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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark
One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
Commission File 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 Identification No.)
Incorporation or Organization)
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)
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 [_] No [X]
Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock as of the latest practicable date.
Shares Outstanding
November 4, 1999
------------------
Common Stock, $0.01 par value............................. 55,300,000
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PART I
FINANCIAL INFORMATION
UNITED INDUSTRIES CORPORATION
Item 1. Financial Statements
UNITED INDUSTRIES CORPORATION
BALANCE SHEETS
September 30, 1999 and December 31, 1998
(Dollars in thousands)
(Unaudited)
September 30, December 31,
1999 1998
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents......................... $ 11,853 $ --
Accounts receivable (less allowance for doubtful
accounts of $60 at September 30, 1999 and
December 31, 1998)............................... 33,225 17,650
Inventories....................................... 35,987 41,444
Prepaid expenses.................................. 1,352 2,172
--------- --------
Total current assets............................ 82,417 61,266
Equipment and leasehold improvements, net........... 27,567 20,156
Deferred income tax................................. 107,574 --
Other assets........................................ 21,018 6,948
Investment in discontinued operations............... -- 5,791
--------- --------
Total assets.................................... $ 238,576 $ 94,161
========= ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Current maturities of long-term debt and capital
lease obligation................................. $ 12,165 $ 929
Accounts payable.................................. 13,024 18,519
Accrued expenses.................................. 20,351 12,705
--------- --------
Total current liabilities....................... 45,540 32,153
Long-term debt...................................... 352,000 3,716
Capital lease obligation............................ 8,127 --
Other liabilities................................... 5,377 35
--------- --------
Total liabilities............................... 411,044 35,904
Commitments and contingencies
Stockholders' (deficit) equity:
Common stock...................................... 553 2
Additional paid-in capital........................ 116,687 972
Retained earnings................................. (287,008) 70,193
Common stock held in Grantor Trust................ (2,700) --
Treasury stock.................................... -- (12,910)
--------- --------
Total stockholders' (deficit) equity............ (172,468) 58,257
--------- --------
Total liabilities and stockholders' (deficit)
equity......................................... $ 238,576 $ 94,161
========= ========
See accompanying notes to financial statements.
2
UNITED INDUSTRIES CORPORATION
STATEMENTS OF OPERATIONS
September 30, 1999 and September 30, 1998
(Dollars in thousands)
(Unaudited)
Three Months
Ended September Nine Months Ended
30, September 30,
---------------- ------------------
1999 1998 1999 1998
------- ------- -------- --------
Net sales................................. $53,536 $47,952 $281,819 $257,178
Operating costs and expenses:
Cost of goods sold...................... 25,224 25,407 137,925 127,102
Advertising and promotion expenses...... 4,115 4,173 29,024 29,226
Selling, general and administrative
expenses............................... 16,425 14,152 54,331 50,138
Recapitalization transaction fees....... -- -- 10,690 --
Change of control bonuses............... -- -- 8,645 --
Severance charge........................ -- -- 1,606 --
Non-recurring litigation charges........ -- -- 1,500 1,200
------- ------- -------- --------
Total operating costs and expenses.... 45,764 43,732 243,721 207,666
------- ------- -------- --------
Operating income.......................... 7,772 4,220 38,098 49,512
Interest expense (income)................. 9,020 (93) 26,388 961
------- ------- -------- --------
Income (loss) before provision for income
taxes, discontinued operations and
extraordinary item....................... (1,248) 4,313 11,710 48,551
Income tax expense........................ 1,693 76 9,468 855
------- ------- -------- --------
Income (loss) from continuing operations,
before extraordinary item................ (2,941) 4,237 2,242 47,696
Income from discontinued operations, net
of tax................................... -- 424 -- 1,378
------- ------- -------- --------
Income (loss) before extraordinary item... (2,941) 4,661 2,242 49,074
Extraordinary loss from early
extinguishment of debt, net of income tax
benefit of $1,425........................ -- -- (2,325) --
------- ------- -------- --------
Net income (loss)......................... $(2,941) $ 4,661 $ (83) $ 49,074
======= ======= ======== ========
See accompanying notes to financial statements.
