $5,344 on an aircraft
in March 2000. The Company is obligated to make monthly lease payments of $68,
with a balloon payment of $3,234 in February 2005. The Company has the option of
purchasing the aircraft following the expiration of the lease agreement for a
bargain purchase price of $10.
The following is a summary of future minimum payments under the operating
and capital leases described above that have initial or remaining noncancelable
lease terms in excess of one year at December 31, 2000.
OPERATING LEASES
--------------------
AFFILIATE OTHER CAPITAL LEASE TOTAL
--------- -------- ------------- --------
Year Ended December 31,
2001................................. $ 2,276 $ 2,614 $ 818 $ 5,708
2002................................. 2,322 2,662 818 5,802
2003................................. 2,380 2,479 818 5,677
2004................................. 2,445 1,906 818 5,169
2005................................. 2,519 1,575 3,343 7,437
Thereafter........................... 13,034 477 -- 13,511
------- ------- ------- -------
Total minimum lease payments......... $24,976 $11,713 $ 6,615 43,304
======= ======= =======
Less amount representing interest.... (1,622)
-------
Present value of net minimum lease
payments........................... $ 4,993
=======
NOTE 17--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.
49
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 17--CONTINGENCIES (CONTINUED)
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.
NOTE 18--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 the withdrawal of virtually all
residential uses of Dursban. Formulation of new Dursban products intended for
residential use must cease by December 1, 2000, and formulators can no longer
sell such products to retailers after February 1, 2001. Retailers will no longer
be able to sell Dursban products after December 31, 2001. A charge of $8,000 was
recorded in September of 2000 for costs associated with this agreement.
Details of this charge and the accrual balances remaining are as follows:
THIRD QUARTER AMOUNTS UTILIZED AMOUNT TO BE
2000 CHARGE DURING 2000 UTILIZED IN 2001
------------- ---------------- ----------------
Customer returns and markdowns..... $5,415 $ 906 $4,509
Inventory.......................... 1,370 252 1,118
Disposal and related costs......... 1,215 776 439
------ ------ ------
$8,000 $1,934 $6,066
====== ====== ======
NOTE 19--SEGMENT INFORMATION
The Company operates in one segment consisting of the manufacturing,
marketing and distribution of lawn and garden care and insect control products
to retail channels principally in the United States. (See Note 3--Discontinued
operations--for a discussion of the spin-off of the Metals Business.) The
Company's product lines include herbicides, household insecticides, insect
repellents and water-soluble fertilizers under a variety of brand names. The
product lines are as follows:
VALUE BRANDS
- Spectracide-Registered Trademark---consumer lawn and garden pesticides;
- Spectracide Terminate-TM---consumer termite killing system;
- Spectracide Pro-Registered Trademark---professional lawn and garden and
pest control products;
- Hot Shot-Registered Trademark---household insecticides;
- Cutter-Registered Trademark---consumer insect repellents; and
- Peters-Registered Trademark---consumer water-soluble fertilizers.
OPENING PRICE POINT BRANDS
- Real-Kill-Registered Trademark---opening price point brand at Home Depot;
50
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 19--SEGMENT INFORMATION (CONTINUED)
- No-Pest-Registered Trademark---opening price point brand at Lowe's; and
- Krid-Registered Trademark- and Kgro-Registered Trademark---opening price
point brand at Kmart.
The Company sells and distributes both its value and opening price point
brands to its four largest customers. Net sales to the Company's four largest
customers were as follows:
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------
2000 1999 1998
-------- -------- --------
Customer A............................................ 23% 31% 26%
Customer B............................................ 19% 15% 17%
Customer C............................................ 15% 15% 14%
No other customers represented more than 10% of 2000, 1999 or 1998 net
sales.
