-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MP/0PhxRns9qQhfG0uQCDgVBKWY94qbY9us8mEAaPZSJszLLhu6yJCcJhMx+T0cN zhEdgta8p+BrUres4K8OEw== 0000950131-00-003309.txt : 20000515 0000950131-00-003309.hdr.sgml : 20000515 ACCESSION NUMBER: 0000950131-00-003309 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED INDUSTRIES CORP CENTRAL INDEX KEY: 0001083200 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE CHEMICALS [2870] IRS NUMBER: 431025604 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-76055 FILM NUMBER: 627251 BUSINESS ADDRESS: STREET 1: 8825 PAGE BOULEVARD CITY: ST LOUIS STATE: MO ZIP: 63114 BUSINESS PHONE: 3144270780 MAIL ADDRESS: STREET 1: 8825 PAGE BOULEVARD CITY: ST LOUIS STATE: MO ZIP: 63114 10-Q 1 UNITED INDUSTRIES CORP. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 March 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 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 (I.R.S. 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) 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 [_] There is no established public market for the Registrant's common stock. As of May 12, 2000, the Registrant had 27,650,000 Class A voting and 27,650,000 Class B non-voting shares of common stock outstanding. Documents Incorporated by Reference: None - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART 1 FINANCIAL INFORMATION UNITED INDUSTRIES CORPORATION ITEM 1. Financial Statements 2 UNITED INDUSTRIES CORPORATION BALANCE SHEETS March 31, 2000 and December 31, 1999 (Dollars in thousands) (Unaudited)
March 31, December 31, 2000 1999 --------- ------------ ASSETS Current assets: Cash and cash equivalents............................ $ -- $ -- Accounts receivable (less allowance for doubtful accounts of $1,187 at March 31, 2000 and $1,031 December 31, 1999).................................. 70,083 19,165 Inventories.......................................... 56,250 53,243 Prepaid expenses..................................... 2,854 3,501 --------- --------- Total current assets............................... 129,187 75,909 Equipment and leasehold improvements, net.............. 33,590 27,860 Deferred income tax.................................... 116,268 116,268 Other assets........................................... 21,123 20,870 --------- --------- Total assets....................................... $ 300,168 $ 240,907 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Current maturities of long-term debt and capital lease obligation.................................... $ 12,570 $ 12,178 Accounts payable..................................... 30,103 25,507 Accrued expenses..................................... 38,957 27,464 Short-term borrowings................................ 35,550 -- --------- --------- Total current liabilities.......................... 117,180 65,149 Long-term debt......................................... 346,250 349,125 Capital lease obligations.............................. 13,169 7,952 Other liabilities...................................... 6,555 5,483 --------- --------- Total liabilities.................................. 483,154 427,709 Commitments and contingencies (see Notes 9 & 10) Stockholders' deficit Common stock......................................... 554 554 Additional paid-in capital........................... 126,865 126,865 Accumulated deficit.................................. (307,705) (311,521) Common stock held in grantor trust................... (2,700) (2,700) Treasury stock....................................... -- -- --------- --------- Total stockholders' deficit........................ (182,986) (186,802) --------- --------- Total liabilities and stockholders' deficit........ $ 300,168 $ 240,907 ========= =========
See accompanying notes to financial statements. 3 UNITED INDUSTRIES CORPORATION STATEMENTS OF OPERATIONS March 31, 2000 and March 31, 1999 (Dollars in thousands) (Unaudited)
Three Months Ended March 31, ------------------ 2000 1999 ------------------ Net sales...................................................... $ 88,546 $ 96,593 -------- --------- Operating costs and expenses: Cost of goods sold........................................... 43,837 48,055 Advertising and promotion expenses........................... 9,747 11,638 Selling, general and administrative expenses................. 19,543 18,320 Recapitalization transaction fees............................ -- 10,690 Change of control bonuses.................................... -- 8,645 Non-recurring litigation charges............................. -- 1,500 -------- --------- Total operating costs and expenses......................... 73,127 98,848 -------- --------- Operating income (loss)........................................ 15,419 (2,255) Interest expense............................................... 10,605 7,906 -------- --------- Income (loss) before provision for income taxes, and extraordinary item............................................ 4,814 (10,161) Income tax expense............................................. 997 2,719 -------- --------- Income (loss) before extraordinary item........................ 3,817 (12,880) Extraordinary loss from early extinguishment of debt, net of income tax benefit of $1,425........................... -- (2,325) -------- --------- Net income (loss).............................................. $ 3,817 $ (15,205) ======== =========