3
UNITED INDUSTRIES CORPORATION
STATEMENTS OF CASH FLOWS
September 30, 1999 and September 30, 1998
(Dollars in thousands)
(Unaudited)
Nine months Ended
September 30,
-------------------
1999 1998
--------- --------
Cash flows from operating activities:
Net income (loss)....................................... $ (83) $ 49,074
Loss from early extinguishment of debt................ 3,750 --
Adjustments to reconcile net income to net cash provided
by operating activities:
Income from discontinued operations................... -- (1,378)
Deferred compensation................................. 2,700 --
Depreciation and amortization......................... 3,468 2,742
Recapitalization transaction fees..................... 10,690 --
Amortization of deferred financing fees............... 1,493 --
Provision for deferred income tax expense............. 8,043 --
Changes in assets and liabilities:
Increase in accounts receivable..................... (15,575) (17,842)
Decrease in inventories............................. 5,457 15,573
Decrease in prepaid expenses........................ 820 801
(Decrease) increase in accounts payable and accrued
expenses........................................... (3,649) 3,884
Increase in other assets............................ (413) (17)
Other, net.......................................... 188 60
--------- --------
Cash flow from continuing operations.............. 16,889 52,897
Cash flow from discontinued operations............ -- 765
--------- --------
Net cash provided by operating activities......... 16,889 53,662
Investing activities:
Purchases of equipment and leasehold improvements....... (1,499) (2,489)
Increase in amounts due from affiliates................. -- (13,949)
--------- --------
Cash used by investing activities--continuing
operations............................................. (1,499) (16,438)
Cash used by investing activities--discontinued
operations............................................. -- (145)
--------- --------
Net cash used by investing activities............. (1,499) (16,583)
Financing activities:
Redemption of common stock.............................. (337,896) --
Transaction costs related to the Recapitalization....... (11,378) --
Net advances to affiliated company...................... (5,700) --
Issuance of common stock................................ 1,990 --
Shareholder equity contribution......................... 8,425 --
Debt issuance costs..................................... (19,271) --
Proceeds from the issuance of debt...................... 520,205 73,895
Payment on debt......................................... (160,162) (66,905)
Repayment of note receivable from employee.............. 250 --
Issuance of treasury stock.............................. -- (5,818)
Distributions paid...................................... -- (38,392)
--------- --------
Net cash used by financing activities............. (3,537) (37,220)
Net increase (decrease) in cash and cash equivalents...... 11,853 (141)
Cash and cash equivalents--beginning of period............ -- 316
--------- --------
Cash and cash equivalents--end of period.................. $ 11,853 $ 175
========= ========
See accompanying notes to financial statements.
4
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
Note 1--Basis of presentation
Interim Financial Statements
The accompanying unaudited financial statements have been prepared in
accordance with the instructions for Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included.
Operating results for any quarter are not necessarily indicative of the
results for any other quarter or for the full year. These statements should be
read in conjunction with the financial statements and notes thereto included
in the annual report of United Industries Corporation (the "Company") for the
year ended December 31, 1998.
Note 2--Recapitalization of the Company and other matters
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 our
existing stockholders for approximately $254.7 million; (ii) The Company's
senior managers purchased common stock from our 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 owns
approximately 91.9% of the Company's issued and outstanding common stock, the
existing stockholders retain approximately 6.0% and the Company's senior
managers own 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 the excess taxes of certain stockholders arising from the
Company's Section 338(h)(10) election. In October 1999, the Company reached an
agreement with these stockholders on the method used to compute their excess
taxes. Based upon this computation method, the Company believes that its
estimated liability for the excess taxes of these stockholders is
approximately $13.0 million, of which the Company has recorded a charge to
equity of $5.8 million for the nine months ended September 30, 1999. The
Company will record an additional charge of $7.2 million in the fourth quarter
of 1999, for an aggregate charge of $13.0 million for excess taxes. The total
consideration was not required to be adjusted based on the Company's working
capital on the date of the Recapitalization. The final transaction value for
the Recapitalization after these adjustment provisions was approximately
$659.2 million.
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) approximately $254.7
million equity investment by the THL Parties through the Equity Investor; (iv)
approximately $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.
5
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
(Unaudited)
Note 2--Recapitalization of the Company and other matters (continued)
The Senior Subordinated Facility was redeemed through the issuance of 9
7/8% Senior Subordinated Notes due 2009. In connection with this redemption,
the Company incurred an extraordinary loss from the early extinguishment of
debt, net of tax of $2,325.
For the nine months ended September 30, 1999, the Company has recorded
$36,449 in fees and expenses associated with the Recapitalization. Such total
fees and expenses consist of: (i) fees and expenses related to the
transactions, including bank commitment fees and underwriting discounts and
commissions; (ii) professional, advisory and investment banking fees and
expenses; and (iii) miscellaneous fees and expenses such as printing and
filing fees. The fees and expenses that could be specifically identified as
relating to the issuance of debt were capitalized and will be amortized over
the life of the debt as interest expense. The fees and expenses that could be
specifically identified as relating to the equity transactions were charged
directly to equity. Other transaction fees were allocated between debt and
recapitalization transaction fees based on the Company's estimate of the
effort spent in the activity giving rise to the fee or expense. The allocation
of fees and expenses to the debt, equity and recapitalization transaction fees
is as follows:
Recapitalization
Debt Equity Transaction Fees Totals
------- ------ ---------------- -------
Direct costs........................ $16,543 $6,488 $ -- $23,031
Allocated costs..................... 2,728 -- 10,690 13,418
------- ------ ------- -------
Total fees and expenses........... $19,271 $6,488 $10,690 $36,449
======= ====== ======= =======
In connection with the Recapitalization of the Company as described above,
the Company formed a wholly-owned subsidiary DW Wej-it, Inc., a Delaware
corporation ("DW"). All of the Company's assets and liabilities related to the
Company's business of manufacturing and marketing construction anchoring
fasteners and providing contract-manufacturing services in metals fabrication
(which is collectively referred to as the "Metals Business") were contributed
to DW. Effective January 1, 1999, the Company distributed all of the shares of
capital stock of DW owned by the Company to its shareholders.