NOTE 20--UNAUDITED QUARTERLY FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31, 2000
----------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
-------- -------- -------- -------- --------
Net sales................................... $ 88,546 $123,508 $51,080 $ 25,484 $288,618
Operating (loss) income..................... 15,419 34,299 (2,582) (4,670) 42,466
(Loss) income from continuing operations.... 3,817 18,455 (7,582) (13,331) 1,359
Net (loss) income........................... $ 3,817 $ 18,455 $(7,582) $(13,331) $ 1,359
YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
-------- -------- -------- -------- --------
Net sales................................... $ 96,593 $131,690 $53,536 $ 22,229 $304,048
Operating (loss) income..................... (2,255) 32,581 7,772 (7,890) 30,208
(Loss) income from continuing operations.... (12,880) 18,063 (2,941) (11,514) (9,272)
Net (loss) income........................... $(15,205) $ 18,063 $(2,941) $(11,514) $(11,597)
Due to the seasonal nature of the Company's business, net sales in the first
and second quarters exceed net sales in the third and fourth quarters.
During the third quarter of 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 the withdrawal of
virtually all residential uses of Dursban. Formulation of new Dursban products
intended for residential use must cease by December 1, 2000, and formulators can
no longer sell such products to retailers after February 1, 2001. Retailers will
no longer be able to sell Dursban products after December 31, 2001. A charge of
$8,000 was recorded in September of 2000 for costs associated with this
agreement.
During the first quarter of 1999, the Company recorded various non-recurring
charges to operations as follows: (i) $10,690 in recapitalization transaction
fees and expenses; (ii) change of control bonuses to some members of senior
management totaling $8,645; (iii) $1,100 to cost of goods sold for the write-off
of its "Citri-Glow" candle inventory; (iv) $900 related to deductions taken by
51
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 20--UNAUDITED QUARTERLY FINANCIAL INFORMATION (CONTINUED)
customers for advertising and promotional spending in excess of contractual
obligations; and (v) $1,500 to primarily reserve for the expected cost of an
adverse judgement on a counterclaim.
In the second quarter of 1999, the Company recorded a severance charge of
$1,606 as a result of the President and Chief Executive Officer terminating
employment with the Company. In the fourth quarter of 1999, the Company recorded
a severance charge of $840 as a result of the Senior Vice President, Sales
terminating employment with the Company.
NOTE 21--SHIPPING AND HANDLING COST
Shipping and handling costs are included in the selling, general and
administrative expenses line item on the Company's Statement of Operations. The
amount is $12,859, $13,253 and $12,659 for 2000, 1999 and 1998, respectively.
The remaining shipping and handling cost are included in the cost of goods sold
line item.
52
SIGNATURES
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: April 2, 2001 By: /s/ ROBERT L. CAULK
-----------------------------------------
Robert L. Caulk, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
***
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ DAVID A. JONES
-------------------------------------- Chairman of the Board and a
David A. Jones Director
Senior Vice President, Chief
Financial Officer,
/s/ DANIEL J. JOHNSTON Information Systems, Legal
-------------------------------------- and Administration (Principal
Daniel J. Johnston Financial and Accounting
Officer)
/s/ MATTHEW MCCARTHY
-------------------------------------- Vice President, General
Matthew McCarthy Counsel & Secretary
/s/ HUNTER BOLL
-------------------------------------- Director
Hunter Boll
/s/ SCOTT A. SCHOEN
-------------------------------------- Director
Scott A. Schoen
/s/ CHARLES A. BRIZIUS
-------------------------------------- Director
Charles A. Brizius
/s/ DAVID C. PRATT
-------------------------------------- Director
David C. Pratt
53
EXHIBIT INDEX
(a) Exhibits.
3.1 Amended and Restated Certificate of Incorporation of the
Company, dated January 13, 1999.
3.2 Certificate of Amendment of the Company, dated January 20,
1999.
3.3 Certificate of Amendment of the Company dated November 9,
2000.
3.4 By-laws of the Company.
4.1 Securities Purchase Agreement, dated as of March 19, 1999,
among the Company, CIBC Oppenheimer Corp. and NationsBanc
Montgomery Securities L.L.C.
4.2 Indenture, dated as of March 24, 1999, between the Company
and State Street Bank and Trust Company as Trustee with
respect to the 9 7/8% Senior Subordinated Notes due 2009
(including the form of 9 7/8% Senior Subordinated Notes).