See accompanying notes to financial statements. 4 UNITED INDUSTRIES CORPORATION STATEMENTS OF CASH FLOWS March 31, 2000 and March 31, 1999 (Dollars in thousands) (Unaudited)
For the Three Months Ended March 31, ----------------- 2000 1999 ------- -------- Cash flows from operating activities: Net income (loss)......................................... $ 3,817 $(15,205) Loss from early extinguishment of debt.................. -- 3,750 Adjustments to reconcile net income (loss) to net cash used for operating activities: Deferred compensation................................... -- 2,700 Depreciation and amortization........................... 1,447 848 Recapitalization transaction fees....................... -- 10,690 Amortization of deferred financing fees................. 565 465 Provision for deferred income tax expense............... 997 1,294 Changes in assets and liabilities: (Increase) in accounts receivable..................... (50,918) (51,597) (Increase) in inventories............................. (3,007) (13,754) Decrease in prepaid expenses.......................... 647 552 Increase in accounts payable and accrued expenses..... 16,089 23,336 Decrease in other assets.............................. 29 994 Other, net............................................ 75 335 ------- -------- Net cash used for operating activities.............. (30,259) (35,592) Investing activities: Purchases of equipment and leasehold improvements......... (1,254) (353) ------- -------- Net cash used for investing activities.............. (1,254) (353) Financing activities: Redemption of treasury stock.............................. -- (337,896) Transaction costs related to the redemption of common stock.................................................... -- (11,378) Recapitalization transactions with affiliate.............. -- (5,700) Issuance of common stock.................................. -- 1,806 Shareholder equity contribution........................... -- 8,425 Debt issuance costs....................................... (902) (18,517) Proceeds from the issuance of debt........................ 35,550 451,355 Payments on debt.......................................... (3,135) (52,150) ------- -------- Net cash provided by financing activities........... 31,513 35,945 Net increase (decrease) in cash and cash equivalents........ -- -- Cash and cash equivalents--beginning of period.............. -- -- ------- -------- Cash and cash equivalents--end of period.................... $ -- $ -- ======= ======== Noncash financing activity: Execution of capital lease.............................. $ 5,869 $ 9,215
See accompanying notes to financial statements. 5 UNITED INDUSTRIES CORPORATION NOTES TO FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) Note 1--Basis of presentation The accompanying unaudited financial statements have been prepared in accordance with the instructions for Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for any quarter are not necessarily indicative of the results for any other quarter or for the full year. These statements should be read in conjunction with the financial statements and notes thereto included in the annual report on form 10-K of United Industries Corporation (the "Company") for the year ended December 31, 1999. Certain balance sheet accounts have been restated from the December 31, 1999 balance sheet in order to provide a consistent comparison with the March 31, 2000 balance sheet. Note 2--Recapitalization of the Company and non-recurring charges On January 20, 1999, pursuant to a Recapitalization agreement with UIC Holdings, L.L.C. (the "Equity Investor"), which is owned by Thomas H. Lee Equity Fund IV, L.P. ("THL Fund IV" and, together with its affiliates, the "THL Parties"), the Company was recapitalized (the "Recapitalization") in a transaction in which: (i) the Equity Investor purchased common stock from the Company's existing stockholders for approximately $254,700; (ii) the Company's senior managers purchased common stock from the Company's existing stockholders for approximately $5,700; and (iii) the Company used the net proceeds of a senior subordinated facility (the "Senior Subordinated Facility") and borrowings under a Senior Credit Facility (the "Senior Credit Facility") to redeem a portion of the common stock held by the Company's existing stockholders. Following the Recapitalization, the Equity Investor owned approximately 91.9% of the Company's issued and outstanding common stock, the existing stockholders retained approximately 6.0% and the Company's senior managers owned approximately 2.1%. On January 20, 1999, the total transaction value of the Recapitalization was approximately $652,000, including related fees and expenses, and the implied total equity value following the Recapitalization was approximately $277,000. The total consideration paid to redeem the Company's common stock was subject to both upward and downward adjustments based on the