For the nine months ended September 30, 1999, the Company recorded various
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); and
(ii) $1,606 of severance charges incurred as a result of the President and
Chief Executive Officer's termination of employment with the Company.
Note 3--Common stock and stock split
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.
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 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, there were 27.7 million shares of
Class A Voting Common Stock outstanding and 27.7 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.
6
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
(Unaudited)
Note 4--Inventories
Inventories at September 30, 1999 and December 31, 1998 are as follows:
September 30, December 31,
1999 1998
------------- ------------
Raw materials.................................. $ 6,084 $ 7,748
Finished goods................................. 29,903 33,696
------- -------
Total inventories............................ $35,987 $41,444
======= =======
Note 5--Other Assets
Other assets at September 30, 1999 and December 31, 1998 consist of:
September 30, December 31,
1999 1998
------------- ------------
Goodwill....................................... $ 7,988 $ 7,988
Accumulated amortization....................... (1,909) (1,744)
------- -------
6,079 6,244
Debt issuance costs, net of amortization....... 14,028 --
Other.......................................... 911 704
------- -------
Total other assets........................... $21,018 $ 6,948
======= =======
Note 6--Accrued expenses
Accrued expenses at September 30, 1999 and December 31, 1998 consist of:
September 30, December 31,
1999 1998
------------- ------------
Advertising and promotional expenses........... $10,150 $ 5,018
Recapitalization fees and expenses............. 5,800 --
Settlement charges............................. 1,200 1,200
Severance...................................... 1,115 --
Commissions.................................... 417 262
Cash overdraft................................. -- 3,148
Litigation expenses............................ -- 1,121
Freight expense................................ -- 238
Other.......................................... 1,669 1,718
------- -------
Total accrued expenses....................... $20,351 $12,705
======= =======
Note 7--Income taxes
In conjunction with the Recapitalization, the Company converted from an "S"
corporation to a "C" corporation. The impact of the conversion was a charge of
$2,062, which has been reflected as income tax expense in the accompanying
financial statements.
7
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
(Unaudited)
Note 7--Income taxes (continued)
Deferred income taxes were recorded for the temporary differences that were
created in conjunction with the Recapitalization and conversion to a "C"
Corporation. The deferred income taxes were as follows on 1/21/99:
Goodwill....................................................... $ 266,300
Equipment and leasehold improvements........................... (2,668)
Other.......................................................... 606
---------
Gross deferred tax asset....................................... 224,238
Valuation allowance............................................ (113,150)
---------
Net deferred tax asset......................................... $ 111,088
=========
The temporary difference for goodwill results from the step up in tax basis
due to the recapitalization while maintaining historical basis for book
purposes. This benefit will be realized 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.
Deferred tax assets and liabilities included in the balance sheet at
September 30, 1999 are as follows:
Deferred income tax............................................. $107,574
Other liabilities............................................... (2,668)
--------
$104,906
========
Note 8--Commitments and transactions with related parties
The Company leases the majority of its operating facilities from a company
owned by a significant shareholder of the Company under various operating
leases expiring December 31, 1999. Minimum annual rentals under these
operating leases amount to approximately $2,637. The Company has options to
renew the leases on a year-to-year basis for an additional ten years,
beginning January 1, 2000. The Company leases a portion of its operating
facilities from the same company under a sublease agreement expiring on
December 31, 2005 with minimum annual rentals ranging from $140 to $368. The
Company has two, five-year options to renew the lease, beginning January 1,
2006.
The Company is also obligated under other operating leases for use of
warehouse space. The leases expire at various dates through January 31, 2001.
Three of the leases provide as many as three five-year options to renew.
Management believes that the terms and expenses associated with the related
party leases described above are similar to those negotiated by unrelated
parties at arm's length.
In connection with the Recapitalization Agreement, 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. The agreement
provides that the Thomas H. Lee Company will receive $62.5 per month for
management and other consulting services provided to the Company. For the nine
months ended September 30, 1999, the Company has paid $522 under this
agreement. The agreement also provides that the Company will reimburse out-of-
pocket expenses incurred in connection with management advisory services.