4.3 Registration Rights Agreement, dated as of March 24, 1999,
among the Company, CIBC Oppenheimer Corp. and NationsBanc
Montgomery Securities L.L.C.
10.1 United Industries Corporation Deferred Compensation Plan.
10.2 Management Agreement, dated as of January 20, 1999, between
the Company and Stephen R. Brian.+
10.3 Management Agreement, dated as of January 20, 1999, between
the Company and Richard A. Bender.+
10.4 Management Agreement, dated as of January 20, 1999, between
the Company and William P. Johnson.+
10.5 Management Agreement, dated as of January 20, 1999, between
the Company and Daniel J. Johnston.+
10.6 Consulting Agreement, dated as of January 20, 1999, between
the Company and David A. Jones.
10.7 United Industries Corporation 1999 Stock Option Plan.
10.8 United Industries Corporation 2001 Stock Option Plan.
10.9 Stock Option Agreement, dated as of January 20, 1999,
between the Company and Stephen R. Brian.+
10.10 Stock Option Agreement, dated as of January 20, 1999,
between the Company and Richard A. Bender.+
10.11 Stock Option Agreement, dated as of January 20, 1999,
between the Company and William P. Johnson.+
10.12 Stock Option Agreement, dated as of January 20, 1999,
between the Company and Daniel J. Johnston.+
10.13 Stock Option Agreement, dated as of January 20, 1999,
between the Company and David A. Jones.+
10.14 Stockholders Agreement, dated as of January 20, 1999, among
the Company and the Stockholders (as defined therein). +
10.15 Professional Services Agreement, dated as of January 20,
1999, between THL Equity Advisors IV, L.L.C., Thomas H. Lee
Capital, L.L.C. and the Company.
54
10.16 Amended and Restated Credit Agreement dated as of March 24,
1999 among the Company, NationsBanc Montgomery Securities
LLC, Morgan Stanley Senior Funding, Inc., Canadian Imperial
Bank of Commerce, NationsBank, N.A., the Initial Lenders (as
defined therein), the Swing Line Bank (as defined therein)
and the Initial Issuing Bank (as defined therein).+
10.17 Office Lease, dated as of June 15, 1987, between Mid-County
Trade Center Investment Company Limited Partnership, Moran
Foods and Moran Foods Inc.+
10.18 First Amendment dated as of August 31, 1987 to Office Lease,
dated as of June 15, 1987, between Mid-County Trade Center
Investment Company Limited Partnership, Moran Foods and
Moran Foods Inc.
10.19 Second Amendment dated as of March 2, 1990 to Office Lease,
dated as of June 15, 1987, between Mid-County Trade Center
Investment Company Limited Partnership, Moran Foods and
Moran Foods Inc.
10.20 Third Amendment dated as of April 3, 1992 to Office Lease,
dated as of June 15, 1987, between Mid-County Trade Center
Investment Company Limited Partnership, Moran Foods and
Moran Foods Inc.
10.21 Fourth Amendment dated as of June 6, 1994 to Office Lease,
dated as of June 15, 1987, between Mid-County Trade Center
Investment Company Limited Partnership, Moran Foods and
Moran Foods Inc.
10.22 Fifth Amendment dated as of October 1, 1996 to Office Lease,
dated as of June 15, 1987, between Mid-County Trade Center
Investment Company Limited Partnership, Moran Foods and
Moran Foods Inc.
10.23 Lease, dated as of October 13, 1995, between First
Industrial Financing Partnership LP and Rex Realty Co.+
10.24 Sublease, dated as of October 13, 1995, between Rex Realty
Co. and the Company.+
10.25 Lease, dated as of December 1, 1995, between Rex Realty Co.
and the Company.+
10.26 Lease, dated as of November 27, 1989, between Rex Realty Co.
and the Company.+
12.1 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges.
99.1 Form of Letter of Transmittal.
99.2 Form of Letter of Notice of Guaranteed Delivery.
99.3 Form of Tender Instructions.
- ------------------------
+ The Company agrees to furnish supplementary to the Commission a copy of any
omitted schedule or exhibit to such agreement upon request by the
Commission.
55