Company's working capital on the date of the Recapitalization and excess taxes of certain stockholders arising from the Company's Section 338(h)(10) election. In December 1999, the Company recorded a $7,200 charge to equity to finalize the costs associated with the Recapitalization increasing the total transaction value to $659,200. On January 20, 1999, the Recapitalization was funded by: (i) $225,000 of borrowings under the Senior Credit Facility; (ii) $150,000 of borrowings under the Senior Subordinated Facility; (iii) $254,700 equity investment by the THL Parties through the Equity Investor; (iv) $5,700 equity investment by the Company's senior management team; and (v) equity retained by the Company's existing stockholders having an implied fair market value of approximately $16,600. The Recapitalization was accounted for as a leveraged recapitalization, which had no impact on the Company's historical basis of assets and liabilities for financial reporting purposes. During 1999, the Company recorded $31,312 in fees and expenses associated with the Recapitalization. The total fees and expenses consist of: (i) fees and expenses related to the debt and equity transactions, including bank commitment fees and underwriting discounts and commissions; (ii) professional, advisory and investment banking fees and expenses; and (iii) miscellaneous fees and expenses such as printing and filing fees. The fees and expenses that could be specifically identified as relating to the issuance of debt were capitalized and will be amortized over the life of the debt as interest expense. The fees and expenses that could be specifically identified 6 UNITED INDUSTRIES CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (Dollars in thousands) (Unaudited) Note 2--Recapitalization of the Company and non-recurring charges (continued) as relating to the equity transactions were charged directly to equity. Other transaction fees were allocated between debt and 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 Transaction Debt Equity Fees Total ------- ------ ---------------- ------- Direct costs........................... $17,205 $688 $ -- $17,893 Allocated costs........................ 2,729 -- 10,690 13,419 ------- ---- ------- ------- Total fees and expenses.............. $19,934 $688 $10,690 $31,312 ======= ==== ======= =======
During the first quarter of 1999, the Company recorded various non-recurring charges as follows: (i) change of control bonuses to some members of senior management totaling $8,645, which were contractually required as a result of the Recapitalization (senior management reinvested $2,700 of their change in control bonuses in the Company's common stock through a Grantor Trust); (ii) $1,100 to cost of goods sold for the write-off of its "Citri-Glow" candle inventory (the Company discontinued this product line during 1999 and chose to dispose of the inventory by selling it through discount channels at prices below cost); and (iii) $900 related to deductions taken by customers for advertising and promotional spending in excess of contractual obligations for which the Company elected not to pursue collection. Note 3--Common stock and stock split The Company's articles of incorporation previously authorized 20 shares of $1.00 par value Class A Voting shares and 20 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 65,000 shares, of which 32,500 have been designated as Class A Voting Common Stock and 32,500 have been designated as Class B Non-Voting Common Stock. As of January 20, 1999, there were 27,600 shares of Class A Voting Common Stock outstanding and 27,600 shares of Class B Non-Voting Common Stock outstanding. In conjunction with the stock split, the Company's board of directors reduced the par value of both the Class A Voting shares and Class B Non-Voting shares to $0.01 per share. Note 4--Inventories Inventories are as follows:
March 31, December 31, 2000 1999 --------- ------------ Raw materials............................................ $10,142 $ 9,916 Finished goods........................................... 47,134 44,149 Allowance for obsolete and slow-moving inventory......... (1,026) (822) ------- ------- Total inventories...................................... $56,250 $53,243 ======= =======
7 UNITED INDUSTRIES CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (Dollars in thousands) (Unaudited) Note 5--Equipment and leasehold improvements Equipment and leasehold improvements are as follows:
March 31, December 31, 2000 1999 --------- ------------ Machinery and equipment.................................. $27,195 $26,791 Office furniture and equipment........................... 9,077 9,606 Automobiles, trucks and aircraft......................... 15,521 9,573 Leasehold improvements................................... 6,878 6,848 ------- ------- 58,671 52,818 Less: accumulated depreciation........................... 25,081 24,958 ------- ------- $33,590 $27,860 ======= =======
Note 6--Other assets Other assets are as follows:
March 31, December 31, 2000 1999 --------- ------------ Goodwill................................................. $ 7,988 $ 7,988 Accumulated amortization................................. (2,019) (1,964) ------- ------- 5,969 6,024 ------- ------- Deferred financing fees.................................. 17,086 16,184 Accumulated amortization................................. (2,557) (1,991) ------- ------- 14,529 14,193 ------- ------- Other.................................................... 625 653 ------- ------- Total other assets..................................... $21,123 $20,870 ======= =======
Note 7--Accrued expenses Accrued expensed are as follows:
March 31, December 31, 2000 1999 --------- ------------ Recapitalization costs................................... $13,000 $13,000 Advertising and promotional expenses..................... 8,119 4,799 Interest expense......................................... 8,144 3,840 Cash overdraft........................................... 5,774 2,078 Severance charges........................................ 1,443 1,805 Settlement charges and litigation expenses............... -- 114 Other.................................................... 2,220 1,828 ------- ------- Total accrued expenses................................. $38,957 $27,464 ======= =======
8 UNITED INDUSTRIES CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (Dollars in thousands) (Unaudited) Note 8--Long-term debt and credit facilities Long-term debt is comprised of the following:
March 31, December 31, 2000 1999 --------- ------------ Senior Credit Facility: Term loan A............................................ $ 60,000 $ 62,500 Term loan B............................................ 147,750 148,125 Revolving credit facility.............................. 35,550 -- 9 7/8% Series B Registered Senior Subordinated Notes..... 150,000 150,000 -------- -------- 393,300 360,625 Less portion due within one year......................... (47,050) (11,500) -------- -------- Total long-term debt net of current portion.............. $346,250 $349,125 ======== ========
The Senior Credit Facility was provided by NationsBank, N.A., Morgan Stanley Senior Funding, Inc. and CIBC Inc. and consists of (i) a $110,000 revolving credit facility (the "Revolving Credit Facility"); (ii) a $75,000 term loan facility ("Term Loan A"); and (iii) a $150,000 term loan facility ("Term Loan B"). The Revolving Credit Facility and Term Loan A matures on January 20, 2005, and Term Loan B matures on January 20, 2006. The Revolving Credit Facility is subject to a clean-down period during which the aggregate amount outstanding under the Revolving Credit Facility shall not exceed $10,000 for 30 consecutive days occurring during the period between August 1 and November 30 in each calendar year. On March 31, 2000, $35,550 was outstanding under the $110,000 revolving credit facility. There were no compensating balance requirements for the $110,000 revolving credit facility at March 31, 2000. The principal amount of Term Loan A is to be repaid in twenty-three consecutive quarterly installments commencing June 30, 1999 with a final installment due January 20, 2005. $10,000 will be payable in each of the first four years and $17,500 will be repaid in each of the last two years. The principal amount of Term Loan B is to be repaid in twenty-seven consecutive quarterly installments commencing June 30, 1999 with a final installment due January 20, 2006. $1,500 will be paid in each of the first six years and $141,000 will be payable in year seven. The Senior Credit Facility agreement contains restrictive affirmative, negative and financial covenants. Affirmative and negative covenants put restrictions on levels of investments, indebtedness, insurance and capital expenditures. Financial covenants require the maintenance of certain financial ratios at defined levels. At December 31, 1999, the Company was not in compliance with certain financial covenants. On January 24, 2000 the Senior Credit Facility agreement was amended to provide new provisions for financial covenant requirements and a waiver of the covenant requirements at December 31, 1999. The amendment contains provisions for the increase in interest rates upon reaching certain maximum leverage ratios. As part of the amended agreement, the Company paid bank fees of $862, which were reflected as deferred financing fees in January 2000 and will be amortized over the life of the debt as interest expense. Under the new covenants, interest on the Revolving Credit Facility, Term Loan A and Term Loan B ranges from 200 to 375 basis points above LIBOR depending on certain financial ratios. Unused commitments under the Revolving Credit Facility are subject to a 50 basis point annual commitment fee. LIBOR was 6.14% at March 31, 2000. As of March 31, 2000 the Company was in compliance with the amended financial covenant requirements. 