8
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
(Unaudited)
Note 9--Contingencies
In March 1998, a judgement for $1,200 was entered against the Company for a
lawsuit filed in 1992 by the spouse of a former employee claiming benefits
from a Company-owned key man life insurance policy. On August 24, 1999 the
Missouri Court of Appeals, Eastern District, affirmed the trial court's
decision. The Company has filed an application to transfer the case to the
Missouri Supreme Court for further review. The Company has reflected the
judgement amount as non-recurring litigation charges for the nine months ended
September 30, 1998, of which no amounts have been paid as of September 30,
1999.
In October 1998, the FTC and several state attorneys general filed a suit
against the Company seeking to enjoin the Company's advertising of Spectracide
Terminate as a "termite home defense system." The suit alleges that the
Company made deceptive and unsubstantiated claims regarding Spectracide
Terminate; the Company has denied the allegations. The Company has entered
into a settlement agreement regarding its advertising claims with the FTC and
the state attorney generals involved in the litigation. As part of the
settlement, the Company agreed that it would not, without competent and
reliable scientific evidence, represent to consumers that: (a) use of
Spectracide Terminate alone is effective in preventing terminate infestations
or eliminating active termite infestations; (b) Spectracide Terminate provides
"protection for you home against subterranean termites"; and (c) Spectracide
Terminate is a "termite home defense system" or make any representations
comparing the performance of Spectracide Terminate to other termite control
methods. The Company further agreed to apply to the federal EPA to rename the
product as "Spectracide Terminate" (without reference to "termite home defense
system"). The agreement provides that the Company may describe the product as
a "do-it-yourself termite killing system for subterranean termites." Finally,
in virtually any advertisement that indicates, either expressly or implicitly,
that Spectracide Terminate kills termites or prevents termite damage or
infestation, the Company agreed to make the following disclosure: "Not
recommended as sole protection against termites, and for active infestations,
get a professional inspection." The Company incurred charges from this suit
totaling $1,100, including $400 paid to 10 states' attorneys general for
reimbursement of their legal expenses and $700 for other legal expenses we
incurred in connection with this suit. These expenses were reflected as non-
recurring litigation charges in the fourth quarter of 1998 and were paid in
the first quarter of 1999.
In March 1999, the Company took a charge of $1,500 to primarily reserve for
the expected cost of an adverse judgement on a counterclaim. On July 29, 1999,
the Company paid $900 in liquidating damages and $112 in past commissions in
settlement of this case. The remaining amounts accrued in connection with the
$1,500 charge will primarily be used to cover unpaid legal costs associated
with this case.
The Company is involved in litigation and arbitration proceedings in the
normal course of business that assert product liability and other claims. The
Company is contesting all such claims. When it appears probable in
management's judgment that the Company will incur monetary damages or other
costs in connection with such claims and proceedings, and such costs can be
reasonably estimated, appropriate liabilities are recorded in the financial
statements and charges are made against earnings.
Management believes the possibility of a material adverse effect on the
Company's consolidated financial position, results of operations and cash
flows from the claims and proceedings described above is remote.
9
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
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.
Results of Operations
The following discussion regarding results of operations refers to net
sales, cost of goods sold, advertising and promotion expenses and selling and
general and administrative expenses which the Company defines as follows:
. Net sales are gross sales of products sold to customers upon shipment of
product less any customer discounts from list price and customer
returns.
. Cost of goods sold includes chemicals, container and packaging material
costs as well as direct labor, outside labor, manufacturing overhead and
freight.
. Advertising and promotion expenses includes the cost of advertising
products through national and regional media as well as the advertising
and promotion of products through cooperative programs with retailers.
. Selling and general and administrative expenses includes all costs
associated with the selling and distribution of product, product
registrations, and administrative functions such as finance, information
systems and human resources.
10
The following table sets forth the percentage relationship of certain items
in the Company's income statement to net sales for the three months ended
September 30, 1999 and the three months ended September 30, 1998:
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1999
------------------ ------------------
Net sales:
Value brands........................... 72.7% 71.6%
Opening price point brands............. 27.3 28.4
----- -----
Total net sales.......................... 100.0 100.0
Operating costs and expenses:
Cost of goods sold..................... 53.0 47.1
Advertising and promotion expenses..... 8.7 7.7
Selling, general and administrative
expenses.............................. 29.5 30.6
----- -----
Total operating costs and expenses....... 91.2 85.4
----- -----
Operating income......................... 8.8 14.6
Interest (income) expense................ (0.2) 16.8
----- -----
Income (loss) before provision for income
taxes and discontinued operations....... 9.0 (2.2)
Income tax expense....................... 0.2 3.2
----- -----
Income (loss) from continuing operations. 8.8% (5.4%)
===== =====
Three Months Ended September 30, 1999 compared to Three Months Ended September
30, 1998
Net Sales. Net sales increased 11.5% to $53.5 million for the three months
ended September 30, 1999 from $48.0 million for the three months ended
September 30, 1998. This increase was driven by expanded distribution of the
company's value brands and opening price point brands at home improvement
centers and mass merchandisers as well as the continued shift in consumer
preferences toward value and opening price point brands. Net sales of the
Company's value brands increased 9.7% to $38.3 million for the three months
ended September 30, 1999 from $34.9 million for the three months ended
September 30, 1998. This increase was a result of continued growth of the
Company's core value brands including Bag-a-Bug, Hot Shot and Cutter. Net
sales of opening price point brands increased 16.0% to $15.2 million for the
three months ended September 30, 1999 from $13.1 million for the three months
ended September 30, 1998 driven by the continued rapid pace of store openings
by the Company's top retail customers.
Gross Profit. Gross profit increased 25.8% to $28.3 million for the three
months ended September 30, 1999 compared to $22.5 million for the three months
ended September 30, 1998. As a percentage of sales, gross profit increased to
52.9% for the three months ended September 30, 1999 as compared to 47.0% for
the three months ended September 30, 1998. The increase in gross profit as a
percentage of sales was the result of lower material costs primarily driven by
increased supplier rebates which were received earlier in 1999 than in 1998.
Advertising and Promotion Expenses. Advertising and promotion expenses
decreased 2.4% to $4.1 million for the three months ended September 30, 1999
compared to $4.2 million for the three months ended September 30, 1998 due to
a reduction in cooperative advertising costs with grocery store customers in
the third quarter of 1999. This decrease was offset by increased cooperative
advertising with home improvement centers due to continued store expansion.
11
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 15.5% to $16.4 million for the three months
ended September 30, 1999 from $14.2 million for the three months ended
September 30, 1998. As a percentage of net sales, selling, general and
administrative expenses increased to 30.6% for the three months ended
September 30, 1999 from 29.5% for the three months ended September 30, 1998.
The overall increase in selling, general and administrative expenses was
related to higher selling, marketing and distribution costs to support the
growth in sales.
Operating Income. Operating income increased 85.7% to $7.8 million for the
three months ended September 30, 1999 from $4.2 million for the three months
ended September 30, 1998. As a percentage of net sales, operating income
increased to 14.6% for the three months ended September 30, 1999 from 8.8% for
the three months ended September 30, 1998 as a result of the factors described
above.
Income tax expense. For the three months ended September 30, 1999, the
Company's effective income tax rate reflects a reduction in the estimated
utilization of the goodwill deduction in fiscal year 1999 and the related
change in the valuation allowance.
The following table sets forth the percentage relationship of certain items
in the Company's income statement to net sales for the nine months ended
September 30, 1999 and the nine months ended September 30, 1998:
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1999
------------------ ------------------
Net sales:
Value brands........................... 77.2% 75.7%
Opening price point brands............. 22.8 24.3
----- -----
Total net sales.......................... 100.0 100.0
Operating costs and expenses:
Cost of goods sold..................... 49.4 48.9
Advertising and promotion expenses..... 11.4 10.3
Selling, general and administrative
expenses.............................. 19.5 19.3
Recapitalization transaction fees...... -- 3.8
Change of control bonuses.............. -- 3.1
Severance charge....................... -- 0.6
Non-recurring litigation charges....... 0.5 0.5
----- -----
Total operating costs and expenses....... 80.8 86.5
----- -----
Operating income......................... 19.2 13.5
Interest expense......................... 0.4 9.4
----- -----
Income before provision for income taxes
and discontinued operations............. 18.8 4.1
Income tax expense....................... 0.3 3.3
----- -----
Income from continuing operations........ 18.5% 0.8%
===== =====
Nine Months Ended September 30, 1999 compared to Nine Months Ended September
30, 1998
Net Sales. Net sales increased 9.6% to $281.8 million for the nine months
ended September 30, 1999 from $257.2 million for the nine months ended
September 30, 1998. This increase was driven by a combination of factors
including:
. the continued shift of consumers' preferences towards value and opening
price point brands;
. new product introductions, including Spectracide Pro; and
12
. expanded distribution at home improvement centers and mass merchandisers
through increased shelf space and continued store expansion.
Net sales of the Company's value brands increased 7.4% to $213.2 million
for the nine months ended September 30, 1999 from $198.6 million for the nine
months ended September 30, 1998. This increase was a result of continued
growth of core value brands including Spectracide, Bag-a-Bug, Hot Shot and
Cutter and the introduction of Spectracide Pro. Net sales of opening price
point brands increased 17.1% to $68.6 million for the nine months ended
September 30, 1999 from $58.6 million for the nine months ended September 30,
1998 driven by the continued rapid pace of store openings by the Company's top
retail customers.