9 UNITED INDUSTRIES CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (Dollars in thousands) (Unaudited) Note 8--Long-term debt and credit facilities (continued) The Senior Credit Facility may be prepaid at any time in whole or in part without premium or penalty. During 1999, principal payments on Term Loans A and B of $12,500 and $1,875, respectively, were paid, which included optional principal prepayments of $5,000 and $675 on Term Loan A and Term Loan B, respectively. According to the Senior Credit Facility agreement, each prepayment on Term Loan A and Term Loan B can be applied to the next principal repayment installments. Obligations under the Senior Credit Facility are secured by substantially all of the properties and assets of the Company and substantially all of the properties and assets of the Company's future domestic subsidiaries. The 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. 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. Aggregate maturities under the Senior Credit Facility (excluding the revolving credit facility) and the Senior Subordinated Notes are as follows: 2000 Remainder of year.......................................... $ 8,625 2001............................................................ 11,500 2002............................................................ 11,500 2003............................................................ 17,125 2004............................................................ 18,375 Thereafter...................................................... 290,625 -------- $357,750 ========
The company entered into a capital lease agreement in March 1999 for $9,215, which will subsequently be cancelled in May of 2000. A new capital lease agreement was entered into in March of 2000 for $5,869. Note 9--Commitments The Company leases the majority of its operating facilities from a company owned by a significant shareholder of the Company under various operating leases expiring December 31, 2010. The Company has options to terminate the leases on a year-to-year basis by giving advance notice of at least twelve months. The Company leases a portion of its operating facilities from the same company under a sublease agreement expiring on December 31, 2005 with minimum annual rentals ranging from $578 to $653. 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. 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. 10 UNITED INDUSTRIES CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (Dollars in thousands) (Unaudited) Note 10--Contingencies In March 1999, the Company recorded a non-recurring litigation charge of $1,500 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., pending in the U.S. District Court in Detroit, Michigan; Case No. 97-76147. The Company alleged that defendants breached contracts by failing to perform various services. Defendants counterclaimed for sales commissions allegedly earned by them but not paid to them by the Company. On July 29, 1999, the Company paid $900 in liquidated damages and $112 in past commissions. The remaining amounts accrued in connection with the $1,500 charge were primarily used to cover 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. 11 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS Certain statements contained herein constitute "forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended." All statements other than statements of historical facts included in this report regarding the Company's financial position, business strategy, budgets and plans and objectives of management for future operations are forward-looking statements. Although the management of the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from those contemplated or projected, forecasted, estimated or budgeted in or expressed or implied by such forward-looking statements. Such factors include, among others, the risk and other factors set forth under "Risk Factors" in the Company's Registration Statement on Form S-4 filed with the Commission and in the Company's Annual Report on Form 10-K for 1999 as well as the following: general economic and business conditions; industry trends; the loss of major customers or suppliers; cost and availability of raw materials; changes in business strategy or development plans; availability and quality of management; and availability, terms and deployment of capital. Overview The Company is the leading manufacturer and marketer of value-oriented branded products for the consumer lawn and garden pesticide and household insecticide markets in the United States. The Company manufactures and markets one of the broadest lines of pesticides in the industry, including herbicides and indoor and outdoor insecticides, as well as insect repellents and water- soluble fertilizers, under a variety of brand names. The Company believes that the key drivers of growth for the $2.7 billion consumer lawn and garden pesticide and household insecticide retail markets include: (a) the aging of the United State population; (b) growth in the home improvement center and mass merchandiser channels; and (c) shifting consumers preferences' toward value-oriented branded products. The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the historical financial information included in the unaudited quarterly financial statements and the related notes to the unaudited quarterly financial statements. Results of Operations The following discussion regarding results of operations refers to net sales, cost of goods sold, advertising and promotion expense 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 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. . 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. 12 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 March 31, 2000 and the three months ended March 31, 1999:
Three Months Ended March 31, -------------- 2000 1999 ------ ------ Net sales: Value Brands................................................ 73.3% 78.2% Opening price point brands.................................. 26.7 21.8 ------ ------ Total net sales............................................ 100.0 100.0 Operating costs and expenses: Cost of goods sold.......................................... 49.5 49.7 Advertising and promotion expenses.......................... 11.0 12.0 Selling, general and administrative expenses................ 22.1 19.0 Recapitalization transaction fees........................... -- 11.1 Change of control bonuses................................... -- 8.9 Non-recurring litigation charges............................ -- 1.6 ------ ------ Total operating costs and expenses......................... 82.6 102.3 ------ ------ Operating income (loss)....................................... 17.4 (2.3) Interest expense.............................................. 12.0 8.2 ------ ------ Income (loss) before provision for income taxes and extraordinary item........................................... 5.4 (10.5) Income tax expense............................................ 1.0 2.8 ------ ------ Income (loss) before extraordinary item....................... 4.4% (13.3)% ====== ======
Three Months Ended March 31, 2000 compared to Three Months Ended March 31, 1999 Net Sales. Net sales decreased 8.4% to $88.5 million for the three months ended March 31, 2000 from $96.6 million for the three months ended March 31, 1999. This decrease was driven by a combination of factors including: . Decline in value brand sales due to the elimination of item listings at Home Depot. . Retail inventory balancing issues affecting shipments. . 1999 Spectracide Pro(R) sales reflected initial sell-in to stock retail shelves. Net sales of the Company's value brands decreased 13.7% to $69.4 million for the three months ended March 31, 2000 from $80.4 million for the three months ended March 31, 1999. Value brand sales to Home Depot were impacted by Home Depot's strategy to move more listings to our opening price point brands as well as competitors' brands. Spectracide Terminate(TM) shipments were impacted by high retail inventory levels. However, retail point of sale trends continue to show improved consumer acceptance. Spectracide Pro's net sales decreased 52.5% to $1.6 million for the three months ended March 31, 2000 from 3.3 million for the three months ended March 31, 1999, as the first quarter of 1999 reflected the initial sell-in to stock retail shelves. Net sales of opening price point brands increased 17.7% to $19.2 million for the three months ended March 31, 2000 from $16.2 million for the three months ended March 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 7.9% to $44.7 million for the three months ended March 31, 2000 compared to $48.5 million for the three months ended March 31, 1999. As a percentage of sales, gross profit increased to 50.5% as compared to 50.3% for the three months ended March 31, 1999. The increase in gross 13 profit as a percentage of sales was the result of lower material costs primarily driven by supplier rebates. Overall product mix changes will determine if this favorable trend will continue for the remainder of the year. Advertising and Promotion Expenses. Advertising and promotion expenses decreased 16.2% to $9.7 million for the three months ended March 31, 2000 compared to $11.6 million for the three months ended March 31, 1999. As a percentage of net sales, advertising and promotion expenses decreased to 11.0% for the three months ended March 31, 2000 from 12.0% for the three months ended March 31, 1999. The reduction in advertising and promotion expense is due to the shift from media spending to supporting in-store retail selling programs. Additionally, a $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 increased 6.7% to $19.5 million for the three months ended March 31, 2000 from $18.3 million for the three months ended March 31, 1999. As a percentage of net sales, selling, general and administrative expenses increased to 22.1% for the three months ended March 31, 2000 from 19.0% for the three months ended March 31, 1999. The overall increase in selling, general and administrative expenses was due to increased spending to support retail selling programs. Recapitalization Transaction Fees. For the three months ended March 31, 1999, the Company recorded a charge of $10.7 million for recapitalization transaction fees. Fees and expenses that could be specifically identified as relating to the issuance of debt were capitalized and will be amortized over the life of the debt as interest expense. The fees and expenses that could be specifically identified as relating to the equity transactions were charged directly to equity. Other transaction fees were allocated between debt and recapitalization transaction fees expense based on the Company's estimate of the effort