Gross Profit. Gross profit increased 10.6% to $143.9 million for the nine
months ended September 30, 1999 compared to $130.1 million for the nine months
ended September 30, 1998. As a percentage of sales, gross profit increased
slightly to 51.1% for the nine months ended September 30, 1999 as compared to
50.6% for the nine months ended September 30, 1998. This increase in gross
profit as a percentage of sales was the result of lower material costs
primarily driven by increased supplier rebates which were received earlier in
1999 than in 1998. For the nine months ended September 30, 1999, the Company
recorded a charge of $1.1 million to cost of goods sold for the write-off of
the Company's "Citro-Glow" candle inventory. The Company discontinued the
production of this product line during 1999 and chose to dispose of the
inventory by selling it through discount channels at prices below cost. If
this charge had not been recorded, gross profit for the nine months ended
September 30, 1999 would have been 51.5% of sales and would have increased
11.5% to $145.0 million as compared to $130.1 million for the nine months
ended September 30, 1998.
Advertising and Promotion Expenses. Advertising and promotion expenses
decreased 0.7% to $29.0 million for the nine months ended September 30, 1999
compared to $29.2 million for the nine months ended September 30, 1998 due to
a reduction in cooperative advertising costs with grocery store customers in
the third quarter of 1999. This decrease was offset by increased cooperative
advertising with home improvement centers due to continued store expansion.
For the nine months ended September 30, 1999, the Company recorded a charge of
$0.9 million related to deductions taken by customers for advertising and
promotional spending in excess of contractual obligations for which the
Company elected not to pursue collection. This charge has been included in
advertising and promotion expense for the nine months ended September 30,
1999. If this charge had not been recorded in the nine months ended September
30, 1999, advertising and promotional expenses would have decreased 3.8% to
$28.1 as compared to $29.2 million for the nine months ended September 30,
1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 8.4% to $54.3 million for the nine months
ended September 30, 1999 from $50.1 million for the nine months ended
September 30, 1998. As a percentage of net sales, selling, general and
administrative expenses decreased slightly to 19.3% for the nine months ended
September 30, 1999 from 19.5% for the nine months ended September 30, 1998.
The overall increase in selling, general and administrative expenses was
related to higher selling, marketing and distribution costs to support the
growth in sales.
Recapitalization Transaction Fees. As of September 30, 1999, the Company
recorded $36.4 million in fees and expenses associated with the
Recapitalization. Fees and expenses that could be specifically identified as
relating to the issuance of debt were capitalized and will be amortized over
the life of the debt as interest expense. The fees and expenses that could be
specifically identified as relating to the equity transactions were charged
directly to equity. Other transaction fees were allocated between debt and
recapitalization transaction fees expense based on the Company's estimate of
the effort spent in the activity giving rise to the fee or expense. For the
nine months ended September 30, 1999, the Company recorded a charge of $10.7
million for recapitalization transaction fees. In October, 1999, the Company
reached an agreement with certain stockholders on the method used to compute
their excess taxes. Based upon this computation method, the Company believes
its estimated liability for the excess taxes of these stockholders is
approximately $13.0 million, of which the Company has recorded a charge of
$5.8 million for the nine months ended September 30, 1999. The Company will
record an additional charge of $7.2 million in the fourth quarter of 1999 for
an aggregate charge of $13.0 million for excess taxes. This amount will be
charged to equity as additional costs of the treasury stock redemption.
13
Change of Control Bonuses. For the nine months ended September 30, 1999,
the Company recorded charges for change of control bonuses paid to some
members of senior management amounting to $8.6 million which were
contractually required as a result of the Recapitalization.
Severance Charges. For the nine months ended September 30, 1999, the
Company recorded a severance charge of $1.6 million incurred as a result of
the Company's President and Chief Executive Officer's termination of
employment with the Company.
Non-recurring Litigation Charges. The Company recorded non-recurring
litigation charges of $1.5 million for the nine months ended September 30,
1999 and $1.2 million for the nine months ended September 30, 1998. In March
1999, the Company took a charge of $1.5 million to primarily reserve for the
expected cost of an adverse judgment on a counterclaim. On July 29, 1999, the
Company paid $900 in liquidating damages and $112 in past commissions. The
remaining amounts accrued in connection with the $1,500 charge will primarily
be used to cover unpaid legal costs associated with this case.
Charges recorded as of September 30, 1998 of $1.2 million were related to
legal proceedings pertaining to a suit filed in 1992 by the spouse of a former
employee claiming benefits from a Company-owned key man life insurance policy.
EBITDA for the nine months ended September 30, 1999 was $64.0 million,
which excludes charges recorded for recapitalization transaction fees, change
of control bonuses, a severance charge and non-recurring litigation charges.
If the Company had excluded the $1.1 million write-off of the Company's
"Citri-Glow" candle inventory and the $0.9 million charge related to
advertising deductions taken by customers in excess of contractual
obligations, EBITDA would have been $66.0 million for the nine months ended
September 30, 1999.
Operating Income. Operating income decreased 23.0% to $38.1 million for the
nine months ended September 30, 1999 from $49.5 million for the nine months
ended September 30, 1998. As a percentage of net sales, operating income
decreased to 13.5% for the nine months ended September 30, 1999 from 19.2% for
the nine months ended September 30, 1998, primarily as a result of charges
related to the Company's Recapitalization, as described 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 its cash requirements for debt service relating to the
Company's 9 7/8 Series B Registered Senior Subordinated Notes and Senior
Credit Facility. As of September 30, 1999, the Company had total debt
outstanding of $372.3 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 $110.0 million revolving credit facility, under which no borrowings
were outstanding at September 30, 1999;
. The $75.0 million Term Loan A ($65.0 million outstanding at September
30, 1999); and
. The $150.0 million Term Loan B ($148.5 million outstanding at September
30, 1999).
14
The Company's revolving credit facility and Term Loan A mature six years
from the closing date of the Senior Credit Facility, and Term Loan B matures
seven years from the closing date of the Senior Credit Facility. 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 a calendar year. The Company has $150.0 million of 9 7/8%
Series B Registered Senior Subordinated Notes that mature on April 1, 2009.
The Company's principal liquidity requirements are for working capital,
capital expenditures and debt service under the Senior Credit Facility and the
senior subordinated notes. Cash flow from continuing operations provided net
cash of $16.9 million and $52.9 million for the nine months ended September
30, 1999 and September 30, 1998, respectively. Net cash used by operating
activities fluctuates during the year as the seasonal nature of the Company's
sales results in a significant increase in working capital (primarily accounts
receivable and inventory) during the first half of the year, with the second
and third quarters being significant cash collection periods.
Capital 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 was $1.5 million and
$2.5 million for the nine months ended September 30, 1999 and September 30,
1998, respectively. In addition, the Company entered into a capital lease
agreement in March 1999 for $9.2 million. Cash used for capital expenditures
for the remainder of 1999 is expected to be less than $1.0 million.
Principal on the Term Loan A is required to be repaid quarterly in annual
amounts of $10.0 million for years one through four and $17.5 million for
years five and six after the closing of the Senior Credit Facility. Principal
on the Term Loan B is required to be repaid quarterly in annual amounts of
$1.5 million for the first six years and $141.0 million for the seventh year
after the closing of the Senior Credit Facility. Principal on the 9 7/8 Series
B Registered Senior Subordinated Notes is required to be repaid on April 1,
2009. On September 30, 1999, principal payments on Term Loans A and B of $7.5
million and $1.1 million, respectively, were paid, which includes optional
principal prepayments of $5.0 million and $0.8 on Term Loan A and Term Loan B,
respectively.
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.
Because a portion of the Company's debt bears interest at floating rates, the
Company's financial condition is and will continue to be affected by changes
in prevailing interest rates.
Seasonality
The Company's business is highly seasonal because the Company's products
are used primarily in the spring and summer. For the past two years,
approximately 75% of the Company's net sales have occurred in the first and
second quarters. The Company's working capital needs, and correspondingly the
Company's borrowings, peak near the end of the Company's first quarter.
Recently Issued Accounting Pronouncements
The Financial Accounting Standard Board issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" in June 1998. SFAS 133
provides standards on accounting and disclosure for derivative instruments and
requires that all derivatives be measured at fair value and reported as either
assets or liabilities on the balance sheet. The Company will be required to
adopt this statement no later than the beginning of fiscal year 2001. The
Company has not completed the analysis to determine the impact of this
statement on the Company's financial statements; however, the impact is not
expected to be material.
15
Year 2000 Compliance
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than year 2000.
In connection with a $2.5 million management information systems upgrade,
the Company has substantially completed an inventory of computer programs and
assessed year 2000 readiness. The Company's information systems and computer
programs include programs developed for the Company's proprietary management
information system. For programs which were identified as not being year 2000
ready, the Company repaired or replaced the programs and has substantially
completed performing appropriate testing for year 2000. The Company believes
that substantially all of the Company's information systems are year 2000
compliant.
Costs related to the year 2000 issue are included in the $2.5 million
management information systems upgrade. The Company estimates that the
remaining testing, repair and replacement necessary to complete the Company's
year 2000 compliance program will cost less than $1.0 million. The Company
does not anticipate any additional costs relating to the year 2000 issue which
would have a material adverse effect on the Company's financial condition or
the Company's results of operations.
While the Company believes all necessary work will be completed in a timely
fashion, the Company cannot assure that all systems will be compliant by the
year 2000, or that the systems of other companies and government agencies on
which the Company relys will be compliant. The Company believes the most
likely worst-case scenarios that the Company might confront with respect to
the year 2000 issues have to do with the possible failure of third-party
systems over which the Company has no control, including, but not limited to,
satellite, power and telephone services. If these failures were not
immediately corrected, the Company's supply and distribution functions would
be temporarily disrupted or delayed. Disruptions of the Company's supply and
distribution functions could also occur if any of the Company's personal
computers receiving electronic data interchange transmissions from third-party
suppliers were not Year 2000 compliant. The Company has exchanged Year 2000
information with most of the Company's third-party suppliers and major
customers. Of the third-party suppliers and major customers the Company has
contacted, over 90% have responded to the Company's requests for information.