spent in the activity giving rise to the fee or expense. Change of Control Bonuses. For the three months ended March 31, 1999, the Company recorded charges for change of control bonuses paid to some members of senior management amounting to $8.6 million, which were contractually required as a result of the Recapitalization. Non-recurring Litigation charges. For the three months ended March 31, 1999, the Company recorded 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 was primarily used to cover legal costs associated with this matter. Operating Income. Operating income increased to $15.4 million for the three months ended March 31, 2000 from a loss of $(2.3) million for the three months ended March 31, 1999. As a percentage of net sales, operating income increased to 17.4% for the three months ended March 31, 2000. Operating income in 1999 was negatively impacted due to costs associated with 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 three months ended March 31, 2000, the Company's effective income tax rate is 20.7%, which reflects the estimated utilization of the goodwill deduction in fiscal year 2000. This benefit is related to the step up in tax basis in conjunction with the Recapitalization. For the three months ended March 31, 1999 income tax expense included the one-time impact of the conversion of the Company from an "S" corporation to a "C" corporation of $2.1 million. This conversion was in conjunction with the Recapitalization. Liquidity and Capital Resources Historically, the Company has utilized internally generated funds and borrowings under credit facilities to meet ongoing working capital and capital expenditure requirements. As a result of the Recapitalization, the 14 Company has significantly increased cash requirements for debt service relating to the Company's notes and Senior Credit Facility. As of December 31, 1999, the Company had total debt outstanding of $369.3 million. As of March 31, 2000, the Company had total debt outstanding of $407.5 million. The increase in debt from December 31, 1999 is due to borrowings on the Revolving Credit Facility to meet seasonal working capital requirements. The Company will rely on internally generated funds and, to the extent necessary, borrowings under the Company's Revolving Credit Facility to meet liquidity needs. . The Company's Senior Credit Facility consists of: . The $110.0 million Revolving Credit Facility ($35.6 million outstanding at March 31, 2000); and . The $75.0 million Term Loan A ($60.0 million outstanding at March 31, 2000); and . The $150.0 million Term Loan B ($147.75 million outstanding at March 31, 2000). The Company's Revolving Credit Facility and the Term Loan A matures on January 20, 2005 and the Term Loan B matures on January 20, 2006. The Revolving Credit Facility is subject to a clean-down period during which the aggregate amount outstanding under the revolving credit facility shall not exceed $10.0 million for 30 consecutive days occurring during the period August 1 and November 30 in a calendar year. On January 24, 2000 The Senior Credit Facility agreement was amended to provide new provisions for financial covenant requirements and a waiver of the covenant requirements at December 31, 1999. The amendment contains provisions for the increase in interest rates upon reaching certain maximum leverage ratios. As part of the amended agreement, the Company paid bank fees of $0.9 million, which will be reflected as deferred financing fees in January 2000 and will be amortized over the life of the debt as interest expense. The Senior Subordinated Facility was redeemed through the issuance of 9 7/8% Senior Subordinated Notes due April 1, 2009. In connection with this redemption, the Company incurred an extraordinary loss from the early extinguishment of debt, net of tax of $2.3 million. In the fourth quarter of 1999, the Company exchanged the 9 7/8% Senior Subordinated Notes for new notes registered under the Securities Act of 1933. The new notes are substantially identical to the old notes. 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. On March 31, 2000, principal payments on Term Loans A and B of $2.5 million and $375 thousand, respectively, were paid. The Company's principal liquidity requirements are for working capital, capital expenditures and debt service under the Senior Credit Facility and the notes. Net cash used for operating activities was $30.3 million and $35.6 million for the three months ended March 31, 2000 and 1999, respectively. Net cash used for operating activities fluctuates during the year as the seasonal nature of the Company's sales results in a significant increase in working capital (primarily accounts receivable and inventory) during the first half of the year, with the second and third quarters being significant cash collection periods. Capital expenditures are related to the enhancement of the Company's existing facilities and the construction of additional production and distribution capacity. Cash used for capital expenditures was $1.3 million and $.4 million for the three months ended March 31, 2000 and 1999, respectively. In addition, the Company entered into a capital lease agreement in March of 1999 for $9.2 million to lease a plane. This capital lease agreement will subsequently be cancelled in May of 2000, and replaced by a second capital lease agreement for a replacement plane in the amount of $5.9 million that was entered into in March of 2000. Cash used for capital expenditures for the remainder of 2000 is expected to be less than $5.0 million. 15 The Company believes that cash flow from operations, together with available borrowings under the Revolving Credit Facility, will be adequate to meet the anticipated requirements for working capital, capital expenditures and scheduled principal and interest payments for at least the next two years. However, the Company cannot ensure that sufficient cash flow will be generated from operations to repay the notes and amounts outstanding under the Senior Credit Facility at maturity without requiring additional financing. The Company's ability to meet debt service and clean-down obligations and reduce debt will be dependent on the Company's future performance, which in turn, will be subject to general economic conditions and to financial, business and other factors, including factors beyond the Company's control. Because a portion of the Company's debt bears interest at floating rates, the Company's financial condition is and will continue to be affected by changes in prevailing interest rates. Seasonality The Company's business is highly seasonal because the Company's products are used primarily in the spring and summer. For both of the past years ended December 31, 1999 and 1998, approximately 75% of the Company's net sales have occurred in the first and second quarters. The Company's working capital needs, and correspondingly the Company's borrowings, peak near the end of the Company's first quarter. Year 2000 Compliance The year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than year 2000. Costs related to the year 2000 issue were incurred in conjunction with the $2.5 million management information systems upgrade that occurred in 1999. The Company does not anticipate any additional costs relating to the year 2000 issue which would have a material adverse effect on the Company's financial condition or results of operations. Through March 2000, the Company has not experienced any significant year 2000 business system issues. The company has not experienced any significant product or service supply problems arising from the Company's vendors' year 2000 preparations. Although there is no guarantee that all year 2000 issues have been identified and resolved, the Company believes that any issues arising will not have a material impact on the Company's financial position, results of operations or cash flows. The Company continues to monitor and correct any issues related to the year 2000. Recently Issued Accounting Pronouncements The Financial Accounting Standard Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" in June 1998. SFAS 133 provides standards on accounting and disclosure for derivative instruments and requires that all derivatives be measured at fair value and reported as either assets or liabilities on the balance sheet. The Company will be required to adopt this statement no later than the beginning of fiscal year 2001. The Company has not completed the analysis to determine the impact of this statement on the Company's financial statements; however, the impact is not expected to be material. 16 ITEM 3. 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 March 31, 2000, variable rate debt was $243.4 million. Interest on Term Loan A and Term Loan B ranges from 200 to 375 basis points above LIBOR depending on certain financial ratios. LIBOR was 6.14% as of March 31, 2000. Exchange Rate The Company does not use derivative instruments to hedge against foreign currency exposures related to transactions denominated in other than the Company's functional currency. Substantially all foreign currency transactions are denominated in United States dollars. Commodity Price The Company does not use derivative instruments to hedge its exposures to changes in commodity prices. The Company utilizes various commodity and specialty chemicals in its production process. Purchasing procedures and arrangements with major customers serve to mitigate its exposure to price changes in commodity and specialty chemicals. 17 PART II OTHER INFORMATION There is no information required to be reported under any items. Item 1. Legal Proceedings. The Company has no reportable legal proceedings in the current period. Item 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. None 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) Report 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 Dated: May 12, 2000 /s/ Daniel J. Johnston By: _________________________________ Name: Daniel J. Johnston Title: Chief Financial Officer II-2 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS MAR-31-2000 JAN-01-2000 MAR-31-2000 0 0 71,270 1,187 56,250 129,187 58,671 25,081 300,168 117,180 0 0 0 554 (183,540) 300,168 88,546 88,546 43,837 73,127 0 0 10,605 4,814 997 3,817 0 0 0 3,817 0 0
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