The Company has developed a contingency plan to facilitate electronic date
interchange communication with the Company's main customers. The Company has
installed special "window adjustment" software to intercept non-Year 2000
compliant electronic data interchange transmissions and electronically correct
the transmission errors to make them Year-2000 compliant before the
transmissions are completed in the Company's system. The Company will have
replaced all non-Year 2000 personal computers utilized in the processing of
electronic data interchange transmission by December 31, 1999. Based on the
Company's assessment to date, the Company has not received any indication from
a third party indicating that it expects to experience year 2000 non-
compliance of a nature which would have a material impact on the Company.
However, the risk remains that the Company's customers or other third parties
may not have accurately determined their state of readiness, in which case
these parties' lack of year 2000 compliance may have a material adverse effect
on the Company's results of operations. The Company continues to monitor the
year 2000 compliance of third parties with which the Company does business.
Forward Looking Statements
This report and other public reports or statements made from time to time
by the Company or its management may contain "forward-looking" statements
concerning possible future events, objectives, strategies, trends or results.
Such statements are identified either by the context in which they appear or
by use of words such as "anticipate," "believe," "estimate," "expect," "plan"
or the like.
Readers are cautioned that any forward-looking statement reflects only the
beliefs of the Company or its management at the time the statement is made. In
addition, readers should keep in mind that, because all forward-
16
looking statements deal with the future, they are subject to risks,
uncertainties and developments that might cause actual events or results to
differ materially from those envisioned or reflected in any forward-looking
statement. Moreover, the Company does not have and does not undertake any duty
to update any forward-looking statement to reflect events or circumstances
after the date on which the statement was made. For all of these reasons,
forward-looking statements should not be relied upon as a prediction of actual
future events, objectives, strategies, trends or results.
It is not possible to anticipate and list all of the risks, uncertainties
and developments which may affect the future operations or performance of the
Company, or which otherwise may cause actual events or results to differ from
forward-looking statements. However, some of these risks and uncertainties
include the following: general economic and market conditions and risks, such
as the rate of economic growth in the United States, inflation, interest
rates, taxation, and the like; risks and uncertainties which could affect
industries or markets in which the Company participates, such as growth rates
and opportunities in those industries, or changes in demand for certain
products; and factors which could impact costs, including but not limited to
the availability and pricing of raw materials and the availability of labor
and wage rates.
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate
The Company has not in the past used derivative financial instruments to
hedge its exposure to interest rate risk. The table below provides information
about the Company's long-term debt obligations sensitive to changes in
interest rates as of September 30, 1999:
Scheduled Maturity Date
--------------------------------------------------
September 30, December 31,
1999 2000 2001 2002 2003 Thereafter 1999 1998
------ ------ ------ ------ ------ ---------- ------------- ------------
(dollars in millions)
Principal fixed rate
debt:
9 7/8 Series B
Registered Senior
Subordinated Notes.... $ -- $ -- $ -- $ -- $ -- $150.0 $150.0 $ --
Average interest rate.. 9.875% 9.875% 9.875% 9.875% 9.875% 9.875% 9.875% --
Principal variable rate
debt:
Senior Credit Facility
Term Loan A.......... 2.5 10.0 10.0 10.0 15.6 21.9 70.0 --
Term Loan B.......... 0.4 1.5 1.5 1.5 1.5 142.9 149.3 --
Miscellaneous debt...... -- 4.6
------ -----
Total debt.............. 369.3 4.6
Less: optional
prepayments............ (5.8) --
Less: current
maturities............. (11.5) (0.9)
------ -----
Total long-term debt.... $352.0 $ 3.7
====== =====
Interest on Term Loan A and Term Loan B ranges from 200 to 325 basis points
above LIBOR depending on certain financial ratios. LIBOR was 5.38% as of
September 30, 1999. On September 30, 1999, the Company made optional
prepayments on Term Loan A and Term Loan B of $5.0 million and $0.8 million,
respectively.
Exchange Rate
The Company does not use derivative instruments to hedge against foreign
currency exposures related to transactions denominated in other than the
Company's functional currency. Substantially all foreign currency transactions
are denominated in United States dollars.
Commodity Price
The Company does not use derivative instruments to hedge its exposures to
changes in commodity prices. The Company utilizes various commodity and
specialty chemicals in its production process. Purchasing procedures and
arrangements with major customers serve to mitigate its exposure to price
changes in commodity and specialty chemicals.
18
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The Company has no reportable legal proceedings in the current period.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None.
II-1
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
/s/ Daniel J. Johnston
Dated: November 12, 1999 By: _________________________________
Daniel J. Johnston
Chief Financial Officer
II-2